Rule 497(c)
Registration No. 33-84842
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Bear Stearns Funds
LARGE CAP VALUE PORTFOLIO o SMALL CAP VALUE PORTFOLIO o TOTAL RETURN BOND
PORTFOLIO
CLASS A, B AND C SHARES
The Bear Stearns Funds (the "Fund") is an open-end management investment
company, known as a mutual fund. The Fund permits you to invest in separate
portfolios. By this Prospectus, the Fund offers Class A, B and C shares of
three diversified portfolios (each, a "Portfolio"): Large Cap Value Portfolio
and Small Cap Value Portfolio (together, the "Equity Portfolios") and Total
Return Bond Portfolio (the "Bond Portfolio").
. Each Equity Portfolio's investment objective is capital
appreciation.
. The Bond Portfolio's investment objective is to maximize total
return, consistent with preservation of capital. The Bond Portfolio
will invest primarily in investment grade, U.S. dollar denominated
fixed-income securities of domestic and foreign issuers. Under
normal market conditions, the Bond Portfolio will invest in a
portfolio of securities with a dollar-weighted average maturity
ranging from four to thirteen years and a duration of not less than
65% of the Salomon Brothers Broad Investment Grade ("BIG") Bond
Index and not more than 135% of the Salomon Brothers BIG Bond Index.
By this Prospectus, each Portfolio is offering three classes of shares. Class
A shares are subject to a sales charge imposed at the time of purchase. Class
B shares are subject to a contingent deferred sales charge of up to 5% imposed
on redemptions made within the first six years of purchase. Class C shares are
subject to a 1% contingent deferred sales charge imposed on redemptions made
within the first year of purchase. Other differences between the classes
include the services offered to and the expenses borne by each class, as
described herein. These alternatives are offered so an investor may choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
circumstances. Each Portfolio issues another class of shares (Class Y shares),
which has different expenses that would affect performance. Investors desiring
to obtain information about this class of shares should call 1-800-766-4111 or
ask their sales representative or the Portfolio's distributor.
BEAR STEARNS ASSET MANAGEMENT INC. ("BSAM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as each Portfolio's investment adviser.
BSAM is also referred to herein as the "Adviser." As of December 3, 1997, Bear
Stearns Funds Management Inc., the registered investment adviser of the
Portfolios, has changed its name to Bear Stearns Asset Management Inc.
BEAR STEARNS FUNDS MANAGEMENT INC. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., is the Administrator of each Portfolio. As of
December 4, 1997, Bear Stearns Funds Management Inc. formed a new corporate
entity under the laws of Delaware to conduct mutual fund administrative work for
The Bear Stearns Funds and other affiliated and non-affiliated companies.
BEAR, STEARNS & CO. INC. ("Bear Stearns"), an affiliate of BSAM, serves as
each Portfolio's distributor. Bear Stearns is also referred to herein as the
"Distributor."
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT EACH PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Part B (also known as the Statement of Additional Information), dated December
24, 1997, which may be revised from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be
of interest to some investors. It has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. For a free copy,
write to the address or call one of the telephone numbers listed under
"General Information" in this Prospectus. Additional information, including
this Prospectus and the Statement of Additional Information, may be obtained
by accessing the Internet Web site maintained by the Securities and Exchange
Commission (http://www.sec.gov).
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank; are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency; and are
subject to investment risks, including possible loss of the principal amount
invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
DECEMBER 24, 1997
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 6
Alternative Purchase Methods............................................... 9
Description of the Portfolios.............................................. 9
Risk Factors............................................................... 13
Management of the Portfolios............................................... 15
How to Buy Shares.......................................................... 18
Shareholder Services....................................................... 24
How to Redeem Shares....................................................... 25
Dividends, Distributions and Taxes......................................... 28
Performance Information.................................................... 30
General Information........................................................ 31
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS A CLASS A CLASS A
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................ 5.50% 5.50% 4.50%
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount
subject to charge)........................... * * *
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)**........... 0.00% 0.00% 0.00%
12b-1 Fees***/+.............................. 0.50% 0.50% 0.35%
Other Expenses (after expense
reimbursement)**............................. 1.00% 1.00% 0.45%
---- ---- ----
Total Portfolio Operating Expenses (after fee
waiver and expense reimbursement)**.......... 1.50% 1.50% 0.80%
==== ==== ====
EXAMPLE:
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:
1 YEAR..................................... $ 69 $ 69 $ 53
3 YEARS.................................... $100 $100 $ 69
5 YEARS.................................... $132 $132 $ 87
10 YEARS.................................... $224 $224 $140
</TABLE>
- ------
*In certain situations, where no sales charge is assessed at the time of
purchase, a contingent deferred sales charge of up to 1.00% may be imposed on
redemptions within the first year of purchase. See "How to Buy Shares--Class A
Shares."
**With respect to Class A shares, BSAM has undertaken to waive its investment
advisory fee and assume certain expenses of each Portfolio other than
brokerage commissions, extraordinary items, interest and taxes to the extent
Total Portfolio Operating Expenses exceed 1.50% and 0.80% for each Equity
Portfolio and the Bond Portfolio, respectively. With respect to all
Portfolios, without such fee waiver and expense reimbursement, Advisory Fees
stated above would have been 0.75% and 0.45%, for each Equity Portfolio and
the Bond Portfolio, respectively. Other Expenses are estimated to be 1.83%,
1.25%, and 1.73% for Large Cap Value Portfolio, Small Cap Value Portfolio and
the Bond Portfolio, respectively, and Total Portfolio Operating Expenses are
estimated to be 3.08%, 2.50% and 2.53% for Large Cap Value Portfolio, Small
Cap Value Portfolio and the Bond Portfolio, respectively. Such amounts are
based on operating results for the fiscal year ended March 31, 1997, restated
for the reduction in 12b-1 fees.
***With respect to Class A shares, 12b-1 fees include a shareholder servicing
fee of 0.25% with respect to each Portfolio and a distribution fee of 0.25%
with respect to each Equity Portfolio and 0.10% with respect to the Bond
Portfolio. Bear Stearns will waive the distribution fee to the extent that the
Portfolio would otherwise exceed the National Association of Securities
Dealers, Inc. ("NASD") limitations on asset-based sales charges. Pursuant to
NASD rules, the aggregate deferred sales loads and annual distribution fees
may not exceed 6.25% of total gross sales, subject to certain exclusions. The
6.25% limitation is imposed on each Portfolio rather than on a per shareholder
basis. Therefore, a long-term shareholder of the Portfolio may pay more in
distribution fees than the economic equivalent of 6.25% of such shareholder's
investment in such shares. The maximum sales charge rule is applied separately
to each class.
+Authorized dealers will be paid distribution and/or servicing fees of 0.50%
for Equity Portfolios and 0.35% for the Bond Portfolio, with respect to shares
in accounts through December 23, 1997. Subsequently, all authorized dealers
will be paid a servicing fee of 0.25% with respect to shares purchased after
December 23, 1997, including shares acquired through dividend reinvestments
prior to December 23, 1997.
3
<PAGE>
Fee Table (continued)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS B CLASS B CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................ -- -- --
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount
subject to charge)........................... 5.00% 5.00% 5.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)*............ 0.00% 0.00% 0.00%
12b-1 Fees................................... 0.75% 0.75% 0.75%
Other Expenses (after expense
reimbursement)*.............................. 1.25% 1.25% 0.70%
----- ----- -----
Total Portfolio Operating Expenses (after fee
waiver and expense reimbursement)*........... 2.00% 2.00% 1.45%
===== ===== =====
EXAMPLE:
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:
1 YEAR..................................... $ 71 $ 71 $ 66
3 YEARS.................................... $ 95 $ 95 $ 79
5 YEARS.................................... $ 131 $ 131 $ 103
10 YEARS**.................................. $ 220 $ 220 $ 156
You would pay the following expenses on the
same investment, assuming no redemption:
1 YEAR..................................... $ 20 $ 20 $ 15
3 YEARS.................................... $ 63 $ 63 $ 46
5 YEARS.................................... $ 108 $ 108 $ 79
10 YEARS**.................................. $ 220 $ 220 $ 156
</TABLE>
- ------
*Other Expenses include a shareholder servicing fee of 0.25%. With respect to
Class B shares, BSAM has undertaken to waive its investment advisory fee and
assume certain expenses of each Portfolio other than brokerage commissions,
extraordinary items, interest and taxes to the extent Total Portfolio
Operating Expenses exceed 2.00% and 1.45% for each Equity Portfolio and the
Bond Portfolio, respectively. With respect to all Portfolios, without such fee
waiver and expense reimbursement, Advisory Fees stated above would have been
0.75% and 0.45%, for each Equity Portfolio and the Bond Portfolio,
respectively. Other Expenses are estimated to be 2.11%, 1.49%, and 1.99% for
Large Cap Value Portfolio, Small Cap Value Portfolio and the Bond Portfolio,
respectively, and Total Portfolio Operating Expenses are estimated to be
3.61%, 2.99% and 3.19% for Large Cap Value Portfolio, Small Cap Value
Portfolio and the Bond Portfolio, respectively.
**Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight.
4
<PAGE>
Fee Table (continued)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
LARGE CAP SMALL CAP TOTAL RETURN
VALUE VALUE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS C CLASS C CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................ -- -- --
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount
subject to charge)........................... 1.00% 1.00% 1.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)*............ 0.00% 0.00% 0.00%
12b-1 Fees**................................. 1.00% 1.00% 0.75%
Other Expenses (after expense
reimbursement)*.............................. 1.00% 1.00% 0.70%
Total Portfolio Operating Expenses (after fee
waiver and expense reimbursement)*........... 2.00% 2.00% 1.45%
EXAMPLE:
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:
1 YEAR..................................... $ 30 $ 30 $ 25
3 YEARS.................................... $ 63 $ 63 $ 46
5 YEARS.................................... $108 $108 $ 79
10 YEARS.................................... $233 $233 $174
You would pay the following expenses on the
same investment, assuming no redemption:
1 YEAR..................................... $ 20 $ 20 $ 15
3 YEARS.................................... $ 63 $ 63 $ 46
5 YEARS.................................... $108 $108 $ 79
10 YEARS.................................... $233 $233 $174
</TABLE>
- ------
*With respect to the Bond Portfolio, Other Expenses include a shareholder
servicing fee of 0.25%. With respect to Class C shares, BSAM has undertaken to
waive its investment advisory fee and assume certain expenses of each
Portfolio other than brokerage commissions, extraordinary items, interest and
taxes to the extent Total Portfolio Operating Expenses exceed 2.00% and 1.45%
for each Equity Portfolio and the Bond Portfolio, respectively. With respect
to all Portfolios, without such fee waiver and expense reimbursement, Advisory
Fees stated above would have been 0.75% and 0.45%, for each Equity Portfolio
and the Bond Portfolio, respectively. Other Expenses would have been 1.86%,
1.24% and 1.99% for Large Cap Value Portfolio, Small Cap Value Portfolio and
the Bond Portfolio, respectively, and Total Portfolio Operating Expenses would
have been 3.61%, 2.99% and 3.19% for Large Cap Value Portfolio, Small Cap
Value Portfolio and the Bond Portfolio, respectively.
**With respect to the Equity Portfolios, 12b-1 fees include a shareholder
servicing fee of 0.25%.
THE AMOUNTS LISTED IN THE EXAMPLES SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE INDICATED. MOREOVER, WHILE THE EXAMPLES ASSUME A 5% ANNUAL RETURN, EACH
PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5%.
The purpose of the foregoing tables is to assist you in understanding the
costs and expenses borne by each Portfolio and investors, the payment of which
will reduce investors' annual return. In addition to the expenses noted above,
the Fund will charge $7.50 for each wire redemption. See "How to Redeem
Shares." Long-term investors could pay more in 12b-1 fees than the economic
equivalent of paying a front-end sales charge. For a description of the
expense reimbursement or fee waiver arrangements in effect, see "Management of
the Portfolios."
5
<PAGE>
Financial Highlights
The information in the table below covering each Portfolio's investment
results for the periods indicated has been audited by Deloitte & Touche LLP.
Further financial data and related notes appear in the Portfolios' Annual
Report for the fiscal year ended March 31, 1997 which is incorporated by
reference into the Portfolios' Statement of Additional Information which is
available upon request.
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class A
and C shares of each Portfolio for the periods indicated. This information has
been derived from information provided in each Portfolio's financial
statements.
LARGE CAP VALUE PORTFOLIO:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL APRIL 3, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
- -------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of peri-
od................................ $ 15.13 $ 15.08 $ 12.00 $ 12.00
------- ------- ------- -------
Net investment income/(loss) (1)... 0.04 (0.02) 0.06 (0.01)
Net realized and unrealized gain on
investments (2)................... 2.28 2.25 3.10 3.10
------- ------- ------- -------
Net increase in net assets
resulting from operations......... 2.32 2.23 3.16 3.09
------- ------- ------- -------
Dividends and distributions to
shareholders from Net investment
income............................ (0.10) (0.02) (0.02) --
Net realized capital gains......... (0.18) (0.18) (0.01) (0.01)
(0.28) (0.20) (0.03) (0.01)
------- ------- ------- -------
Net asset value, end of period..... $ 17.17 $ 17.11 $ 15.13 $ 15.08
======= ======= ======= =======
Total investment return (3)........ 15.44% 14.87% 26.35% 25.71%
======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted).......................... $ 4,987 $ 2,986 $ 3,616 $ 3,520
Ratio of expenses to average net
assets (1)........................ 1.50% 2.00% 1.50%(4) 2.00%(4)
Ratio of net investment
income/(loss) to average net as-
sets (1).......................... 0.43% (0.08)% 0.46%(4) (0.06)%(4)
Decrease reflected in above expense
ratios and net investment
income/(loss) due to waivers and
reimbursements.................... 1.58% 1.61% 4.34%(4) 4.39%(4)
Portfolio turnover rate............ 136.67% 136.67% 45.28%(5) 45.28%(5)
Average commission rate per share
(6)............................... $0.0593 $0.0593 $0.0596 $0.0596
</TABLE>
- ------
* Commencement of operations. Commenced investment operations on April 4,
1995.
** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on actual shares outstanding on the dates of distributions.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses in investments during the respective periods because of the timing
of sales and repurchases of Portfolio shares in relation to fluctuating
net asset values during the respective periods.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends
and distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Not annualized.
(6) Represents average commission rate per share charged to the Portfolio on
purchases and sales of investments subject to such commissions during each
period.
6
<PAGE>
Financial Highlights (continued)
SMALL CAP VALUE PORTFOLIO:
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL APRIL 3, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFOR-
MANCE**
Net asset value, beginning of
period........................ $ 15.87 $ 15.79 $ 12.00 $ 12.00
------- ------- ------- -------
Net investment loss (1)........ (0.10) (0.18) (0.07) (0.10)
Net realized and unrealized
gain on
investments (2)............... 1.95 1.93 4.17 4.11
------- ------- ------- -------
Net increase in net assets
resulting from
operations.................... 1.85 1.75 4.10 4.01
------- ------- ------- -------
Distributions to shareholders
from
Net realized capital gains..... (0.24) (0.16) (0.23) (0.22)
------- ------- ------- -------
Net asset value, end of period. $ 17.48 $ 17.38 $ 15.87 $ 15.79
======= ======= ======= =======
Total investment return (3).... 11.71% 11.12% 34.36% 33.59%
======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)............... $13,143 $11,071 $ 6,474 $ 6,753
Ratio of expenses to average
net assets (1)................ 1.50% 2.00% 1.50% (4) 2.00% (4)
Ratio of net investment loss to
average net
assets (1).................... (0.81)% (1.31)% (0.66)%(4) (1.09)%(4)
Decrease reflected in above
expense ratios and net
investment loss due to waivers
and reimbursements............ 1.00% 0.99% 2.32% (4) 2.39% (4)
Portfolio turnover rate........ 56.88% 56.88% 40.79% (5) 40.79% (5)
Average commission rate per
share (6)..................... $0.0550 $0.0550 $0.0572 $0.0572
</TABLE>
- --------
* Commencement of investment operations.
** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on actual shares outstanding on the dates of distributions.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses in investments during the respective periods because of the timing
of sales and repurchases of Portfolio shares in relation to fluctuating
net asset values during the respective periods.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends
and distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Not annualized.
(6) Represents average commission rate per share charged to the Portfolio on
purchases and sales of investments subject to such commissions during each
period.
7
<PAGE>
Financial Highlights (continued)
TOTAL RETURN BOND PORTFOLIO:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL APRIL 3, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
--------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period.. $12.26 $12.26 $12.00 $12.00
------ ------ ------ ------
Net investment income (1)............. 0.73 0.68 0.71 0.67
Net realized and unrealized
gain/(loss) on
investments (2)...................... (0.20) (0.20) 0.30 0.30
------ ------ ------ ------
Net increase in net assets resulting
from
operations........................... 0.53 0.48 1.01 0.97
------ ------ ------ ------
Dividends and distributions to
shareholders from
Net investment income................. (0.73) (0.68) (0.71) (0.67)
Net realized capital gains............ (0.03) (0.03) (0.04) (0.04)
------ ------ ------ ------
(0.76) (0.71) (0.75) (0.71)
------ ------ ------ ------
Net asset value, end of period........ $12.03 $12.03 $12.26 $12.26
====== ====== ====== ======
Total investment return (3)........... 4.40% 3.99% 8.54% 8.13%
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA (6)
Net assets, end of period (000's
omitted)............................. $3,367 $1,018 $4,467 $1,775
Ratio of expenses to average net
assets (1)........................... 0.80% 1.20% 0.85%(4) 1.25%(4)
Ratio of net investment income to
average
net assets (1)....................... 5.99% 5.57% 5.76%(4) 5.38%(4)
Decrease reflected in above expense
ratios and net investment income due
to waivers and reimbursements........ 1.73% 1.74% 2.87%(4) 2.95%(4)
Portfolio turnover rate............... 262.95% 262.95% 107.35%(5) 107.35%(5)
</TABLE>
- --------
* Commencement of operations. Commenced investment operations on April 5,
1995.
** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on actual shares outstanding on the dates of distributions.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses in investments during the respective periods because of the timing
of sales and repurchases of Portfolio shares in relation to fluctuating
net asset values during the respective periods.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends
and distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Not annualized.
(6) Average commission rate per share disclosure is required for fiscal years
beginning on or after September 1, 1995. The Portfolio incurred no such
charges.
Further information about performance is contained in the Portfolios' Annual
Report, which may be obtained without charge by writing to the address or
calling one of the telephone numbers listed under "General Information."
8
<PAGE>
Alternative Purchase Methods
By this Prospectus, each Portfolio offers investors three methods of
purchasing its shares; investors may choose the class of shares that best
suits their needs, given the amount of purchase, the length of time the
investor expects to hold the shares and any other relevant circumstances. Each
Portfolio share represents an identical pro rata interest in each Portfolio's
investment portfolio.
CLASS A SHARES
Class A shares of each Equity Portfolio and the Bond Portfolio are sold at net
asset value per share plus a maximum initial sales charge of 5.50% and 4.50%,
respectively, of the public offering price imposed at the time of purchase.
The initial sales charge may be reduced or waived for certain purchases. See
"How to Buy Shares--Class A Shares." The Class A shares of each Equity
Portfolio and the Bond Portfolio are subject to an annual distribution and
shareholder servicing fee at the rate of 0.50 of 1% and 0.35 of 1%,
respectively, of the value of the average daily net assets of Class A.
CLASS B SHARES
Class B shares of each Portfolio are sold without an initial sales charge, but
are subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares--Class B Shares." The Class B shares of each Portfolio also are subject
to an annual distribution fee at the rate of 0.75 of 1% of the value of the
average daily net assets of Class B. Class B shares are subject to an annual
shareholder servicing fee at the rate of 0.25 of 1% of the value of the
average daily net assets of Class B shares incurred in connection with the
personal service and maintenance of accounts holding Portfolio shares. See
"Management of the Portfolios--Distribution Plan" and "Shareholder Servicing
Plan". Class B shares will convert to Class A shares, based on their relative
net asset values, eight years after the initial purchase. The distribution and
shareholder servicing fees will cause Class B shares to have a higher expense
ratio and to pay lower dividends than Class A shares.
CLASS C SHARES
Class C shares of each Portfolio are subject to a 1% CDSC which is assessed
only if Class C shares are redeemed within one year of purchase. See "How to
Redeem Shares--Class C Shares." Class C shares of each Equity Portfolio and
the Bond Portfolio are subject to an annual distribution and shareholder
servicing fee at the rate of 1.00% and 0.75%, respectively, of the average
daily net assets of Class C. With respect to Class C shares of the Bond
Portfolio, the Fund has also adopted a Shareholder Servicing Plan under which
the Fund pays 0.25% of the average daily net assets of Class C shares for fees
incurred in connection with the personal service and maintenance of accounts
holding Portfolio shares. See "Management of the Portfolios--Distribution and
Shareholder Servicing Plan" and "Shareholder Servicing Plan." The distribution
and shareholder servicing fees will cause Class C shares to have a higher
expense ratio and to pay lower dividends than Class A shares.
The decision as to which class of shares is more beneficial to each investor
depends on the amount and the intended length of time of the investor's
investment. Each investor should consider whether, during the anticipated life
of the investor's investment in the Fund, the accumulated distribution and
shareholder servicing fee and CDSC, if any, on Class B or C shares would be
less than the initial sales charge on Class A shares purchased at the same
time, and to what extent, if any, such differential would be offset by the net
return of Class A. See "How to Buy Shares--Choosing a Class of Shares".
Description of the Portfolios
GENERAL
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios. Each portfolio is treated as a separate entity for certain
purposes under the Investment Company Act of 1940, as amended (the "1940
Act"), and for other purposes. A shareholder of one portfolio is not deemed to
be a shareholder of any other portfolio. As described below, for certain
matters Fund shareholders vote together as a group; as to others they vote
separately by portfolio. By this Prospectus, shares of
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each Equity Portfolio and the Bond Portfolio are being offered. From time to
time, other portfolios may be established and sold pursuant to other offering
documents. See "General Information."
INVESTMENT OBJECTIVE
Each Equity Portfolio's investment objective is capital appreciation. The Bond
Portfolio's investment objective is to maximize total return, consistent with
preservation of capital. See "Management Policies" below. Each Portfolio's
investment objective cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of such Portfolio's outstanding voting
shares. There can be no assurance that a Portfolio's investment objective will
be achieved.
MANAGEMENT POLICIES
EQUITY PORTFOLIOS
LARGE CAP VALUE PORTFOLIO invests, under normal market conditions,
substantially all of its assets in equity securities of issuers with market
capitalizations of $1 billion or more and identified by BSAM as value
companies.
SMALL CAP VALUE PORTFOLIO invests, under normal market conditions,
substantially all of its assets in equity securities of issuers with market
capitalizations of up to $1 billion and identified by BSAM as value companies.
To determine whether a company's stock falls within the value classification,
BSAM analyzes it based on fundamental factors such as price to book ratios,
price to earnings ratios, earnings growth, dividend payout ratios, return on
equity, and the company's beta (a measure of stock price volatility relative
to the market generally). In general, BSAM believes that companies with
relatively low price to book ratios, low price to earnings ratios or higher
than average dividend payments in relation to price should be classified as
value companies.
For potential investments, BSAM also, among other matters, may review new
management and upcoming corporate restructuring plans, consider the general
business cycle and the company's position within the specific industry and
consider the responsiveness of the company to identified problems in an effort
to assess the likelihood of future appreciation of the company's securities.
BSAM anticipates that at least 85% of the value of each Equity Portfolio's
total assets (except when maintaining a temporary defensive position) will be
invested in equity securities of domestic and foreign issuers. Each Equity
Portfolio expects, under normal market conditions, to invest less than 10% of
its assets in the equity securities of foreign issuers. Equity securities
consist of common stocks, convertible securities and preferred stocks. The
convertible securities and preferred stocks in which each Equity Portfolio may
invest will be rated at least investment grade by a nationally recognized
statistical rating organization at the time of purchase. Each Equity Portfolio
may invest, in anticipation of investing cash positions, in money market
instruments consisting of U.S. Government securities, certificates of deposit,
time deposits, bankers' acceptances, short-term investment grade corporate
bonds and other short-term debt instruments, and repurchase agreements, as set
forth in the Appendix. Under normal market conditions, each Equity Portfolio
expects to have less than 15% of its assets invested in money market
instruments. However, when BSAM determines that adverse market conditions
exist, each Equity Portfolio may adopt a temporary defensive posture and
invest all of its assets in money market instruments.
BOND PORTFOLIO
The BOND PORTFOLIO invests at least 65% of the value of its total assets
(except when maintaining a temporary defensive position) in bonds (which it
defines as bonds, debentures and other fixed-income securities). The Bond
Portfolio is permitted to invest in a broad range of investment grade, U.S.
dollar denominated fixed-income securities and securities with debt-like
characteristics (e.g., bearing interest or having stated principal) of
domestic and foreign issuers. These debt securities include bonds, debentures,
notes, money market instruments (including foreign bank obligations, such as
time deposits, certificates of deposit and bankers' acceptances, commercial
paper and other short-term corporate debt obligations, and repurchase
agreements), mortgage-related securities (including interest-only and
principal-only stripped mortgage-backed securities), asset-backed securities,
municipal obligations and convertible debt obligations. The issuers may
include domestic and foreign corporations, partnerships or trusts, and
governments or their political subdivisions, agencies or instrumentalities.
Under normal market conditions, the Bond Portfolio seeks to provide
performance results that equal or exceed the Salomon Brothers BIG Bond Index,
which is a market-capitalization weighted index that includes U.S. Treasury,
Government-sponsored, mortgage and investment grade
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fixed-rate corporate fixed-income securities with a maturity of one year or
longer and a minimum of $50 million amount outstanding at the time of
inclusion in the Salomon Brothers BIG Bond Index. As of March 31, 1997, the
weighted average maturity of securities comprising the Salomon Brothers BIG
Bond Index was approximately eight and 1/2 years and their average duration
was approximately four and 1/2 years. Under normal market conditions, the Bond
Portfolio invests in a portfolio of securities with a dollar-weighted average
maturity ranging from four to 13 years and a duration of not less than 65% of
the Salomon Brothers BIG Bond Index and not more than 135% of the Salomon
Brothers BIG Bond Index.
As a measure of a fixed-income security's cash flow, duration is an
alternative to the concept of "term to maturity" in assessing the price
volatility associated with changes in interest rates. Generally, the longer
the duration, the more volatility an investor should expect. For example, the
market price of a bond with a duration of five years would be expected to
decline 5% if interest rates rose 1%. Conversely, the market price of the same
bond would be expected to increase 5% if interest rates fell 1%. The market
price of a bond with a duration of 10 years would be expected to increase or
decline twice as much as the market price of a bond with a five year duration.
Duration measures a security's maturity in terms of the average time required
to receive the present value of all interest and principal payments as opposed
to its term to maturity. The maturity of a security measures only the time
until final payment is due; it does not take account of the pattern of a
security's cash flows over time, which would include how cash flow is affected
by prepayments and by changes in interest rates. Incorporating a security's
yield, coupon interest payments, final maturity and option features into one
measure, duration is computed by determining the weighted average maturity of
a bond's cash flows, where the present values of the cash flows serve as
weights. In computing the duration of the Bond Portfolio, BSAM will estimate
the duration of obligations that are subject to prepayment or redemption by
the issuer, taking into account the influence of interest rates on
prepayments, coupon flows and other factors which may affect the maturity of
the security. This method of computing duration is known as effective
duration.
BSAM anticipates actively managing the Bond Portfolio's assets in response to
changes in the business cycle. BSAM seeks to identify and respond to phases in
the business cycle-simplistically, the expansion, topping out, recession and
trough phases--and to invest the Bond Portfolio's assets by shifting among
market sectors, maturities and relative credit quality in a way which it
believes will achieve the Bond Portfolio's objective in a relatively
conservative manner taking into account the volatility and risk associated
with investing in a portfolio of relatively longer-term fixed-income
securities. While the Bond Portfolio seeks, as part of its investment
objective, to preserve capital, investors should recognize that the net asset
value per share of the Bond Portfolio should be expected to be more volatile
than the net asset value per share of a fund that invested in portfolio
securities with a shorter duration.
At least 70% of the value of the Bond Portfolio's net assets must consist of
securities which, in the case of bonds and other debt instruments, are rated
no lower than A by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"),
Fitch Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co.
("Duff") or, if unrated, deemed to be of comparable quality by BSAM. Up to 30%
of the value of the Bond Portfolio's net assets may consist of securities
which, in the case of bonds and other debt instruments, are rated no lower
than Baa by Moody's or BBB by S&P, Fitch and Duff or, if unrated, deemed to be
of comparable quality by BSAM. The Bond Portfolio may invest in short-term
fixed-income obligations which are rated in the two highest rating categories
by Moody's, S&P, Fitch or Duff. See "Risk Factors--Fixed-Income Securities"
below, and "Appendix" in the Statement of Additional Information.
INVESTMENT TECHNIQUES
Each Portfolio may engage in various investment techniques, such as options
and futures transactions, short selling and lending portfolio securities, each
of which involves risk. Each Equity Portfolio also may engage in foreign
currency exchange transactions, which also involve risk. Options and futures
transactions, as well as investments in certain asset-backed, mortgage-backed
and government securities, involve "derivative securities." Short selling is
discussed below. For a discussion of these other investment techniques and
their related risks, see "Appendix--Investment Techniques" and "Risk Factors"
below.
Short sales are transactions in which a Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Portfolio must borrow
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the security to make delivery to the buyer. The Portfolio then is obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Portfolio. Until the security is replaced,
the Portfolio is required to pay to the lender amounts equal to any dividend
which accrues during the period of the loan. To borrow the security, the
Portfolio also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out. Short selling by the Bond Portfolio will be used
primarily in conjunction with a long transaction, but not necessarily in the
same instrument or an instrument with a similar maturity or interest rate, to
effect a hedged position to take advantage of spreads in the market place.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account, containing
liquid securities, at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral always equals the
current value of the security sold short; or (b) otherwise cover its short
position in accordance with positions taken by the staff of the Securities and
Exchange Commission.
A Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. A Portfolio will realize a
gain if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium or amounts in lieu of interest the
Portfolio may be required to pay in connection with a short sale. Each
Portfolio may purchase call options to provide a hedge against an increase in
the price of a security sold short by the Portfolio. See "Appendix--Investment
Techniques--Options Transactions."
Each Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Portfolio's net assets. No Portfolio may sell
short the securities of any single issuer listed on a national securities
exchange to the extent of more than 5% of the value of its net assets. No
Portfolio may sell short the securities of any class of an issuer to the
extent, at the time of the transaction, of more than 2% of the outstanding
securities of that class.
In addition to the short sales discussed above, each Portfolio may make short
sales "against the box," a transaction in which the Portfolio enters into a
short sale of a security which the Portfolio owns. The proceeds of the short
sale will be held by a broker until the settlement date at which time the
Portfolio delivers the security to close the short position. The Portfolio
receives the net proceeds from the short sale. The Portfolio at no time will
have more than 15% of the value of its net assets in deposits on short sales
against the box. It currently is anticipated that the Portfolio will make
short sales against the box for purposes of protecting the value of the
Portfolio's net assets. There are certain tax implications associated with
this strategy. See "Dividends, Distributions and Taxes."
CERTAIN FUNDAMENTAL POLICIES
Each Portfolio may (i) borrow money to the extent permitted under the 1940
Act; (ii) invest up to 5% of the value of its total assets in the obligations
of any issuer, except that up to 25% of the value of the Portfolio's total
assets may be invested, and securities issued or guaranteed by the U.S.
Government, its agencies or sponsored enterprises may be purchased, without
regard to any such limitation; and (iii) invest up to 25% of the value of its
total assets in the securities of issuers in a single industry, provided that
there is no such limitation on investments in securities issued or guaranteed
by the U.S. Government, its agencies or sponsored enterprises. This paragraph
describes fundamental policies that cannot be changed as to a Portfolio
without approval by the holders of a majority (as defined in the 1940 Act) of
such Portfolio's outstanding voting shares. See "Investment Objective and
Management Policies--Investment Restrictions" in the Statement of Additional
Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
Each Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its
assets, but only to secure permitted borrowings; and (ii) invest up to 15% of
the value of its net assets in repurchase agreements providing for settlement
in more than seven days after notice and in other illiquid securities. In
addition, each Equity Portfolio may purchase securities of any company having
less than three years' continuous operation (including operations of any
predecessors) if such purchase does
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not cause the value of such Equity Portfolio's investments in all such
companies to exceed 5% of the value of its total assets. See "Investment
Objective and Management Policies--Investment Restrictions" in the Statement
of Additional Information.
RISK FACTORS
No investment is free from risk. Investing in a Portfolio will subject
investors to certain risks which should be considered.
NET ASSET VALUE FLUCTUATIONS--(ALL PORTFOLIOS)
Each Portfolio's net asset value per share is not fixed and should be expected
to fluctuate. Investors should purchase Portfolio shares only as a supplement
to an overall investment program and only if investors are willing to
undertake the risks involved.
EQUITY SECURITIES--(EQUITY PORTFOLIOS)
Investors should be aware that equity securities fluctuate in value, often
based on factors unrelated to the value of the issuer of the securities, and
that fluctuations can be pronounced. The securities of smaller cap companies
may be subject to more abrupt or erratic market movements than larger cap
companies, both because the securities typically are traded in lower volume
and because the issuers typically are subject to a greater degree to changes
in earnings and prospects. Changes in the value of the equity securities in an
Equity Portfolio's portfolio will result in changes in the value of the Equity
Portfolio's shares and thus the Equity Portfolio's yield and total return to
investors.
FIXED-INCOME SECURITIES--(BOND PORTFOLIO)
Investors should be aware that even though interest-bearing securities are
investments which promise a stable stream of income, the prices of such
securities typically are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. Thus, if
interest rates have increased from the time a security was purchased, such
security, if sold, might be sold at a price less than its cost. Similarly, if
interest rates have declined from the time a security was purchased, such
security, if sold, might be sold at a price greater than its cost. In either
instance, if the security was purchased at face value and held to maturity, no
gain or loss would be realized. Certain securities purchased by the Bond
Portfolio, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the
credit rating or financial condition of the issuing entities. Once the rating
of a security purchased by the Bond Portfolio has been adversely changed, the
Bond Portfolio will consider all circumstances deemed relevant in determining
whether to continue to hold the security. Holding such securities that have
been downgraded below investment grade can subject the Bond Portfolio to
additional risk. Certain securities purchased by the Bond Portfolio, such as
those rated Baa by Moody's or BBB by S&P, Fitch or Duff, may be subject to
such risk with respect to the issuing entity and to greater market
fluctuations than certain lower yielding, higher rated fixed-income
securities. Debt securities which are rated Baa by Moody's are considered
medium grade obligations; they are neither highly protected nor poorly
secured, and are considered by Moody's to have speculative characteristics.
Debt securities rated BBB by S&P are regarded as having adequate capacity to
pay interest and repay principal, and while such debt securities ordinarily
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt securities in this category than in
higher rated categories. Fitch considers the obligor's ability to pay interest
and repay principal on debt securities rated BBB to be adequate; adverse
changes in economic conditions and circumstances, however, are more likely to
have an adverse impact on these debt securities and, therefore, impair timely
payment. Debt securities rated BBB by Duff are considered to have below
average protection factors but still considered sufficient for prudent
investment.
No assurance can be given as to the liquidity of the market for certain
mortgage-backed securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by
the U.S. Government or its agencies and instrumentalities will be made in
accordance with guidelines established by the Fund's Board of Trustees. In
accordance with such guidelines, BSAM will monitor investments in such
securities with particular regard to trading activity, availability of
reliable price information and other relevant information. The Bond Portfolio
intends to treat other stripped
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mortgage-backed securities as illiquid securities. See "Appendix--Certain
Portfolio Securities-Illiquid Securities."
Federal income tax law requires the holder of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. If the Bond Portfolio invests in such
securities it may be required, to maintain its qualification as a regulated
investment company and avoid liability for federal income taxes, to distribute
the income accrued with respect to these securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
cash to satisfy these distribution requirements.
CERTAIN INVESTMENT TECHNIQUES--(ALL PORTFOLIOS)
The use of investment techniques such as engaging in options and futures
transactions, engaging in foreign currency exchange transactions, short
selling and lending portfolio securities involves greater risk than that
incurred by many other funds with a similar objective. Using these techniques
may produce higher than normal portfolio turnover and may affect the degree to
which a Portfolio's net asset value fluctuates. Higher portfolio turnover
rates are likely to result in comparatively greater brokerage commissions or
transaction costs. See "Appendix--Investment Techniques."
For taxable years beginning on or before August 5, 1997, each Portfolio's
ability to engage in certain short-term transactions may be limited by the
requirement that, to qualify as a regulated investment company, it must earn
less than 30% of its gross income from the disposition of securities held for
less than three months. This 30% test limits the extent to which a Portfolio
may sell securities held for less than three months, effect short sales of
securities held for less than three months, write options expiring in less
than three months and invest in certain futures contracts, among other
strategies. With the exception of the above requirement, the amount of
portfolio activity will not be a limiting factor when making portfolio
decisions. Under normal market conditions, the portfolio turnover rate of each
Portfolio generally will not exceed 100%. See "Portfolio Transactions" in the
Portfolios' Statement of Additional Information.
INVESTING IN FOREIGN SECURITIES--(ALL PORTFOLIOS)
Foreign securities markets generally are not as developed or efficient as
those in the United States. Securities of some foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Similarly,
volume and liquidity in most foreign securities markets are less than in the
United States and, at times, volatility of price can be greater than in the
United States. The issuers of some of these securities, such as foreign bank
obligations, may be subject to less stringent or different regulations than
are U.S. issuers. In addition, there may be less publicly available
information about a non-U.S. issuer, and non-U.S. issuers generally are not
subject to uniform accounting and financial reporting standards, practices and
requirements comparable to those applicable to U.S. issuers.
Because stock certificates and other evidences of ownership of such securities
usually are held outside the United States, each Portfolio will be subject to
additional risks which include possible adverse political and economic
developments, possible seizure or nationalization of foreign deposits and
possible adoption of governmental restrictions that might adversely affect the
payment of principal, interest and dividends on the foreign securities or
might restrict the payment of principal, interest and dividends to investors
located outside the country of the issuers, whether from currency blockage or
otherwise. Custodial expenses for a portfolio of non-U.S. securities generally
are higher than for a portfolio of U.S. securities. Since foreign securities
often are purchased with and payable in currencies of foreign countries, the
value of these assets as measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency rates and exchange control regulations.
Some currency exchange costs may be incurred when a Portfolio changes
investments from one country to another.
Furthermore, some of these securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the cost of such
investment and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by a Portfolio from
sources within foreign countries may be reduced by withholding or other taxes
imposed by such countries, although applicable tax conventions may reduce or
eliminate such taxes. All such taxes paid by a Portfolio will reduce its net
income available for distribution to investors.
FOREIGN CURRENCY EXCHANGE--(EQUITY PORTFOLIOS)
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be
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affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or
political developments in the United States or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in currencies
occurs on an exchange. Since a forward currency contract is not guaranteed by
an exchange or clearinghouse, a default on the contract would deprive an
Equity Portfolio of unrealized profits or force the Equity Portfolio to cover
its commitments for purchase or resale, if any, at the current market price.
FOREIGN COMMODITY TRANSACTIONS--(EQUITY PORTFOLIOS)
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the Commodity Futures Trading Commission (the
"CFTC") and may be subject to greater risks than trading on domestic
exchanges. See "Appendix-Investment Techniques." For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
a trader may look only to the broker for performance of the contract. In
addition, unless an Equity Portfolio hedges against fluctuations in the
exchange rate between the U.S. dollar and the currencies in which trading is
done on foreign exchanges, any profits that the Equity Portfolio might realize
in trading could be eliminated by adverse changes in the exchange rate, or the
Equity Portfolio could incur losses as a result of those changes.
SIMULTANEOUS INVESTMENTS--(ALL PORTFOLIOS)
Investment decisions for each Portfolio are made independently from those of
other investment companies or accounts advised by BSAM. However, if such other
investment companies or accounts are prepared to invest in, or desire to
dispose of, securities of the type in which a Portfolio invests at the same
time as the Portfolio, available investments or opportunities for sales will
be allocated equitably to each. In some cases, this procedure may adversely
affect the size of the position obtained for or disposed of by a Portfolio or
the price paid or received by the Portfolio.
Management of the Portfolios
BOARD OF TRUSTEES
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. The Portfolios' Statement of Additional Information
contains the name and general business experience of each Trustee.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolios' investment adviser is BSAM, a wholly-owned subsidiary of The
Bear Stearns Companies Inc., which is located at 575 Lexington Avenue, New
York, New York 10022. The Bear Stearns Companies Inc. is a holding company
which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSAM is a registered investment
adviser and offers, either directly or through affiliates, investment advisory
services to open-end and closed-end investment funds and other managed pooled
investment vehicles with net assets at October 31, 1997 of $7.7 billion.
BSAM supervises and assists in the overall management of the Portfolios'
affairs under an Investment Advisory Agreement between BSAM and the
Portfolios, subject to the overall authority of the Fund's Board of Trustees
in accordance with Massachusetts law. Large Cap Value Portfolio's principal
portfolio managers are Robert S. Reitzes, Mark A. Kurland and James G.
McCluskey. Mark A. Kurland, President and Chairman of BSAM, serves as Co-
Manager of the Portfolio. Mr. Kurland also serves as Senior Managing Director
of Bear Stearns. He was previously Director of Global Research from 1991 to
1995 at Bear Stearns, where he also served as a member of the Investment
Policy Committee, President's Advisory Counsel, Equities Subcommittee and the
Funds Committee. He was previously Co-Head of Institutional Equities and
Director of Research at Mabon, Nugent & Co. Mr. McCluskey serves as Senior
Portfolio Manager of the Portfolio. He is also a Senior Managing Director of
Bear Stearns. Prior to joining Bear Stearns in 1997, Mr. McCluskey was a
Principal and Senior Portfolio Manager at Spare, Kaplan, Bischel & Associates,
Inc. from 1990 to 1997. Mr. Reitzes is also the principal portfolio manager
for Small Cap Value Portfolio. Small Cap Value Portfolio is managed by Robert
S. Reitzes, Harris Cohen and Gail Sprute. Mr. Reitzes is the Director of
Mutual Funds of BSAM and Senior Managing Director of Bear Stearns since March
1994. From January 1991 to March 1994,
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he was Co-Director of Research and Senior Chemical Analyst of C.J.
Lawrence/Deutsche Bank Securities Corp. Ms. Sprute joined BSAM in 1994 as an
equity portfolio manager/equity analyst. From 1991 to 1994, she was employed
by Deutsche Morgan Grenfell/C.J. Lawrence as an associate analyst in the
equity research division. Mr. Cohen joined BSAM in 1996 as an equity portfolio
manager/analyst. Prior to this, he was a Senior Analyst at Furman Selz LLC.
Mr. Cohen graduated in 1993 with a M.B.A. from the Stern School of Business at
New York University. The Bond Portfolio's principal portfolio manager is Peter
E. Mahoney. Mr. Mahoney rejoined Bear Stearns in November 1995 as a Managing
Director of Bear Stearns and Director of Fixed Income Investments of BSAM,
positions he held during his employment with Bear Stearns from June 1987
through November 1994. From November 1994 to November 1995 he was a financial
consultant.
Under the terms of the Investment Advisory Agreement, each Equity Portfolio
has agreed to pay BSAM a monthly fee at the annual rate of 0.75 of 1% of the
Equity Portfolio's average daily net assets and the Bond Portfolio has agreed
to pay BSAM a monthly fee at the annual rate of 0.45 of 1% of the Bond
Portfolio's average daily net assets. For the fiscal year ended March 31,
1997, no fees were paid by Large Cap Value Portfolio, Small Cap Value
Portfolio or the Bond Portfolio pursuant to a voluntary undertaking by BSAM.
Each Portfolio's administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New
York 10167. BSFM offers administrative services to open-end and closed-end
investment funds and other managed pool investment vehicles with assets at
October 31, 1997 of $3.0 billion.
Under the terms of an Administration Agreement with the Fund, BSFM generally
supervises all aspects of the operation of each Portfolio, subject to the
overall authority of the Fund's Board of Trustees in accordance with
Massachusetts law. For providing administrative services to each Portfolio,
the Fund has agreed to pay BSFM a monthly fee at the annual rate of 0.15 of 1%
of each Portfolio's average daily net assets. Under the terms of an
Administrative Services Agreement with the Fund, PFPC Inc. provides certain
administrative services to each Portfolio. For providing these services, PFPC
Inc. is entitled to receive from each Portfolio a monthly fee equal to an
annual rate of 0.10 of 1% of the Portfolio's average daily net assets up to
$200 million, 0.075 of 1% of the next $200 million, 0.05 of 1% of the next
$200 million and 0.03 of 1% of net assets above $600 million, subject to a
minimum annual fee of $132,000 for each Portfolio.
For the fiscal year ended March 31, 1997, Large Cap Value Portfolio, Small Cap
Value Portfolio and the Bond Portfolio each paid PFPC Inc. a monthly fee at
the effective annual rate of 0.49 of 1%, 0.31 of 1% and 0.45 of 1%,
respectively of the Portfolio's average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily
assume certain Portfolio expenses, which would have the effect of lowering the
Portfolio's expense ratio and increasing yield to investors at the time such
amounts are waived or assumed, as the case may be. No Portfolio will pay BSFM
at a later time for any amounts it may waive, nor will a Portfolio reimburse
BSFM for any amounts it may assume. From time to time PFPC Inc. may waive a
portion of its fee. Effective May 1, 1996, and until further notice, PFPC Inc.
will reduce each Portfolio's monthly minimum to $7,500 for net assets of less
than $25 million; $9,167 for net assets of $25 million to $50 million; and
$11,000 for net assets in excess of $50 million. PFPC Inc. reserves the right
to revoke this voluntary fee waiver at any time.
Brokerage commissions may be paid to Bear Stearns for executing transactions
if the use of Bear Stearns is likely to result in price and execution at least
as favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of each
Portfolio's shares. See "Portfolio Transactions" in the Statement of
Additional Information.
Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment
Advisory Agreement is in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
each Portfolio's principal underwriter and distributor of each Portfolio's
shares pursuant to an agreement which is renewable annually. Bear Stearns is
entitled to receive the sales load described under "How to Buy Shares" and
payments under each Portfolio's Distribution and Shareholder Servicing Plans
described below.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is each Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each
Portfolio's transfer agent, dividend disbursing agent and
16
<PAGE>
registrar (the "Transfer Agent"). The Transfer Agent also provides certain
administrative services to each Portfolio.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN--CLASS A AND CLASS C SHARES
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), each Portfolio pays Bear Stearns for
distributing Portfolio shares and for providing personal services to, and/or
maintaining accounts of, Portfolio shareholders.
The Equity Portfolios for Class A shares will pay Bear Stearns an annual fee
of 0.50% and 1.00%, respectively, of each Portfolio's average daily net
assets. The Bond Portfolio for Class A and C shares will pay Bear Stearns
0.35% and 0.75%, respectively of the Portfolio's average daily net assets.
With respect to Class A shares of each Equity Portfolio and the Bond
Portfolio, Bear Stearns will waive the distribution fee to the extent that the
fees would otherwise exceed the NASD limitations on asset-based sales charges.
The 6.25% limitation is imposed on the Portfolio rather than on a per
shareholder basis. Therefore, a long-term shareholder of the Portfolio may pay
more in distribution fees than the economic equivalent of 6.25% of such
shareholder's investment in such shares.
Under the Plan, Bear Stearns may pay third parties in respect of these
services such amount as it may determine. The fees paid to Bear Stearns under
the Plan are payable without regard to actual expenses incurred. With respect
to Class A and C shares of the Equity Portfolios, up to 0.25% of the average
daily net assets of each class will compensate institutions for personal
service and maintenance of accounts holding the Equity Portfolio's shares.
With respect to Class A shares of the Bond Portfolio, up to 0.25% of the
average daily net assets of Class A will compensate institutions for personal
service and maintenance of accounts holding the Bond Portfolio's Class A
shares. The Fund understands that these third parties also may charge fees to
their clients who are beneficial owners of Portfolio shares in connection with
their client accounts. These fees would be in addition to any amounts which
may be received by them from Bear Stearns under the Plan. Fees paid under the
Plan may also include a service fee paid to broker-dealers or others who
provide services in connection with "no transaction fee" or similar programs
for the purchase of shares.
DISTRIBUTION PLAN--CLASS B SHARES
Under a Plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan") for Class B shares, each
Portfolio will pay Bear Stearns an annual fee of 0.75% of the average daily
net assets of Class B shares. Amounts paid under the Distribution Plan
compensates Bear Stearns for distributing Portfolio shares. Bear Stearns may
pay third parties that sell Portfolio shares such amount as it may determine.
Each Portfolio understands that these third parties may also charge fees for
their clients who are beneficial owners of Portfolio shares in connection with
their client accounts. These fees would be in addition to any amounts which
may be received by them from Bear Stearns under the Distribution Plan.
SHAREHOLDER SERVICING PLAN--CLASS B SHARES AND CLASS C SHARES (BOND PORTFOLIO
ONLY)
The Fund has adopted a shareholder servicing plan on behalf of the Portfolios'
Class B shares and the Class C shares of the Bond Portfolio (the "Shareholder
Servicing Plan"). In accordance with the Shareholder Servicing Plan, the Fund
may enter into shareholder service agreements under which each Portfolio pays
fees of up to 0.25% of the average daily net assets of Class B shares of the
Portfolios and Class C shares of the Bond Portfolio for fees incurred in
connection with the personal service and maintenance of accounts holding
Portfolio shares for responding to inquiries of, and furnishing assistance to,
shareholders regarding ownership of the shares or their accounts or similar
services not otherwise provided on behalf of the Portfolio. Fees paid under
the Shareholder Servicing Plan may also include a service fee paid to broker-
dealers or others who provide services in connection with "no transaction fee"
or similar programs for the purchase of shares.
EXPENSE LIMITATION
BSAM has undertaken (until such time as it gives investors at least 60 days
notice to the contrary) that, if in any fiscal year, certain expenses,
including the investment advisory fee and fees paid under the Plan and the
Distribution Plan, exceed 0.80% of the average daily net assets of the Bond
Portfolio--Class A, 1.45% of the average daily net assets of the Bond
Portfolio--Class B, 1.45% of the average
17
<PAGE>
daily net assets of the Bond Portfolio--Class C, 1.50% of the average daily
net assets of each Equity Portfolio--Class A, 2.00% of the average daily net
assets of each Equity Portfolio--Class B, and 2.00% of the average daily net
assets of each Equity Portfolio--Class C for the fiscal year, BSAM may waive a
portion of its investment advisory fee or bear other expenses to the extent of
the excess expense.
How to Buy Shares
GENERAL
The minimum initial investment is $1,000, or $500 if the investment is for
Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant.
Subsequent investments ordinarily must be at least $50 or $25 for retirement
plans. Share certificates are issued only upon written request. No
certificates are issued for fractional shares. The Fund reserves the right to
reject any purchase order. The Fund reserves the right to vary the initial and
subsequent investment minimum requirements at any time. Investments by
employees of Bear Stearns and its affiliates are not subject to minimum
investment requirements.
Purchases of a Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the NASD who have sales agreements with Bear Stearns (an
"Authorized Dealer"). Purchases of a Portfolio's shares also may be made
directly through the Transfer Agent. When purchasing Portfolio shares,
investors must specify which class is being purchased. If you do not specify
in your instructions to the Fund which class of shares you wish to purchase,
the Fund will assume that your instructions apply to Class A shares.
Purchases are effected at the public offering price next determined after a
purchase order is received by Bear Stearns, an Authorized Dealer or the
Transfer Agent (the "trade date"). Payment for Portfolio shares generally is
due to Bear Stearns or the Authorized Dealer on the third business day (the
"settlement date") after the trade date. Investors who make payment before the
settlement date may permit the payment to be held in their brokerage accounts
or may designate a temporary investment for payment until the settlement date.
If a temporary investment is not designated, Bear Stearns or the Authorized
Dealer will benefit from the temporary use of the funds if payment is made
before the settlement date.
CHOOSING A CLASS OF SHARES
Determining which class of shares best suits your investment needs depends on
several factors. Each class of shares has its own operating costs and sales
charges that will affect the results of your investment over time. Perhaps the
most significant factors are how much you intend to invest and the length of
time you expect to hold your investment.
In general, Class A shares are the most beneficial for the investor who
qualifies for a waiver or certain reductions of the front end sales charges as
described herein under "How to Buy Shares--Class A Shares." Class B and Class
C shareholders may pay a CDSC upon redemption. Investors who expect to redeem
during the eight year CDSC period applicable to Class B shares or the one year
CDSC period applicable to Class C shares should consider the cost of the
applicable CDSC plus the aggregate annual distribution and service fees
applicable to Class B and Class C shares, as compared with the cost of the
front end sales charge plus the aggregate annual distribution and service fees
applicable to Class A shares. Because Class B and Class C shareholders pay no
front end sales charge, the entire purchase price is immediately invested in
shares of the Portfolio. Over time, however, the cumulative distribution and
service fees applicable to Class B and Class C shares will approach and may
exceed the 5.50% or 4.50% maximum front end sales charge plus the distribution
and service fees applicable to Class A shares of the Equity Portfolios and the
Bond Portfolio, respectively.
The factors below assume the expenses that apply to each class of shares as
described in this prospectus. In addition, they assume an annual rate of
return of approximately 5%. The actual amount of return may be higher or
lower, depending on the actual investment returns over time. This discussion
is not intended to be investment advice or recommendations, because each
investor's goals, needs and circumstances are unique.
18
<PAGE>
MAXIMUM PURCHASE AMOUNT
There is a maximum purchase limitation of up to $500,000 in the aggregate on
purchases of Class B shares and a maximum purchase limitation of up to $1
million in the aggregate on purchases of Class C shares. Investors who
purchase $1 million or more may only purchase Class A shares (as the sales
charge is waived for purchases in excess of $1 million). However, if you
purchase over $1 million of Class A shares, and do not maintain your
investment for at least one year from the date of purchase, you will be
charged a CDSC of 1%.
LENGTH OF INVESTMENT
Knowing the approximate time you plan to hold your investment can help you
select the class of shares that is most appropriate for you. Generally, the
amount of sales charge you pay over time will depend on the amount you invest.
If you plan to invest a large amount over time, the reduced sales charges
available for larger purchases of Class A shares may, over time, offset the
effect of paying an initial sales charge on your investment (the initial sales
charge of Class A Shares effectively reduces the amount of your investment),
compared to the higher expenses on Class B shares or Class C shares, which do
not have an initial sales charge. Your entire investment in Class B shares is
available to work for you from the time you make your initial investment but
the higher expenses will cause your Class B shares (until conversion to Class
A shares) to have a higher expense ratio and to pay lower dividends, to the
extent dividends are paid, than Class A shares. If you prefer not to pay an
initial sales charge on an investment you might consider purchasing Class B
shares.
ALL PORTFOLIOS
With respect to each Portfolio, if you plan to invest less than $250,000 for a
period of approximately eight years or less, you should probably consider
Class C shares as the appropriate choice even though the class expenses are
higher, because there is no initial sales charge and no CDSC after one year.
If you plan to invest less than $250,000 for a period of between nine and
twelve years, Class B shares may be the appropriate choice. If you plan to
hold your investment for more than twelve years, then Class A shares may be
the appropriate choice, because the effect of the higher class expenses of
Class B and C shares might be greater than the effect of the initial sales
charge on the Class A shares.
EQUITY PORTFOLIOS
With respect to the Equity Portfolios, if you plan to invest more than
$250,000 but less than $500,000 for a period of five years or less, then you
should probably consider investing in Class C shares. If you plan to hold your
investment for approximately six years or more you may find Class A shares
more advantageous because the annual total expenses on Class B and C
shares will have a greater impact on your investment over the longer term than
the reduced front end sales charge available for larger purchases of Class A
shares.
With respect to the Equity Portfolios, if you plan to invest more than
$500,000 but less than $1,000,000 for a period of four years or less, then you
should probably consider investing in Class C shares. If you plan to hold your
investment for approximately five years or more, you may find Class A shares
more advantageous.
For investors who invest $1 million or more, Class A shares will be the most
advantageous choice, no matter how long you intend to hold your shares.
BOND PORTFOLIO
With respect to the Bond Portfolio, if you plan to invest more than $250,000
but less than $500,000 for a period of six years or less, then you should
probably consider investing in Class C shares. If you plan to hold your
investment for approximately seven years or more you may find Class A shares
more advantageous.
With respect to the Bond Portfolio, if you plan to invest more than $500,000
but less than $1,000,000 for a period of five years or less, then you should
probably consider investing in Class C shares. If you plan to hold your
investment for approximately five years or more, you may find Class A shares
more advantageous.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling
shares of one class of shares than for selling another class. The purpose of
both the CDSC and the asset-based sales charge is to compensate Bear Stearns
and the brokers who sell the shares.
19
<PAGE>
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds--[Name of
Portfolio]" if purchased directly from the Portfolio, and should be directed
to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds--[Name of
Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960. Direct overnight
deliveries to PFPC, Inc., 400 Bellevue Parkway, Suite 108, Wilmington,
Delaware 19809. Payment by check or Federal Reserve draft must be received
within three business days of receipt of the purchase order by Bear Stearns or
an Authorized Dealer. Shareholders may not purchase shares of the Portfolio
with a check issued by a third party and endorsed over to the Portfolio.
Orders placed directly with the Transfer Agent must be accompanied by payment.
Bear Stearns (or an investor's Authorized Dealer) is responsible for
forwarding payment promptly to the Fund. The Fund will charge $7.50 for each
wire redemption. The payment proceeds of a redemption of shares recently
purchased by check may be delayed as described under "How to Redeem Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares
through the Transfer Agent. To make an initial investment in a Portfolio, an
investor must establish an account with the Portfolio by furnishing necessary
information to the Fund. An account with a Portfolio may be established by
completing and signing the Account Information Form indicating which class of
shares is being purchased, a copy of which is attached to this Prospectus, and
mailing it, together with a check to cover the purchase, to PFPC Inc.,
Attention: The Bear Stearns Funds-[Name of Portfolio], P.O. Box 8960,
Wilmington, Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph. The
Portfolio account number should appear on the check.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the relevant Portfolio
calculates its net asset value are priced according to the net asset value
determined on that date. Purchase orders received after the close of trading
on the New York Stock Exchange are priced as of the time the net asset value
is next determined.
NET ASSET VALUE
Shares of the Portfolios are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of each Portfolio is computed by
dividing the value of the Portfolio's net assets represented by such class
(i.e., the value of its assets less liabilities) by the total number of shares
of such class outstanding. Each Equity Portfolio's investments are valued
based on market value or, where market quotations are not readily available,
based on fair value as determined in good faith by, or in accordance with
procedures established by, the Fund's Board of Trustees. Substantially all of
the Bond Portfolio's investments are valued each business day at fair value as
determined by one or more independent pricing services (the "Service")
approved by the Fund's Board of Trustees. Procedures of the Service are
reviewed under the general supervision of the Fund's Board of Trustees. The
remaining assets of the Bond Portfolio are valued using available market
quotations or at fair value as determined in good faith by, or in accordance
with procedures established by, the Fund's Board of Trustees. For further
information regarding the methods employed in valuing each Portfolio's
investments, see "Determination of Net Asset Value" in the Portfolios'
Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to
the Fund could subject the investor to backup withholding and a $50 penalty
imposed by the Internal Revenue Service (the "IRS").
20
<PAGE>
CLASS A SHARES
The sales charge may vary depending on the dollar amount invested in each
Portfolio. The public offering price for Class A shares of each Equity
Portfolio is the net asset value per share of that class plus a sales load,
which is imposed in accordance with the following schedule:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 5.50% 5.82% 5.25%
$50,000 to less than
$100,000..................... 4.75 4.99 4.25
$100,000 to less than
$250,000..................... 3.75 3.90 3.25
$250,000 to less than
$500,000..................... 2.75 2.83 2.50
$500,000 to less than
$1,000,000................... 2.00 2.04 1.75
$1,000,000 and above......... 0.00* 0.00 1.25
</TABLE>
The public offering price for Class A shares of the Bond Portfolio is the net
asset value per share of that class plus a sales load, which is imposed in
accordance with the following schedule:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 4.50% 4.71% 4.25%
$50,000 to less than
$100,000..................... 4.25 4.44 4.00
$100,000 to less than
$250,000..................... 3.25 3.36 3.00
$250,000 to less than
$500,000..................... 2.50 2.56 2.25
$500,000 to less than
$1,000,000................... 2.00 2.04 1.75
$1,000,000 and above......... 0.00* 0.00 1.25
</TABLE>
- ------
* There is no initial sales charge on purchases of $1,000,000 or more of Class
A shares. However, if an investor purchases Class A shares without an
initial sales charge as part of an investment of at least $1,000,000 and
redeems those shares within one year after purchase, a CDSC of 1.00% will be
imposed at the time of redemption. Letter of Intent and Right of
Accumulation apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the
same for all dealers. From time to time, Bear Stearns may make or allow
additional payments or promotional incentives to dealers that sell Class A
shares. In some instances, these incentives may be offered only to certain
dealers who have sold or may sell significant amounts of Class A shares.
Dealers may receive a larger percentage of the sales load from Bear Stearns
than they receive for selling most other funds.
Class A shares may be sold at net asset value to (a) Bear Stearns, its
affiliates or their respective officers, directors or employees (including
retired employees), any partnership of which Bear Stearns is a general
partner, any Trustee or officer of the Fund and designated family members of
any of the above individuals; (b) qualified retirement plans of Bear Stearns;
(c) any employee or registered representative of any Authorized Dealer or
their respective spouses and minor children; (d) trustees or directors of
investment companies for which Bear Stearns or an affiliate acts as sponsor;
(e) any state, county or city, or any instrumentality, department, authority
or agency thereof, which is prohibited by applicable investment laws from
paying a sales load or commission in connection with the purchase of Portfolio
shares; (f) any institutional investment clients including corporate sponsored
pension and profit-sharing plans, other benefit plans and insurance companies;
and (g) any pension funds, state and municipal governments or funds, Taft-
Hartley plans and qualified non-profit organizations, foundations and
endowments; (h) trust institutions (including bank trust departments)
investing on their own behalf or on behalf of their clients; and (i) accounts
as to which an Authorized Dealer charges an asset management fee. To take
advantage of these exemptions, a purchaser must indicate its eligibility for
an exemption to Bear Stearns along with its Account Information Form. Such
purchaser agrees to notify Bear Stearns if, at any time of any additional
purchases, it is no longer eligible for an exemption. Bear Stearns reserves
the right to request certification or additional information from a purchaser
in order to verify that such purchaser is eligible for an exemption.
21
<PAGE>
Bear Stearns reserves the right to limit the participation of its employees in
Class A shares of each Portfolio. Dividends and distributions reinvested in
Class A shares of a Portfolio will be made at the net asset value per share on
the reinvestment date.
Class A shares of each Portfolio also may be purchased at net asset value,
with the proceeds from the redemption of shares of an investment company sold
with a sales charge or commission and not distributed by Bear Stearns. This
includes shares of a mutual fund which were subject to a contingent deferred
sales charge upon redemption. The purchase must be made within 60 days of the
redemption, and Bear Stearns must be notified by the investor in writing, or
by the investor's investment professional, at the time the purchase is made.
However, if such investor redeems those shares within one year after purchase,
a CDSC of 1.00% will be imposed at the time of redemption. Bear Stearns will
offer to pay Authorized Dealers an amount up to 1.25% of the net asset value
of shares purchased by the dealers' clients or customers in this manner.
In addition, Class A Shares of each Portfolio may be purchased at net asset
value by the following customers of a broker that operates a master account
for purchasing and redeeming, and otherwise providing shareholder services in
respect of Fund shares pursuant to agreements with the Fund or Bear Stearns:
(i) investment advisers and financial planners who place trades for their own
accounts or for the accounts of their clients and who charge a management,
consulting or other fee, (ii) clients of such investment advisers and
financial planners if such clients place trades through accounts linked to
master accounts of such investment advisers or financial planners on the books
and records of such broker and (iii) retirement and deferred compensation
plans, and trusts used to fund such plans, including, but not limited to,
plans or trusts defined in sections 401(a), 403(b) or 457 of the Internal
Revenue Code of 1986, as amended (the "Code"), and "rabbi trusts," provided,
in each case, the purchase transaction is effected through such broker. The
broker may charge a fee for transactions in Portfolio shares.
CLASS B SHARES
The public offering price for Class B shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class B shares made
within six years of purchase. See "How to Redeem Shares". The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first
day of that month. In processing redemptions of Class B shares, the Portfolios
will first redeem shares not subject to any CDSC, and then shares held longest
during the eight-year period, resulting in the shareholder paying the lowest
possible CDSC. The amount of the CDSC charged upon redemption is as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CDSC
- --------------------------------------------------------------------------------
<S> <C>
First................................................... 5%
Second.................................................. 4%
Third................................................... 3%
Fourth.................................................. 3%
Fifth................................................... 2%
Sixth................................................... 1%
Seventh................................................. 0%
Eighth*................................................. 0%
</TABLE>
- ------
* As discussed below, Class B shares automatically convert to Class A shares
after the eighth year following purchase.
Class B shares of a Portfolio will automatically convert into Class A shares
of the same Portfolio at the end of the calendar quarter that is eight years
after the initial purchase of the Class B shares. Class B shares acquired by
exchange from Class B shares of another portfolio will convert into Class A
shares of such Portfolio based on the date of the initial purchase. Class B
shares acquired through reinvestment of distributions will convert into Class
A shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolios are advised that such conversions may
constitute taxable
22
<PAGE>
The Bear Stearns Funds
Account Information Form
Please Note: Do not use this form to open a retirement plan account. For
retirement plan forms call 1-800-447-1139. For assistance in completing
this form, contact PFPC Inc. at 1-800-447-1139.
1 Account Type (Please print; indicate only one registration type)
|_| Individual |_| Joint Tenant
___________________________________________________________________________
NAME
___________________________________________________________________________
JOINT REGISTRANT, IF ANY (SEE NOTES 1 AND 2)
__ __ __ - __ __ - __ __ __ __ __ __ - __ __ __ __ __ __ __
SOCIAL SECURITY NUMBER OF PRIMARY OWNER TAXPAYER IDENTIFICATION NUMBER
(1) Use only the Social Security number or Taxpayer Identification
Number of the first listed joint tenant.
(2) For joint registrations, the account registrants will be joint
tenants with right of survivorship and not tenants in common unless
tenants in common or community property registrations are requested.
___________________________________________________________________________
|_| Uniform Gift to Minors, or |_| Uniform Transfer to Minors
(where allowed by law)
___________________________________________________________________________
NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED)
___________________________________________________________________________
NAME OF MINOR (ONLY ONE PERMITTED)
Under the ________________________ Uniform Gift/Transfers to Minors Act.
STATE RESIDENCE OF MINOR
___ ___ / ___ ___ / ___ ___ ___ ___ ___ - ___ ___ - ___ ___ ___ ___
MINOR'S DATE OF BIRTH MINOR'S SOCIAL SECURITY NUMBER
(REQUIRED TO OPEN ACCOUNT)
___________________________________________________________________________
|_| Corporation |_| Partnership |_| Trust* |_| Other
___________________________________________________________________________
NAME OF CORPORATION, PARTNERSHIP, OR OTHER
___________________________________________________________________________
NAME(S) OF TRUSTEE(S)
__ __ __ - __ __ - __ __ __ __ __ __ - __ __ __ __ __ __ __
SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER
(REQUIRED TO OPEN ACCOUNT) (REQUIRED TO OPEN ACCOUNT)
* If a Trust, include date of trust instrument and list of trustees if
they are to be named in the registration.
2 Mailing Address
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
( ) ( )
_________________________________________ _______________________________
DAY TELEPHONE EVENING TELEPHONE
3 Investment Information
Method of Investment
|_| I have enclosed a check for a minimum initial investment of $1,000
per Fund.
|_| I have enclosed a check for a minimum subsequent investment of $50
per Portfolio or completed the Systematic Investment Plan
information in Section 13.
|_| I purchased _____________________ shares of
_______________________________________________ through my broker on
____/____/____. Confirm # _______________.
Please make my investment in the Funds designated below:
---------------------------------------------------------------------------
CLASS A CLASS B CLASS C BEAR STEARNS FUNDS INVESTMENT AMOUNT
---------------------------------------------------------------------------
|_| |_| |_| S&P STARS Portfolio $__________
|_| |_| |_| Large Cap Value Portfolio $__________
|_| |_| |_| Small Cap Value Portfolio $__________
|_| |_| |_| Total Return Bond Portfolio $__________
|_| |_| |_| The Insiders Select Fund $__________
|_| |_| |_| Focus List Portfolio $__________
|_| |_| |_| Balanced Portfolio $__________
|_| |_| |_| High Yield Total Return Portfolio $__________
|_| |_| |_| International Equity Portfolio $__________
|_| |_| |_| Money Market Portfolio $__________
TOTAL INVESTMENT AMOUNT $
==========
Note: All shares purchased will be held in a shareholder account for the
investor at the Transfer Agent. Checks drawn on foreign banks and checks
made payable to persons or entities other than the Portfolio will not be
accepted. Checks should be made payable to the Portfolio which you are
investing in. If no class is designated, your investment will be made in
Class A shares.
NOT PART OF THE PROSPECTUS
<PAGE>
4 Reduced Sales Charge (Available for Class A Shares Only)
Method of Investment
Are you a shareholder in another Bear Stearns Fund? |_| Yes |_| No
|_| I apply for Right of Accumulation reduced sales charges based on the
following Bear Stearns Fund Accounts (excluding Class C Shares).
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
Letter of Intent
|_| I am already investing under an existing Letter of Intent.
|_| I agree to the Letter of Intent provisions in the Portfolio's current
prospectus. During a 13-month period, I plan to invest a dollar amount
of at least: |_| $50,000 |_| $100,000 |_| $250,000 |_| $500,000
|_| $1,000,000
Net Asset Value Purchase
|_| I qualify for an exemption from the sales charge by meeting the
conditions set forth in the prospectus. (Please attach certification
to this form.)
|_| I qualify to purchase shares at net asset value, with proceeds
received from a mutual fund or closed-end fund not distributed by Bear
Stearns. (Please attach proof of fund share redemption.)
5 Distribution Options
Dividends and capital gains may be reinvested or paid by check. If no
options are selected below, both dividends and capital gains will be
reinvested in additional Portfolio shares.
Dividends |_| Pay by check. |_| Reinvest.
Capital Gains |_| Pay by check. |_| Reinvest.
The Redirected Distribution Option allows an investor to have dividends and
any other distributions from a Portfolio automatically used to purchase
shares of the same class of any other Portfolio. The receiving account must
be in the same name as your existing account.
|_| Please reinvest dividends and capital gains from the
____________________________ to the __________________________.
(NAME OF PORTFOLIO) (NAME OF PORTFOLIO)
If you elect to have distributions paid by check, distributions will be
sent to the address of record. Distributions may also be sent to another
payee:
___________________________________________________________________________
NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
___________________________________________________________________________
Optional Features
6 Automatic Withdrawal Plan
|_| Fund Name ______________________________ |_| Amount _____________
|_| Startup month __________________________
Frequency option: |_| Monthly |_| Every other month |_| Quarterly
|_| Semiannually |_| Annually
o A minimum account value of $5,000 in a single account is required to
establish an automatic withdrawal plan.
o Payments will be made on or near the 25th of the month.
o Shareholders holding share certificates are not eligible for the
Automatic Withdrawal Plan.
|_| Please mail checks to Address of Record (Named in Section 2)
|_| Please electronically credit my Bank of Record (Named in Section 9)
|_| Special payee as specified below:
___________________________________________________________________________
NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
7 Telephone Exchange Privilege
Unless indicated below, I authorize the Transfer Agent to accept
instructions from any persons to exchange shares in my account(s) by
telephone, in accordance with the procedures and conditions set forth in
the Portfolio's current prospectus.
|_| I DO NOT want the Telephone Exchange Privilege.
NOT PART OF THE PROSPECTUS
<PAGE>
8 Telephone Redemption Privilege
|_| I authorize the Transfer Agent to accept instructions from any person
to redeem shares in my account(s) by telephone, in accordance with the
procedures and conditions set forth in the Portfolio's current prospectus.
Checks for redemption of proceeds will be sent by check via U.S. Mail to
the address of record, unless the information in Section 9 is completed for
redemption by wire of $500 or more.
9 Bank of Record (for Telephone Redemptions and/or Systematic Investment
Plans)
Please attach a voided check (for electronic credit to your checking
account) in the space provided in Section 13.
___________________________________________________________________________
BANK NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
___________________________________________________________________________
BANK ABA NUMBER BANK ACCOUNT NUMBER
___________________________________________________________________________
ACCOUNT NAME
10 Signature and Taxpayer Certification
The undersigned warrants that I(we) have full authority and, if a natural
person, I(we) am(are) of legal age to purchase shares pursuant to this
Account Information Form, and have received a current prospectus for the
Bear Stearns Fund(s) in which I(we) am(are) investing. The undersigned
acknowledges that the Telephone Exchange Privilege is automatic and that
I(we) may bear the risk of loss in event of fraudulent use of the
Privilege. If I(we) do not want the Telephone Exchange Privilege, I(we)
have so indicated on this Account Information Form.
Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is
required to have the following certification:
Under penalty of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from
backup withholding or (b) I have not been notified by the IRS that I am
subject to 31% backup withholding as a result of a failure to report all
interest or dividends or (c) the IRS has notified me that I am no longer
subject to backup withholding.
Certification Instructions -- You must cross out item (2) above if you have
been notified by the IRS that you are currently subject to backup
withholding because of underreporting of interest or dividends on your tax
return. Mutual fund shares are not deposits of, or guaranteed by, any
depository institution, nor are they insured by the FDIC. Investment in the
funds involves investment risks, including possible loss of principal.
|_| Exempt from backup withholding
|_| Nonresident alien (Form W-8 attached) _________________________________
COUNTRY OF CITIZENSHIP
___________________________________________________________________________
AUTHORIZED SIGNATURE TITLE DATE
___________________________________________________________________________
AUTHORIZED SIGNATURE TITLE DATE
11 For Authorized Dealer Use Only (Please Print)
We hereby authorize the Transfer Agent to act as our agent in connection
with the transactions authorized by the Account Information Form and agree
to notify the Transfer Agent of any purchases made under a Letter of Intent
or Right of Accumulation. If this Account Information Form includes a
Telephone Exchange Privilege authorization, a Telephone Redemption
Privilege authorization or an Automatic Withdrawal Plan request, we
guarantee the signature(s) above.
___________________________________________________________________________
DEALER'S NAME DEALER NUMBER
___________________________________________________________________________
MAIN OFFICE ADDRESS BRANCH NUMBER
___________________________________________________________________________
REPRESENTATIVE'S NAME REP. NUMBER
( )
___________________________________________________ ______________________
BRANCH ADDRESS TELEPHONE NUMBER
___________________________________________________________________________
AUTHORIZED SIGNATURE OF DEALER TITLE DATE
12 Additional Account Statements (Please Print)
In addition to myself and my representative, please send copies of my
account statements to:
___________________________________ ______________________________________
NAME NAME
___________________________________ ______________________________________
ADDRESS ADDRESS
___________________________________ ______________________________________
CITY, STATE, ZIP CODE CITY, STATE, ZIP CODE
NOT PART OF THE PROSPECTUS
<PAGE>
events for federal tax purposes, which the Portfolios believe is unlikely. If
conversions do not occur as a result of possible taxability, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indeterminate period.
The purpose of the conversion feature is to allow the holders of Class B
shares the ability to not bear the burden of distribution related expenses
when the shares have been outstanding for a duration sufficient for Bear
Stearns to have obtained compensation for distribution related expenses
incurred in connection with Class B shares.
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares."
RIGHT OF ACCUMULATION--CLASS A SHARES
Pursuant to the Right of Accumulation, certain investors are permitted to
purchase Class A shares of any Portfolio at the sales charge applicable to the
total of (a) the dollar amount then being purchased plus (b) the current
public offering price of all Class A shares of the Portfolios, shares of the
Fund's other portfolios and shares of certain other funds sponsored or advised
by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns
Investment Trust, then held by the investor. The following purchases of Class
A shares may be aggregated for the purposes of determining the amount of
purchase and the corresponding sales load: (a) individual purchases on behalf
of a single purchaser, the purchaser's spouse and their children under the age
of 21 years including shares purchased in connection with a retirement account
exclusively for the benefit of such individual(s), such as an IRA, and
purchases made by a company controlled by such individual(s); (b) individual
purchases by a trustee or other fiduciary account, including an employee
benefit plan (such as employer-sponsored pension, profit-sharing and stock
bonus plans, including plans under section 401(k) of the Code, and medical,
life and disability insurance trusts); or (c) individual purchases by a
trustee or other fiduciary purchasing shares concurrently for two or more
employee benefit plans of a single employer or of employers affiliated with
each other. Subsequent purchases made under the conditions set forth above
will be subject to the minimum subsequent investment of $50 and will be
entitled to the Right of Accumulation.
LETTER OF INTENT--CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load
applicable to the total number of Class A shares of each Portfolio, Class A
shares of the Fund's other portfolios and shares of certain other funds
sponsored or advised by Bear Stearns, including the Emerging Markets Debt
Portfolio of Bear Stearns Investment Trust, purchased in a 13-month period
pursuant to the terms and under the conditions set forth herein. A minimum
initial purchase of $1,000 is required. The Transfer Agent will hold in escrow
5% of the amount indicated in the Account Information Form for payment of a
higher sales load if the investor does not purchase the full amount indicated
in the Account Information Form. The escrow will be released when the investor
fulfills the terms of the Letter of Intent by purchasing the specified amount.
If an investor's purchases qualify for a further sales load reduction, the
sales load will be adjusted to reflect the total purchase at the end of 13
months. If total purchases are less than the amount specified, the investor
will be requested to remit an amount equal to the difference between the sales
load actually paid and the sales load applicable to the aggregate purchases
actually made. If such remittance is not received within 20 days, the Transfer
Agent, as attorney-in-fact, will redeem an appropriate number of shares held
in escrow to realize the difference. Checking a box in the Letter of Intent
section of the Account Information Form does not bind an investor to purchase,
or a Portfolio to sell, the full amount indicated at the sales load in effect
at the time of signing, but the investor must complete the intended purchase
to obtain the reduced sales load. At the time an investor purchases shares of
any of the above-listed funds, the investor must indicate its intention to do
so under the Letter of Intent section of the Account Information Form.
SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan permits investors to purchase shares of a
Portfolio (minimum initial investment of $250 and minimum subsequent
investments of $50 per transaction) at regular intervals selected by the
investor. Provided the investor's bank or other financial institution allows
automatic withdrawals, Portfolio shares may be purchased by transferring funds
from the account designated by
23
<PAGE>
the investor. At the investor's option, the account designated will be debited
in the specified amount, and Portfolio shares will be purchased once a month,
on or about the twentieth day. Only an account maintained at a domestic
financial institution which is an Automated Clearing House member may be so
designated. Investors desiring to participate in the Systematic Investment
Plan should call the Transfer Agent at 1-800-447-1139 to obtain the
appropriate forms. The Systematic Investment Plan does not assure a profit and
does not protect against loss in declining markets. Since the Systematic
Investment Plan involves the continuous investment in a Portfolio regardless
of fluctuating price levels of the Portfolio's shares, investors should
consider their financial ability to continue to purchase through periods of
low price levels. The Fund may modify or terminate the Systematic Investment
Plan at any time or charge a service fee. No such fee currently is
contemplated.
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a class of a Portfolio, shares of the same class of the Fund's other
portfolios or shares of certain other funds sponsored or advised by Bear
Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns
Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the
extent such shares are offered for sale in the investor's state of residence.
These funds have different investment objectives which may be of interest to
investors. To use this privilege, investors should consult their account
executive at Bear Stearns, their account executive at an Authorized Dealer or
the Transfer Agent to determine if it is available and whether any conditions
are imposed on its use.
To use this privilege, exchange instructions must be given to the Transfer
Agent in writing or by telephone. A shareholder wishing to make an exchange
may do so by sending a written request to the Transfer Agent at the address
given above in "How to Buy Shares--General." Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless
they indicate on the account application that they do not wish to use this
privilege. Shareholders holding share certificates are not eligible to
exchange shares of a Portfolio by phone because share certificates must
accompany all exchange requests. To add this feature to an existing account
that previously did not provide for this option, a Telephone Exchange
Authorization Form must be filed with the Transfer Agent. This form is
available from the Transfer Agent. Once this election has been made, the
shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 to
request the exchange. During periods of substantial economic or market change,
telephone exchanges may be difficult to complete and shareholders may have to
submit exchange requests to the Transfer Agent in writing.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor any Portfolio will be liable for
losses or expenses arising out of telephone instructions reasonably believed
to be genuine.
If the exchanging shareholder does not currently own shares of the portfolio
or fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and Authorized
Dealer of record as the account from which shares are exchanged, unless
otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as described below. To
participate in the Systematic Investment Plan or establish automatic
withdrawal for the new account, however, an exchanging shareholder must file a
specific written request. The Exchange Privilege may be modified or terminated
at any time, or from time to time, by the Fund on 60 days' notice to the
affected portfolio or fund shareholders. The Fund, BSAM and Bear Stearns will
not be liable for any loss, liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Fund will
use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (such as
the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. Except in the case of Personal
24
<PAGE>
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the
shares being exchanged must have a value of at least the minimum initial
investment required for the portfolio or fund into which the exchange is being
made; if making an exchange to an existing account, the dollar value must
equal or exceed the applicable minimum for subsequent investments. If any
amount remains in the investment portfolio from which the exchange is being
made, such amount must not be below the minimum account value required by the
Portfolio or Fund.
Shares will be exchanged at the next determined net asset value. No CDSC will
be imposed on Class B or C shares at the time of an exchange. The CDSC
applicable on redemption of Class B or C shares will be calculated from the
date of the initial purchase of the Class B or C shares exchanged. If an
investor is exchanging Class A shares into a portfolio or fund that charges a
sales load, the investor may qualify for share prices which do not include the
sales load or which reflect a reduced sales load, if the shares of the
portfolio or fund from which the investor is exchanging were: (a) purchased
with a sales load; (b) acquired by a previous exchange from shares purchased
with a sales load; or (c) acquired through reinvestment of dividends or
distributions paid with respect to the foregoing categories of shares. To
qualify, at the time of the exchange the investor must notify Bear Stearns,
the Authorized Dealer or the Transfer Agent. Any such qualification is subject
to confirmation of the investor's holdings through a check of appropriate
records. No fees currently are charged shareholders directly in connection
with exchanges, although the Fund reserves the right, upon not less than 60
days' written notice, to charge shareholders a $5.00 fee in accordance with
rules promulgated by the Securities and Exchange Commission. The Fund reserves
the right to reject any exchange request in whole or in part. The Exchange
Privilege may be modified or terminated at any time upon notice to
shareholders.
The exchange of shares of one portfolio or fund for shares of another is
treated for federal income tax purposes as a sale of the shares given in
exchange by the shareholder and, therefore, an exchanging shareholder may
recognize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest
automatically dividends and/or capital gain distributions, if any, paid by a
Portfolio in shares of the same class of another portfolio of the Fund or a
fund advised or sponsored by Bear Stearns of which the shareholder is an
investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the
other portfolio or fund will be purchased at the current net asset value. If
an investor is investing in a class that charges a CDSC, the shares purchased
will be subject upon redemption to the CDSC, if applicable, to the purchased
shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
GENERAL
The redemption price will be based on the net asset value next computed after
receipt of a redemption request; in certain instances a CDSC will be charged.
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one class, any
request for redemption must specify the class of shares being redeemed. If the
investor fails to specify the class of shares to be redeemed or if the
investor owns fewer shares of the class than specified to be redeemed, the
redemption request may be delayed until the Transfer Agent receives further
instructions from the investor, the investor's Bear Stearns account executive
or the investor's Authorized Dealer. The Fund imposes no charges (other than
any applicable CDSC) when shares are redeemed directly through Bear Stearns.
Each Portfolio ordinarily will make payment for all shares redeemed within
three days after receipt by the Transfer Agent of a redemption request in
proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased Portfolio shares by check
and subsequently submits a redemption request by mail, the redemption proceeds
will not be
25
<PAGE>
transmitted until the check used for investment has cleared, which may take up
to 15 days. The Fund will reject requests to redeem shares by telephone or
wire for a period of 15 days after receipt by the Transfer Agent of the
purchase check against which such redemption is requested. This procedure does
not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 days written notice if the account's net asset value is $750 or
less, for reasons other than market conditions, and remains so during the
notice period. Shareholders who have redeemed Class A shares may reinstate
their Portfolio account without a sales charge up to the dollar amount
redeemed by purchasing Class A shares of the same Portfolio or of any other
Bear Stearns Fund within 60 days of the redemption. Shareholders should obtain
and read the applicable prospectuses of such other funds and consider their
objectives, policies and applicable fees before investing in any of such
funds. To take advantage of this reinstatement privilege, shareholders must
notify their Bear Stearns account executive, Authorized Dealer or the Transfer
Agent at the time the privilege is exercised.
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class A
shares within one year of the date of purchase by any investor that purchased
Class A shares as part of an investment of at least $1,000,000. A CDSC of 1%
is also imposed on any redemption of Class A shares within one year of the
date of purchase by any investor that purchased the shares with the proceeds
from the redemption of shares of an investment company sold with a sales
charge or commission and not distributed by Bear Stearns. No CDSC will be
imposed to the extent that the net asset value of the Class A shares redeemed
does not exceed (i) the current net asset value of Class A shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii)
increases in the net asset value of an investor's Class A shares above the
dollar amount of all such investor's payments for the purchase of Class A
shares held by the investor at the time of redemption. See the Statement of
Additional Information for more information.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of
Class B shares within six years of the date of purchase. No CDSC will be
imposed to the extent that the net asset value of the Class B shares redeemed
does not exceed (i) the current net asset value of Class B shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii)
increases in the net asset value of an investor's Class B shares above the
dollar amount of all such investor's payments for the purchase of Class B
shares held by the investor at the time of redemption.
If the aggregate value of Class B shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class B shares above
the total amount of payments for the purchase of Class B shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of an Equity Portfolio at
$10 per share for a cost of $1,000. Subsequently, the shareholder acquired 5
additional shares through dividend reinvestment. During the first year after
the purchase the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 5% for a total CDSC of $12.00.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases
in the net asset value
26
<PAGE>
of an investor's Class C shares above the dollar amount of all such investor's
payments for the purchase of Class C shares held by the investor at the time
of redemption.
If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class C shares above
the total amount of payments for the purchase of Class C shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of an Equity Portfolio at
$10 per share for a cost of $1,000. Subsequently, the shareholder acquired 5
additional shares through dividend reinvestment. During the first year after
the purchase the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 1% for a total CDSC of $2.40.
WAIVER OF CDSC--CLASS A, B AND C SHARES
The CDSC applicable to Class A, B and C shares will be waived in connection
with (a) redemptions made within one year after the death or disability, as
defined in section 72(m)(7) of the Code, of the shareholder, (b) redemptions
by employees participating in eligible benefit plans, (c) redemptions as a
result of a combination of any investment company with a Portfolio by merger,
acquisition of assets or otherwise, (d) a distribution following retirement
under a tax-deferred retirement plan or upon attaining age 70 1/2 in the case
of an IRA or Keogh plan or custodial account pursuant to section 403(b) of the
Code, and (e) to the extent that shares redeemed have been withdrawn from the
Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the
automatic withdrawal is established. If the Fund's Trustees determine to
discontinue the waiver of the CDSC, the disclosure in the Portfolios'
prospectus will be revised appropriately. Any Portfolio shares subject to a
CDSC which were purchased prior to the termination of such waiver will have
the CDSC waived as provided in the Portfolio's prospectus at the time of the
purchase of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor
must notify the Transfer Agent or the investor's Bear Stearns account
executive or the investor's Authorized Dealer must notify Bear Stearns. Any
such qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their
account executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a
redemption request by repurchasing Fund shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by Bear
Stearns or the Authorized Dealer. Under normal circumstances, within three
days, redemption proceeds will be paid by check or credited to the
shareholder's brokerage account at the election of the shareholder. Bear
Stearns account executives or Authorized Dealers are responsible for promptly
forwarding redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably
believed by the Transfer Agent to be genuine. The Fund will require the
Transfer Agent to employ reasonable procedures, such as requiring a form of
personal identification, to confirm that instructions are genuine and, if it
does not follow such procedures, the Transfer Agent or the Fund may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the
Fund nor the Transfer Agent will be liable for following telephone
instructions reasonably believed to be genuine.
27
<PAGE>
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares through the Transfer Agent. Mail
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds--[Name of Portfolio], P.O. Box 8960,
Wilmington, Delaware 19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the
shareholder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any
Authorized Dealer, or to the Transfer Agent if the shares are not held in a
brokerage account.
If share certificates have been issued, written redemption instructions,
indicating the portfolio from which shares are to be redeemed, and duly
endorsed share certificates, must be received by the Transfer Agent in proper
form and signed exactly as the shares are registered. If the proceeds of the
redemption would exceed $25,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the shareholder is a corporation,
partnership, trust or fiduciary, signature(s) must be guaranteed by any
eligible guarantor institution. A signature guarantee is designed to protect
the shareholders and the Portfolio against fraudulent transactions by
unauthorized persons. A signature guarantee may be obtained from a domestic
bank or trust company, recognized broker, dealer, clearing agency or savings
association who are participants in a medallion program by the Securities
Transfer Association. The three recognized medallion programs are Securities
Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program
(SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP).
Signature Guarantees which are not a part of these programs will not be
accepted. Please note that a notary public stamp or seal is not acceptable.
The Fund reserves the right to amend or discontinue its signature guarantee
policy at any time and, with regard to a particular redemption transaction, to
require a signature guarantee at its discretion. Any questions with respect to
signature-guarantees should be directed to the Transfer Agent by calling 1-
800-447-1139.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting Bear Stearns or Authorized Dealers by
telephone to request a redemption of Portfolio shares. In such cases,
investors should consider using the other redemption procedures described
herein. Use of these other redemption procedures may result in the redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, each Portfolio's net asset value
may fluctuate.
AUTOMATIC WITHDRAWAL
Automatic Withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for Automatic Withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Fund or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through
Automatic Withdrawal. Purchases of additional shares concurrent with
withdrawals generally are undesirable.
Dividends, Distributions and Taxes
Dividends will be automatically reinvested in additional Portfolio shares at
net asset value, unless payment in cash is requested or dividends are
redirected into another fund pursuant to the Redirected Distribution Option.
The Bond Portfolio declares dividends from net investment income on each day
the New York Stock Exchange is open for business. These dividends usually are
paid on or about the twentieth day of each month. The earnings for Saturdays,
Sundays and holidays are declared as dividends on the preceding business day.
Shares begin accruing income dividends on the day the purchase order is
effective. If all shares in an account are redeemed at any time, all dividends
to which the shareholder is entitled will be paid along with the proceeds of
the redemption.
Each Equity Portfolio ordinarily pays dividends from its net investment income
at least once a year.
Each Portfolio distributes net realized securities gains, if any, once a year,
but it may make distributions on a more frequent basis to comply with the
distribution requirements of the Code, in
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all events in a manner consistent with the provisions of the 1940 Act. No
Portfolio will make distributions from net realized securities gains unless
capital loss carryovers, if any, have been utilized or have expired. Dividends
are automatically reinvested in additional Portfolio shares at net asset
value, unless payment in cash is requested or dividends are redirected into
another fund pursuant to the Redirected Distribution Option. All expenses are
accrued daily and deducted before declaration of dividends to investors.
Dividends paid by each class of each Portfolio will be calculated at the same
time and in the same manner and will be of the same amount, except that the
expenses attributable solely to a particular class of a Portfolio will be
borne exclusively by such class. Class B and C shares will receive lower per
share dividends than Class A shares because of the higher expenses borne by
Class B and C shares. See "Fee Table."
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain market discount bonds, paid
by a Portfolio will be taxable to U.S. shareholders as ordinary income,
whether received in cash or reinvested in additional shares of the Portfolio
or redirected into another portfolio or fund. Distributions from net realized
long-term securities gains of a Portfolio will be taxable to U.S. shareholders
as long-term capital gains for federal income tax purposes, regardless of how
long shareholders have held their Portfolio's shares and whether such
distributions are received in cash or reinvested in, or redirected into other,
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of 28% and
certain capital gains of individuals may be subject to a lower tax rate.
Dividends and distributions may be subject to state and local taxes.
Each Portfolio may make short sales "against the box." See "Description of the
Portfolios--Investment Techniques." Any gains realized by a Portfolio as such
sales will be recognized at the time the Portfolio enters into the short
sales.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
disposition of certain market discount bonds, paid by a Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the
rate of 30%, unless the foreign investor claims the benefit of a lower rate
specified in a tax treaty. Distributions from net realized long-term
securities gains paid by a Portfolio to a foreign investor as well as the
proceeds of any redemptions from a foreign investor's account, regardless of
the extent to which gain or loss may be realized, generally will not be
subject to U.S. nonresident withholding tax. However, such distributions may
be subject to backup withholding, as described below, unless the foreign
investor certifies his non-U.S. residency status.
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of
their accounts which will include information as to dividends and
distributions from securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on a Portfolio's Class A shares if an investor exchanges such shares for
shares of another fund or portfolio advised or sponsored by BSAM or its
affiliates within 91 days of purchase and such other fund reduces or
eliminates its otherwise applicable sales load for the purpose of the
exchange. In this case, the amount of the sales load charged the investor for
such shares, up to the amount of the reduction of the sales load charge on the
exchange, is not included in the basis of such shares for purposes of
computing gain or loss on the exchange, and instead is added to the basis of
the fund shares received on the exchange.
Generally, the Fund must withhold ("backup withholding") and remit to the U.S.
Treasury 31% of dividends, distributions from net realized securities gains
and the proceeds of any redemption, regardless of the extent to which gain or
loss may be realized, paid to a shareholder if such share holder fails to
certify that the TIN furnished in connection with opening an account is
correct and that such shareholder has not received notice from the IRS of
being subject to backup withholding as a result of a failure to properly
report taxable dividend or interest income on a Federal income tax return.
Furthermore, the IRS may direct the Fund to institute backup withholding if
the IRS determines that a shareholder's TIN is incorrect or if a shareholder
has failed to properly report taxable dividend and interest income on a
federal income tax return.
A TIN is either the Social Security number or employer identification number
of the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner
of the account, and may be claimed as a credit on the record owner's federal
income tax return.
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While a Portfolio is not expected to have any federal tax liability, investors
should expect to be subject to federal, state and local taxes in respect of
their investment in Portfolio shares.
Management of the Fund believes that each Portfolio has qualified for the
fiscal year ended March 31, 1997 as a "regulated investment company" under the
Code. Each Portfolio intends to continue to so qualify if such qualification
is in the best interests of its shareholders. Such qualification relieves a
Portfolio of any liability for federal income tax to the extent its earnings
are distributed in accordance with applicable provisions of the Code. A
Portfolio may be subject to a non-deductible 4% excise tax, measured with
respect to certain undistributed amounts of taxable investment income and
capital gains.
Each investor should consult its tax adviser regarding specific questions as
to federal, state or local taxes applicable to an investment in a Portfolio.
Performance Information
For purposes of advertising, performance for each class of each Portfolio may
be calculated on the basis of average annual total return and/or total return.
These total return figures reflect changes in the price of the shares and
assume that any income dividends and/or capital gains distributions made by a
Portfolio during the measuring period were reinvested in shares of the same
class. These figures also take into account any applicable distribution and
shareholder servicing fees. As a result, at any given time, the performance of
Class B and Class C should be expected to be lower than that of Class A.
Performance for each class will be calculated separately.
Performance of the Bond Portfolio also may be advertised on the basis of
current yield. Current yield refers to the Bond Portfolio's annualized net
investment income per share over a 30-day period, expressed as a percentage of
the net asset value per share at the end of the period.
For purposes of calculating current yield, the amount of net investment income
per share during that 30-day period, computed in accordance with regulatory
requirements, is compounded by assuming that it is reinvested at a constant
rate over a six-month period. An identical result is then assumed to have
occurred during a second six-month period which, when added to the result for
the first six months, provides an "annualized" yield for an entire one-year
period. Average annual total return is calculated pursuant to a standardized
formula which assumes that an investment in the Portfolio was purchased with
an initial payment of $1,000 and that the investment was redeemed at the end
of a stated period of time, after giving effect to the reinvestment of
dividends and distributions during the period. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would result
in the redeemable value of the investment at the end of the period.
Advertisements of each Portfolio's performance will include such Portfolio's
average annual total return for one, five and ten year periods, or for shorter
periods depending upon the length of time during which the Portfolio has
operated. Computations of average annual total return for periods of less than
one year represent an annualization of such Portfolio's actual total return
for the applicable period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value (or maximum
public offering price in the case of Class A shares) per share at the
beginning of the period. Class B total return will reflect the deduction of
the CDSC. Advertisements may include the percentage rate of total return or
may include the value of a hypothetical investment at the end of the period
which assumes the application of the percentage rate of total return. Total
return for each Portfolio also may be calculated by using the net asset value
per share at the beginning of the period instead of the maximum offering price
per share at the beginning of the period for Class A shares or without giving
effect to any applicable CDSC at the end of the period for Class B or C
shares. Calculations based on the net asset value per share do not reflect the
deduction of the sales load on the Portfolios' Class A shares, which, if
reflected, would reduce the performance quoted.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance
information, such as that described above, may not provide a basis for
comparison with other investments or other investment companies using a
different method of calculating performance.
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Comparative performance information may be used from time to time in
advertising or marketing each Equity Portfolio's shares, including data from
Lipper Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price
Index, Wilshire 4500 Stock Index, Russell Small Cap Index, the Dow Jones
Industrial Average and other industry publications. Performance information
that may be used in advertising or marketing the Bond Portfolio's shares can
include data from Lipper Analytical Services, Inc., Morningstar, Inc., Bond
Buyer's 20-Bond Index, Moody's Bond Survey Bond Index, Lehman Brothers
Aggregate Bond Index, Salomon Brothers Broad Investment-Grade Index and
components thereof, Mutual Fund Values, Mutual Fund Forecaster, Mutual Fund
Investing and other industry publications.
General Information
The Fund was organized as a business trust under the laws of The Commonwealth
of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust
Agreement") dated September 29, 1994, and commenced operations on or about
April 3, 1995. The Fund is authorized to issue an unlimited number of shares
of beneficial interest, par value $0.001 per share. Each Portfolio's shares
are classified into four classes-Class A, B, C and Y. Each share has one vote
and shareholders will vote in the aggregate and not by class, except as
otherwise required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio of which they are
shareholders. However, the Trust Agreement disclaims shareholder liability for
acts or obligations of the relevant Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into
or executed by the Fund or a Trustee. The Trust Agreement provides for
indemnification from the respective Portfolio's property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio. Thus, the risk of a shareholder incurring financial loss on account
of a shareholder liability is limited to circumstances in which the Portfolio
itself would be unable to meet its obligations, a possibility which management
believes is remote. Upon payment of any liability incurred by a Portfolio, the
shareholder paying such liability will be entitled to reimbursement from the
general assets of such Portfolio. The Fund's Trustees intend to conduct the
operations of each Portfolio in a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Portfolio. As
discussed under "Management of the Fund" in the Portfolios' Statement of
Additional Information, each Portfolio ordinarily will not hold shareholder
meetings; however, shareholders under certain circumstances may have the right
to call a meeting of shareholders for the purpose of voting to remove
Trustees.
To date, the Fund's Board has authorized the creation of 10 portfolios of
shares. All consideration received by the Fund for shares of one of the
portfolios and all assets in which such consideration is invested will belong
to that portfolio (subject only to the rights of creditors of the Fund) and
will be subject to the liabilities related thereto. The assets attributable
to, and the expenses of, one portfolio (and as to classes within a portfolio)
are treated separately from those of the other portfolios (and classes). The
Fund has the ability to create, from time to time, new portfolios of shares
without shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the holders of the outstanding voting securities of an investment
company, such as the Fund, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that
the interests of such portfolio in the matter are identical or that the matter
does not affect any interest of such portfolio. However, Rule 18f-2 exempts
the selection of independent accountants and the election of Trustees from the
separate voting requirements of Rule 18f-2.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc.,
Attention: The Bear Stearns Funds, P.O. Box 8960, Wilmington, Delaware 19899-
8960, by calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766-4111.
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Appendix
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, each Portfolio may
employ, among others, the following investment techniques which may involve
certain risks. Options and futures transactions involve "derivative
securities."
OPTIONS TRANSACTIONS--(ALL PORTFOLIOS)
Each Portfolio may engage in options transactions. Each Portfolio is permitted
to invest up to 5% of its assets, represented by the premium paid, in the
purchase of call and put options in respect of specific securities (or groups
or "baskets" of specific securities) in which the Portfolio may invest. Each
Portfolio may write and sell covered call option contracts on securities owned
by the Portfolio not exceeding 20% of the value of its net assets at the time
such option contracts are written. Each Portfolio also may purchase call
options to enter into closing purchase transactions. Each Portfolio also may
write covered put option contracts to the extent of 20% of the value of its
net assets at the time such option contracts are written. A call option gives
the purchaser of the option the right to buy, and obligates the writer to
sell, the underlying security at the exercise price at any time during the
option period. Conversely, a put option gives the purchaser of the option the
right to sell, and obligates the writer to buy, the underlying security at the
exercise price at any time during the option period. A covered put option sold
by a Portfolio exposes the Portfolio during the term of the option to a
decline in price of the underlying security or securities. A put option sold
by the Portfolio is covered when, among other things, cash or liquid
securities are placed in a segregated account with the Fund's custodian to
fulfill the obligation undertaken.
Each Equity Portfolio also may purchase and sell call and put options on
foreign currency for the purpose of hedging against changes in future currency
exchange rates. Call options convey the right to buy the underlying currency
at a price which is expected to be lower than the spot price of the currency
at the time the option expires. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option expires.
Each Equity Portfolio may purchase and sell call and put options on stock
indexes listed on U.S. securities exchanges or traded in the over-the-counter
market. A stock index fluctuates with changes in the market values of the
stocks included in the index. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
stock, whether an Equity Portfolio will realize a gain or loss from the
purchase or writing of options on an index depends upon movements in the level
of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than movements in the price
of a particular stock.
Successful use by each Equity Portfolio of options will be subject to BSAM's
ability to predict correctly movements in the direction of individual stocks,
the stock market generally, foreign currencies or interest rates. The Bond
Portfolio's successful use of options will be subject to BSAM's ability to
predict correctly movements in interest rates. To the extent BSAM's
predictions are incorrect, a Portfolio may incur losses which could adversely
affect the value of a shareholder's investment.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS--(ALL PORTFOLIOS)
Each Portfolio may enter into interest rate futures contracts and options with
respect thereto. Each Equity Portfolio also may enter into stock index futures
contracts and currency futures contracts, and options with respect thereto, in
U.S. domestic markets or on exchanges located outside the United States. See
"--Options Transactions" above. These transactions will be entered into as a
substitute for comparable market positions in the underlying securities or for
hedging purposes. Although no Portfolio would be a commodity pool, it would be
subject to rules of the CFTC limiting the extent to which it could engage in
these transactions.
Each Portfolio's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the
CFTC. In addition, a Portfolio may not engage in such transactions if the sum
of the amount of initial margin deposits and premiums paid for unexpired
commodity options, other than for bona fide hedging transactions, would exceed
5% of the liquidation value of the Portfolio's assets, after taking into
account unrealized profits and unrealized losses on such contracts it has
entered into; provided, however, that in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount may be excluded in
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calculating the 5%. To the extent a Portfolio engages in the use of futures
and options on futures for other than bona fide hedging purposes, the
Portfolio may be subject to additional risk.
Engaging in these transactions involves risk of loss to a Portfolio which
could adversely affect the value of a shareholder's investment. Although each
Portfolio intends to purchase or sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid
market will exist for any particular contract at any particular time. Many
futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move
to the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Portfolio to substantial losses. In addition, an Equity
Portfolio engaging in futures transactions in foreign markets may involve
greater risks than trading on domestic exchanges.
Successful use of futures by an Equity Portfolio or the Bond Portfolio also is
subject to BSAM's ability to predict correctly movements in the direction of
the market or foreign currencies, or interest rates, respectively, and, to the
extent the transaction is entered into for hedging purposes, to ascertain the
appropriate correlation between the transaction being hedged and the price
movements of the futures contract. For example, if a Portfolio has hedged
against the possibility of a decline in the market adversely affecting the
value of securities held in its portfolio and prices increase instead, the
Portfolio will lose part or all of the benefit of the increased value of
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily,
be at increased prices which reflect the rising market. The Portfolio may have
to sell securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, each Portfolio may be required to segregate cash or high
quality liquid securities in connection with its commodities transactions in
an amount generally equal to the value of the underlying commodity. The
segregation of such assets will have the effect of limiting the Portfolio's
ability otherwise to invest those assets.
FORWARD COMMITMENTS--(BOND PORTFOLIO)
The Bond Portfolio may purchase securities on a when-issued or forward
commitment basis, which means that the price is fixed at the time of
commitment, but delivery and payment ordinarily take place a number of days
after the date of the commitment to purchase. The Bond Portfolio will make
commitments to purchase such securities only with the intention of actually
acquiring the securities, but the Bond Portfolio may sell these securities
before the settlement date if it is deemed advisable. The Bond Portfolio will
not accrue income in respect of a security purchased on a forward commitment
basis prior to its stated delivery date.
Securities purchased on a when-issued or forward commitment basis and certain
other securities held by the Bond Portfolio are subject to changes in value
(both generally changing in the same way, i.e., appreciating when interest
rates decline and depreciating when interest rates rise) based upon the
public's perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a when-
issued or forward commitment basis may expose the Bond Portfolio to risk
because they may experience such fluctuations prior to their actual delivery.
Purchasing securities on a when-issued or forward commitment basis can involve
the additional risk that the yield available in the market when the delivery
takes place actually may be higher than that obtained in the transaction
itself. A segregated account of the Bond Portfolio consisting of cash, cash
equivalents or U.S. Government securities or other high quality liquid debt
securities of the type in which the Bond Portfolio invests at least equal at
all times to the amount of the when-issued or forward commitments will be
established and maintained at the Fund's custodian bank. Purchasing securities
on a forward commitment basis when the Bond Portfolio is fully or almost fully
invested may result in greater potential fluctuation in the value of the Bond
Portfolio's net assets and its net asset value per share.
FUTURE DEVELOPMENTS--(ALL PORTFOLIOS)
Each Portfolio may take advantage of opportunities in the area of options and
futures contracts, options on futures contracts and any other derivative
investments which are not presently
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contemplated for use by a Portfolio or which are not currently available but
which may be developed, to the extent such opportunities are both consistent
with a Portfolio's investment objective and legally permissible for such
Portfolio. Before entering into such transactions or making any such
investment, the Portfolio will provide appropriate disclosure in its
prospectus.
LENDING PORTFOLIO SECURITIES--(ALL PORTFOLIOS)
From time to time, each Portfolio may lend securities from its portfolio of
investments to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. Such loans may not exceed
33 1/3% of the value of a Portfolio's total assets. In connection with such
loans, a Portfolio will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit which will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. Each Portfolio can increase its income through the
investment of such collateral. A Portfolio continues to be entitled to
payments in amounts equal to the interest, dividends and other distributions
payable on the loaned security and receives interest on the amount of the
loan. Such loans will be terminable at any time upon specified notice. A
Portfolio might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with such
Portfolio.
BORROWING MONEY--(ALL PORTFOLIOS)
As a fundamental policy, each Portfolio is permitted to borrow to the extent
permitted under the 1940 Act. The 1940 Act permits an investment company to
borrow in an amount up to 33 1/3% of the value of such company's total assets.
However, each Portfolio currently intends to borrow money only for temporary
or emergency (not leveraging) purposes, in an amount up to 15% of the value of
its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time
the borrowing is made. While borrowings exceed 5% of a Portfolio's total
assets, such Portfolio will not make any additional investments.
CERTAIN PORTFOLIO SECURITIES
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS--(EQUITY PORTFOLIOS)
Each Equity Portfolio's assets may be invested in the securities of foreign
issuers in the form of American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"). These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a United States bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depositary
Receipts ("CDRs"), are receipts issued in Europe typically by non-United
States banks and trust companies that evidence ownership of either foreign or
domestic securities. Generally, ADRs in registered form are designed for use
in the United States securities markets and EDRs and CDRs in bearer form are
designed for use in Europe. Each Equity Portfolio may invest in ADRs, EDRs and
CDRs through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the underlying security and a depositary,
whereas a depositary may establish an unsponsored facility without
participation by the issuer of the deposited security. Holders of unsponsored
depositary receipts generally bear all the costs of such facilities and the
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the
deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities.
MORTGAGE-RELATED SECURITIES--(BOND PORTFOLIO)
Mortgage-related securities are a form of derivative securities collateralized
by pools of mortgage loans assembled for sale to investors by various
governmental agencies, such as the Government National Mortgage Association
and government-related organizations such as the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, as well as by
private issuers such as commercial banks, savings and loan institutions,
mortgage banks and private mortgage insurance companies, and similar foreign
entities. The mortgage-related securities in which the Bond Portfolio may
invest include those with fixed, floating and variable interest rates, those
with interest rates that change based on multiples of changes in interest
rates and those with interest rates that change inversely to changes in
interest rates, as well as stripped mortgage-backed securities which are
derivative multiclass mortgage securities. Stripped mortgage-backed securities
usually are structured with two classes that receive different proportions of
interest and principal distributions on a pool of mortgage-backed securities
or whole loans. A common type of stripped mortgage-backed security will have
one class receiving some of the interest and most of the principal from the
mortgage collateral, while the other class will receive most of the interest
and the remainder of the
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principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). Although certain
mortgage-related securities are guaranteed by a third party or otherwise
similarly secured, the market value of the security, which may fluctuate, is
not so secured. If the Bond Portfolio purchases a mortgage-related security at
a premium, all or part of the premium may be lost if there is a decline in the
market value of the security, whether resulting from changes in interest rates
or prepayments in the underlying mortgage collateral. As with other interest-
bearing securities, the prices of certain of these securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse
is not necessarily true, since in periods of declining interest rates the
mortgages underlying the security are more likely to prepay. For this and
other reasons, a mortgage-related security's stated maturity may be shortened
by unscheduled prepayments on the underlying mortgages, and, therefore, it is
not possible to predict accurately the security's return to the Bond
Portfolio. Moreover, with respect to stripped mortgage-backed securities, if
the underlying mortgage securities experience greater than anticipated
prepayments of principal, the Bond Portfolio may fail to fully recoup its
initial investment in these securities even if the securities are rated in the
highest rating category by a nationally recognized statistical rating
organization. In addition, regular payments received in respect of mortgage-
related securities include both interest and principal. No assurance can be
given as to the return the Bond Portfolio will receive when these amounts are
reinvested. For further discussion concerning the investment considerations
involved, see "Description of the Fund--Risk Factors--Fixed-Income Securities"
above and "Illiquid Securities" below and "Investment Objective and Management
Policies--Portfolio Securities--Mortgage-Related Securities" in the Statement
of Additional Information.
ASSET-BACKED SECURITIES--(BOND PORTFOLIO)
The Bond Portfolio may invest in asset-backed securities which are a form of
derivative securities. The securitization techniques used for asset-backed
securities are similar to those used for mortgage-related securities. These
securities include debt securities and securities with debt-like
characteristics. The collateral for these securities has included home equity
loans, automobile and credit card receivables, boat loans, computer leases,
airplane leases, mobile home loans, recreational vehicle loans and hospital
account receivables.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit card
receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and Federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of asset-backed
securities backed by automobile receivables permit the servicers of such
receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
CONVERTIBLE SECURITIES--(ALL PORTFOLIOS)
Convertible securities are fixed income securities that may be converted at
either a stated price or stated rate within a specified period of time into a
specified number of shares of common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but usually are subordinated to non-convertible debt securities.
While providing a fixed-income stream (generally higher in yield than the
income derivable from a common stock but lower than that afforded by a non-
convertible debt security), a convertible security also affords an investor
the opportunity, through its conversion feature, to participate in the capital
appreciation of the common stock into which it is convertible.
The Bond Portfolio also may invest in debt securities with warrants attached
or in units with warrants. A warrant is an instrument issued by a corporation
which gives the holder the right to subscribe to a specified amount of the
corporation's capital stock at a set price for a specified period of time.
A-4
<PAGE>
In connection with its purchases of convertible securities (which include debt
securities with warrants), the Bond Portfolio from time to time may hold
common stock received upon the conversion of the security or the exercise of
the warrant. The Bond Portfolio does not intend to retain the common stock in
its portfolio and will sell it as promptly as it can and in a manner which it
believes will reduce the risk to the Bond Portfolio of loss in connection with
the sale.
In general, the market value of a convertible security is the higher of its
"investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., the value of the underlying shares of common stock
if the security is converted). As a fixed-income security, the market value of
a convertible security generally increases when interest rates decline and
generally decreases when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the
common stock of the same issuer.
MUNICIPAL OBLIGATIONS--(BOND PORTFOLIO)
Municipal obligations are debt obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multistate agencies
or authorities. While in general, municipal obligations are tax exempt
securities having relatively low yields as compared to taxable, non-municipal
obligations of similar quality, certain issues of municipal obligations, both
taxable and non-taxable, offer yields comparable and in some cases greater
than the yields available on other permissible investments. Municipal
obligations generally include debt obligations issued to obtain funds for
various public purposes as well as certain industrial development bonds issued
by or on behalf of public authorities. Dividends received by shareholders
which are attributable to interest income received by it from municipal
obligations generally will be subject to federal income tax. Municipal
obligations bear fixed, floating or variable rates of interest, which are
determined in some instances by formulas under which the municipal
obligation's interest rate will change directly or inversely to changes in
interest rates or an index, or multiples thereof, in many cases subject to a
maximum and minimum. The Bond Portfolio currently intends to invest no more
than 25% of its assets in municipal obligations. However, this percentage may
be varied from time to time without shareholder approval.
ZERO COUPON AND STRIPPED SECURITIES--(BOND PORTFOLIO)
The Bond Portfolio may invest in zero coupon U.S. Treasury securities, which
are Treasury Notes and Bonds that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The Bond
Portfolio also may invest in zero coupon securities issued by corporations and
financial institutions which constitute a proportionate ownership of the
issuer's pool of underlying U.S. Treasury securities. A zero coupon security
pays no interest to its holder during its life and is sold at a discount to
its face value at maturity. The amount of the discount fluctuates with the
market price of the security. The market prices of zero coupon securities
generally are more volatile than the market prices of securities that pay
interest periodically and are likely to respond to a greater degree to changes
in interest rates than non-zero coupon securities having similar maturities
and credit qualities.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL ENTITIES--(BOND
PORTFOLIO)
The Bond Portfolio may invest in U.S. dollar denominated obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by BSAM to be
of comparable quality to the other obligations in which the Bond Portfolio may
invest. Such securities also include debt obligations of supranational
entities. Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and
related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
The percentage of the Bond Portfolio's assets invested in securities issued by
foreign governments will vary depending on the relative yields of such
securities, the economic and financial markets of the countries in which the
investments are made and the interest rate climate of such countries.
MONEY MARKET INSTRUMENTS
Each Portfolio may invest, in the circumstances described under "Description
of the Fund--Management Policies," in the following types of money market
instruments, each of which at the time
A-5
<PAGE>
of purchase must have or be deemed to have under rules of the Securities and
Exchange Commission remaining maturities of 13 months or less.
U.S. TREASURY SECURITIES--(ALL PORTFOLIOS)
U.S. Treasury securities include Treasury Bills, Treasury Notes and Treasury
Bonds that differ in their interest rates, maturities and times of issuance.
Treasury Bills have initial maturities of one year or less; Treasury Notes
have initial maturities of one to ten years; and Treasury Bonds generally have
initial maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES--(ALL PORTFOLIOS)
In addition to U.S. Treasury securities, U.S. Government securities include
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or
the relationship of rates. While the U.S. Government provides financial
support to such U.S. Government-sponsored agencies or instrumentalities, no
assurance can be given that it will always do so, since it is not so obligated
by law.
BANK OBLIGATIONS--(ALL PORTFOLIOS)
Each Portfolio may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations
of domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Portfolio may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of
principal and interest on these securities and the possible seizure or
nationalization of foreign deposits.
Certificates of deposit are negotiable certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by each Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. No Portfolio will invest more than 15%
of the value of its net assets in time deposits maturing in more than seven
days and in other securities that are illiquid.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
REPURCHASE AGREEMENTS--(ALL PORTFOLIOS)
Repurchase agreements involve the acquisition by a Portfolio of an underlying
debt instrument, subject to an obligation of the seller to repurchase, and
such Portfolio to resell, the instrument at a fixed price usually not more
than one week after its purchase. Certain costs may be incurred by a Portfolio
in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by a Portfolio may be delayed or
limited.
A-6
<PAGE>
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS--(ALL PORTFOLIOS)
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by each
Portfolio will consist only of direct obligations which, at the time of their
purchase, are (a) rated not lower than Prime-1 by Moody's, A-1 by S&P, F-1 by
Fitch or Duff-1 by Duff, (b) issued by companies having an outstanding
unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by
S&P, Fitch or Duff, or (c) if unrated, determined by BSAM to be of comparable
quality to those rated obligations which may be purchased by a Portfolio. Each
Portfolio may purchase floating and variable rate demand notes and bonds,
which are obligations ordinarily having stated maturities in excess of one
year, but which permit the holder to demand payment of principal at any time
or at specified intervals.
WARRANTS--(EQUITY PORTFOLIOS)
Each Equity Portfolio may invest up to 5% of its net assets in warrants,
except that this limitation does not apply to warrants acquired in units or
attached to securities. A warrant is an instrument issued by a corporation
which gives the holder the right to subscribe to a specified amount of the
corporation's capital stock at a set price for a specified period of time.
INVESTMENT COMPANY SECURITIES--(ALL PORTFOLIOS)
Each Portfolio may invest in securities issued by other investment companies.
Under the 1940 Act, a Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of such Portfolio's total assets with
respect to any one investment company and (iii) 10% of the Portfolio's total
assets in the aggregate. Investments in the securities of other investment
companies will involve duplication of advisory fees and certain other
expenses.
ILLIQUID SECURITIES--(ALL PORTFOLIOS)
Each Portfolio may invest up to 15% of the value of its net assets in
securities as to which a liquid trading market does not exist, provided such
investments are consistent with the Portfolio's investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, repurchase agreements providing for settlement in more than seven days
after notice, options traded in the over-the-counter market and securities
used to cover such options, and certain asset-backed and mortgage-backed
securities, such as certain collateralized mortgage obligations and stripped
mortgage-backed securities. As to these securities, each Portfolio is subject
to a risk that should such Portfolio desire to sell them when a ready buyer is
not available at a price the Portfolio deems representative of their value,
the value of such Portfolio's net assets could be adversely affected.
RATINGS--(ALL PORTFOLIOS)
The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to the
quality of the obligations which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and, although
ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of such obligations.
Therefore, although these ratings may be an initial criterion for selection of
portfolio investments, BSAM also will evaluate such obligations and the
ability of their issuers to pay interest and principal. Each Portfolio will
rely on BSAM's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, BSAM will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, the quality of the issuer's
management and regulatory matters. It also is possible that a rating agency
might not timely change the rating on a particular issue to reflect subsequent
events. Once the rating of a security held by a Portfolio has been changed,
BSAM will consider all circumstances deemed relevant in determining whether
such Portfolio should continue to hold the security.
A-7
<PAGE>
The
Bear Stearns
Funds
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, NY 10022
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE FOCUS LIST PORTFOLIO'S
PROSPECTUS AND IN THE FOCUS LIST PORTFOLIO'S SALES LITERATURE IN CONNECTION
WITH THE OFFER OF THE FOCUS LIST PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND. THE FOCUS LIST PORTFOLIO'S PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-002-05
<PAGE>
Rule 497(c)
Registration No. 33-84842
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
S&P STARS Portfolio
CLASS A, B AND C SHARES
THE BEAR STEARNS FUNDS (the "Fund"), is an open-end management investment com-
pany, known as a mutual fund. By this Prospectus, the Fund offers Class A, B
and C shares of the S&P Portfolio (the "STARS Portfolio" or the "Portfolio"),
a non-diversified portfolio. STARS Portfolio's investment objective is to pro-
vide investment results that exceed the total return of publicly traded common
stocks in the aggregate, as represented by the Standard & Poor's 500 Stock In-
dex (the "S&P 500"). As its investment strategy, the investment adviser prin-
cipally uses Standard & Poor's ("S&P") Stock Appreciation Ranking System (or
STARS) to identify a universe of securities in the highest category (which is
five stars) to evaluate for purchase and in the lowest category (which is one
star) to evaluate for short selling. The investment adviser believes that this
approach will provide opportunities to achieve performance that exceeds the
S&P 500's total return.
Class A shares are subject to a sales charge imposed at the time of purchase.
Class B shares are subject to a contingent deferred sales charge of up to 5%
imposed on redemptions made within the first six years of purchase. Class C
shares are subject to a 1% contingent deferred sales charge imposed on redemp-
tions made within the first year of purchase. Other differences between the
classes include the services offered to and the expenses borne by each class,
as described herein. These alternatives are offered so an investor may choose
the method of purchasing shares that is most beneficial given the amount of
the purchase, the length of time the investor expects to hold the shares and
other circumstances. The STARS Portfolio issues another class of shares (Class
Y shares), which has different expenses that would affect performance. Invest-
ors desiring to obtain information about this class of shares should call 1-
800-766-4111 or ask their sales representative or the STARS Portfolio's dis-
tributor.
BEAR STEARNS ASSET MANAGEMENT INC. ("BSAM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as the Portfolio's investment adviser.
BSAM is also referred to herein as the "Adviser." As of December 3, 1997, Bear
Stearns Funds Management Inc., the registered investment adviser of the Port-
folio, has changed its name to Bear Stearns Asset Management Inc.
BEAR STEARNS FUNDS MANAGEMENT INC. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., is the Administrator of the Portfolio. As of De-
cember 4, 1997, Bear Stearns Funds Management Inc. formed a new corporate en-
tity under the laws of Delaware to conduct mutual fund administrative work for
The Bear Stearns Funds and other affiliated and non-affiliated investment com-
panies.
BEAR, STEARNS & CO. INC. ("Bear Stearns"), an affiliate of BSAM, serves as the
Portfolio's distributor. Bear Stearns is also referred to herein as the "Dis-
tributor."
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE REFER-
ENCE.
Part B (also known as the Statement of Additional Information), dated December
24, 1997, which may be revised from time to time, provides a further discus-
sion of certain areas in this Prospectus and other matters which may be of in-
terest to some investors. It has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. For a free copy, write to
the address or call one of the telephone numbers listed under "General Infor-
mation" in this Prospectus. Additional information, including this Prospectus
and the Statement of Additional Information, may be obtained by accessing the
Internet Web site maintained by the Securities and Exchange Commission
(http://www.sec.gov).
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or en-
dorsed by, any bank; are not federally insured by the Federal Deposit Insur-
ance Corporation, the Federal Reserve Board, or any other agency; and are sub-
ject to investment risks, including possible loss of the principal amount in-
vested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DECEMBER 24, 1997
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 4
Alternative Purchase Methods............................................... 6
Description of the STARS Portfolio......................................... 7
Risk Factors............................................................... 9
Management of the STARS Portfolio.......................................... 11
How to Buy Shares.......................................................... 13
Shareholder Services....................................................... 19
How to Redeem Shares....................................................... 20
Dividends, Distributions and Taxes......................................... 23
Performance Information.................................................... 24
General Information........................................................ 25
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)......................... 5.50% -- --
Maximum Deferred Sales Charge Imposed on Redemptions
(as a percentage of the amount subject to charge)*.... * 5.00% 1.00%
ANNUAL STARS PORTFOLIO OPERATING EXPENSES**
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)***................... 0.05% 0.05% 0.05%
12b-1 Fees****/+...................................... 0.50% 0.75% 1.00%
Other Expenses***..................................... 0.95% 1.20% 0.95%
---- ---- ----
Total Portfolio Operating Expenses (after fee waiver
and expense reimbursement)***......................... 1.50% 2.00% 2.00%
==== ==== ====
EXAMPLE:
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
1 YEAR.............................................. $ 69 $ 71 $ 30
3 YEARS............................................. $100 $ 95 $ 63
5 YEARS............................................. $132 $131 $108
10 YEARS*****........................................ $224 $220 $233
You would pay the following expenses on the same in-
vestment, assuming no redemption:
1 YEAR.............................................. -- $ 20 $ 20
3 YEARS............................................. -- $ 63 $ 63
5 YEARS............................................. -- $108 $108
10 YEARS*****........................................ -- $220 $233
</TABLE>
- ------
*In certain situations, where no sales charge is assessed at the time of pur-
chase, a contingent deferred sales charge of up to 1.00% may be imposed on re-
demptions of Class A shares within the first year after purchase. See "How to
Buy Shares--Class A Shares."
**Prior to June 25, 1997, the Portfolio invested all of its assets in the S&P
STARS Master Series (the "Master Series"), a series of S&P STARS Fund. The
Master Series had substantially the same investment objective, policies and
restrictions as the Portfolio.
***With respect to Class B shares, Other Expenses include a shareholder ser-
vicing fee of 0.25%. With respect to all classes, BSAM has undertaken to waive
its advisory fee and assume certain expenses of the STARS Portfolio other than
brokerage commissions, extraordinary items, interest and taxes to the extent
Total STARS Portfolio Operating Expenses exceed 1.50% for Class A, and 2.00%
for Class B and Class C. Without such fee waiver, Advisory Fees stated above
would have been 0.75% for each class. Other Expenses would have been 0.95% for
Class A and 0.95% for Class C and Total STARS Portfolio Operating Expenses
would be 2.20% for Class A and 2.70% for Class C. With respect to Class B
shares, Other Expenses are estimated to be 1.20%, and Total Portfolio Operat-
ing Expenses are estimated to be 2.70%.
****With respect to Class A and Class C shares, 12b-1 fees include a share-
holder servicing fee of 0.25% and a distribution fee of 0.25% and 0.75%, re-
spectively. With respect to Class A shares, Bear Stearns will waive the dis-
tribution fee to the extent that the Portfolio would otherwise exceed the Na-
tional Association of Securities Dealers, Inc. ("NASD") limitations on asset-
based sales charges. Pursuant to NASD rules, the aggregate deferred sales
loads and annual distribution fees may not exceed 6.25% of total gross sales,
subject to certain exclusions. The 6.25% limitation is imposed on the Portfo-
lio rather than on a per shareholder basis. Therefore, a long-term shareholder
of the Portfolio may pay more in distribution fees than the economic equiva-
lent of 6.25% of such shareholder's investment in such shares. The maximum
sales charge rule is applied separately to each class.
*****Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight with respect to Class B shares.
+Authorized dealers will be paid distribution and/or servicing fees of 0.50%
for the Class A shares of the Portfolio, with respect to shares in accounts
through December 23, 1997. Subsequently, all authorized dealers will be paid a
servicing fee of 0.25% with respect to Class A shares purchased after December
23, 1997, including shares acquired through dividend reinvestments prior to
December 23, 1997.
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE
STARS PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RE-
TURN GREATER OR LESS THAN 5%.
The purpose of the foregoing table is to assist you in understanding the costs
and expenses borne by the STARS Portfolio and investors, the payment of which
will reduce investors' annual return. In addition to the expenses noted above,
the Fund will charge $7.50 for each wire redemption. See "How to Redeem
Shares." Long-term investors could pay more in 12b-1 fees than the economic
equivalent of paying a front-end sales charge. For a description of the ex-
pense reimbursement or waiver arrangements in effect, see "Management of the
STARS Portfolio."
3
<PAGE>
Financial Highlights
The information in the table below covering the STARS Portfolio's investment
results for the periods indicated has been audited by Deloitte & Touche LLP.
Further financial data and related notes appear in the Portfolio's Annual
Report for the fiscal year ended March 31, 1997 which is incorporated by
reference into the Portfolio's Statement of Additional Information which is
available upon request.
Contained below is per share operating performance data, total investment re-
turn, ratios to average net assets and other supplemental data for Class A and
Class C shares of the Portfolio for the periods indicated. Prior to June 25,
1997, the Portfolio invested all of its assets in the S&P STARS Master Series
(the "Master Series"), a series of S&P STARS Fund. The Master Series had sub-
stantially the same investment objective, policies and restrictions as the
Portfolio. This information has been derived from information provided in the
Portfolio's financial statements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE FISCAL YEAR APRIL 5, 1995*
ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
- -------------------------------------------------------------------------------
CLASS A CLASS C CLASS A CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFOR-
MANCE**
Net asset value, beginning
of period.................. $ 14.92 $ 14.86 $ 12.00 $ 12.00
--------- --------- ------- -------
Net investment loss (1)..... (0.09) (0.17) -- (0.06)
Net realized and unrealized
gain from Master Series
(2)........................ 2.63 2.62 3.31 3.28
--------- --------- ------- -------
Net increase in net assets
resulting from operations.. 2.54 2.45 3.31 3.22
--------- --------- ------- -------
Dividends and distributions
to shareholders from Net
realized capital gains..... (1.33) (1.25) (0.39) (0.36)
--------- --------- ------- -------
(1.33) (1.25) (0.39) (0.36)
--------- --------- ------- -------
Net asset value, end of pe-
riod....................... $ 16.13 $ 16.06 $ 14.92 $ 14.86
========= ========= ======= =======
Total investment return for
the period (3)............. 16.87 % 16.33 % 27.68 % 26.91 %
========= ========= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)............ $ 67,491 $ 37,622 $45,049 $28,081
Ratio of expenses to average
net assets (1)............. 1.50 % 2.00 % 1.50 %(4) 2.00 %(4)
Ratio of net investment loss
to average net
assets (1)................. (0.59)% (1.09)% (0.01)%(4) (0.45)%(4)
Decrease reflected in above
expense ratios and net
investment loss due to
waivers and reimbursements
(5)........................ 0.70 % 0.70 % 0.89 %(4) 0.92 %(4)
</TABLE>
- --------
* Commencement of investment operations.
** Calculated based upon shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on actual shares outstanding on the dates of distributions.
(1) Reflects waivers and/or reimbursements.
(2) The amounts shown for a share outstanding throughout the respective peri-
ods are not in accord with the changes in the aggregate gains and losses
in investments during the respective periods because of the timing of
sales and repurchases of Portfolio shares in relation to fluctuating net
asset value during the respective period.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends
and distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Includes Portfolio's share of Master Series' expenses.
4
<PAGE>
Contained below are ratios to average net assets and other supplemental data
for the Master Series for the periods indicated. This information has been de-
rived from information provided in the Master Series' financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL APRIL 5, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)........ $120,140 $82,028
Ratio of expenses to average net assets(1)....... 0.32% 0.19%(2)
Ratio of net investment income to average net as-
sets(1)......................................... 0.59% 1.36%(2)
Decrease reflected in above expense ratios due to
waivers and/or reimbursements................... 0.70% 0.91%(2)
Portfolio turnover rate.......................... 220.00% 295.97%(3)
Average commission rate per share(4)............. $ 0.0595 $0.0603
</TABLE>
- ------
* Commencement of investment operations.
(1) Reflects waivers and/or reimbursements.
(2) Annualized.
(3) Not annualized.
(4) Represents average commission rate per share charged to the Master Series
on purchases and sales of investments subject to such commissions during
each period.
Further information about performance is contained in the STARS Portfolio's
Annual Report, which may be obtained without charge by writing to the address
or calling one of the telephone numbers listed under "General Information."
5
<PAGE>
Alternative Purchase Methods
By this Prospectus, the Portfolio offers investors three methods of purchasing
its shares; investors may choose the class of shares that best suits their
needs, given the amount of purchase, the length of time the investor expects
to hold the shares and any other relevant circumstances. Each Portfolio share
represents an identical pro rata interest in the Portfolio's investment port-
folio.
CLASS A SHARES
Class A shares of the Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 5.50% of the public offering price imposed at
the time of purchase. The initial sales charge may be reduced or waived for
certain purchases. See "How to Buy Shares--Class A Shares." The Class A shares
of the Portfolio are subject to an annual distribution and shareholder servic-
ing fee at the rate of 0.50 of 1% of the value of the average daily net assets
of Class A.
CLASS B SHARES
Class B shares of the Portfolio are sold without an initial sales charge but
are subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if the
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares--Class B Shares." The Class B shares of the Portfolio also are subject
to an annual distribution fee at the rate of 0.75 of 1% of the value of the
average daily net assets of Class B. Class B shares are subject to an annual
shareholder servicing fee at the rate of 0.25 of 1% of the value of the aver-
age daily net assets of Class B shares incurred in connection with the per-
sonal service and maintenance of accounts holding Portfolio shares. See "Man-
agement of the STARS Portfolio--Distribution Plan" and "Shareholder Servicing
Plan." Class B shares will convert to Class A shares, based on their relative
net asset values, eight years after the initial purchase. The distribution and
shareholder servicing fees will cause Class B shares to have a higher expense
ratio and to pay lower dividends than Class A shares.
CLASS C SHARES
Class C shares of the Portfolio are subject to a 1% CDSC which is assessed
only if Class C shares are redeemed within one year of purchase. See "How to
Redeem Shares--Class C Shares." These shares of the Portfolio also are subject
to an annual distribution and shareholder servicing fee at the rate of 1% of
the average daily net assets of Class C. See "Management of the STARS Portfo-
lio--Distribution and Shareholder Servicing Plan." The distribution and share-
holder servicing fees will cause Class C shares to have a higher expense ratio
and to pay lower dividends than Class A shares.
The decision as to which class of shares is more beneficial to each investor
depends on the amount and the intended length of time of the investor's in-
vestment. Each investor should consider whether, during the anticipated life
of the investor's investment in the Fund, the accumulated distribution and
shareholder servicing fee and CDSC, if any, on Class B or C shares would be
less than the initial sales charge on Class A shares purchased at the same
time, and to what extent, if any, such differential would be offset by the net
return of Class A. See "How to Buy Shares--Choosing a Class of Shares."
6
<PAGE>
Description of the STARS Portfolio
GENERAL
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios. Each portfolio is treated as a separate entity for certain pur-
poses under the Investment Company Act of 1940, as amended (the "1940 Act"),
and for other purposes, and a shareholder of one portfolio is not deemed to be
a shareholder of any other portfolio. As described below, for certain matters
Fund shareholders vote together as a group; as to others they vote separately
by portfolio. By this Prospectus, shares of the STARS Portfolio are being of-
fered. From time to time, other portfolios may be established and sold pursu-
ant to other offering documents. See "General Information."
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to provide investment results that ex-
ceed the total return of publicly traded common stocks, in the aggregate, as
represented by the S&P 500. The Portfolio's investment objective cannot be
changed without approval by the holders of a majority (as defined in the 1940
Act) of its outstanding voting shares. There can be no assurance that the in-
vestment objective of the Portfolio will be achieved.
STARS
STARS is S&P's proprietary stock ranking system. It is used by BSAM to iden-
tify a universe of securities in the highest category to evaluate for purchase
and in the lowest category to evaluate for short selling.
STARS ranks on a scale from five stars (highest) to one star (lowest) the
stocks of approximately 1,100 issuers analyzed by S&P's research staff of se-
curities analysts. STARS represents the evaluation of S&P's analysts of the
short-term (up to 12 months) appreciation potential of the evaluated stocks.
The rankings are as follows:
*****Buy--Expected to be among the best performers over the next 12
months and to rise in price.
****Accumulate--Expected to be an above-average performer.
***Hold--Expected to be an average performer.
**Avoid--Expected to be a below-average performer.
*Sell--Expected to be a well-below-average performer and to fall in
price.
STARS was introduced by S&P in January 1987. Since 1993, on average, the five
star category has consisted of approximately 95 stocks, the four star category
has consisted of approximately 375 stocks, the three star category has con-
sisted of approximately 525 stocks, the two star category has consisted of ap-
proximately 100 stocks, and the one star category has consisted of between ap-
proximately 14 and 23 stocks. Rankings may change frequently as developments
affecting individual securities and the markets are considered by the S&P ana-
lysts.
For purposes of evaluating the performance of stocks in the various catego-
ries--and thus of the performance of its analysts--S&P has created a model
which initially gives equal weight by dollar amount to the stocks in the vari-
ous categories, does not rebalance the portfolio based on changes in values or
rankings and does not take into account dividends or transaction costs. STARS
is only a model; it does not reflect actual investment performance. While its
performance cannot be used to predict actual results, S&P believes it is use-
ful in evaluating the capability of its analysts. Investors should recognize
that the pool of S&P analysts changes and their past performance is not neces-
sarily predictive of future results either of the model or of the STARS Port-
folio.
From January 1, 1987 through March 31, 1997
- The S&P 500 (measured on a total return basis, with-
out dividend reinvestment)* increased by 212.64%.
- The ranked stocks, measured as described above,
changed in value as follows*:
- Five stars-- +443.52%
- Four stars-- +264.03%
- Three stars-- +161.04%
- Two stars-- +140.11%
- One star-- -47.81%
- ------
* During this period, the average dividend yields on securities included in the
S&P 500 and the securities ranked five stars were approximately 2.9% and 1.9%,
respectively.
7
<PAGE>
The Portfolio believes that this information should be used by investors only
in their consideration that, historically, the five star stocks, measured as
described above, have significantly outperformed lower ranked stocks and the
one star stocks, similarly measured, have significantly underperformed the
higher ranked stocks. THIS INFORMATION SHOULD NOT BE USED TO PREDICT WHETHER
THE RESULTS WILL OCCUR IN THE FUTURE OR THE ACTUAL PERFORMANCE OF A PARTICULAR
CATEGORY. STARS performance has been more volatile than that of conventional
indices such as the Dow Jones Industrial Average and the S&P 500. In addition,
at times, lower ranked STARS categories have outperformed higher ranked STARS
categories and higher ranked STARS categories have under-performed the S&P
500. Specifically, the performance of five star and one star stocks has not
consistently exceeded or fallen below the performance of the S&P 500. In some
years, one star stocks have outperformed the S&P 500 as well as five star
stocks; in other years, both one and five star stocks have outperformed the
S&P 500. In 1994, one star stocks outperformed the S&P 500, which in turn
outperformed five star stocks. In 1995, the S&P 500 outperformed five star
stocks, which in turn outperformed one star stocks. In 1996, five star stocks
outperformed both the one star stocks and the S&P 500. Investors also should
consider that the Portfolio is managed actively--and, thus, its performance
will depend materially on BSAM's investment determinations--and will incur
transaction and other costs, including management and 12b-1 fees, which are
not reflected in the foregoing information.
STARS is available to the public through various S&P publications. BSAM has
access to STARS through S&P's MarketScope, a computer-accessed subscription
service available for an annual fee, currently with more than 74,000 sub-
scriber terminals.
MANAGEMENT POLICIES
The STARS Portfolio invests primarily in equity securities that, at the time
of purchase, were ranked as five stars in STARS or at their time of short sale
were ranked as one star in STARS.
As its investment strategy, BSAM uses STARS to identify a universe of securi-
ties in the five star category to evaluate for purchase and in the one star
category to evaluate for short selling. BSAM anticipates that at least 85% of
the value of the Portfolio's total assets (except when maintaining a temporary
defensive position) will be invested in common stocks that, at their time of
purchase, were ranked as five stars in STARS or, at their time of short sale,
were ranked as one star in STARS. The Portfolio may invest up to 15% of its
assets in common stocks without regard to STARS ranking, if BSAM believes that
such securities offer opportunities for capital appreciation. BSAM will not
seek to replicate STARS performance and will not necessarily sell a security
once it has been downgraded from five stars or cover a short position once it
has been upgraded from one star. From time to time, certain closed-end invest-
ment companies are ranked by STARS and will be eligible for purchase by the
Portfolio. Subsequent market appreciation of a security or changes in total
assets due to subscriptions and redemptions or dividends or distributions to
shareholders will not by themselves cause a violation of this investment poli-
cy. In addition, a subsequent downgrade of a five star ranked security (or a
subsequent upgrade of a one-star security that has been sold short) will cause
the security to be included in the 15% calculation, but will not by itself
cause the Portfolio to violate this limitation. If at any time, however, the
Portfolio exceeds the 15% limitation, the Portfolio will not purchase addi-
tional non-five star ranked securities or sell short additional non-one star
ranked securities. The Portfolio may invest, in anticipation of investing cash
positions and, without limitation, for temporary defensive purposes, in money
market instruments consisting of U.S. Government securities, certificates of
deposit, time deposits, bankers' acceptances, short-term investment grade cor-
porate bonds and other short-term debt instruments, and repurchase agreements,
as set forth in the Appendix. The Portfolio will not count money market in-
struments for purposes of determining compliance with the 15% limitation.
INVESTMENT TECHNIQUES
The Portfolio may engage in various investment techniques, such as short sell-
ing, lending portfolio securities, and options transactions, each of which in-
volves risk. Options transactions involve "derivative securities." Short sell-
ing is discussed below. For a discussion of these other investment techniques
and their related risks, see "Appendix--Investment Techniques" and "Risk Fac-
tors" below.
Short sales are transactions in which the Portfolio sells a security it does
not own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Portfolio must borrow the security to make
delivery to the buyer. The Portfolio then is obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security
was sold by the Portfolio. Until the
8
<PAGE>
security is replaced, the Portfolio is required to pay to the lender amounts
equal to any dividend which accrues during the period of the loan. To borrow
the security, the Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account, containing
liquid securities at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral always equals the cur-
rent value of the security sold short; or (b) otherwise cover its short posi-
tion in accordance with positions taken by the staff of the Securities and Ex-
change Commission.
The Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. The Portfolio will realize
a gain if the security declines in price between those dates. This result is
the opposite of what one would expect from a cash purchase of a long position
in a security. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of any premium or amounts in lieu of interest
the Portfolio may be required to pay in connection with a short sale. The
Portfolio may purchase call options to provide a hedge against an increase in
the price of a security sold short by the Portfolio. See "Appendix--Investment
Techniques--Options Transactions."
The Portfolio anticipates that the frequency of short sales will vary substan-
tially in different periods, and it does not intend that any specified portion
of its assets, as a matter of practice, will be invested in short sales. How-
ever, no securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed
25% of the value of the Portfolio's net assets. The Portfolio may not sell
short the securities of any single issuer listed on a national securities ex-
change to the extent of more than 5% of the value of its net assets. The Port-
folio may not sell short the securities of any class of an issuer to the ex-
tent, at the time of the transaction, of more than 2% of the outstanding secu-
rities of that class.
In addition to the short sales discussed above, the Portfolio may make short
sales "against the box," a transaction in which the Portfolio enters into a
short sale of a security which the Portfolio owns. The proceeds of the short
sale will be held by a broker until the settlement date at which time the
Portfolio delivers the security to close the short position. The Portfolio re-
ceives the net proceeds from the short sale. The Portfolio at no time will
have more than 15% of the value of its net assets in deposits on short sales
against the box. It currently is anticipated that the Portfolio will make
short sales against the box for purposes of protecting the value of the Port-
folio's net assets. There are certain tax implications associated with this
strategy. See "Dividends, Distributions and Taxes."
CERTAIN FUNDAMENTAL POLICIES
The Portfolio may (i) borrow money to the extent permitted under the 1940 Act;
and (ii) invest up to 25% of the value of its total assets in the securities
of issuers in a single industry, provided that there is no such limitation on
investments in securities issued or guaranteed by the U.S. Government, its
agencies or sponsored enterprises. This paragraph describes fundamental poli-
cies that cannot be changed as to the Portfolio without approval by the hold-
ers of a majority (as defined in the 1940 Act) of the outstanding voting secu-
rities of the Portfolio. See "Investment Objective and Management Policies--
Investment Restrictions" in the Statement of Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
The Portfolio may (i) purchase securities of any company having less than
three years' continuous operation (including operations of any predecessors)
if such purchase does not cause the value of its investments in all such com-
panies to exceed 5% of the value of its total assets; (ii) pledge, hypothe-
cate, mortgage or otherwise encumber its assets, but only to secure permitted
borrowings; and (iii) invest up to 15% of the value of its net assets in re-
purchase agreements providing for settlement in more than seven days after no-
tice and in other illiquid securities. See "Investment Objective and Manage-
ment Policies--Investment Restrictions" in the Statement of Additional Infor-
mation.
RISK FACTORS
No investment is free from risk. Investing in the STARS Portfolio will subject
investors to certain risks which should be considered.
9
<PAGE>
NET ASSET VALUE FLUCTUATIONS
The Portfolio's net asset value is not fixed and should be expected to fluctu-
ate. Investors should purchase STARS Portfolio shares only as a supplement to
an overall investment program and only if investors are willing to undertake
the risks involved, including the potential loss of a significant portion of
their investment.
EQUITY SECURITIES
Investors should be aware that equity securities fluctuate in value, often
based on factors unrelated to the value of the issuer of the securities, and
that fluctuations can be pronounced. Changes in the value of the common stocks
held by the Portfolio will result in changes in the value of its shares and
thus its yield and total return to investors.
STARS PERFORMANCE
STARS rankings are the subjective determination of S&P's analysts. The pool of
these analysts changes. Past performance of securities and issuers included in
STARS cannot be used to predict future results of the Portfolio, which is man-
aged actively by BSAM and the results of which should be expected to vary from
the performance of STARS. None of the STARS Portfolio, Bear Stearns or BSAM
have any ongoing relationship with S&P regarding the STARS Portfolio other
than the right for a fee to use the S&P, Standard & Poor's and STARS trade-
marks in connection with the management of mutual funds and access to STARS
through S&P's publicly available subscription service.
CERTAIN INVESTMENT TECHNIQUES
The use of investment techniques, such as short selling, lending portfolio se-
curities and engaging in options transactions, involves greater risk than that
incurred by many other funds with a similar objective. See "Appendix--Invest-
ment Techniques."
For taxable years beginning on or before August 5, 1997, the Portfolio's abil-
ity to engage in certain short-term transactions may be limited by the re-
quirement that, to qualify as a regulated investment company, it must earn
less than 30% of its gross income from the disposition of securities held for
less than three months. This 30% test limits the extent to which the Portfolio
may sell securities held for less than three months, effect short sales of se-
curities held for less than three months, and write options expiring in less
than three months, among other strategies. Except for this requirement, the
amount of portfolio activity will not be a limiting factor when making portfo-
lio decisions. Under normal market conditions, the turnover rate of the Port-
folio generally will not exceed 150%. However, the portfolio turnover rate may
exceed this rate, when BSAM believes the anticipated benefits of short-term
investments outweigh any increase in transaction costs or increase in short-
term gains. Higher portfolio turnover rates are likely to result in compara-
tively greater brokerage commissions or transaction costs. Short-term gains
realized from portfolio transactions are taxable to shareholders as ordinary
income. See "Portfolio Transactions" in the Statement of Additional Informa-
tion.
NON-DIVERSIFIED STATUS
The Portfolio's classification as a "non-diversified" investment company means
that the proportion of its assets that may be invested in the securities of a
single issuer is not limited by the 1940 Act. However, the Portfolio intends
to conduct its operations so as to qualify as a "regulated investment company"
for purposes of the Internal Revenue Code of 1986, as amended (the "Code"),
which requires that, at the end of each quarter of its taxable year, (i) at
least 50% of the market value of the Portfolio's total assets be invested in
cash, U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5%
of the value of the Portfolio's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its to-
tal assets be invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment compa-
nies). Since a relatively high percentage of the Portfolio's assets may be in-
vested in the securities of a limited number of issuers, some of which may be
within the same industry or economic sector, the Portfolio's securities may be
more susceptible to any single economic, political or regulatory occurrence
than the portfolio securities of a diversified investment company.
SIMULTANEOUS INVESTMENTS
Investment decisions for the Portfolio are made independently from those of
other investment companies or accounts advised by BSAM. However, if such other
investment companies or accounts are prepared to invest in, or desire to dis-
pose of, securities of the type in which the STARS Portfolio invests at the
same time as the Portfolio, available investments or opportunities for sales
will be
10
<PAGE>
allocated equitably to each. In some cases, this procedure may adversely af-
fect the size of the position obtained for or disposed of by the Portfolio or
the price paid or received by the Portfolio.
Management of the STARS Portfolio
BOARD OF TRUSTEES
The STARS Portfolio's business affairs are managed under the general supervi-
sion of the Fund's Board of Trustees. The STARS Portfolio's Statement of Addi-
tional Information contains the name and general business experience of each
Trustee.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio's investment adviser is BSAM, a wholly-owned subsidiary of The
Bear Stearns Companies Inc., which is located at 575 Lexington Avenue, New
York, New York 10022. The Bear Stearns Companies Inc. is a holding company
which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSAM is a registered investment ad-
viser and offers, either directly or through affiliates, investment advisory
services to open-end and closed-end investment funds and other managed pooled
investment vehicles with net assets at October 31, 1997 of $7.7 billion.
BSAM serves as investment adviser of the Portfolio under an Investment Advi-
sory Agreement between BSAM and the Portfolio, subject to the overall author-
ity of the Fund's Board of Trustees in accordance with Massachusetts law. The
Portfolio's principal portfolio manager is Robert S. Reitzes. Mr. Reitzes
joined BSAM in 1994 as Director of Mutual Funds for Bear Stearns Asset Manage-
ment and Senior Managing Director of Bear Stearns. From 1991 until 1994, he
was Co-Director of Research and Senior Chemical Analyst at C.J.
Lawrence/Deutsche Bank Securities Corp. For six years prior thereto, Mr.
Reitzes was employed by Mabon, Nugent & Co. as Chief Investment Officer and
Chemical Analyst.
Under the terms of the Investment Advisory Agreement, the Portfolio has agreed
to pay BSAM a monthly fee at the annual rate of 0.75 of 1% of the Portfolio's
average daily net assets. Prior to June 25, 1997, the Portfolio did not retain
an investment adviser. Rather, the Portfolio invested all of its assets in the
S&P STARS Master Series, a series of S&P STARS Fund, which was advised by
BSAM. Accordingly, information contained in this Prospectus and Statement of
Additional Information, to the extent it describes historical information re-
garding fees, expenses and other portfolio information, reflects such results
incurred by the Master Series. For the period April 3, 1995 (commencement of
operations) through March 31, 1996, investment advisory fees payable amounted
to $384,778 all of which was waived. In addition, BSAM reimbursed $4,424 and
$79,750 of the Portfolio's and the Master Series' expenses, respectively, pur-
suant to a voluntary undertaking by BSAM. For the fiscal year ended March 31,
1997, the investment advisory fees payable amounted to $747,970. BSAM waived
$699,997 of its advisory fee pursuant to a voluntary undertaking by BSAM re-
sulting in net advisory fees of $47,973 paid by the Master Series.
The Portfolio's Administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York
10167. BSFM offers administrative services to open-end and closed-end in-
vestment funds and other managed pool investment vehicles with net assets at
Octo- ber 31, 1997 of $3.0 billion.
Under the terms of an Administration Agreement with the Fund, BSFM generally
supervises all aspects of the operation of the Portfolio, subject to the over-
all authority of the Fund's Board of Trustees in accordance with Massachusetts
law. For providing administrative services to the STARS Portfolio, the Fund
has agreed to pay BSFM a monthly fee at the annual rate of 0.15 of 1% of the
STARS Portfolio's average daily net assets. Under the terms of an Administra-
tive Services Agreement with the Fund, PFPC Inc. provides certain administra-
tive services to the STARS Portfolio. For providing these services, PFPC Inc.
is entitled to receive a monthly fee equal to an annual rate of 0.10 of 1% of
the Portfolio's average daily net assets up to $200 million, 0.075 of 1% of
the next $200 million, 0.05 of 1% of the next $200 million and 0.03 of 1% of
net assets above $600 million, subject to a minimum annual fee of approxi-
mately $100,000 for the Portfolio. Prior to June 25, 1997, PFPC Inc. provided
certain administrative services to the STARS Portfolio. For providing these
services, the Fund agreed to pay PFPC Inc. $5,500 per month.
11
<PAGE>
Prior to June 25, 1997, the Master Series paid PFPC International Ltd. a
monthly fee equal to an annual rate of 0.12 of 1% of the Portfolio's average
daily net assets up to $200 million, 0.09 of 1% of the next $200 million,
0.075 of 1% of the next $200 million and 0.05 of 1% of net assets above $600
million, subject to a minimum annual fee of $8,500 for the Portfolio.
For the period April 3, 1995 (commencement of operations) through March 31,
1996, and the fiscal year ended March 31, 1997, the Master Series paid PFPC
International Ltd. a monthly fee at the effective annual rate of 0.12 of 1% of
the Master Series' average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily as-
sume certain Portfolio expenses, which would have the effect of lowering the
STARS Portfolio's expense ratio, as the case may be, and increasing yield to
investors at the time such amounts are waived or assumed, as the case may be.
The Portfolio will not pay BSFM at a later time for any amounts it may waive,
nor will it reimburse BSFM for any amounts it may assume.
Brokerage commissions may be paid to Bear Stearns for executing transactions
if the use of Bear Stearns is likely to result in price and execution at least
as favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of the
Portfolio's shares. See "Portfolio Transactions" in the Statement of Addi-
tional Information.
Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment Ad-
visory Agreement is in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
the STARS Portfolio's principal underwriter within the meaning of the 1940 Act
and as distributor of the STARS Portfolio's shares pursuant to an agreement
which is renewable annually. Bear Stearns is entitled to receive the sales
load described under "How to Buy Shares" and payments under the STARS Portfo-
lio's Distribution and Shareholder Servicing Plan described below.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is the Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to the Portfolio.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN--CLASS A AND CLASS C SHARES
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), the Portfolio pays Bear Stearns for distrib-
uting Portfolio shares and for providing personal services to, and/or main-
taining accounts of, Portfolio shareholders, a fee at the annual rate of 0.50%
and 1.00% of the average daily net assets of Class A and Class C, respective-
ly. With respect to Class A shares of the Portfolio, Bear Stearns will waive
the distribution fee to the extent that the fees would otherwise exceed the
NASD limitations on asset-based sales charges. The 6.25% limitation is imposed
on the Portfolio rather than on a per shareholder basis. Therefore, a long-
term shareholder of the Portfolio may pay more in distribution fees than the
economic equivalent of 6.25% of such shareholder's investment in such shares.
Under the Plan, Bear Stearns may pay third parties in respect of these serv-
ices such amount as it may determine. The fees paid to Bear Stearns under the
Plan are payable without regard to actual expenses incurred. Of these amounts,
up to 0.25% of the average daily net assets of each class will compensate in-
stitutions for personal service and maintenance of accounts holding portfolio
shares. The Portfolio understands that these third parties also may charge
fees to their clients who are beneficial owners of Portfolio shares in connec-
tion with their client accounts. These fees would be in addition to any
amounts which may be received by them from Bear Stearns under the Plan. Fees
paid under the Plan may also include a service fee paid to broker-dealers or
others who provide services in connection with "no transaction fee" or similar
programs for the purchase of shares.
DISTRIBUTION PLAN--CLASS B SHARES
Under a Plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan"), for Class B shares, the Portfo-
lio will pay Bear Stearns an annual fee of
12
<PAGE>
0.75% per year of the average daily net assets of Class B shares. Amounts paid
under the Distribution Plan compensates Bear Stearns for distributing Portfo-
lio shares. Bear Stearns may pay third parties that sell Portfolio shares such
amount as it may determine.
The Portfolio understands that these third parties may also charge fees for
their clients who are beneficial owners of Portfolio shares in connection with
their client accounts. These fees would be in addition to any amounts which
may be received by them from Bear Stearns under the Distribution Plan.
SHAREHOLDER SERVICING PLAN--CLASS B SHARES
The Fund has adopted a shareholder servicing plan on behalf of the Portfolio's
Class B shares (the "Shareholder Servicing Plan"). In accordance with the
Shareholder Servicing Plan, the Fund may enter into shareholder service agree-
ments under which the Portfolio pays fees of up to 0.25% of the average daily
net assets of Class B shares for fees incurred in connection with the personal
service and maintenance of accounts holding Portfolio shares for responding to
inquiries of, and furnishing assistance to, shareholders regarding ownership
of the shares or their accounts or similar services not otherwise provided on
behalf of the Portfolio. Fees paid under the Shareholder Servicing Plan may
also include a service fee paid to broker-dealers or others who provide serv-
ices in connection with "no transaction fee" or similar programs for the pur-
chase of shares.
EXPENSE LIMITATION
BSAM has undertaken (until such time as it gives investors at least 60 days'
notice to the contrary) that, if in any fiscal year, certain expenses, includ-
ing the investment advisory fee and fees paid under the Plan and the Distribu-
tion Plan, exceed 1.50% of Class A's average daily net assets, 2% of Class B's
average daily net assets and 2% of Class C's average daily net assets for the
fiscal year, BSAM may waive a portion of its investment advisory fee or bear
other expenses to the extent of the excess expense.
How to Buy Shares
GENERAL
The minimum initial investment is $1,000, or $500 if the investment is for
Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant.
Subsequent investments ordinarily must be at least $50 or $25 for retirement
plans. Share certificates are issued only upon written request. No certifi-
cates are issued for fractional shares. The Portfolio reserves the right to
reject any purchase order. The STARS Portfolio reserves the right to vary the
initial and subsequent investment minimum requirements at any time. Invest-
ments by employees of Bear Stearns and its affiliates are not subject to mini-
mum investment requirements.
Purchases of the Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the NASD who have sales agreements with Bear Stearns (an "Autho-
rized Dealer"). Purchases of the Portfolio's shares also may be made directly
through the Transfer Agent. When purchasing Portfolio shares, investors must
specify which class is being purchased. If you do not specify in your instruc-
tions to the Fund which class of shares you wish to purchase, the Fund will
assume that your instructions apply to Class A shares.
Purchases are effected at the public offering price next determined after a
purchase order is received by Bear Stearns, an Authorized Dealer or the Trans-
fer Agent (the "trade date"). Payment for Portfolio shares generally is due to
Bear Stearns or the Authorized Dealer on the third business day (the "settle-
ment date") after the trade date. Investors who make payment before the set-
tlement date may permit the payment to be held in their brokerage accounts or
may designate a temporary investment for payment until the settlement date. If
a temporary investment is not designated, Bear Stearns or the Authorized
Dealer will benefit from the temporary use of the funds if payment is made be-
fore the settlement date.
CHOOSING A CLASS OF SHARES
Determining which class of shares best suits your investment needs depends on
several factors. Each class of shares has its own operating costs and sales
charges that will affect the results of your investment over time. Perhaps the
most significant factors are how much you intend to invest and the length of
time you expect to hold your investment.
13
<PAGE>
In general, Class A shares are the most beneficial for the investor who quali-
fies for a waiver or certain reductions of the front end sales charges as de-
scribed herein under "How to Buy Shares--Class A Shares." Class B and Class C
shareholders may pay a CDSC upon redemption. Investors who expect to redeem
during the eight year CDSC period applicable to Class B shares or the one year
CDSC period applicable to Class C shares should consider the cost of the ap-
plicable CDSC plus the aggregate annual distribution and service fees applica-
ble to Class B and Class C shares, as compared with the cost of the front end
sales charge plus the aggregate annual distribution and service fees applica-
ble to Class A shares. Because Class B and Class C shareholders pay no front
end sales charge, the entire purchase price is immediately invested in shares
of the Portfolio. Over time, however, the cumulative distribution and service
fees applicable to Class B and Class C shares will approach and may exceed the
5.50% maximum front end sales charge plus the distribution and service fees
applicable to Class A shares.
The factors below assume the expenses that apply to each class of shares as
described in this prospectus. In addition, they assume an annual rate of re-
turn of approximately 5%. The actual amount of return may be higher or lower,
depending on the actual investment returns over time. This discussion is not
intended to be investment advice or recommendations, because each investor's
goals, needs and circumstances are unique.
MAXIMUM PURCHASE AMOUNT
There is a maximum purchase limitation of up to $500,000 in the aggregate on
purchases of Class B shares and a maximum purchase limitation of up to $1 mil-
lion in the aggregate on purchases of Class C shares. Investors who purchase
$1 million or more may only purchase Class A shares (as the sales charge is
waived for purchases in excess of $1 million). However, if you purchase over
$1 million of Class A shares, and do not maintain your investment for at least
one year from the date of purchase, you will be charged a CDSC of 1%.
LENGTH OF INVESTMENT
Knowing the approximate time you plan to hold your investment can help you se-
lect the class of shares that is most appropriate for you. Generally, the
amount of sales charge you pay over time will depend on the amount you invest.
If you plan to invest a large amount over time, the reduced sales charges
available for larger purchases of Class A shares may, over time, offset the
effect of paying an initial sales charge on your investment (the initial sales
charge of Class A Shares effectively reduces the amount of your investment),
compared to the higher expenses on Class B shares or Class C shares, which do
not have an initial sales charge. Your entire investment in Class B shares is
available to work for you from the time you make your initial investment but
the higher expenses will cause your Class B shares (until conversion to Class
A shares) to have a higher expense ratio and to pay lower dividends, to the
extent dividends are paid, than Class A shares. If you prefer not to pay an
initial sales charge on an investment you might consider purchasing Class B
shares.
If you plan to invest less than $250,000 for a period of approximately eight
years or less, you should probably consider Class C shares as the appropriate
choice even though the class expenses are higher, because there is no initial
sales charge and no CDSC after one year. If you plan to invest less than
$250,000 for a period of between nine and twelve years, Class B shares may be
the appropriate choice. If you plan to hold your investment for more than
twelve years, then Class A shares may be the appropriate choice, because the
effect of the higher class expenses of Class B and C shares might be greater
than the effect of the initial sales charge of the Class A shares.
If you plan to invest more than $250,000 but less than $500,000 for a period of
five years or less, then you should probably consider investing in Class C
shares. If you plan to hold your investment for six years or more you may find
Class A shares more advantageous because the annual total expenses on Class B
and C shares will have a greater impact on your investment over the longer term
than the reduced front end sales charge available for larger pur- chases of
Class A shares.
If you plan to invest more than $500,000 but less than $1,000,000 for a period
of four years or less, then you should probably consider investing in Class C
shares. If you plan to hold your investment for five years or more, you may
find Class A shares more advantageous.
For investors who invest $1 million or more, Class A shares will be the most
advantageous choice, no matter how long you intend to hold your shares.
14
<PAGE>
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling
shares of one class of shares than for selling another class. The purpose of
both the CDSC and the asset-based sales charge is to compensate Bear Stearns
and the brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be accept-
ed), Federal Reserve draft or by wiring Federal Funds with funds held in bro-
kerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "STARS Portfolio" if purchased di-
rectly from the Portfolio, and should be directed to the Transfer Agent: PFPC
Inc., Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-
8960. Direct overnight deliveries to PFPC, Inc., 400 Bellevue Parkway, Suite
108, Wilmington, Delaware 19809. Payment by check or Federal Reserve draft
must be received within three business days of receipt of the purchase order
by Bear Stearns or an Authorized Dealer. Shareholders may not purchase shares
of the Portfolio with a check issued by a third party and endorsed over to the
Portfolio. Orders placed directly with the Transfer Agent must be accompanied
by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible
for forwarding payment promptly to the Portfolio. The Fund will charge $7.50
for each wire redemption. The payment proceeds of a redemption of shares re-
cently purchased by check may be delayed as described under "How to Redeem
Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares
through the Transfer Agent. To make an initial investment in the Portfolio, an
investor must establish an account with the Portfolio by furnishing necessary
information to the Portfolio. An account with the Portfolio may be established
by completing and signing the Account Information Form indicating which class
of shares is being purchased, a copy of which is attached to this Prospectus,
and mailing it, together with a check to cover the purchase, to PFPC Inc., At-
tention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Port-
folio and directed to the address set forth in the preceding paragraph.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange (cur-
rently 4:00 p.m., New York time) on any day the Portfolio calculates its net
asset value are priced according to the net asset value determined on that
date. Purchase orders received after the close of trading on the New York
Stock Exchange are priced as of the time the net asset value is next deter-
mined.
NET ASSET VALUE
Shares of the Portfolio are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of the Portfolio is computed by
dividing the value of the Portfolio's net assets represented by such class
(i.e., the value of its assets less liabilities) by the total number of shares
of such class outstanding. The STARS Portfolio's investments are valued based
on market value or, where market quotations are not readily available, based
on fair value as determined in good faith by, or in accordance with procedures
established by, the Board of Trustees. For further information regarding the
methods employed in valuing the Portfolio's investments, see "Determination of
Net Asset Value" in the Portfolio's Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer Iden-
tification Number (a "TIN") upon opening or reopening an account. See "Divi-
dends, Distributions and Taxes." Failure to furnish a certified TIN to the
Fund could subject the investor to backup withholding and a $50 penalty im-
posed by the Internal Revenue Service (the "IRS").
15
<PAGE>
CLASS A SHARES
The public offering price for Class A shares of the Portfolio is the net asset
value per share of that class plus a sales load, which is imposed in accor-
dance with the following schedule:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A %
AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 5.50% 5.82% 5.25%
$50,000 to less than
$100,000..................... 4.75 4.99 4.25
$100,000 to less than
$250,000..................... 3.75 3.90 3.25
$250,000 to less than
$500,000..................... 2.75 2.83 2.50
$500,000 to less than
$1,000,000................... 2.00 2.04 1.75
$1,000,000 and above......... 0.00* 0.00 1.25
</TABLE>
- ------
* There is no initial sales charge on purchases of $1,000,000 or more of Class
A shares. However, if an investor purchases Class A shares without an ini-
tial sales charge as part of an investment of at least $1,000,000 and re-
deems those shares within one year after purchase, a CDSC of 1.00% will be
imposed at the time of redemption. Letter of Intent and Right of Accumula-
tion apply to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the
same for all dealers. From time to time, Bear Stearns may make or allow addi-
tional payments or promotional incentives to dealers that sell Class A shares.
In some instances, these incentives may be offered only to certain dealers who
have sold or may sell significant amounts of Class A shares. Dealers may re-
ceive a larger percentage of the sales load from Bear Stearns than they re-
ceive for selling most other funds.
Class A shares may be sold at net asset value to (a) Bear Stearns, its affili-
ates or their respective officers, directors or employees (including retired
employees), any partnership of which Bear Stearns is a general partner, any
Trustee or officer of the Fund and designated family members of any of the
above individuals; (b) qualified retirement plans of Bear Stearns; (c) any em-
ployee of McGraw-Hill, Inc. and its affiliates, or their respective spouses
and minor children; (d) any employee or registered representative of any Au-
thorized Dealer or their respective spouses and minor children; (e) trustees
or directors of investment companies for which Bear Stearns or an affiliate
acts as sponsor; (f) any state, county or city, or any instrumentality, de-
partment, authority or agency thereof, which is prohibited by applicable in-
vestment laws from paying a sales load or commission in connection with the
purchase of Portfolio shares; (g) any institutional investment clients includ-
ing corporate sponsored pension and profit-sharing plans, other benefit plans
and insurance companies; (h) any pension funds, state and municipal govern-
ments or funds, Taft-Hartley plans and qualified non-profit organizations,
foundations and endowments; (i) trust institutions (including bank trust de-
partments) investing on their own behalf or on behalf of their clients; and
(j) accounts as to which an Authorized Dealer charges an asset management fee.
To take advantage of these exemptions, a purchaser must indicate its eligibil-
ity for an exemption to Bear Stearns along with its Account Information Form.
Such purchaser agrees to notify Bear Stearns if, at any time of any additional
purchases, it is no longer eligible for an exemption. Bear Stearns reserves
the right to request certification or additional information from a purchaser
in order to verify that such purchaser is eligible for an exemption. Bear
Stearns reserves the right to limit the participation of its employees in
Class A shares of the STARS Portfolio. Dividends and distributions reinvested
in Class A shares of the Portfolio will be made at the net asset value per
share on the reinvestment date.
Class A shares of the Portfolio also may be purchased at net asset value, with
the proceeds from the redemption of shares of an investment company sold with
a sales charge or commission and not distributed by Bear Stearns. This in-
cludes shares of a mutual fund which were subject to a contingent deferred
sales charge upon redemption. The purchase must be made within 60 days of the
redemption, and Bear Stearns must be notified by the investor in writing, or
by the investor's investment professional, at the time the purchase is made.
However, if such investor redeems those shares within one year after purchase,
a CDSC of 1.00% will be imposed at the time of redemption. Bear Stearns will
offer to pay Authorized Dealers an amount up to 1.25% of the net asset value
of shares purchased by the dealers' clients or customers in this manner.
In addition, Class A Shares of the Portfolio may be purchased at net asset
value by the following customers of a broker that operates a master account
for purchasing and redeeming, and otherwise
16
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
- --------------------------------------------------------------------------------
Account Information Form
Please Note: Do not use this form to open a retirement plan account. For
retirement plan forms call 1-800-447-1139. For assistance in completing
this form, contact PFPC Inc. at 1-800-447-1139.
1 Account Type (Please print; indicate only one registration type)
|_| Individual |_| Joint Tenant
___________________________________________________________________________
NAME
___________________________________________________________________________
JOINT REGISTRANT, IF ANY (SEE NOTES 1 AND 2)
__ __ __ - __ __ - __ __ __ __ __ __ - __ __ __ __ __ __ __
SOCIAL SECURITY NUMBER OF PRIMARY OWNER TAXPAYER IDENTIFICATION NUMBER
(1) Use only the Social Security number or Taxpayer Identification
Number of the first listed joint tenant.
(2) For joint registrations, the account registrants will be joint
tenants with right of survivorship and not tenants in common unless
tenants in common or community property registrations are requested.
___________________________________________________________________________
|_| Uniform Gift to Minors, or |_| Uniform Transfer to Minors
(where allowed by law)
___________________________________________________________________________
NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED)
___________________________________________________________________________
NAME OF MINOR (ONLY ONE PERMITTED)
Under the ________________________ Uniform Gift/Transfers to Minors Act.
STATE RESIDENCE OF MINOR
___ ___ / ___ ___ / ___ ___ ___ ___ ___ - ___ ___ - ___ ___ ___ ___
MINOR'S DATE OF BIRTH MINOR'S SOCIAL SECURITY NUMBER
(REQUIRED TO OPEN ACCOUNT)
___________________________________________________________________________
|_| Corporation |_| Partnership |_| Trust* |_| Other
___________________________________________________________________________
NAME OF CORPORATION, PARTNERSHIP, OR OTHER
___________________________________________________________________________
NAME(S) OF TRUSTEE(S)
__ __ __ - __ __ - __ __ __ __ __ __ - __ __ __ __ __ __ __
SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER
(REQUIRED TO OPEN ACCOUNT) (REQUIRED TO OPEN ACCOUNT)
* If a Trust, include date of trust instrument and list of trustees if
they are to be named in the registration.
2 Mailing Address
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
( ) ( )
_________________________________________ _______________________________
DAY TELEPHONE EVENING TELEPHONE
3 Investment Information
Method of Investment
|_| I have enclosed a check for a minimum initial investment of $1,000
per Portfolio.
|_| I have enclosed a check for a minimum subsequent investment of $50
per Portfolio or completed the Systematic Investment Plan
information in Section 13.
|_| I purchased _____________________ shares of
_______________________________________________ through my broker on
____/____/____. Confirm # _______________.
Please make my investment in the Funds designated below:
---------------------------------------------------------------------------
CLASS A CLASS B CLASS C BEAR STEARNS FUNDS INVESTMENT AMOUNT
---------------------------------------------------------------------------
|_| |_| |_| S&P STARS Portfolio $__________
|_| |_| |_| Large Cap Value Portfolio $__________
|_| |_| |_| Small Cap Value Portfolio $__________
|_| |_| |_| Total Return Bond Portfolio $__________
|_| |_| |_| The Insiders Select Fund $__________
|_| |_| |_| Emerging Markets Debt Portfolio $__________
|_| |_| |_| Focus List Portfolio $__________
|_| |_| |_| Balanced Portfolio $__________
|_| |_| |_| High Yield Total Return Portfolio $__________
|_| |_| |_| International Equity Portfolio $__________
|_| |_| |_| Money Market Portfolio $__________
TOTAL INVESTMENT AMOUNT $
==========
Note: All shares purchased will be held in a shareholder account for the
investor at the Transfer Agent. Checks drawn on foreign banks and checks
made payable to persons or entities other than the Portfolio will not be
accepted. Checks should be made payable to the Portfolio which you are
investing in. If no class is designated, your investment will be made in
Class A shares.
NOT PART OF THE PROSPECTUS
<PAGE>
4 Reduced Sales Charge (Available for Class A Shares Only)
Method of Investment
Are you a shareholder in another Bear Stearns Fund? |_| Yes |_| No
|_| I apply for Right of Accumulation reduced sales charges based on the
following Bear Stearns Fund Accounts (excluding Class C Shares).
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
Letter of Intent
|_| I am already investing under an existing Letter of Intent.
|_| I agree to the Letter of Intent provisions in the Portfolio's current
prospectus. During a 13-month period, I plan to invest a dollar amount
of at least: |_| $50,000 |_| $100,000 |_| $250,000 |_| $500,000
|_| $1,000,000
Net Asset Value Purchase
|_| I qualify for an exemption from the sales charge by meeting the
conditions set forth in the prospectus. (Please attach certification
to this form.)
|_| I qualify to purchase shares at net asset value, with proceeds
received from a mutual fund or closed-end fund not distributed by Bear
Stearns. (Please attach proof of fund share redemption.)
5 Distribution Options
Dividends and capital gains may be reinvested or paid by check. If no
options are selected below, both dividends and capital gains will be
reinvested in additional Portfolio shares.
Dividends |_| Pay by check. |_| Reinvest.
Capital Gains |_| Pay by check. |_| Reinvest.
The Redirected Distribution Option allows an investor to have dividends and
any other distributions from a Portfolio automatically used to purchase
shares of the same class of any other Portfolio. The receiving account must
be in the same name as your existing account.
|_| Please reinvest dividends and capital gains from the
____________________________ to the __________________________.
(NAME OF PORTFOLIO) (NAME OF PORTFOLIO)
If you elect to have distributions paid by check, distributions will be
sent to the address of record. Distributions may also be sent to another
payee:
___________________________________________________________________________
NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
___________________________________________________________________________
Optional Features
6 Automatic Withdrawal Plan
|_| Portfolio Name ____________________________ |_| Amount _____________
|_| Startup month __________________________
Frequency option: |_| Monthly |_| Every other month |_| Quarterly
|_| Semiannually |_| Annually
o A minimum account value of $5,000 in a single account is required to
establish an automatic withdrawal plan.
o Payments will be made on or near the 25th of the month.
o Shareholders holding share certificates are not eligible for the
Automatic Withdrawal Plan.
|_| Please mail checks to Address of Record (Named in Section 2)
|_| Please electronically credit my Bank of Record (Named in Section 9)
|_| Special payee as specified below:
___________________________________________________________________________
NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
7 Telephone Exchange Privilege
Unless indicated below, I authorize the Transfer Agent to accept
instructions from any persons to exchange shares in my account(s) by
telephone, in accordance with the procedures and conditions set forth in
the Portfolio's current prospectus.
|_| I DO NOT want the Telephone Exchange Privilege.
NOT PART OF THE PROSPECTUS
<PAGE>
8 Telephone Redemption Privilege
|_| I authorize the Transfer Agent to accept instructions from any person
to redeem shares in my account(s) by telephone, in accordance with the
procedures and conditions set forth in the Portfolio's current prospectus.
Checks for redemption of proceeds will be sent by check via U.S. Mail to
the address of record, unless the information in Section 9 is completed for
redemption by wire of $500 or more.
9 Bank of Record (for Telephone Redemptions and/or Systematic Investment
Plans)
Please attach a voided check (for electronic credit to your checking
account) in the space provided in Section 13.
___________________________________________________________________________
BANK NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
___________________________________________________________________________
BANK ABA NUMBER BANK ACCOUNT NUMBER
___________________________________________________________________________
ACCOUNT NAME
10 Signature and Taxpayer Certification
The undersigned warrants that I(we) have full authority and, if a natural
person, I(we) am(are) of legal age to purchase shares pursuant to this
Account Information Form, and have received a current prospectus for the
Bear Stearns Fund(s) in which I(we) am(are) investing. The undersigned
acknowledges that the Telephone Exchange Privilege is automatic and that
I(we) may bear the risk of loss in event of fraudulent use of the
Privilege. If I(we) do not want the Telephone Exchange Privilege, I(we)
have so indicated on this Account Information Form.
Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is
required to have the following certification:
Under penalty of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from
backup withholding or (b) I have not been notified by the IRS that I am
subject to 31% backup withholding as a result of a failure to report all
interest or dividends or (c) the IRS has notified me that I am no longer
subject to backup withholding.
Certification Instructions -- You must cross out item (2) above if you have
been notified by the IRS that you are currently subject to backup
withholding because of underreporting of interest or dividends on your tax
return. Mutual fund shares are not deposits of, or guaranteed by, any
depository institution, nor are they insured by the FDIC. Investment in the
funds involves investment risks, including possible loss of principal.
|_| Exempt from backup withholding
|_| Nonresident alien (Form W-8 attached) _________________________________
COUNTRY OF CITIZENSHIP
___________________________________________________________________________
AUTHORIZED SIGNATURE TITLE DATE
___________________________________________________________________________
AUTHORIZED SIGNATURE TITLE DATE
11 For Authorized Dealer Use Only (Please Print)
We hereby authorize the Transfer Agent to act as our agent in connection
with the transactions authorized by the Account Information Form and agree
to notify the Transfer Agent of any purchases made under a Letter of Intent
or Right of Accumulation. If this Account Information Form includes a
Telephone Exchange Privilege authorization, a Telephone Redemption
Privilege authorization or an Automatic Withdrawal Plan request, we
guarantee the signature(s) above.
___________________________________________________________________________
DEALER'S NAME DEALER NUMBER
___________________________________________________________________________
MAIN OFFICE ADDRESS BRANCH NUMBER
___________________________________________________________________________
REPRESENTATIVE'S NAME REP. NUMBER
( )
___________________________________________________ ______________________
BRANCH ADDRESS TELEPHONE NUMBER
___________________________________________________________________________
AUTHORIZED SIGNATURE OF DEALER TITLE DATE
12 Additional Account Statements (Please Print)
In addition to myself and my representative, please send copies of my
account statements to:
___________________________________ ______________________________________
NAME NAME
___________________________________ ______________________________________
ADDRESS ADDRESS
___________________________________ ______________________________________
CITY, STATE, ZIP CODE CITY, STATE, ZIP CODE
NOT PART OF THE PROSPECTUS
<PAGE>
13 Systematic Investment Plan
The Systematic Investment Plan, which is available to shareholders of the
Bear Stearns Funds, makes possible regularly scheduled purchases of
Portfolio shares to allow dollar-cost averaging. The Portfolios' Transfer
Agent can arrange for an amount of money selected by you ($100 minimum) to
be deducted from your checking account and used to purchase shares of a
specified Bear Stearns Fund. A $250 minimum initial investment is required.
This may not be used in conjunction with the Automatic Withdrawal Plan.
Please debit $_______________ from my checking account (named in Section 9)
on or about the 20th of the month. Depending on the Application receipt
date, the Plan may take 10 to 20 days to be in effect.
|_| Monthly |_| Every alternate month
|_| Quarterly |_| Other _________________________________
$ ____________ into the ___________________ Portfolio ________ Start Month.
$100 MINIMUM
$ ____________ into the ___________________ Portfolio ________ Start Month.
$100 MINIMUM
$ ____________ into the ___________________ Portfolio ________ Start Month.
$100 MINIMUM
If you are applying for the Telephone Redemption Privilege or Systematic
Investment Plan, please tape your voided check on top of our sample below.
===========================================================================
John Smith 000
123 First Avenue
Anytown, USA 12345
[VOID]
----------
______________________________________________________________ $
----------
___________________________________________________________________________
_________________________________ ______________________________________
===========================================================================
Service Assistance Mailing or Fax Instructions
Our knowledgeable Client Mail your completed
Services Representatives Account Information Form
are available to assist and check to:
you between 8:00 a.m. and
6:00 p.m. Eastern Time The Bear Stearns Funds
at: c/o PFPC Inc.
P.O. Box 8960
1-800-447-1139 Wilmington, DE 19899-8960
Fax: 302-791-1777
If applications will be
faxed please call and
notify Client Services at
1-800-447-1139 before
placing an order.
NOT PART OF THE PROSPECTUS
<PAGE>
providing shareholder services in respect of Fund shares pursuant to agree-
ments with the Fund or Bear Stearns: (i) investment advisers and financial
planners who place trades for their own accounts or for the accounts of their
clients and who charge a management, consulting or other fee, (ii) clients of
such investment advisers and financial planners if such clients place trades
through accounts linked to master accounts of such investment advisers or fi-
nancial planners on the books and records of such broker and (iii) retirement
and deferred compensation plans, and trusts used to fund such plans, includ-
ing, but not limited to, plans or trusts defined in Section 401(a), 403(b) or
457 of the Code, and "rabbi trusts", provided, in each case, the purchase
transaction is effected through such broker. The broker may charge a fee for
transactions in STARS Portfolio shares.
CLASS B SHARES
The public offering price for Class B shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class B shares made
within six years of purchase. See "How to Redeem Shares". The amount of the
CDSC, if any, will vary depending on the number of years from the time of pur-
chase until the time of redemption of Class B shares. For the purpose of de-
termining the number of years from the time of any purchase, all payments dur-
ing a month will be aggregated and deemed to have been made on the first day
of that month. In processing redemptions of Class B shares, the Portfolios
will first redeem shares not subject to any CDSC, and then shares held longest
during the eight-year period, resulting in the shareholder paying the lowest
possible CDSC. The amount of the CDSC charged upon redemption is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CDSC AS A PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CDSC
- --------------------------------------------------------------------------------
<S> <C>
First................................................... 5%
Second.................................................. 4%
Third................................................... 3%
Fourth.................................................. 3%
Fifth................................................... 2%
Sixth................................................... 1%
Seventh................................................. 0%
Eighth*................................................. 0%
</TABLE>
- ------
* As discussed below, Class B shares automatically convert to Class A shares
after the eighth year following purchase.
Class B shares of the Portfolio will automatically convert into Class A shares
of the same Portfolio at the end of the calendar quarter that is eight years
after the initial purchase of the Class B shares. Class B shares acquired by
exchange from Class B shares of another portfolio will convert into Class A
shares of such Portfolio based on the date of the initial purchase. Class B
shares acquired through reinvestment of distributions will convert into Class
A shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolio is advised that such conversions may con-
stitute taxable events for federal tax purposes, which the Portfolio believes
is unlikely. If conversions do not occur as a result of possible taxability,
Class B shares would continue to be subject to higher expenses than Class A
shares for an indeterminate period.
The purpose of the conversion feature is to allow the holders of Class B
shares the ability to not bear the burden of distribution related expenses
when the shares have been outstanding for a duration sufficient for Bear
Stearns to have obtained compensation for distribution related expenses in-
curred in connection with Class B shares.
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares."
RIGHT OF ACCUMULATION--CLASS A SHARES
Pursuant to the Right of Accumulation, certain investors are permitted to pur-
chase Class A shares of the Portfolio at the sales charge applicable to the
total of (a) the dollar amount then being pur-
17
<PAGE>
chased plus (b) the current public offering price of all Class A shares of the
Portfolio, shares of the Fund's other portfolios and shares of certain other
funds sponsored or advised by Bear Stearns, including the Emerging Markets
Debt Portfolio of Bear Stearns Investment Trust, then held by the investor.
The following purchases of Class A shares may be aggregated for the purposes
of determining the amount of purchase and the corresponding sales load: (a)
individual purchases on behalf of a single purchaser, the purchaser's spouse
and their children under the age of 21 years including shares purchased in
connection with a retirement account exclusively for the benefit of such indi-
vidual(s), such as an IRA, and purchases made by a company controlled by such
individual(s); (b) individual purchases by a trustee or other fiduciary ac-
count, including an employee benefit plan (such as employer-sponsored pension,
profit-sharing and stock bonus plans, including plans under Section 401(k) of
the Code, and medical, life and disability insurance trusts); or (c) individ-
ual purchases by a trustee or other fiduciary purchasing shares concurrently
for two or more employee benefit plans of a single employer or of employers
affiliated with each other. Subsequent purchases made under the conditions set
forth above will be subject to the minimum subsequent investment of $50 and
will be entitled to the Right of Accumulation.
LETTER OF INTENT--CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load appli-
cable to the total number of Class A shares of the Portfolio, Class A shares
of the Fund's other portfolios and shares of certain other funds sponsored or
advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear
Stearns Investment Trust, purchased in a 13-month period pursuant to the terms
and under the conditions set forth herein. A minimum initial purchase of
$1,000 is required. The Transfer Agent will hold in escrow 5% of the amount
indicated in the Account Information Form for payment of a higher sales load
if the investor does not purchase the full amount indicated in the Account In-
formation Form. The escrow will be released when the investor fulfills the
terms of the Letter of Intent by purchasing the specified amount. If an in-
vestor's purchases qualify for a further sales load reduction, the sales load
will be adjusted to reflect the total purchase at the end of 13 months. If to-
tal purchases are less than the amount specified, the investor will be re-
quested to remit an amount equal to the difference between the sales load ac-
tually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent,
as attorney-in-fact, will redeem an appropriate number of shares held in es-
crow to realize the difference. Checking a box in the Letter of Intent section
of the Account Information Form does not bind an investor to purchase, or the
Portfolio to sell, the full amount indicated at the sales load in effect at
the time of signing, but the investor must complete the intended purchase to
obtain the reduced sales load. At the time an investor purchases shares of any
of the above-listed funds, the investor must indicate its intention to do so
under the Letter of Intent section of the Account Information Form.
SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan permits investors to purchase shares of the
Portfolio (minimum initial investment of $250 and minimum subsequent invest-
ments of $50 per transaction) at regular intervals selected by the investor.
Provided the investor's bank or other financial institution allows automatic
withdrawals, Portfolio shares may be purchased by transferring funds from the
account designated by the investor. At the investor's option, the account des-
ignated will be debited in the specified amount, and STARS Portfolio shares
will be purchased once a month, on or about the twentieth day. Only an account
maintained at a domestic financial institution which is an Automated Clearing
House member may be so designated. Investors desiring to participate in the
Systematic Investment Plan should call the Transfer Agent at 1-800-447-1139 to
obtain the appropriate forms. The Systematic Investment Plan does not assure a
profit and does not protect against loss in declining markets. Since the Sys-
tematic Investment Plan involves the continuous investment in the Portfolio
regardless of fluctuating price levels of the Portfolio's shares, investors
should consider their financial ability to continue to purchase through peri-
ods of low price levels. The Fund may modify or terminate the Systematic In-
vestment Plan at any time or charge a service fee. No such fee currently is
contemplated.
18
<PAGE>
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a class of the Portfolio, shares of the same class of the Fund's other
portfolios or shares of certain other funds sponsored or advised by Bear
Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Invest-
ment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the ex-
tent such shares are offered for sale in the investor's state of residence.
These funds have different investment objectives which may be of interest to
investors. To use this privilege, investors should consult their account exec-
utive at Bear Stearns, their account executive at an Authorized Dealer or the
Transfer Agent to determine if it is available and whether any conditions are
imposed on its use.
To use this privilege, exchange instructions must be given to the Transfer
Agent in writing or by telephone. A shareholder wishing to make an exchange
may do so by sending a written request to the Transfer Agent at the address
given above in "How to Buy Shares--General." Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless
they indicate on the account application that they do not wish to use this
privilege. Shareholders holding share certificates are not eligible to ex-
change shares of the Portfolio by phone because share certificates must accom-
pany all exchange requests. To add this feature to an existing account that
previously did not provide for this option, a Telephone Exchange Authorization
Form must be filed with the Transfer Agent. This form is available from the
Transfer Agent. Once this election has been made, the shareholder may contact
the Transfer Agent by telephone at 1-800-447-1139 to request the exchange.
During periods of substantial economic or market change, telephone exchanges
may be difficult to complete and shareholders may have to submit exchange re-
quests to the Transfer Agent in writing.
The Transfer Agent may use security procedures to confirm that telephone in-
structions are genuine. If the Transfer Agent does not use reasonable proce-
dures, it may be liable for losses due to unauthorized transactions, but oth-
erwise neither the Transfer Agent nor the Portfolio will be liable for losses
or expenses arising out of telephone instructions reasonably believed to be
genuine.
If the exchanging shareholder does not currently own shares of the portfolio
or fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and Authorized
Dealer of record as the account from which shares are exchanged, unless other-
wise specified in writing by the shareholder with all signatures guaranteed by
an eligible guarantor institution as described below. To participate in the
Systematic Investment Plan or establish automatic withdrawal for the new ac-
count, however, an exchanging shareholder must file a specific written re-
quest. The Exchange Privilege may be modified or terminated at any time, or
from time to time, by the Fund on 60 days' notice to the affected portfolio or
fund shareholders. The Fund, BSAM and Bear Stearns will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Fund will use such procedures as are considered
reasonable, including recording those instructions and requesting information
as to account registration (such as the name in which an account is regis-
tered, the account number, recent transactions in the account, and the account
holder's Social Security number, address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any Au-
thorized Dealer or the Transfer Agent. Except in the case of Personal Retire-
ment Plans, the shares being exchanged must have a current value of at least
$250; furthermore, when establishing a new account by exchange, the shares be-
ing exchanged must have a value of at least the minimum initial investment re-
quired for the portfolio or fund into which the exchange is being made; if
making an exchange to an existing account, the dollar value must equal or ex-
ceed the applicable minimum for subsequent investments. If any amount remains
in the investment portfolio from which the exchange is being made, such amount
must not be below the minimum account value required by the Portfolio or Fund.
Shares will be exchanged at the next determined net asset value. No CDSC will
be imposed on Class B or C shares at the time of an exchange. The CDSC appli-
cable on redemption of Class B or C shares will be calculated from the date of
the initial purchase of the Class B or C shares exchanged. If an investor is
exchanging Class A shares into a portfolio or fund that charges a sales
19
<PAGE>
load, the investor may qualify for share prices which do not include the sales
load or which reflect a reduced sales load, if the shares of the portfolio or
fund from which the investor is exchanging were: (a) purchased with a sales
load; (b) acquired by a previous exchange from shares purchased with a sales
load; or (c) acquired through reinvestment of dividends or distributions paid
with respect to the foregoing categories of shares. To qualify, at the time of
the exchange the investor must notify Bear Stearns, the Authorized Dealer or
the Transfer Agent. Any such qualification is subject to confirmation of the
investor's holdings through a check of appropriate records. No fees currently
are charged shareholders directly in connection with exchanges, although the
Fund reserves the right, upon not less than 60 days' written notice, to charge
shareholders a $5.00 fee in accordance with rules promulgated by the Securi-
ties and Exchange Commission. The Fund reserves the right to reject any ex-
change request in whole or in part. The Exchange Privilege may be modified or
terminated at any time upon notice to shareholders.
The exchange of shares of one portfolio or fund for shares of another is
treated for federal income tax purposes as a sale of the shares given in ex-
change by the shareholder and, therefore, an exchanging shareholder may real-
ize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest automati-
cally dividends and/or capital gain distributions, if any, paid by the Portfo-
lio in shares of the same class of another portfolio of the Fund or a fund ad-
vised or sponsored by Bear Stearns of which the shareholder is an investor, or
the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio
or fund will be purchased at the current net asset value. If an investor is
investing in a class that charges a CDSC, the shares purchased will be subject
upon redemption to the CDSC, if applicable, to the purchased shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
GENERAL
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one class, any re-
quest for redemption must specify the class of shares being redeemed. If the
investor fails to specify the class of shares to be redeemed or if the in-
vestor owns fewer shares of the class than specified to be redeemed, the re-
demption request may be delayed until the Transfer Agent receives further in-
structions from the investor, the investor's Bear Stearns account executive or
the investor's Authorized Dealer. The Fund imposes no charges (other than any
applicable CDSC) when shares are redeemed directly through Bear Stearns.
The Portfolio ordinarily will make payment for all shares redeemed within
three days after receipt by the Transfer Agent of a redemption request in
proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased Portfolio shares by check
and subsequently submits a redemption request by mail, the redemption proceeds
will not be transmitted until the check used for investment has cleared, which
may take up to 15 days. The Fund will reject requests to redeem shares by tel-
ephone or wire for a period of 15 days after receipt by the Transfer Agent of
the purchase check against which such redemption is requested. This procedure
does not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 days' written notice if the account's net asset value is $750 or
less, for reasons other than market conditions, and remains so during the no-
tice period. Shareholders who have redeemed Class A shares may reinstate their
Portfolio account without a sales charge up to the dollar amount redeemed by
purchasing Class A shares of the Portfolio or of any other Bear Stearns Fund
within 60 days of the redemption. Shareholders should obtain and read the ap-
plicable prospectuses of such other funds and consider their objectives, poli-
cies and applicable fees before investing in any of such funds. To take advan-
tage of this reinstatement privilege, shareholders must notify their Bear
Stearns account executive, Authorized Dealer or the Transfer Agent at the time
the privilege is exercised.
20
<PAGE>
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class A
shares within one year of the date of purchase by any investor that purchased
Class A shares as part of an investment of at least $1,000,000. A CDSC of 1%
is also imposed on any redemption of Class A shares within one year of the
date of purchase by any investor that purchased the shares with the proceeds
from the redemption of shares of an investment company sold with a sales
charge or commission and not distributed by Bear Stearns. No CDSC will be im-
posed to the extent that the net asset value of the Class A shares redeemed
does not exceed (i) the current net asset value of Class A shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii) in-
creases in the net asset value of an investor's Class A shares above the dol-
lar amount of all such investor's payments for the purchase of Class A shares
held by the investor at the time of redemption. See the Statement of Addi-
tional Information for more information.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of
Class B shares within six years of the date of purchase. No CDSC will be im-
posed to the extent that the net asset value of the Class B shares redeemed
does not exceed (i) the current net asset value of Class B shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii) in-
creases in the net asset value of an investor's Class B shares above the dol-
lar amount of all such investor's payments for the purchase of Class B shares
held by the investor at the time of redemption.
If the aggregate value of Class B shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares ac-
quired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class B shares above
the total amount of payments for the purchase of Class B shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of the Portfolio at $10
per share for a cost of $1,000. Subsequently, the shareholder acquired 5 addi-
tional shares through dividend reinvestment. During the first year after the
purchase the investor decided to redeem $500 of his or her investment. Assum-
ing at the time of the redemption the net asset value had appreciated to $12
per share, the value of the investor's shares would be $1,260 (105 shares at
$12 per share). The CDSC would not be applied to the value of the reinvested
dividend shares and the amount which represents appreciation ($260). There-
fore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged
at a rate of 5% for a total CDSC of $12.00.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through reinvest-
ment of dividends or capital gain distributions, plus (ii) increases in the
net asset value of an investor's Class C shares above the dollar amount of all
such investor's payments for the purchase of Class C shares held by the in-
vestor at the time of redemption.
If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares ac-
quired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class C shares above
the total amount of payments for the purchase of Class C shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and, finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
21
<PAGE>
For example, assume an investor purchased 100 shares of the Portfolio at $10
per share for a cost of $1,000. Subsequently, the shareholder acquired 5 addi-
tional shares through dividend reinvestment. During the first year after the
purchase the investor decided to redeem $500 of his or her investment. Assum-
ing at the time of the redemption the net asset value had appreciated to $12
per share, the value of the investor's shares would be $1,260 (105 shares at
$12 per share). The CDSC would not be applied to the value of the reinvested
dividend shares and the amount which represents appreciation ($260). There-
fore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged
at a rate of 1% for a total CDSC of $2.40.
WAIVER OF CDSC--CLASS A, B AND C SHARES
The CDSC applicable to Class A, B and C shares will be waived in connection
with (a) redemptions made within one year after the death or disability, as
defined in section 72(m)(7) of the Code, of the shareholder, (b) redemptions
by employees participating in eligible benefit plans, (c) redemptions as a re-
sult of a combination of any investment company with the Portfolio by merger,
acquisition of assets or otherwise, (d) a distribution following retirement
under a tax-deferred retirement plan or upon attaining age 70 1/2 in the case
of an IRA or Keogh plan or custodial account pursuant to section 403(b) of the
Code, and (e) to the extent that shares redeemed have been withdrawn from the
Automatic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the auto-
matic withdrawal is established. If the Fund's Trustees determine to discon-
tinue the waiver of the CDSC, the disclosure in the Portfolio's prospectus
will be revised appropriately. Any Portfolio shares subject to a CDSC which
were purchased prior to the termination of such waiver will have the CDSC
waived as provided in the Portfolio's prospectus at the time of the purchase
of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor
must notify the Transfer Agent or the investor's Bear Stearns account execu-
tive or the investor's Authorized Dealer must notify Bear Stearns. Any such
qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their ac-
count executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a re-
demption request by repurchasing Fund shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by Bear
Stearns or the Authorized Dealer. Under normal circumstances, within three
days, redemption proceeds will be paid by check or credited to the sharehold-
er's brokerage account at the election of the shareholder. Bear Stearns ac-
count executives or Authorized Dealers are responsible for promptly forwarding
redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably be-
lieved by the Transfer Agent to be genuine. The Fund will require the Transfer
Agent to employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Fund may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Fund nor
the Transfer Agent will be liable for following telephone instructions reason-
ably believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares through the Transfer Agent. Mail re-
demption requests should be sent to the Transfer Agent at: PFPC Inc., Atten-
tion: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the share-
holder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any Autho-
rized Dealer, or to the Transfer Agent if the shares are not held in a broker-
age account.
22
<PAGE>
If share certificates have been issued, written redemption instructions, indi-
cating the portfolio from which shares are to be redeemed, and duly endorsed
share certificates, must be received by the Transfer Agent in proper form and
signed exactly as the shares are registered. If the proceeds of the redemption
would exceed $25,000, or if the proceeds are not to be paid to the record
owner at the record address, or if the shareholder is a corporation, partner-
ship, trust or fiduciary, signature(s) must be guaranteed by any eligible
guarantor institution. A signature guarantee is designed to protect the share-
holders and the Portfolio against fraudulent transactions by unauthorized per-
sons. A signature guarantee may be obtained from a domestic bank or trust com-
pany, recognized broker, dealer, clearing agency or savings association who
are participants in a medallion program recognized by the Securities Transfer
Association. The three recognized medallion programs are Securities Transfer
Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and
New York Stock Exchange, Inc. Medallion Signature Program (MSP). Signature
Guarantees which are not a part of these programs will not be accepted. Please
note that a notary public stamp or seal is not acceptable. The Fund reserves
the right to amend or discontinue its signature guarantee policy at any time
and, with regard to a particular redemption transaction, to require a signa-
ture guarantee at its discretion. Any questions with respect to signature-
guarantees should be directed to the Transfer Agent by calling 1-800-447-1139.
During times of drastic economic or market conditions, investors may experi-
ence difficulty in contacting Bear Stearns or Authorized Dealers by telephone
to request a redemption of STARS Portfolio shares. In such cases, investors
should consider using the other redemption procedures described herein. Use of
these other redemption procedures may result in the redemption request being
processed at a later time than it would have been if telephone redemption had
been used. During the delay, the STARS Portfolio's net asset value may fluctu-
ate.
AUTOMATIC WITHDRAWAL
Automatic Withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for Automatic Withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Fund or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through Au-
tomatic Withdrawal. Purchases of additional shares concurrent with withdrawals
generally are undesirable.
Dividends, Distributions and Taxes
Dividends will be automatically reinvested in additional STARS Portfolio
shares at net asset value, unless payment in cash is requested or dividends
are redirected into another fund pursuant to the Redirected Distribution Op-
tion.
The Portfolio ordinarily pays dividends from net investment income and dis-
tributes net realized securities gains, if any, once a year, but it may make
distributions on a more frequent basis to comply with the distribution re-
quirements of the Code, in all events in a manner consistent with the provi-
sions of the 1940 Act. The Portfolio will not make distributions from net re-
alized securities gains unless capital loss carryovers, if any, have been uti-
lized or have expired. Dividends are automatically reinvested in additional
Portfolio shares at net asset value, unless payment in cash is requested or
dividends are redirected into another fund pursuant to the Redirected Distri-
bution Option. All expenses are accrued daily and deducted before declaration
of dividends to investors. Dividends paid by each class of the Portfolio will
be calculated at the same time and in the same manner and will be of the same
amount, except that the expenses attributable solely to a particular class
will be borne exclusively by such class. Class B and C shares will receive
lower per share dividends than Class A shares because of the higher expenses
borne by Class B and C shares. See "Fee Table."
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains re-
alized from the sale or disposition of certain market discount bonds, paid by
the Portfolio will be taxable to U.S. shareholders as ordinary income whether
received in cash or reinvested in additional shares of the Portfolio or redi-
rected into another portfolio or fund. Distributions from net realized long-
term securities gains of the Portfolio will be taxable to U.S. shareholders as
long-term capital gains for federal income tax purposes, regardless of how
long shareholders have held their Portfolio's shares and whether such distri-
butions are received in cash or reinvested in, or redirected into other,
shares. The Code provides that the net capital gain of an individual generally
will not be subject to federal income tax at a rate in excess of
23
<PAGE>
28% and certain capital gains of individuals may be subject to a lower tax
rate. Dividends and distributions may be subject to state and local taxes.
The Portfolio may enter into short sales "against the box." See "Description
of the STARS Portfolio--Investment Techniques." Any gains realized by the
Portfolio on such sales will be recognized at the time the Portfolio enters
into the short sales.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other dispo-
sition of certain market discount bonds, paid by the Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the
rate of 30%, unless the foreign investor claims the benefit of a lower rate
specified in a tax treaty. Distributions from net realized long-term securi-
ties gains paid by the Portfolio to a foreign investor as well as the proceeds
of any redemptions from a foreign investor's account, regardless of the extent
to which gain or loss may be realized, generally will not be subject to U.S.
nonresident withholding tax. However, such distributions may be subject to
backup withholding, as described below, unless the foreign investor certifies
his non-U.S. residency status.
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of
their accounts which will include information as to dividends and distribu-
tions from securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on the Portfolio's Class A shares if an investor exchanges such shares for
shares of another fund or portfolio advised or sponsored by BSAM or its affil-
iates within 91 days of purchase and such other fund reduces or eliminates its
otherwise applicable sales load for the purpose of the exchange. In this case,
the amount of the sales load charged the investor for such shares, up to the
amount of the reduction of the sales load charge on the exchange, is not in-
cluded in the basis of such shares for purposes of computing gain or loss on
the exchange, and instead is added to the basis of the fund shares received on
the exchange.
Generally the Fund must withhold ("backup withholding") and remit to the U.S.
Treasury 31% of dividends, distributions from net realized securities gains
and the proceeds of any redemption, regardless of the extent to which gain or
loss may be realized, paid to a shareholder if such shareholder fails to cer-
tify either that the TIN furnished in connection with opening an account is
correct and that such shareholder has not received notice from the IRS of be-
ing subject to backup withholding as a result of a failure to properly report
taxable dividend or interest income on a federal income tax return. Further-
more, the IRS may notify the Fund to institute backup withholding if the IRS
determines a shareholder's TIN is incorrect or if a shareholder has failed to
properly report taxable dividend and interest income on a federal income tax
return.
A TIN is either the Social Security number or employer identification number
of the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner
of the account, and may be claimed as a credit on the record owner's federal
income tax return.
While the STARS Portfolio is not expected to have any federal tax liability,
investors should expect to be subject to federal, state or local taxes in re-
spect of their investment in STARS Portfolio shares.
Management of the Fund believes that the Portfolio has qualified for the fis-
cal year ended March 31, 1997 as a "regulated investment company" under the
Code. The Portfolio intends to continue to so qualify if such qualification is
in the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for federal income tax to the extent its earnings
are distributed in accordance with applicable provisions of the Code. The
Portfolio may be subject to a non-deductible 4% excise tax, measured with re-
spect to certain undistributed amounts of taxable investment income and capi-
tal gains.
Each investor should consult its tax adviser regarding specific questions as
to federal, state or local taxes applicable to an investment in the STARS
Portfolio.
Performance Information
For purposes of advertising, performance for each class may be calculated on
the basis of average annual total return and/or total return. These total re-
turn figures reflect changes in the price of the shares and assume that any
income dividends and/or capital gains distributions made by the Portfo-
24
<PAGE>
lio during the measuring period were reinvested in shares of the same class.
These figures also take into account any applicable distribution and share-
holder servicing fees. As a result, at any given time, the performance of
Class B and Class C should be expected to be lower than that of Class A. Per-
formance for each class will be calculated separately.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Portfolio was purchased with an ini-
tial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the re-
deemable value of the investment at the end of the period. Advertisements of
the Portfolio's performance will include its average annual total return for
one, five and ten year periods, or for shorter periods depending upon the
length of time during which the STARS Portfolio has operated. Computations of
average annual total return for periods of less than one year represent an an-
nualization of the Portfolio's actual total return for the applicable period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a percent-
age rate which is calculated by combining the income and principal changes for
a specified period and dividing by the net asset value (or maximum public of-
fering price in the case of Class A shares) per share at the beginning of the
period. Class B total return will reflect the deduction of the CDSC. Adver-
tisements may include the percentage rate of total return or may include the
value of a hypothetical investment at the end of the period which assumes the
application of the percentage rate of total return. Total return for the Port-
folio also may be calculated by using the net asset value per share at the be-
ginning of the period instead of the maximum offering price per share at the
beginning of the period for Class A shares or without giving effect to any ap-
plicable CDSC at the end of the period for Class B or C shares. Calculations
based on the net asset value per share do not reflect the deduction of the
sales load on the Portfolio's Class A shares, which, if reflected, would re-
duce the performance quoted.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance infor-
mation, such as that described above, may not provide a basis for comparison
with other investments or other investment companies using a different method
of calculating performance.
Comparative performance information may be used from time to time in advertis-
ing or marketing the Portfolio's shares, including data from Lipper Analytical
Services, Inc. and other industry publications, and indices such as the S&P
500 and the Dow Jones Industrial Average.
General Information
The Fund was organized as a business trust under the laws of The Commonwealth
of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust
Agreement") dated September 29, 1994, and commenced operations on or about
April 3, 1995. The Fund is authorized to issue an unlimited number of shares
of beneficial interest, par value $0.001 per share. The Portfolio's shares are
classified into four classes--Class A, B, C and Y. Each share has one vote and
shareholders will vote in the aggregate and not by class, except as otherwise
required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio. However, the
Trust Agreement disclaims shareholder liability for acts or obligations of the
Portfolio and requires that notice of such disclaimer be given in each agree-
ment, obligation or instrument entered into or executed by the Portfolio or a
Trustee. The Trust Agreement provides for indemnification from the Portfolio's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Portfolio. Thus, the risk of a shareholder incur-
ring financial loss on account of a shareholder liability is limited to cir-
cumstances in which the Portfolio itself would be unable to meet its obliga-
tions, a possibility which management believes is remote. Upon payment of any
liability incurred by the Portfolio, the shareholder paying such liability
will be entitled to reimbursement from the general assets of the Portfolio.
The Fund's Trustees intend to conduct the operations of the Portfolio in a way
so as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Portfolio. As discussed under "Management of the Portfolio"
in the Portfolio's Statement of Additional Information, the Portfolio ordinar-
ily will
25
<PAGE>
not hold shareholder meetings; however, shareholders under certain circum-
stances may have the right to call a meeting of shareholders for the purpose
of voting to remove Trustees.
To date, the Fund's Board has authorized the creation of 10 portfolios of
shares. All consideration received by the Fund for shares of one of the port-
folios and all assets in which such consideration is invested will belong to
that portfolio (subject only to the rights of creditors of the Fund) and will
be subject to the liabilities related thereto. The assets attributable to, and
the expenses of, one portfolio (and as to classes within a portfolio) are
treated separately from those of the other portfolios (and classes). The Fund
has the ability to create, from time to time, new portfolios of shares without
shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be submit-
ted under the provisions of the 1940 Act or applicable state law or otherwise
to the holders of the outstanding voting securities of an investment company,
such as the Fund, will not be deemed to have been effectively acted upon un-
less approved by the holders of a majority of the outstanding shares of each
portfolio affected by such matter. Rule 18f-2 further provides that a portfo-
lio shall be deemed to be affected by a matter unless it is clear that the in-
terests of such portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, Rule 18f-2 exempts the se-
lection of independent accountants and the election of Trustees from the sepa-
rate voting requirements of Rule 18f-2.
The Portfolio is not sponsored, endorsed, sold or promoted by S&P. S&P makes
no representation or warranty, express or implied, to shareholders of the
Portfolio or any member of the public regarding the advisability of investing
in the Portfolio. S&P's only ongoing relationship with Bear Stearns and its
affiliates in connection with the Portfolio is the licensing for a fee of cer-
tain S&P trademarks and trade names and the provision of access to the STARS
ranking system through a publicly available subscription service of S&P. This
license is terminable under circumstances generally described in the Portfo-
lio's Statement of Additional Information under "Information About the Portfo-
lio."
BSAM will have no greater access to STARS than any other subscriber to Market-
Scope. S&P has no obligation to take the needs of Bear Stearns and its affili-
ates or shareholders of the STARS Portfolio into consideration in operating
the STARS system. S&P is not responsible for and has not participated in the
determination of the securities to be purchased by the Portfolio. S&P has ad-
vised that its Equity Services Group, which publishes STARS, operates indepen-
dently of, and has no access to information obtained by, Standard & Poor's
Ratings Services, and may in its regular operations obtain information of a
confidential nature.
The Transfer Agent maintains a record of share ownership and will send confir-
mations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Atten-
tion: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960, by
calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766-4111.
26
<PAGE>
Appendix A
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, the Portfolio may
employ, among others, the following investment techniques which may involve
certain risks. Options transactions involve "derivative securities."
OPTIONS TRANSACTIONS
The Portfolio may write and sell covered call option contracts to the extent
of 20% of the value of its net assets at the time such option contracts are
written and may purchase call options to close such positions. A call option
gives the purchaser of the option the right to buy, and obligates the writer
to sell, the underlying security at the exercise price at any time during the
option period.
The Portfolio may purchase call and put options on stock indexes listed on
U.S. securities exchanges. A stock index fluctuates with changes in the market
values of the stocks included in the index. Because the value of an index op-
tion depends upon movements in the level of the index rather than the price of
a particular stock, whether the Portfolio will realize a gain or loss from
purchasing options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock.
The Portfolio is permitted to invest in put options in respect of a specific
security or groups or "baskets" of specific securities in which it may invest.
A put option gives the purchaser of the option the right to sell, and obli-
gates the writer to buy, the underlying security at the exercise price at any
time during the option period.
The Portfolio may not invest more than 5% of its assets, represented by the
premium paid, in the purchase of options at any one time.
Successful use by the Portfolio of options will be subject to BSAM's ability
to predict correctly movement in the direction of individual stocks or the
stock market generally. To the extent BSAM's predictions are incorrect, the
Portfolio may incur losses which could adversely affect the value of a share-
holder's investment.
LENDING PORTFOLIO SECURITIES
From time to time, the Portfolio may lend securities from its portfolio to
brokers, dealers and other financial institutions needing to borrow securities
to complete certain transactions. Such loans may not exceed 33 1/3% of the
value of its total assets. In connection with such loans, the Portfolio will
receive collateral consisting of cash, U.S. Government securities or irrevoca-
ble letters of credit which will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. The
Portfolio can increase its income through the investment of such collateral.
The Portfolio continues to be entitled to payments in amounts equal to the in-
terest, dividends and other distributions payable on the loaned security and
receives interest on the amount of the loan. Such loans will be terminable at
any time upon specified notice. The Portfolio might experience risk of loss if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Portfolio.
BORROWING MONEY
As a fundamental policy, the Portfolio is permitted to borrow to the extent
permitted under the 1940 Act. The 1940 Act permits an investment company to
borrow in an amount up to 33 1/3% of the value of such company's total assets.
However, the Portfolio currently intends to borrow money only for temporary or
emergency (not leveraging) purposes, in an amount up to 15% of the value of
its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time
the borrowing is made. While borrowings exceed 5% of its total assets, the
Portfolio will not make any additional investments.
CERTAIN PORTFOLIO SECURITIES
AMERICAN DEPOSITARY RECEIPTS
The Portfolio may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"). These securities may not necessarily be
denominated in the same currency as the securities into which they may be con-
verted. ADRs are receipts typically issued by a United States
A-1
<PAGE>
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. The Portfolio may invest in ADRs through "sponsored"
or "unsponsored" facilities. A sponsored facility is established jointly by
the issuer of the underlying security and a depositary, whereas a depositary
may establish an unsponsored facility without participation by the issuer of
the deposited security. Holders of unsponsored depositary receipts generally
bear all the costs of such facilities and the depositary of an unsponsored fa-
cility frequently is under no obligation to distribute shareholder communica-
tions received from the issuer of the deposited security or to pass through
voting rights to the holders of such receipts in respect of the deposited se-
curities.
MONEY MARKET INSTRUMENTS
The Portfolio may invest, in the circumstances described under "Description of
the STARS Portfolio--Management Policies," in the following types of money
market instruments, each of which at the time of purchase must have or be
deemed to have under rules of the Securities and Exchange Commission remaining
maturities of 13 months or less.
U.S. GOVERNMENT SECURITIES
The Portfolio may purchase securities issued or guaranteed by the U.S. Govern-
ment or its agencies or sponsored enterprises, which include U.S. Treasury se-
curities that differ in their interest rates, maturities and times of issu-
ance. Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds gener-
ally have initial maturities of greater than ten years. Some obligations is-
sued or guaranteed by U.S. Government agencies and instrumentalities, for ex-
ample, Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal Home Loan Banks, by the right of the issuer to borrow
from the U.S. Treasury; others, such as those issued by the Federal National
Mortgage Association, by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or sponsored enterprise; and oth-
ers, such as those issued by the Student Loan Marketing Association, only by
the credit of the agency or instrumentality. These securities bear fixed,
floating or variable rates of interest. Principal and interest may fluctuate
based on generally recognized reference rates or the relationship of rates.
While the U.S. Government provides financial support to such U.S. Government-
sponsored agencies or instrumentalities, no assurance can be given that it
will always do so, because it is not so obligated by law.
BANK OBLIGATIONS
The Portfolio may purchase certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations of domestic banks, foreign sub-
sidiaries of domestic banks, foreign branches of domestic banks, and domestic
and foreign branches of foreign banks, domestic savings and loan associations
and other banking institutions. With respect to such securities issued by for-
eign branches of domestic banks, foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks, the Portfolio may be subject
to additional investment risks that are different in some respects from those
incurred by a fund which invests only in debt obligations of U.S. domestic is-
suers. Such risks include possible future political and economic developments,
the possible imposition of foreign withholding taxes on interest income pay-
able on the securities, the possible establishment of exchange controls or the
adoption of other foreign governmental restrictions which might adversely af-
fect the payment of principal and interest on these securities and the possi-
ble seizure or nationalization of foreign deposits.
Certificates of deposit are negotiable certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by the Portfolio will not benefit from insurance from the Bank In-
surance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. The Portfolio will not invest more than
15% of the value of its net assets in time deposits maturing in more than
seven days and in other securities that are illiquid.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include unin-
sured, direct obligations bearing fixed, floating or variable interest rates.
A-2
<PAGE>
REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an under-
lying debt instrument, subject to an obligation of the seller to repurchase,
and the Portfolio to resell, the instrument at a fixed price usually not more
than one week after its purchase. Certain costs may be incurred by the Portfo-
lio in connection with the sale of the securities if the seller does not re-
purchase them in accordance with the repurchase agreement. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the securi-
ties, realization on the securities by the Portfolio may be delayed or limit-
ed.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by the Portfo-
lio will consist only of direct obligations which, at the time of their pur-
chase, are (a) rated not lower than Prime-1 by Moody's Investors Service Inc.
("Moody's"), A-1 by the S&P Ratings Group (which operates separately from and
independently of S&P's Equity Services Group, which publishes STARS), F-1 by
Fitch Investors Service L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Rat-
ing Co. ("Duff"), (b) issued by companies having an outstanding unsecured debt
issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or
Duff, or (c) if unrated, determined by BSAM to be of comparable quality to
those rated obligations which may be purchased by the Portfolio. The Portfolio
may purchase floating and variable rate demand notes and bonds, which are ob-
ligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time or at specified
intervals.
INVESTMENT COMPANY SECURITIES
The Portfolio may invest in securities issued by other investment companies
which are ranked by STARS. Under the 1940 Act, the Portfolio's investment in
such securities currently is limited to, subject to certain exceptions, (i) 3%
of the total voting stock of any one investment company, (ii) 5% of the Port-
folio's total assets with respect to any one investment company and (iii) 10%
of the Portfolio's total assets in the aggregate. Investments in the securi-
ties of other investment companies will involve duplication of advisory fees
and certain other expenses.
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of the value of its net assets in securi-
ties as to which a liquid trading market does not exist, provided such invest-
ments are consistent with its investment objective. Such securities may in-
clude securities that are not readily marketable, such as certain securities
that are subject to legal or contractual restrictions on resale and repurchase
agreements providing for settlement in more than seven days after notice. As
to these securities, the Portfolio is subject to a risk that should it desire
to sell them when a ready buyer is not available at a price it deems represen-
tative of their value, the value of its net assets could be adversely affect-
ed.
A-3
<PAGE>
The
Bear Stearns
Funds
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, NY 10022
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE FOCUS LIST PORTFOLIO'S
PROSPECTUS AND IN THE FOCUS LIST PORTFOLIO'S SALES LITERATURE IN CONNECTION
WITH THE OFFER OF THE FOCUS LIST PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND. THE FOCUS LIST PORTFOLIO'S PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-001-06
<PAGE>
Rule 497(c)
Registration No. 33-84842
T H E B E A R S T E A R N S F U N D S
5 7 5 L E X I N G T O N A V E N U E N E W Y O R K, N Y 1 0 0 2 2
1 . 8 0 0 . 7 6 6 . 4 1 1 1
PROSPECTUS
The Insiders Select Fund
CLASS A, B AND C SHARES
THE BEAR STEARNS FUNDS (the "Fund") is an open-end management investment
company, known as a mutual fund. The Fund permits you to invest in separate
portfolios. By this Prospectus, the Fund offers Class A, B and C shares of The
Insiders Select Fund, a non-diversified portfolio (the "Portfolio"). The
Portfolio's investment objective is capital appreciation.
Class A shares are subject to a sales charge imposed at the time of purchase.
Class B shares are subject to a contingent deferred sales charge of up to 5%
imposed on redemptions made within the first six years of purchase. Class C
shares are subject to a 1% contingent deferred sales charge imposed on
redemptions made within the first year of purchase. Other differences between
the classes include the services offered to and the expenses borne by each
class, as described herein. These alternatives are offered so an investor may
choose the method of purchasing shares that is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other circumstances. The Portfolio issues another class of shares
(Class Y shares), which has different expenses that would affect performance.
Investors desiring to obtain information about this class of shares should
call 1-800-766-4111 or ask their sales representative or the Portfolio's
distributor.
BEAR STEARNS ASSET MANAGEMENT INC. ("BSAM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., serves as the Portfolio's investment adviser.
BSAM is also referred to herein as the "Adviser." As of December 3, 1997, Bear
Stearns Funds Management Inc., the registered investment adviser of the
Portfolio, has changed its name to Bear Stearns Asset Management Inc.
BEAR STEARNS FUNDS MANAGEMENT INC. ("BSFM"), a wholly-owned subsidiary of The
Bear Stearns Companies Inc., is the Administrator of the Portfolio. As of
December 4, 1997, Bear Stearns Funds Management Inc. formed a new corporate
entity under the laws of Delaware to conduct mutual fund administrative work
for The Bear Stearns Funds and other affiliated and non-affiliated companies.
BEAR, STEARNS & CO. INC. ("Bear Stearns"), an affiliate of BSAM, serves as the
Portfolio's distributor. Bear Stearns is also referred to herein as the
"Distributor."
----------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE PORTFOLIO THAT YOU
SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Part B (also known as the Statement of Additional Information), dated December
24, 1997, which may be revised from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be
of interest to some investors. It has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. For a free copy,
write to the address or call one of the telephone numbers listed under
"General Information" in this Prospectus. Additional information, including
this Prospectus and the Statement of Additional Information, may be obtained
by accessing the Internet Web site maintained by the Securities and Exchange
Commission (http://www.sec.gov).
----------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank; are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency; and are
subject to investment risks, including possible loss of the principal amount
invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
DECEMBER 24, 1997
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.................................................................. 3
Financial Highlights....................................................... 4
Alternative Purchase Methods............................................... 5
Description of the Portfolio............................................... 5
Risk Factors............................................................... 9
Management of the Portfolio................................................ 10
How to Buy Shares.......................................................... 13
Shareholder Services....................................................... 19
How to Redeem Shares....................................................... 20
Dividends, Distributions and Taxes......................................... 23
Performance Information.................................................... 25
General Information........................................................ 25
Appendix................................................................... A-1
</TABLE>
2
<PAGE>
Fee Table
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)...................... 5.50% -- --
Maximum Deferred Sales Charge Imposed on
Redemptions (as a percentage of the amount subject
to charge)......................................... * 5.00% 1.00%
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fees (after fee waiver)**................. 0.00%*** 0.00%*** 0.00%***
12b-1 Fees****/+................................... 0.50% 0.75% 1.00%
Other Expenses (after expense reimbursement)**..... 1.15% 1.40% 1.15%
------- ----- ----
Total Portfolio Operating Expenses (after fee
waiver and expense reimbursement)**................ 1.65% 2.15% 2.15%
======= ===== ====
EXAMPLE:
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
1 YEAR........................................... $ 71 $ 73 $ 32
3 YEARS.......................................... $104 $ 99 $ 67
5 YEARS.......................................... $140 $138 $115
10 YEARS*****..................................... $240 $235 $248
EXAMPLE:
You would pay the following expenses on the same
investment, assuming no redemption:
1 YEAR........................................... -- $ 22 $ 22
3 YEARS.......................................... -- $ 67 $ 67
5 YEARS.......................................... -- $115 $115
10 YEARS*****..................................... -- $235 $248
</TABLE>
- ------
*In certain situations, where no sales charge is assessed at the time of
purchase, a contingent deferred sales charge of up to 1.00% may be imposed on
redemptions within the first year after purchase. See "How to Buy Shares--
Class A Shares."
**With respect to Class B shares, Other Expenses include a shareholder
servicing fee of 0.25%. With respect to all classes, BSAM has undertaken to
waive its investment advisory fee and assume certain expenses of the Portfolio
other than brokerage commissions, extraordinary items, interest and taxes to
the extent Total Portfolio Operating Expenses exceed 1.65% for Class A, and
2.15% for Class B and Class C. Without such fee waiver and expense
reimbursement, Advisory Fees stated above would have been 1.00% for each
class, Other Expenses would have been 1.97% for Class A and 1.96% for Class C,
and Total Portfolio Operating Expenses would have been 3.47% for Class A and
3.96% for Class C. With respect to Class B shares, Other Expenses are
estimated to be 2.21%, and Total Portfolio Operating Expenses are estimated to
be 3.96%.
***The Advisory Fee is payable at an annual rate equal to 1% of the
Portfolio's average daily net assets, subject to increase or decrease by up to
0.50% annually depending on the Portfolio's performance. See "Management of
the Portfolio-- Investment Adviser."
****With respect to Class A and Class C shares, 12b-1 fees include a
shareholder servicing fee of 0.25% and a distribution fee of 0.25% and 0.75%,
respectively. With respect to Class A shares, Bear Stearns will waive the
distribution fee to the extent that the Portfolio would otherwise exceed the
National Association of Securities Dealers, Inc. ("NASD") limitations on
asset-based sales charges. Pursuant to NASD rules, the aggregate deferred
sales loads and annual distribution fees may not exceed 6.25% of total gross
sales, subject to certain exclusions. The 6.25% limitation is imposed on the
Portfolio rather than on a per shareholder basis. Therefore, a long-term
shareholder of the Portfolio may pay more in distribution fees than the
economic equivalent of 6.25% of such shareholder's investment in such shares.
The maximum sales charge rule is applied separately to each class.
*****Class B shares convert to Class A shares eight years after purchase;
therefore, Class A expenses are used in the hypothetical example after year
eight with respect to Class B shares.
+Authorized dealers will be paid distribution and/or servicing fees of 0.50%
for the Class A shares of the Portfolio, with respect to shares in accounts
through December 23, 1997. Subsequently, all authorized dealers will be paid a
servicing fee of 0.25% with respect to Class A shares purchased after December
23, 1997, including shares acquired through dividend reinvestments prior to
December 23, 1997.
THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE
PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5%.
The purpose of the foregoing table is to assist you in understanding the costs
and expenses borne by the Portfolio and investors, the payment of which will
reduce investors' annual return. In addition to the expenses noted above, the
Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares."
Long-term investors could pay more in 12b-1 fees than the economic equivalent
of paying a front-end sales charge. For a description of the expense
reimbursements or fee waiver arrangements in effect, see "Management of the
Portfolio."
3
<PAGE>
Financial Highlights
The information in the table below covering the Portfolio's investment results
for the periods indicated has been audited by Deloitte & Touche LLP. Further
financial data and related notes appear in the Portfolio's Annual Report for
the fiscal year ended March 31, 1997 which is incorporated by reference into
the Portfolio's Statement of Additional Information which is available upon
request.
Contained below is per share operating performance data, total investment
return, ratios to average net assets and other supplemental data for Class A
and C shares of the Portfolio for the periods indicated. This information has
been derived from information provided in the Portfolio's financial
statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL JUNE 16, 1995*
YEAR ENDED THROUGH
MARCH 31, 1997 MARCH 31, 1996
---------------- -------------------
CLASS A CLASS C CLASS A CLASS C
------- ------- ------- -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of
period........................... $ 14.00 $ 13.96 $ 12.00 $ 12.00
------- ------- ------- -------
Net investment income/(loss) (1).. 0.02 (0.06) 0.03 (0.01)
Net realized and unrealized gain
on investments and securities
sold short (2)................... 2.48 2.47 1.98 1.97
------- ------- ------- -------
Net increase in net assets
resulting from operations........ 2.50 2.41 2.01 1.96
------- ------- ------- -------
Dividends and distributions to
shareholders from Net investment
income............................ (0.01) -- (0.01) --
Net realized capital gains........ (1.91) (1.89) -- --
------- ------- ------- -------
(1.92) (1.89) (0.01) --
------- ------- ------- -------
Net asset value, end of period.... $ 14.58 $ 14.48 $ 14.00 $ 13.96
======= ======= ======= =======
Total investment return (3)....... 18.31% 17.69% 16.75% 16.33%
======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's
omitted).......................... $13,860 $ 9,519 $12,132 $ 9,928
Ratio of expenses to average net
assets (1)........................ 1.65% 2.15% 1.65%(4) 2.15%(4)
Ratio of net investment
income/(loss) to average net
assets........................... 0.11% (0.38)% 0.38%(4) (0.12)%(4)
Decrease reflected in above
expense ratios and net investment
income/(loss) due to waivers and
reimbursements................... 1.82% 1.81% 1.87%(4) 1.92%(4)
Portfolio turnover rate........... 128.42% 128.42% 93.45%(5) 93.45%(5)
Average commission rate per share
(6).............................. $0.0264 $0.0264 $0.0294 $0.0294
</TABLE>
- ------
* Commencement of investment operations.
** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on the actual shares outstanding on the date of distribution.
(1) Reflects waivers and reimbursements.
(2) The amounts shown for a share outstanding throughout the respective
periods are not in accord with the changes in the aggregate gains and
losses in investments during the respective periods because of the timing
of sales and repurchases of Portfolio shares in relation to fluctuating
net asset values during the respective periods.
(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and includes reinvestment of dividends
and distributions, if any. Total investment return is not annualized.
(4) Annualized.
(5) Not annualized.
(6) Represents average commission rate per share charged to the Portfolio on
purchases and sales of investments subject to such commissions during each
period.
Further information about performance is contained in the Portfolio's Annual
Report, which may be obtained without charge by writing to the address or
calling one of the telephone numbers listed under "General Information."
4
<PAGE>
Alternative Purchase Methods
By this Prospectus, the Portfolio offers investors three methods of purchasing
its shares; investors may choose the class of shares that best suits their
needs, given the amount of purchase, the length of time the investor expects
to hold the shares and any other relevant circumstances. Each Portfolio share
represents an identical pro rata interest in the Portfolio's investment
portfolio.
CLASS A SHARES
Class A shares of the Portfolio are sold at net asset value per share plus a
maximum initial sales charge of 5.50% of the public offering price imposed at
the time of purchase. The initial sales charge may be reduced or waived for
certain purchases. See "How to Buy Shares--Class A shares." Class A shares of
the Portfolio are subject to an annual distribution and shareholder servicing
fee at the rate of 0.50 of 1% of the value of the average daily net assets of
Class A.
CLASS B SHARES
Class B shares of the Portfolio are sold without an initial sales charge, but
are subject to a Contingent Deferred Sales Charge ("CDSC") of up to 5% if the
Class B shares are redeemed within six years of purchase. See "How to Redeem
Shares--Class B shares." The Class B shares of the Portfolio also are subject
to an annual distribution fee at the rate of 0.75 of 1% of the value of the
average daily net assets of Class B. Class B shares are subject to an annual
shareholder servicing fee at the rate of 0.25 of 1% of the value of the
average daily net assets of Class B shares incurred in connection with the
personal service and maintenance of accounts holding Portfolio shares. See
"Management of the Portfolio--Distribution Plan" and "Shareholder Servicing
Plan." Class B shares will convert to Class A shares, based on their relative
net asset values, eight years after initial purchase. The distribution and
shareholder servicing fees will cause Class B shares to have a higher expense
ratio and to pay lower dividends than Class A shares.
CLASS C SHARES
Class C shares of the Portfolio are subject to a 1% CDSC which is assessed
only if Class C shares are redeemed within one year of purchase. See "How to
Redeem Shares--Class C Shares." These shares of the Portfolio also are subject
to an annual distribution and shareholder servicing fee at the rate of 1% of
the average daily net assets of Class C. See "Management of the Portfolio--
Distribution and Shareholder Servicing Plan." The distribution and shareholder
servicing fees will cause Class C shares to have a higher expense ratio and to
pay lower dividends than Class A shares.
The decision as to which class of shares is more beneficial to each investor
depends on the amount and the intended length of time of the investor's
investment. Each investor should consider whether, during the anticipated life
of the investor's investment in the Portfolio, the accumulated distribution
and shareholder servicing fee and CDSC, if any, on Class B or C shares would
be less than the initial sales charge on Class A shares purchased at the same
time, and to what extent, if any, such differential would be offset by the net
return of Class A. See "How to Buy Shares--Choosing a Class of Shares."
Description of the Portfolio
GENERAL
The Fund is a "series fund," which is a mutual fund divided into separate
portfolios. Each portfolio is treated as a separate entity for certain matters
under the Investment Company Act of 1940, as amended (the "1940 Act"), and for
other purposes, and a shareholder of one portfolio is not deemed to be a
shareholder of any other portfolio. As described below, for certain matters
Fund shareholders vote together as a group; as to others they vote separately
by portfolio. By this Prospectus, shares of the Portfolio are being offered.
From time to time, other portfolios may be established and sold pursuant to
other offering documents. See "General Information."
INVESTMENT OBJECTIVE
The Portfolio's investment objective is capital appreciation. The Portfolio's
investment objective cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Portfolio's outstanding voting
shares. There can be no assurance that the Portfolio's investment objective
will be achieved.
5
<PAGE>
INVESTMENT STRATEGY
The Adviser selects portfolio securities by analyzing the behavior of (i)
corporate insiders-officers, directors and significant stockholders-through an
analysis of their publicly filed reports of their trading activities in the
equity securities of the companies for which they are insiders, (ii) financial
analysts, through an analysis of their published reports about covered
companies, including predicted earnings and revisions to predicted earnings,
and (iii) the company itself, through an analysis of its behavior as to
corporate finance matters, such as stock repurchase programs, dividend
policies and new securities issuance.
Corporate insiders are believed by the Adviser to be in the best position to
understand the near-term prospects of their companies. The Adviser believes
that insider behavior can be observed and analyzed since insiders are required
to disclose transactions in their company's equity securities to the
Securities and Exchange Commission generally no later than the tenth day of
the month following the transaction. Each month many thousands of these
disclosures are received. The Adviser believes that collecting, classifying
and analyzing these transactions provides valuable investment management
information.
These insiders may have many reasons for transacting in company stock and
stock options. Many of these are entirely incidental to the future of the
company. For example, an insider may sell stock to buy a home or finance a
college education for his or her child. Likewise a new management team may
wish to signal confidence in the company by making token purchases of the
company's equity. Many other transactions, however, are related directly to
the insider's beliefs about the near-term price expectations for the company's
stock. An insider who exercises long-term options early for small profits
likely believes the stock soon will decline. Insiders who exercise options,
hold the stock, and buy in the open market probably believe that the stock
soon will rise. Clusters of insiders making substantial buys or sells indicate
broad agreement within a firm as to the direction of the stock.
Financial analysts use a variety of means to learn more about the companies
they follow. Among these are visits to the company and in-depth discussions
with management. Successful analysts learn to interpret the words and actions
of management and the firm itself. Likewise, management uses its discussions
with certain analysts as a means of signaling their views to the marketplace.
The Adviser monitors changes in analysts' predicted earnings and ratings. The
Adviser believes that analysts' revisions can be a valuable indicator of
future returns for the company's stock.
Part of the normal activity of every public company is its financing
decisions. A company must routinely decide whether to maintain or change its
dividend policy, whether to buy its own stock in the open market or whether to
issue new securities. From time to time the company may decide that its stock
is undervalued. Many companies see undervaluation as an opportunity to
purchase the company's stock in the open market. The Adviser believes that by
monitoring changes in shares outstanding (in the hands of the public), a
useful signal can be extracted relating to the company's beliefs about its
prospects. Similarly, the company's decision to sell securities to the public
or another firm can be an indication that the company believes that its stock
has reached a near-term high, a potentially useful sell signal.
Insiders, analysts and the company each send signals that can be analyzed by
the Adviser to produce valuable information about the prospects for individual
companies. The Adviser believes that the most powerful analysis, however,
comes from the interaction of all three sources. While no one signal alone
determines whether a security will be purchased or sold, no security will be
considered for purchase or sale unless a positive or negative signal, as the
case may be, is received from insider behavior. In its analysis, the Adviser
uses only data that is available to the public. The Adviser obtains the data
on insider trading activity from CDA/Investnet, which compiles this
information from publicly available Securities and Exchange Commission
filings.
MANAGEMENT POLICIES
Under normal market conditions, the Adviser invests substantially all of the
Portfolio's assets in the equity securities of U.S. issuers. The Adviser
selects equity securities believed by it to provide opportunities for capital
appreciation or gains through short selling. Issuers are selected without
regard to market capitalization, although the Adviser anticipates that the
issuers principally will be mid- to large capitalization companies; that is,
those with market capitalizations exceeding $1 billion.
The Adviser selects from the universe of U.S. equity securities those
securities it believes, in the aggregate, will approximate or exceed the total
return performance of the Standard & Poor's MidCap
6
<PAGE>
400 Index Stock Index* (the "MidCap 400 Index"). The Portfolio will not invest
in all or substantially all of the common stocks included in the S&P MidCap
400 Index and may invest in stocks that are not included in the S&P MidCap 400
index. The Portfolio expects ordinarily to invest in approximately 60 to 150
stocks.
By investing in this manner-that is purchasing other equity securities in a
manner intended to approximate or exceed the performance of the S&P MidCap 400
Index-the Adviser seeks to exceed the total return of the S&P MidCap 400
Index.
The S&P MidCap 400 Index consists of 400 domestic stocks chosen for market
size (median market capitalization of about $1,175 million as of December
1995), liquidity, and industry group representation. It is a market-weighted
index, with each stock affecting the Index in proportion to its market value.
Equity securities consist of common stocks, convertible securities and
preferred stocks. The convertible securities and preferred stocks in which the
Portfolio may invest will be rated at least investment grade by a nationally
recognized statistical rating organization at the time of purchase.
Convertible securities rated in the lowest investment grade rating may be
considered to have speculative characteristics. Preferred stock generally
receives dividends before distributions are paid on common stock and
ordinarily has a priority claim over common stockholders if the issuer of the
stock is liquidated. The Portfolio may invest, in anticipation of investing
cash positions, in money market instruments consisting of U.S. Government
securities, certificates of deposit, time deposits, bankers' acceptances,
short-term investment grade corporate bonds and other short-term debt
instruments, and repurchase agreements, as set forth in the Appendix. Under
normal market conditions, the Portfolio expects to have less than 15% of its
assets invested in money market instruments. However, when the Adviser
determines that adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest all of its assets in money market
instruments.
INVESTMENT TECHNIQUES
The Portfolio may engage in various investment techniques, such as short
selling, lending portfolio securities and options and futures transactions,
each of which involves risk. Options and futures transactions involve
"derivative securities." Short selling and futures transactions are discussed
below. For a discussion of these other investment techniques and their related
risks, see "Appendix--Investment Techniques" and "Risk Factors."
SHORT SELLING
Short sales are transactions in which the Portfolio sells a security it does
not own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Portfolio must borrow the security to make
delivery to the buyer. The Portfolio then is obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security
was sold by the Portfolio. Until the security is replaced, the Portfolio is
required to pay to the lender amounts equal to any dividend which accrues
during the period of the loan. To borrow the security, the Portfolio also may
be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is
closed out.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account, containing
liquid securities, at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral always equals the
current value of the security sold short; or (b) otherwise cover its short
position in accordance with positions taken by the staff of the Securities and
Exchange Commission.
The Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. The Portfolio will realize
a gain if the security declines in price between those dates. This result is
the opposite of what one would expect from a cash purchase of a long position
in a security. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of any premium or amounts in lieu of interest
the Portfolio may be required to pay in connection with a short sale.
- ------
*"Standard & Poor's," "S&P(R)" and "S&P MidCap 400" are trademarks of The
McGraw-Hill Companies, Inc. The Portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's or The McGraw-Hill Companies, Inc.
7
<PAGE>
The Portfolio may purchase call options to provide a hedge against an increase
in the price of a security sold short by the Portfolio. See "Appendix--
Investment Techniques--Options Transactions."
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be invested in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 25% of the value of the Portfolio's net assets. The Portfolio may not
sell short the securities of any single issuer listed on a national securities
exchange to the extent of more than 5% of the value of its net assets. The
Portfolio may not sell short the securities of any class of an issuer to the
extent, at the time of the transaction, of more than 2% of the outstanding
securities of that class.
In addition to the short sales discussed above, the Portfolio may make
short
sales "against the box," a transaction in which the Portfolio enters into a
short sale of a security which the Portfolio owns. The proceeds of the short
sale will be held by a broker until the settlement date at which time the
Portfolio delivers the security to close the short position. The Portfolio
receives the net proceeds from the short sale. The Portfolio at no time will
have more than 15% of the value of its net assets in deposits on short sales
against the box. It currently is anticipated that the Portfolio will make
short sales against the box for purposes of protecting the value of the
Portfolio's net assets. There are certain tax implications associated with
this strategy. See "Dividends, Distributions and Taxes."
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Portfolio may enter into stock index futures contracts, and options with
respect thereto, in U.S. domestic markets. See "Appendix--Investment
Techniques-Options Transactions." These transactions will be entered into as a
substitute for comparable market positions in the underlying securities or for
hedging purposes. Although the Portfolio is not a commodity pool, it is
subject to rules of the Commodity Futures Trading Commission (the "CFTC")
limiting the extent to which it may engage in these transactions.
The Portfolio's commodities transactions must constitute bona fide hedging or
other permissible transactions pursuant to regulations promulgated by the
CFTC. In addition, the Portfolio may not engage in such transactions if the
sum of the amount of initial margin deposits and premiums paid for unexpired
commodity options, other than for bona fide hedging transactions, would exceed
5% of the liquidation value of the Portfolio's assets, after taking into
account unrealized profits and unrealized losses on such contracts it has
entered into; provided, however, that in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5%. To the extent the Portfolio engages in the use of futures
and options on futures for other than bona fide hedging purposes, the
Portfolio may be subject to additional risk.
Engaging in these transactions involves risk of loss to the Portfolio which
could adversely affect the value of a shareholder's investment. Although the
Portfolio intends to purchase or sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid
market will exist for any particular contract at any particular time. Many
futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move
to the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Portfolio to substantial losses. In addition, engaging in
futures transactions in foreign markets may involve greater risks than trading
on domestic exchanges.
Successful use of futures by the Portfolio also is subject to the Adviser's
ability to predict correctly movements in the direction of the market or
foreign currencies and, to the extent the transaction is entered into for
hedging purposes, to ascertain the appropriate correlation between the
transaction being hedged and the price movements of the futures contract. For
example, if the Portfolio has hedged against the possibility of a decline in
the market adversely affecting the value of securities held in its portfolio
and prices increase instead, the Portfolio will lose part or all of the
benefit of the increased value of securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Portfolio may have to sell securities at a time when it
may be disadvantageous to do so.
8
<PAGE>
Pursuant to regulations and/or published positions of the Securities and
Exchange Commission, the Portfolio may be required to segregate cash or liquid
securities in connection with its commodities transactions in an amount
generally equal to the value of the underlying commodity. The segregation of
such assets will have the effect of limiting the Portfolio's ability otherwise
to invest those assets.
FUTURE DEVELOPMENTS
The Portfolio may take advantage of opportunities in the area of options and
futures contracts, options on futures contracts and any other derivative
investments which are not presently contemplated for use by the Portfolio or
which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Portfolio's investment
objective and legally permissible for the Portfolio. Before entering into such
transactions or making any such investment, the Portfolio will provide
appropriate disclosure in its prospectus.
CERTAIN FUNDAMENTAL POLICIES
The Portfolio may (i) borrow money to the extent permitted under the 1940 Act;
and (ii) invest up to 25% of the value of its total assets in the securities
of issuers in a single industry, provided that there is no such limitation on
investments in securities issued or guaranteed by the U.S. Government, its
agencies or sponsored enterprises. This paragraph describes fundamental
policies that cannot be changed as to the Portfolio without approval by the
holders of a majority (as defined in the 1940 Act) of the Portfolio's
outstanding voting shares. See "Investment Objective and Management Policies--
Investment Restrictions" in the Statement of Additional Information.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES
The Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its
assets, but only to secure permitted borrowings; and (ii) invest up to 15% of
the value of its net assets in repurchase agreements providing for settlement
in more than seven days after notice and in other illiquid securities. See
"Investment Objective and Management Policies--Investment Restrictions" in the
Statement of Additional Information.
RISK FACTORS
No investment is free from risk. Investing in the Portfolio will subject
investors to certain risks which should be considered.
NET ASSET VALUE FLUCTUATIONS
The Portfolio's net asset value per share is not fixed and should be expected
to fluctuate. Investors should purchase Portfolio shares only as a supplement
to an overall investment program and only if investors are willing to
undertake the risks involved.
EQUITY SECURITIES
Investors should be aware that equity securities fluctuate in value, often
based on factors unrelated to the value of the issuer of the securities, and
that fluctuations can be pronounced. Changes in the value of the equity
securities in the Portfolio's portfolio will result in changes in the value of
the Portfolio's shares and thus the Portfolio's yield and total return to
investors.
CERTAIN INVESTMENT TECHNIQUES
The use of investment techniques such as short selling, lending portfolio
securities and engaging in options and futures transactions, involves greater
risk than that incurred by many other funds with a similar objective. Using
these techniques may produce higher than normal portfolio turnover and may
affect the degree to which the Portfolio's net asset value fluctuates.
See
"Appendix--Investment Techniques."
For taxable years beginning on or before August 5, 1997, the Portfolio's
ability to engage in certain short-term transactions may be limited by the
requirement that, to qualify as a regulated investment company, it must earn
less than 30% of its gross income from the disposition of securities held for
less than three months. This 30% test limits the extent to which the Portfolio
may sell securities held for less than three months, effect short sales of
securities held for less than three months, write options expiring in less
than three months and invest in certain futures contracts, among other
strategies. With the exception of the above requirement, the amount of
portfolio activity will not be a limiting factor when making portfolio
decisions. Under normal market conditions, the Portfolio's portfolio turnover
rate generally will not exceed 150%. Higher portfolio turnover rates are
likely to result in comparatively greater brokerage commissions or transaction
costs. Short-term gains realized
9
<PAGE>
from portfolio transactions are taxable to shareholders as ordinary income.
See "Portfolio Transactions" in the Portfolio's Statement of Additional
Information.
NON-DIVERSIFIED STATUS
The Portfolio's classification as a "non-diversified" investment company means
that the proportion of its assets that may be invested in the securities of a
single issuer is not limited by the 1940 Act. However, the Portfolio intends
to conduct its operations so as to qualify as a "regulated investment company"
for purposes of the Internal Revenue Code of 1986, as amended (the "Code"),
which requires that, at the end of each quarter of its taxable year, (i) at
least 50% of the market value of the Portfolio's total assets be invested in
cash, U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5%
of the value of the Portfolio's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
total assets be invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies). Since a relatively high percentage of the Portfolio's assets may
be invested in the securities of a limited number of issuers, some of which
may be within the same industry or economic sector, the Portfolio's securities
may be more susceptible to any single economic, political or regulatory
occurrence than the portfolio securities of a diversified investment company.
SIMULTANEOUS INVESTMENTS
Investment decisions for the Portfolio are made independently from those of
other investment companies or accounts advised by the Adviser. However, if
such other investment companies or accounts are prepared to invest in, or
desire to dispose of, securities of the type in which the Portfolio invests at
the same time as the Portfolio, available investments or opportunities for
sales will be allocated equitably to each. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Portfolio or the price paid or received by the Portfolio.
Management of the Portfolio
BOARD OF TRUSTEES
The Fund's business affairs are managed under the general supervision of its
Board of Trustees. The Portfolio's Statement of Additional Information
contains the name and general business experience of each Trustee.
INVESTMENT ADVISER AND ADMINISTRATOR
The Portfolio's investment adviser is BSAM, a wholly-owned subsidiary of The
Bear Stearns Companies Inc., which is located at 575 Lexington Avenue, New
York, New York 10022. The Bear Stearns Companies Inc. is a holding company
which, through its subsidiaries including its principal subsidiary, Bear
Stearns, is a leading United States investment banking, securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. BSAM is a registered investment
adviser and offers, either directly or through affiliates, investment advisory
services to open-end and closed-end investment funds and other managed pooled
investment vehicles with net assets at October 31, 1997 of $7.7 billion.
BSAM supervises and assists in the overall management of the Portfolio's
affairs under an Investment Advisory Agreement between BSAM and the Fund,
subject to the overall authority of the Fund's Board of Trustees in accordance
with Massachusetts law. BSAM uses a team approach to money management
consisting of portfolio managers, assistant portfolio managers and analysts
performing as a dynamic unit to manage the assets of the Portfolio. The team
consists of Mark Kurland, Senior Portfolio Manager; Robert Reitzes, Senior
Portfolio Manager; Jim McCluskey, Senior Portfolio Manager; Gail Sprute,
Portfolio Manager/Analyst and Harris Cohen, Portfolio Manager/Analyst. Jim
McCluskey leads the portfolio manager team for the Portfolio. Mr. McCluskey, a
Chartered Financial Analyst, joined BSAM in May 1997 as a Senior Managing
Director and Senior Portfolio Manager. From 1989 through 1997, he was a Senior
Portfolio Manager at Spare, Kaplan, Bischel & Associates, an institutional
asset management firm where he co-managed over $2 billion in assets.
Under the terms of the Investment Advisory Agreement, the Portfolio has agreed
to pay BSAM a monthly fee at the annual rate of 1% of the Portfolio's average
daily net assets (the "Basic Fee") which will be adjusted monthly (the
"Monthly Performance Adjustment") depending on the extent to which
10
<PAGE>
the investment performance of the class of shares (currently, Class C) expected
to bear the highest total Portfolio operating expenses, after expenses, exceeded
or was exceeded by the percentage change in the investment record of the S&P
MidCap 400 Index. The Monthly Performance Adjustment may increase or decrease
the total advisory fee payable to BSAM (the "Total Advisory Fee") by up to 0.50%
per year of the value of the Portfolio's average daily net assets.
The monthly Total Advisory Fee is calculated as follows: (a) one-twelfth of
the 1.0% annual Basic Fee rate (0.083%) is applied to the Portfolio's average
daily net assets over the most recent calendar month, giving a dollar amount
which is the Basic Fee for that month; (b) one-twelfth of the applicable
performance adjustment rate from the table below is applied to the Portfolio's
average daily net assets over the most recent calendar month, giving a dollar
amount which is the Monthly Performance Adjustment (for the first twelve-month
period, no performance adjustment will be made); and (c) the Monthly
Performance Adjustment is then added to or subtracted from the Basic Fee and
the result is the amount payable by the Portfolio to BSAM as the Total
Advisory Fee for that month.
The full range of Total Advisory Fees on an annualized basis is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PERCENTAGE POINT DIFFERENCE
BETWEEN DESIGNATED CLASS'
PERFORMANCE (NET OF PERFORMANCE
EXPENSES INCLUDING ADVISORY FEES) ADJUSTMENT
AND PERCENTAGE CHANGE IN THE BASIS FEE
S&P 500 INDEX (%) RATE (%) TOTAL FEE (%)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
+3.00 percentage points or more............. 1% 0.50% 1.50%
+2.75 percentage points or more but less
than +3.00 percentage points................ 1% 0.40% 1.40%
+2.50 percentage points or more but less
than +2.75 percentage points................ 1% 0.30% 1.30%
+2.25 percentage points or more but less
than +2.50 percentage points................ 1% 0.20% 1.20%
+2.00 percentage points or more but less
than +2.25 percentage points................ 1% 0.10% 1.10%
Less than +2.00 percentage points but more
than -2.00 percentage points................ 1% 0.00% 1.00%
- -2.00 percentage points or less but more
than -2.25 percentage points................ 1% -0.10% 0.90%
- -2.25 percentage points or less but more
than -2.50 percentage points................ 1% -0.20% 0.80%
- -2.50 percentage points or less but more
than -2.75 percentage points................ 1% -0.30% 0.70%
- -2.75 percentage points or less but more
than -3.00 percentage points................ 1% -0.40% 0.60%
- -3.00 percentage points or less............. 1% -0.50% 0.50%
</TABLE>
The period over which performance is measured is a rolling twelve-month period
and the performance of the S&P MidCap 400 Index is calculated as the sum of the
change in the level of the S&P MidCap 400 Index during the period, plus the
value of any dividends or distributions made by the companies whose securities
comprise the S&P MidCap 400 Index. For the fiscal year ended March 31, 1997 the
S&P 500 Index was the Portfolios Performance Benchmark, no fees were paid by the
Portfolio pursuant to a voluntary undertaking by BSAM.
The Portfolio's administrator is BSFM, a wholly-owned subsidiary of The Bear
Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York
10167. BSFM offers administrative services to open-end and close end investment
funds and other managed pool investment vehicles with net assets at October 31,
1997 of $3.0 billion.
Under the terms of an Administration Agreement with the Fund, BSFM generally
supervises all aspects of the operation of the Portfolio, subject to the
overall authority of the Fund's Board of
11
<PAGE>
Trustees in accordance with Massachusetts law. For providing administrative
services to the Portfolio, the Fund has agreed to pay BSFM a monthly fee at
the annual rate of 0.15 of 1% of the Portfolio's average daily net assets.
Under the terms of an Administrative Services Agreement with the Fund, PFPC
Inc. provides certain administrative services to the Portfolio. For providing
these services, the Fund has agreed to pay PFPC Inc. an annual fee, as
follows: 0.10 of 1% per annum of the first $200 million of the Portfolio's
average daily net assets, 0.075 of 1% per annum of the next $200 million up to
$400 million of the Portfolio's average daily net assets, 0.05 of 1% of the
next $200 million up to $600 million of the Portfolio's average daily net
assets, and 0.03 of 1% per annum of average daily net assets in excess of $600
million. These advisory fees are subject to a monthly minimum fee of $11,000.
For the fiscal year ended March 31, 1997, the Portfolio paid PFPC Inc. a
monthly fee at the effective annual rate of 0.45 of 1% of the Portfolio's
average daily net assets.
From time to time, BSFM may waive receipt of its fees and/or voluntarily
assume certain Portfolio expenses, which would have the effect of lowering the
Portfolio's expense ratio and increasing yield to investors at the time such
amounts are waived or assumed, as the case may be. The Portfolio will not pay
BSFM at a later time for any amounts it may waive, nor will the Portfolio
reimburse BSFM for any amounts it may assume. From time to time, PFPC Inc. may
waive a portion of its fee. Effective May 1, 1996, and until further notice,
PFPC Inc. will reduce its monthly minimum to $7,500 for net assets of less
than $25 million; $9,167 for net assets of $25 million to $50 million; and
$11,000 for net assets in excess of $50 million. PFPC Inc. reserves the right
to revoke this voluntary fee waiver at any time.
Brokerage commissions may be paid to Bear Stearns for executing transactions
if the use of Bear Stearns is likely to result in price and execution at least
as favorable as those of other qualified broker-dealers. The allocation of
brokerage transactions also may take into account a broker's sales of the
Portfolio's shares. See "Portfolio Transactions" in the Statement of
Additional Information.
Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or
derivatives thereof as part of the Fund name for as long as the Investment
Advisory Agreement is in effect.
DISTRIBUTOR
Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as
the Portfolio's principal underwriter and distributor of the Portfolio's
shares pursuant to an agreement which is renewable annually. Bear Stearns is
entitled to receive the sales load described under "How to Buy Shares" and
payments under the Portfolio's Distribution and Shareholder Servicing Plans
described below.
CUSTODIAN AND TRANSFER AGENT
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an
affiliate of Bear Stearns, is the Portfolio's custodian. PFPC Inc., Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the
Portfolio's transfer agent, dividend disbursing agent and registrar (the
"Transfer Agent"). The Transfer Agent also provides certain administrative
services to the Portfolio.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN--CLASS A SHARES AND CLASS C SHARES
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), the Portfolio pays Bear Stearns for
distributing Portfolio shares and for providing personal services to, and/or
maintaining accounts of, Portfolio shareholders a fee at the annual rate of
0.50% and 1.00% of the average daily net assets of Class A and Class C,
respectively. With respect to Class A shares of the Portfolio, Bear Stearns
will waive the distribution fee to the extent that the fees would otherwise
exceed the NASD limitations on asset-based sales charges. Pursuant to NASD
rules, the aggregate deferred sales loads and annual distribution fees may not
exceed 6.25% of total gross sales, subject to certain exclusions. The 6.25%
limitation is imposed on the Portfolio rather than on a per shareholder basis.
Therefore, a long-term shareholder of the Portfolio may pay more in
distribution fees than the economic equivalent of 6.25% of such shareholder's
investment in such shares.
Under the Plan, Bear Stearns may pay third parties in respect of these
services such amount as it may determine. The fees paid to Bear Stearns under
the Plan are payable without regard to actual expenses incurred. Of these
amounts, up to 0.25% of the average daily net assets of each class will
12
<PAGE>
compensate institutions for personal service and maintenance of accounts
holding Portfolio shares. The Fund understands that these third parties also
may charge fees to their clients who are beneficial owners of Portfolio shares
in connection with their client accounts. These fees would be in addition to
any amounts which may be received by them from Bear Stearns under the Plan.
Fees paid under the Plan may also include a service fee paid to broker-dealers
or others who provide services in connection with "no transaction fee" or
similar programs for the purchase of shares.
DISTRIBUTION PLAN--CLASS B SHARES
Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Distribution Plan"), for Class B shares, the
Portfolio will pay Bear Stearns an annual fee of 0.75% per year of the average
daily net assets of Class B shares. Amounts paid under the Distribution Plan
compensates Bear Stearns for distributing Portfolio shares. Bear Stearns may
pay third parties that sell Portfolio shares such amount as it may determine.
The Portfolio understands that these third parties may also charge fees for
their clients who are beneficial owners of Portfolio shares in connection with
their client accounts. These fees would be in addition to any amounts which
may be received by them from Bear Stearns under the Distribution Plan.
SHAREHOLDER SERVICING PLAN--CLASS B SHARES
The Fund has adopted a shareholder servicing plan on behalf of the Portfolio's
Class B shares (the "Shareholder Servicing Plan"). In accordance with the
Shareholder Servicing Plan, the Fund may enter into shareholder service
agreements under which the Portfolio pays fees of up to 0.25% of the average
daily net assets of Class B shares for fees incurred in connection with the
personal service and maintenance of accounts holding Portfolio shares for
responding to inquiries of, and furnishing assistance to, shareholders
regarding ownership of the shares or their accounts or similar services not
otherwise provided on behalf of the Portfolio. Fees paid under the Shareholder
Servicing Plan may also include a service fee paid to broker-dealers or others
who provide services in connection with "no transaction fee" or similar
programs for the purchase of shares.
EXPENSE LIMITATION
BSAM has undertaken (until such time as it gives investors at least 60 days
notice to the contrary) that, if in any fiscal year, certain expenses, including
the investment advisory fee and fees paid under the Plan and the Distribution
Plan, exceed 1.65% of Class A's average daily net assets, 2.15% of Class B's
average daily net assets and 2.15% of Class C's average daily net assets for the
fiscal year, BSAM may waive a portion of its investment advisory fee or bear
other expenses to the extent of the excess expense.
How to Buy Shares
GENERAL
The minimum initial investment is $1,000, or $500 if the investment is for
Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant.
Subsequent investments ordinarily must be at least $50 or $25 for retirement
plans. Share certificates are issued only upon written request. No
certificates are issued for fractional shares. The Fund reserves the right to
reject any purchase order. The Fund reserves the right to vary the initial and
subsequent investment minimum requirements at any time. Investments by
employees of Bear Stearns and its affiliates are not subject to minimum
investment requirements.
Purchases of the Portfolio's shares may be made through a brokerage account
maintained with Bear Stearns or through certain investment dealers who are
members of the NASD who have sales agreements with Bear Stearns (an
"Authorized Dealer"). Purchases of the Portfolio's shares also may be made
directly through the Transfer Agent. When purchasing Portfolio shares,
investors must specify which class is being purchased. If you do not specify
in your instructions to the Fund which class of shares you wish to purchase,
the Fund will assume that your instructions apply to Class A shares.
Purchases are effected at the public offering price next determined after a
purchase order is received by Bear Stearns, an Authorized Dealer or the
Transfer Agent (the "trade date"). Payment for Portfolio shares generally is
due to Bear Stearns or the Authorized Dealer on the third business day (the
13
<PAGE>
"settlement date") after the trade date. Investors who make payment before the
settlement date may permit the payment to be held in their brokerage accounts
or may designate a temporary investment for payment until the settlement date.
If a temporary investment is not designated, Bear Stearns or the Authorized
Dealer will benefit from the temporary use of the funds if payment is made
before the settlement date.
CHOOSING A CLASS OF SHARES
Determining which class of shares best suits your investment needs depends on
several factors. Each class of shares has its own operating costs and sales
charges that will affect the results of your investment over time. Perhaps the
most significant factors are how much you intend to invest and the length of
time you expect to hold your investment.
In general, Class A shares are the most beneficial for the investor who
qualifies for a waiver or certain reductions of the front end sales charges as
described herein under "How to Buy Shares--Class A Shares." Class B and Class
C shareholders may pay a CDSC upon redemption. Investors who expect to redeem
during the eight year CDSC period applicable to Class B shares or the one year
CDSC period applicable to Class C shares should consider the cost of the
applicable CDSC plus the aggregate annual distribution and service fees
applicable to Class B and Class C shares, as compared with the cost of the
front end sales charge plus the aggregate annual distribution and service fees
applicable to Class A shares. Because Class B and Class C shareholders pay no
front end sales charge, the entire purchase price is immediately invested in
shares of the Portfolio. Over time, however, the cumulative distribution and
service fees applicable to Class B and Class C shares will approach and may
exceed the 5.50% maximum front end sales charge plus the distribution and
service fees applicable to Class A shares.
The factors below assume the expenses that apply to each class of shares as
described in this prospectus. In addition, they assume an annual rate of
return of approximately 5%. The actual amount of return may be higher or
lower, depending on the actual investment returns over time. This discussion
is not intended to be investment advice or recommendations, because each
investor's goals, needs and circumstances are unique.
MAXIMUM PURCHASE AMOUNT
There is a maximum purchase limitation of up to $500,000 in the aggregate on
purchases of Class B shares and a maximum purchase limitation of up to $1
million in the aggregate on purchases of Class C shares. Investors who
purchase $1 million or more may only purchase Class A shares (as the sales
charge is waived for purchases in excess of $1 million). However, if you
purchase over $1 million of Class A shares, and do not maintain your
investment for at least one year from the date of purchase, you will be
charged a CDSC of 1%.
LENGTH OF INVESTMENT
Knowing the approximate time you plan to hold your investment can help you
select the class of shares that is most appropriate for you. Generally, the
amount of sales charge you pay over time will depend on the amount you invest.
If you plan to invest a large amount over time, the reduced sales charges
available for larger purchases of Class A shares may, over time, offset the
effect of paying an initial sales charge on your investment (the initial sales
charge of Class A Shares effectively reduces the amount of your investment),
compared to the higher expenses on Class B shares or Class C shares, which do
not have an initial sales charge. Your entire investment in Class B shares is
available to work for you from the time you make your initial investment but
the higher expenses will cause your Class B shares (until conversion to Class
A shares) to have a higher expense ratio and to pay lower dividends, to the
extent dividends are paid, than Class A shares. If you prefer not to pay an
initial sales charge on an investment you might consider purchasing Class B
shares.
If you plan to invest less than $250,000 for a period of approximately eight
years or less, you should probably consider Class C shares as the appropriate
choice even though the class expenses are higher, because there is no initial
sales charge and no CDSC after one year. If you plan to invest less than
$250,000 for a period of between approximately nine and twelve years, Class B
shares may be the appropriate choice. If you plan to hold your investment for
more than twelve years, then Class A shares may be the appropriate choice,
because the effect of the higher class expenses of Class B and C shares might
be greater than the effect of the initial sales charge of the Class A shares.
If you plan to invest more than $250,000 but less than $500,000 for a period
of five years or less, then you should probably consider investing in Class C
shares. If you plan to hold your investment
14
<PAGE>
for approximately six years or more you may find Class A shares more
advantageous because the annual total expenses on Class B and C shares will have
a greater impact on your investment over the longer term than the reduced front
end sales charge available for larger purchases of Class A shares.
If you plan to invest more than $500,000 but less than $1,000,000 for a period
of four years or less, then you should probably consider investing in Class C
shares. If you plan to hold your investment for approximately five years or
more, you may find Class A shares more advantageous.
For investors who invest $1 million or more, Class A shares will be the most
advantageous choice, no matter how long you intend to hold your shares.
PAYMENTS TO BROKERS
Your broker may be entitled to receive different compensation for selling
shares of one class of shares than for selling another class. The purpose of
both the CDSC and the asset-based sales charge is to compensate Bear Stearns
and the brokers who sell the shares.
CONSULT YOUR FINANCIAL ADVISER
You should consult your financial adviser to assist you in determining which
class of shares is most appropriate for you.
PURCHASE PROCEDURES
Purchases through Bear Stearns account executives or Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve draft or by wiring Federal Funds with funds held in
brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal
Reserve drafts should be made payable as follows: (i) to Bear Stearns or an
investor's Authorized Dealer or (ii) to "The Bear Stearns Funds--The Insiders
Select Fund" if purchased directly from the Portfolio, and should be directed
to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds--The
Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960. Direct
overnight deliveries to PFPC Inc., 400 Bellevue Parkway, Suite 108,
Wilmington, Delaware 19809. Payment by check or Federal Reserve draft must be
received within three business days of receipt of the purchase order by Bear
Stearns or an Authorized Dealer. Shareholders may not purchase shares of the
Portfolio with a check issued by a third party and endorsed over to the
Portfolio. Orders placed directly with the Transfer Agent must be accompanied
by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible
for forwarding payment promptly to the Fund. The Fund will charge $7.50 for
each wire redemption. The payment proceeds of a redemption of shares recently
purchased by check may be delayed as described under "How to Redeem Shares."
Investors who are not Bear Stearns clients may purchase Portfolio shares
through the Transfer Agent. To make an initial investment in the Portfolio, an
investor must establish an account with the Portfolio by furnishing necessary
information to the Fund. An account with the Portfolio may be established by
completing and signing the Account Information Form, a copy of which is
attached to this Prospectus, indicating which class of shares is being
purchased and mailing it, together with a check to cover the purchase, to PFPC
Inc., Attention: The Bear Stearns Funds--The Insiders Select Fund, P.O. Box
8960, Wilmington, Delaware 19899-8960.
Subsequent purchases of shares may be made by checks made payable to the Fund
and directed to the address set forth in the preceding paragraph. The account
number should appear on the check.
Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer
Agent before the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York time) on any day the Portfolio calculates its
net asset value are priced according to the net asset value determined on that
date. Purchase orders received after the close of trading on the New York
Stock Exchange are priced as of the time the net asset value is next
determined.
NET ASSET VALUE
Shares of the Portfolio are sold on a continuous basis. Net asset value per
share is determined as of the close of regular trading on the floor of the New
York Stock Exchange (currently 4:00 p.m., New York time) on each business day.
The net asset value per share of each class of the Portfolio is computed by
dividing the value of the Portfolio's net assets represented by such class
(i.e., the value of its assets less liabilities) by the total number of shares
of such class outstanding. The Portfolio's investments are valued based on
market value or, where market quotations are not readily available,
15
<PAGE>
based on fair value as determined in good faith by, or in accordance with
procedures established by, the Fund's Board of Trustees. For further
information regarding the methods employed in valuing the Portfolio's
investments, see "Determination of Net Asset Value" in the Portfolio's
Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to
the Fund could subject the investor to backup withholding and a $50 penalty
imposed by the Internal Revenue Service (the "IRS").
CLASS A SHARES
The sales charge may vary depending on the dollar amount invested in the
Portfolio. The public offering price for Class A shares of the Portfolio is
the net asset value per share of that class plus a sales load, which is
imposed in accordance with the following schedule:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TOTAL SALES LOAD
------------------------------
AS A % OF AS A % OF DEALER CONCESSIONS
OFFERING PRICE NET ASSET VALUE AS A % OF
AMOUNT OF TRANSACTION PER SHARE PER SHARE OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............ 5.50% 5.82% 5.25%
$50,000 to less than
$100,000.................... 4.75 4.99 4.25
$100,000 to less than
$250,000.................... 3.75 3.90 3.25
$250,000 to less than
$500,000.................... 2.75 2.83 2.50
$500,000 to less than
$1,000,000.................. 2.00 2.04 1.75
$1,000,000 and above......... 0.00* 0.00 1.25
</TABLE>
- ------
* There is no initial sales charge on purchases of $1,000,000 or more of Class
A shares. However, if an investor purchases Class A shares without an initial
sales charge as part of an investment of at least $1,000,000 and redeems
those shares within one year after purchase, a CDSC of 1.00% will be imposed
at the time of redemption. Letter of Intent and Right of Accumulation apply
to such purchases of Class A shares.
The dealer concession may be changed from time to time but will remain the
same for all dealers. From time to time, Bear Stearns may make or allow
additional payments or promotional incentives to dealers that sell Class A
shares. In some instances, these incentives may be offered only to certain
dealers who have sold or may sell significant amounts of Class A shares.
Dealers may receive a larger percentage of the sales load from Bear Stearns
than they receive for selling most other funds.
Class A shares may be sold at net asset value to (a) the Adviser, its
affiliates or its officers, directors or employees (including retired
employees), any partnership of which the Adviser is a general partner, any
Trustee or officer of the Fund and designated family members of any of the
above individuals; (b) qualified retirement plans of the Adviser; (c) any
employee or registered representative of any Authorized Dealer or their
respective spouses and minor children; (d) trustees or directors of investment
companies for which the Adviser or an affiliate acts as sponsor; (e) any
state, county or city, or any instrumentality, department, authority or agency
thereof, which is prohibited by applicable investment laws from paying a sales
load or commission in connection with the purchase of Portfolio shares; (f)
any institutional investment clients including corporate sponsored pension and
profit-sharing plans and other benefit plans (excluding Keogh Plans, IRAs and
SEP-IRAs), and insurance companies; (g) any pension funds (excluding Keogh
Plans, IRAs and SEP-IRAs), state and municipal governments or funds, Taft-
Hartley plans and qualified non-profit organizations, foundations and
endowments; (h) trust institutions (including bank trust departments)
investing on their own behalf or on behalf of their clients; and (i) accounts
as to which an Authorized Dealer charges an asset management fee. To take
advantage of these exemptions, a purchaser must indicate its eligibility for
an exemption to Bear Stearns along with its Account Information Form. Such
purchaser agrees to notify Bear Stearns if, at any time of any additional
purchases, it is no longer eligible for an exemption. Bear Stearns reserves
the right to request certification or additional information from a purchaser
in order to verify that such purchaser is eligible for an exemption. Bear
Stearns reserves the right to limit the participation of its employees in
Class A shares of the Portfolio. Dividends and distributions reinvested in
Class A shares of the Portfolio will be made at the net asset value per share
on the reinvestment date.
Class A shares of the Portfolio also may be purchased at net asset value, with
the proceeds from the redemption of shares of an investment company sold with
a sales charge or commission and not
16
<PAGE>
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
- --------------------------------------------------------------------------------
Account Information Form
Please Note: Do not use this form to open a retirement plan account. For
retirement plan forms call 1-800-447-1139. For assistance in completing
this form, contact PFPC Inc. at 1-800-447-1139.
1 Account Type (Please print; indicate only one registration type)
|_| Individual |_| Joint Tenant
___________________________________________________________________________
NAME
___________________________________________________________________________
JOINT REGISTRANT, IF ANY (SEE NOTES 1 AND 2)
__ __ __ - __ __ - __ __ __ __ __ __ - __ __ __ __ __ __ __
SOCIAL SECURITY NUMBER OF PRIMARY OWNER TAXPAYER IDENTIFICATION NUMBER
(1) Use only the Social Security number or Taxpayer Identification
Number of the first listed joint tenant.
(2) For joint registrations, the account registrants will be joint
tenants with right of survivorship and not tenants in common unless
tenants in common or community property registrations are requested.
___________________________________________________________________________
|_| Uniform Gift to Minors, or |_| Uniform Transfer to Minors
(where allowed by law)
___________________________________________________________________________
NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED)
___________________________________________________________________________
NAME OF MINOR (ONLY ONE PERMITTED)
Under the ________________________ Uniform Gift/Transfers to Minors Act.
STATE RESIDENCE OF MINOR
___ ___ / ___ ___ / ___ ___ ___ ___ ___ - ___ ___ - ___ ___ ___ ___
MINOR'S DATE OF BIRTH MINOR'S SOCIAL SECURITY NUMBER
(REQUIRED TO OPEN ACCOUNT)
___________________________________________________________________________
|_| Corporation |_| Partnership |_| Trust* |_| Other
___________________________________________________________________________
NAME OF CORPORATION, PARTNERSHIP, OR OTHER
___________________________________________________________________________
NAME(S) OF TRUSTEE(S)
__ __ __ - __ __ - __ __ __ __ __ __ - __ __ __ __ __ __ __
SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER
(REQUIRED TO OPEN ACCOUNT) (REQUIRED TO OPEN ACCOUNT)
* If a Trust, include date of trust instrument and list of trustees if
they are to be named in the registration.
2 Mailing Address
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
( ) ( )
_________________________________________ _______________________________
DAY TELEPHONE EVENING TELEPHONE
3 Investment Information
Method of Investment
|_| I have enclosed a check for a minimum initial investments of $1,000
per Portfolio.
|_| I have enclosed a check for a minimum subsequent investment of $50
per Portfolio or completed the Systematic Investment Plan
information in Section 13.
|_| I purchased _____________________ shares of
_______________________________________________ through my broker on
____/____/____. Confirm # _______________.
Please make my investment in the Funds designated below:
---------------------------------------------------------------------------
CLASS A CLASS B CLASS C BEAR STEARNS FUNDS INVESTMENT AMOUNT
---------------------------------------------------------------------------
|_| |_| |_| S&P STARS Portfolio $__________
|_| |_| |_| Large Cap Value Portfolio $__________
|_| |_| |_| Small Cap Value Portfolio $__________
|_| |_| |_| Total Return Bond Portfolio $__________
|_| |_| |_| The Insiders Select Fund $__________
|_| |_| |_| Emerging Markets Debt Portfolio $__________
|_| |_| |_| Focus List Portfolio $__________
|_| |_| |_| Balanced Portfolio $__________
|_| |_| |_| High Yield Total Return Portfolio $__________
|_| |_| |_| International Equity Portfolio $__________
|_| |_| |_| Money Market Portfolio $__________
TOTAL INVESTMENT AMOUNT $
==========
Note: All shares purchased will be held in a shareholder account for the
investor at the Transfer Agent. Checks drawn on foreign banks and checks
made payable to persons or entities other than the Fund will not be
accepted. Checks should be made payable to the Fund which you are investing
in. If no class is designated, your investment will be made in Class A
shares.
NOT PART OF THE PROSPECTUS
<PAGE>
4 Reduced Sales Charge (Available for Class A Shares Only)
Method of Investment
Are you a shareholder in another Bear Stearns Fund? |_| Yes |_| No
|_| I apply for Right of Accumulation reduced sales charges based on the
following Bear Stearns Fund Accounts (excluding Class C Shares).
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
___________________________________________________________________________
PORTFOLIO ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER
Letter of Intent
|_| I am already investing under an existing Letter of Intent.
|_| I agree to the Letter of Intent provisions in the Portfolio's current
prospectus. During a 13-month period, I plan to invest a dollar amount
of at least: |_| $50,000 |_| $100,000 |_| $250,000 |_| $500,000
|_| $1,000,000
Net Asset Value Purchase
|_| I qualify for an exemption from the sales charge by meeting the
conditions set forth in the prospectus. (Please attach certification
to this form.)
|_| I qualify to purchase shares at net asset value, with proceeds
received from a mutual fund or closed-end fund not distributed by Bear
Stearns. (Please attach proof of fund share redemption.)
5 Distribution Options
Dividends and capital gains may be reinvested or paid by check. If no
options are selected below, both dividends and capital gains will be
reinvested in additional Portfolio shares.
Dividends |_| Pay by check. |_| Reinvest.
Capital Gains |_| Pay by check. |_| Reinvest.
The Redirected Distribution Option allows an investor to have dividends and
any other distributions from a Portfolio automatically used to purchase
shares of the same class of any other Portfolio. The receiving account must
be in the same name as your existing account.
|_| Please reinvest dividends and capital gains from the
____________________________ to the __________________________.
(NAME OF PORTFOLIO) (NAME OF PORTFOLIO)
If you elect to have distributions paid by check, distributions will be
sent to the address of record. Distributions may also be sent to another
payee:
___________________________________________________________________________
NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
___________________________________________________________________________
Optional Features
6 Automatic Withdrawal Plan
|_| Portfolio Name ____________________________ |_| Amount _____________
|_| Startup month __________________________
Frequency option: |_| Monthly |_| Every other month |_| Quarterly
|_| Semiannually |_| Annually
o A minimum account value of $5,000 in a single account is required to
establish an automatic withdrawal plan.
o Payments will be made on or near the 25th of the month.
o Shareholders holding share certificates are not eligible for the
Automatic Withdrawal Plan.
|_| Please mail checks to Address of Record (Named in Section 2)
|_| Please electronically credit my Bank of Record (Named in Section 9)
|_| Special payee as specified below:
___________________________________________________________________________
NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
7 Telephone Exchange Privilege
Unless indicated below, I authorize the Transfer Agent to accept
instructions from any persons to exchange shares in my account(s) by
telephone, in accordance with the procedures and conditions set forth in
the Portfolio's current prospectus.
|_| I DO NOT want the Telephone Exchange Privilege.
NOT PART OF THE PROSPECTUS
<PAGE>
8 Telephone Redemption Privilege
|_| I authorize the Transfer Agent to accept instructions from any person
to redeem shares in my account(s) by telephone, in accordance with the
procedures and conditions set forth in the Portfolio's current prospectus.
Checks for redemption of proceeds will be sent via U.S. Mail to the address
of record, unless the information in Section 9 is completed for redemption
by wire of $500 or more.
9 Bank of Record (for Telephone Redemptions and/or Systematic Investment
Plans)
Please attach a voided check (for electronic credit to your checking
account) in the space provided in Section 13.
___________________________________________________________________________
BANK NAME
___________________________________________________________________________
STREET OR P.O. BOX APARTMENT NUMBER
___________________________________________________________________________
CITY STATE ZIP CODE
___________________________________________________________________________
BANK ABA NUMBER BANK ACCOUNT NUMBER
___________________________________________________________________________
ACCOUNT NAME
10 Signature and Taxpayer Certification
The undersigned warrants that I(we) have full authority and, if a natural
person, I(we) am(are) of legal age to purchase shares pursuant to this
Account Information Form, and have received a current prospectus for the
Bear Stearns Fund(s) in which I(we) am(are) investing. The undersigned
acknowledges that the Telephone Exchange Privilege is automatic and that
I(we) may bear the risk of loss in event of fraudulent use of the
Privilege. If I(we) do not want the Telephone Exchange Privilege, I(we)
have so indicated on this Account Information Form.
Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is
required to have the following certification:
Under penalty of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from
backup withholding or (b) I have not been notified by the Interal Revenue
Service that I am subject to 31% backup withholding as a result of a
failure to report all interest or dividends or (c) the IRS has notified me
that I am no longer subject to backup withholding.
Certification Instructions -- You must cross out item (2) above if you have
been notified by the IRS that you are currently subject to backup
withholding because of underreporting of interest or dividends on your tax
return. Mutual fund shares are not deposits of, or guaranteed by, any
depository institution, nor are they insured by the FDIC. Investment in the
funds involves investment risks, including possible loss of principal.
|_| Exempt from backup withholding
|_| Nonresident alien (Form W-8 attached) _________________________________
COUNTRY OF CITIZENSHIP
___________________________________________________________________________
AUTHORIZED SIGNATURE TITLE DATE
___________________________________________________________________________
AUTHORIZED SIGNATURE TITLE DATE
11 For Authorized Dealer Use Only (Please Print)
We hereby authorize the Transfer Agent to act as our agent in connection
with the transactions authorized by the Account Information Form and agree
to notify the Transfer Agent of any purchases made under a Letter of Intent
or Right of Accumulation. If this Account Information Form includes a
Telephone Exchange Privilege authorization, a Telephone Redemption
Privilege authorization or an Automatic Withdrawal Plan request, we
guarantee the signature(s) above.
___________________________________________________________________________
DEALER'S NAME DEALER NUMBER
___________________________________________________________________________
MAIN OFFICE ADDRESS BRANCH NUMBER
___________________________________________________________________________
REPRESENTATIVE'S NAME REP. NUMBER
( )
___________________________________________________ ______________________
BRANCH ADDRESS TELEPHONE NUMBER
___________________________________________________________________________
AUTHORIZED SIGNATURE OF DEALER TITLE DATE
12 Additional Account Statements (Please Print)
In addition to myself and my representative, please send copies of my
account statements to:
___________________________________ ______________________________________
NAME NAME
___________________________________ ______________________________________
ADDRESS ADDRESS
___________________________________ ______________________________________
CITY, STATE, ZIP CODE CITY, STATE, ZIP CODE
NOT PART OF THE PROSPECTUS
<PAGE>
13 Systematic Investment Plan
The Systematic Investment Plan, which is available to shareholders of the
Bear Stearns Funds, makes possible regularly scheduled purchases of
Portfolio shares to allow dollar-cost averaging. The Portfolios' Transfer
Agent can arrange for an amount of money selected by you ($100 minimum) to
be deducted from your checking account and used to purchase shares of a
specified Bear Stearns Fund. A $250 minimum initial investment is required.
This may not be used in conjunction with the Automatic Withdrawal Plan.
Please debit $_______________ from my checking account (named in Section 9)
on or about the 20th of the month. Depending on the Application receipt
date, the Plan may take 10 to 20 days to be in effect.
|_| Monthly |_| Every alternate month
|_| Quarterly |_| Other _________________________________
$ ____________ into the ___________________ Portfolio ________ Start Month.
$100 MINIMUM
$ ____________ into the ___________________ Portfolio ________ Start Month.
$100 MINIMUM
$ ____________ into the ___________________ Portfolio ________ Start Month.
$100 MINIMUM
If you are applying for the Telephone Redemption Privilege or Systematic
Investment Plan, please tape your voided check on top of our sample below.
===========================================================================
John Smith 000
123 First Avenue
Anytown, USA 12345
[VOID]
----------
______________________________________________________________ $
----------
___________________________________________________________________________
_________________________________ ______________________________________
===========================================================================
Service Assistance Mailing or Fax Instructions
Our knowledgeable Client Mail your completed
Services Representatives Account Information Form
are available to assist and check to:
you between 8:00 a.m. and
6:00 p.m. Eastern Time The Bear Stearns Funds
at: c/o PFPC Inc.
P.O. Box 8960
1-800-447-1139 Wilmington, DE 19899-8960
Fax: 302-791-1777
If applications will be
faxed please call and
notify Client Services at
1-800-447-1139 before
placing an order.
Bear, Stearns & Co. Inc.
7.97
NOT PART OF THE PROSPECTUS
<PAGE>
distributed by Bear Stearns. This includes shares of a mutual fund which were
subject to a contingent deferred sales charge upon redemption. The purchase
must be made within 60 days of the redemption, and Bear Stearns must be
notified by the investor in writing, or by the investor's investment
professional, at the time the purchase is made. However, if such investor
redeems those shares within one year after purchase, a CDSC of 1.00% will be
imposed at the time of redemption. Bear Stearns will offer to pay Authorized
Dealers an amount up to 1.25% of the net asset value of shares purchased by
the dealers' clients or customers in this manner.
In addition, Class A shares of the Portfolio may be purchased at net asset
value by the following customers of a broker that operates a master account
for purchasing and redeeming, and otherwise providing shareholder services in
respect of, Fund shares pursuant to agreements with the Fund or Bear Stearns:
(i) investment advisers and financial planners who place trades for their own
accounts or for the accounts of their clients and who charge a management,
consulting or other fee, (ii) clients of such investment advisers and
financial planners if such clients place trades through accounts linked to
master accounts of such investment advisers or financial planners on the books
and records of such broker and (iii) retirement and deferred compensation
plans, and trusts used to fund such plans, including, but not limited to,
plans or trusts defined in Section 401(a), 403(b) or 457 of the Code and
"rabbi trusts", provided, in each case, the purchase transaction is effected
through such broker. The broker may charge a fee for transactions in Portfolio
shares.
CLASS B SHARES
The public offering price for Class B shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class B shares made
within six years of purchase. See "How to Redeem Shares". The amount of the
CDSC, if any, will vary depending on the number of years from the time of
purchase until the time of redemption of Class B shares. For the purpose of
determining the number of years from the time of any purchase, all payments
during a month will be aggregated and deemed to have been made on the first
day of that month. In processing redemptions of Class B shares, the Portfolio
will first redeem shares not subject to any CDSC, and then shares held longest
during the eight-year period, resulting in the shareholder paying the lowest
possible CDSC. The amount of the CDSC charged upon redemption is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CDSC AS A PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CDSC
- --------------------------------------------------------------------------------
<S> <C>
First................................................... 5%
Second.................................................. 4%
Third................................................... 3%
Fourth.................................................. 3%
Fifth................................................... 2%
Sixth................................................... 1%
Seventh................................................. 0%
Eighth*................................................. 0%
</TABLE>
- ------
* As discussed below, Class B shares automatically convert to Class A shares
after the eighth year following purchase.
Class B shares of the Portfolio will automatically convert into Class A shares
of the same Portfolio at the end of the calendar quarter that is eight years
after the initial purchase of the Class B shares. Class B shares acquired by
exchange from Class B shares of another portfolio will convert into Class A
shares of such Portfolio based on the date of the initial purchase. Class B
shares acquired through reinvestment of distributions will convert into Class
A shares based on the date of the initial purchase of the shares on which the
distribution was paid. The conversion of Class B shares to Class A shares will
not occur at any time the Portfolio is advised that such conversions may
constitute taxable events for federal tax purposes, which the Portfolio
believes is unlikely. If conversions do not occur as a result of possible
taxability, Class B shares would continue to be subject to higher expenses
than Class A shares for an indeterminate period.
The purpose of the conversion feature is to allow the holders of Class B
shares the ability to not bear the burden of distribution related expenses
when the shares have been outstanding for a duration sufficient for Bear
Stearns to have obtained compensation for distribution related expenses
incurred in connection with Class B shares.
17
<PAGE>
CLASS C SHARES
The public offering price for Class C shares is the next determined net asset
value per share of that class. No initial sales charge is imposed at the time
of purchase. A CDSC is imposed, however, on redemptions of Class C shares made
within the first year of purchase. See "How to Redeem Shares."
RIGHT OF ACCUMULATION--CLASS A SHARES
Investors in Class A shares may qualify for a reduced sales charge. Pursuant
to the Right of Accumulation, certain investors are permitted to purchase
Class A shares of the Portfolio at the sales charge applicable to the total of
(a) the dollar amount then being purchased plus (b) the current public
offering price of all Class A shares of the Portfolio, shares of the Fund's
other portfolios and shares of certain other funds sponsored or advised by
Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns
Investment Trust, then held by the investor. The following purchases of Class
A shares may be aggregated for the purposes of determining the amount of
purchase and the corresponding sales load: (a) individual purchases on behalf
of a single purchaser, the purchaser's spouse and their children under the age
of 21 years including shares purchased in connection with a retirement account
exclusively for the benefit of such individual(s), such as an IRA, and
purchases made by a company controlled by such individual(s); (b) individual
purchases by a trustee or other fiduciary account, including an employee
benefit plan (such as employer-sponsored pension, profit-sharing and stock
bonus plans, including plans under Section 401(k) of the Code, and medical,
life and disability insurance trusts); or (c) individual purchases by a
trustee or other fiduciary purchasing shares concurrently for two or more
employee benefit plans of a single employer or of employers affiliated with
each other. Subsequent purchases made under the conditions set forth above
will be subject to the minimum subsequent investment of $50 and will be
entitled to the Right of Accumulation.
LETTER OF INTENT--CLASS A SHARES
By checking the appropriate box in the Letter of Intent section of the Account
Information Form, investors become eligible for the reduced sales load
applicable to the total number of Class A shares of the Portfolio, Class A
shares of the Fund's other portfolios and shares of certain other funds
sponsored or advised by Bear Stearns, including the Emerging Markets Debt
Portfolio of Bear Stearns Investment Trust, purchased in a 13-month period
pursuant to the terms and under the conditions set forth herein. A minimum
initial purchase of $1,000 is required. The Transfer Agent will hold in escrow
5% of the amount indicated in the Account Information Form for payment of a
higher sales load if the investor does not purchase the full amount indicated
in the Account Information Form. The escrow will be released when the investor
fulfills the terms of the Letter of Intent by purchasing the specified amount.
If an investor's purchases qualify for a further sales load reduction, the
sales load will be adjusted to reflect the total purchase at the end of 13
months. If total purchases are less than the amount specified, the investor
will be requested to remit an amount equal to the difference between the sales
load actually paid and the sales load applicable to the aggregate purchases
actually made. If such remittance is not received within 20 days, the Transfer
Agent, as attorney-in-fact, will redeem an appropriate number of shares held
in escrow to realize the difference. Checking a box in the Letter of Intent
section of the Account Information Form does not bind an investor to purchase,
or the Portfolio to sell, the full amount indicated at the sales load in
effect at the time of signing, but the investor must complete the intended
purchase to obtain the reduced sales load. At the time an investor purchases
shares of any of the above-listed funds, the investor must indicate its
intention to do so under the Letter of Intent section of the Account
Information Form.
SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan permits investors to purchase shares of the
Portfolio (minimum initial investment of $250 and minimum subsequent
investments of $50 per transaction) at regular intervals selected by the
investor. Provided the investor's bank or other financial institution allows
automatic withdrawals, Portfolio shares may be purchased by transferring funds
from the account designated by the investor. At the investor's option, the
account designated will be debited in the specified amount, and Portfolio
shares will be purchased once a month, on or about the twentieth day. Only an
account maintained at a domestic financial institution which is an Automated
Clearing House member may be so designated. Investors desiring to participate
in the Systematic Investment Plan should call the Transfer Agent at 1-800-447-
1139 to obtain the appropriate forms. The Systematic Investment Plan does not
assure a profit and does not protect against loss in declining markets. Since
the Systematic Investment Plan involves the continuous investment in the
Portfolio regardless of fluctuating price
18
<PAGE>
levels of the Portfolio's shares, investors should consider their financial
ability to continue to purchase through periods of low price levels. The Fund
may modify or terminate the Systematic Investment Plan at any time or charge a
service fee. No such fee currently is contemplated.
Shareholder Services
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in exchange for shares
of a class of the Portfolio, shares of the same class of the Fund's other
portfolios or shares of certain other funds sponsored or advised by Bear
Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns
Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the
extent such shares are offered for sale in the investor's state of residence.
These funds have different investment objectives which may be of interest to
investors. To use this privilege, investors should consult their account
executive at Bear Stearns, their account executive at an Authorized Dealer or
the Transfer Agent to determine if it is available and whether any conditions
are imposed on its use.
To use this privilege, exchange instructions must be given to the Transfer
Agent in writing or by telephone. A shareholder wishing to make an exchange
may do so by sending a written request to the Transfer Agent at the address
given above in "How to Buy Shares--General." Shareholders are automatically
provided with telephone exchange privileges when opening an account, unless
they indicate on the account application that they do not wish to use this
privilege. Shareholders holding share certificates are not eligible to
exchange shares of the Portfolio by phone because share certificates must
accompany all exchange requests. To add this feature to an existing account
that previously did not provide for this option, a Telephone Exchange
Authorization Form must be filed with the Transfer Agent. This form is
available from the Transfer Agent. Once this election has been made, the
shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 to
request the exchange. During periods of substantial economic or market change,
telephone exchanges may be difficult to complete and shareholders may have to
submit exchange requests to the Transfer Agent in writing.
The Transfer Agent may use security procedures to confirm that telephone
instructions are genuine. If the Transfer Agent does not use reasonable
procedures, it may be liable for losses due to unauthorized transactions, but
otherwise neither the Transfer Agent nor the Portfolio will be liable for
losses or expenses arising out of telephone instructions reasonably believed
to be genuine.
If the exchanging shareholder does not currently own shares of the portfolio
or fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and Authorized
Dealer of record as the account from which shares are exchanged, unless
otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as described below. To
participate in the Systematic Investment Plan or establish automatic
withdrawal for the new account, however, an exchanging shareholder must file a
specific written request. The Exchange Privilege may be modified or terminated
at any time, or from time to time, by the Fund on 60 days notice to the
affected portfolio or fund shareholders. The Fund, BSAM and Bear Stearns will
not be liable for any loss, liability, cost or expense for acting upon
telephone instructions that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Fund will
use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (such as
the name in which an account is registered, the account number, recent
transactions in the account, and the account holder's Social Security number,
address and/or bank).
Before any exchange, the investor must obtain and should review a copy of the
current prospectus of the portfolio or fund into which the exchange is being
made. Prospectuses may be obtained free of charge from Bear Stearns, any
Authorized Dealer or the Transfer Agent. Except in the case of Personal
Retirement Plans, the shares being exchanged must have a current value of at
least $250; furthermore, when establishing a new account by exchange, the
shares being exchanged must have a value of at least the minimum initial
investment required for the portfolio or fund into which the exchange is being
made; if making an exchange to an existing account, the dollar value must
equal or exceed the applicable minimum for subsequent investments. If any
amount remains in the investment portfolio from which the exchange is being
made, such amount must not be below the minimum account value required by the
Portfolio or Fund.
19
<PAGE>
Shares will be exchanged at the next determined net asset value. No CDSC will
be imposed on Class B or C shares at the time of an exchange. The CDSC
applicable on a redemption of Class B or C shares will be calculated from the
date of the initial purchase of the Class B or C shares exchanged. If an
investor is exchanging Class A shares into a portfolio or fund that charges a
sales load, the investor may qualify for share prices which do not include the
sales load or which reflect a reduced sales load, if the shares of the
portfolio or fund from which the investor is exchanging were: (a) purchased
with a sales load; (b) acquired by a previous exchange from shares purchased
with a sales load; or (c) acquired through reinvestment of dividends or
distributions paid with respect to the foregoing categories of shares. To
qualify, at the time of the exchange the investor must notify Bear Stearns,
the Authorized Dealer or the Transfer Agent. Any such qualification is subject
to confirmation of the investor's holdings through a check of appropriate
records. No fees currently are charged shareholders directly in connection
with exchanges, although the Fund reserves the right, upon not less than 60
days written notice, to charge shareholders a $5.00 fee in accordance with
rules promulgated by the Securities and Exchange Commission. The Fund reserves
the right to reject any exchange request in whole or in part. The Exchange
Privilege may be modified or terminated at any time upon notice to
shareholders.
The exchange of shares of one portfolio or fund for shares of another is
treated for federal income tax purposes as a sale of the shares given in
exchange by the shareholder and, therefore, an exchanging shareholder may
recognize a taxable gain or loss.
REDIRECTED DISTRIBUTION OPTION
The Redirected Distribution Option enables a shareholder to invest
automatically dividends and/or capital gain distributions, if any, paid by the
Portfolio in shares of the same class of another portfolio of the Fund or a
fund advised or sponsored by Bear Stearns of which the shareholder is an
investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the
other portfolio or fund will be purchased at the current net asset value. If
an investor is investing in a class that charges a CDSC, the shares purchased
will be subject upon redemption to the CDSC, if applicable, to the purchased
shares.
This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund may
modify or terminate this privilege at any time or charge a service fee. No
such fee currently is contemplated.
How to Redeem Shares
GENERAL
The redemption price will be based on the net asset value next computed after
receipt of a redemption request; in certain instances a CDSC will be charged.
Investors may request redemption of Portfolio shares at any time. Redemption
requests may be made as described below. When a request is received in proper
form, the Portfolio will redeem the shares at the next determined net asset
value. If the investor holds Portfolio shares of more than one class, any
request for redemption must specify the class of shares being redeemed. If the
investor fails to specify the class of shares to be redeemed or if the
investor owns fewer shares of the class than specified to be redeemed, the
redemption request may be delayed until the Transfer Agent receives further
instructions from the investor, the investor's Bear Stearns account executive
or the investor's Authorized Dealer. The Fund imposes no charges (other than
any applicable CDSC) when shares are redeemed directly through Bear Stearns.
The Portfolio ordinarily will make payment for all shares redeemed within
three days after receipt by the Transfer Agent of a redemption request in
proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased Portfolio shares by check
and subsequently submits a redemption request by mail, the redemption proceeds
will not be transmitted until the check used for investment has cleared, which
may take up to 15 days. The Fund will reject requests to redeem shares by
telephone or wire for a period of 15 days after receipt by the Transfer Agent
of the purchase check against which such redemption is requested. This
procedure does not apply to shares purchased by wire payment.
The Fund reserves the right to redeem investor accounts at its option upon not
less than 60 days written notice if the account's net asset value is $750 or
less, for reasons other than market conditions, and remains so during the
notice period. Shareholders who have redeemed Class A shares may
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reinstate their Portfolio account without a sales charge up to the dollar
amount redeemed by purchasing Class A shares of the same Portfolio or of any
other Bear Stearns Fund within 60 days of the redemption. Shareholders should
obtain and read the applicable prospectuses of such other funds and consider
their objectives, policies and applicable fees before investing in any of such
funds. To take advantage of this reinstatement privilege, shareholders must
notify their Bear Stearns account executive, Authorized Dealer or the Transfer
Agent at the time the privilege is exercised.
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class A
shares within one year of the date of purchase by any investor that purchased
Class A shares as part of an investment of at least $1,000,000. A CDSC of 1%
is also imposed on any redemption of Class A shares within one year of the
date of purchase by any investor that purchased the shares with the proceeds
from the redemption of shares of an investment company sold with a sales
charge or commission and not distributed by Bear Stearns. No CDSC will be
imposed to the extent that the net asset value of the Class A shares redeemed
does not exceed (i) the current net asset value of Class A shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii)
increases in the net asset value of an investor's Class A shares above the
dollar amount of all such investor's payments for the purchase of Class A
shares held by the investor at the time of redemption. See the Statement of
Additional Information for more information.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
A CDSC of up to 5% payable to Bear Stearns is imposed on any redemption of
Class B shares within six years of the date of purchase. No CDSC will be
imposed to the extent that the net asset value of the Class B shares redeemed
does not exceed (i) the current net asset value of Class B shares acquired
through reinvestment of dividends or capital gain distributions, plus (ii)
increases in the net asset value of an investor's Class B shares above the
dollar amount of all such investor's payments for the purchase of Class B
shares held by the investor at the time of redemption.
If the aggregate value of Class B shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value of Class B shares above
the total amount of payments for the purchase of Class B shares made during
the preceding year; then of amounts representing shares purchased more than
one year prior to the redemption; and finally, of amounts representing the
cost of shares purchased within one year prior to the redemption.
For example, assume an investor purchased 100 shares of the Portfolio at $10
per share for a cost of $1,000. Subsequently, the shareholder acquired 5
additional shares through dividend reinvestment. During the first year after
the purchase the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 5% for a total CDSC of $12.00.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C
shares within one year of the date of purchase. No CDSC will be imposed to the
extent that the net asset value of the Class C shares redeemed does not exceed
(i) the current net asset value of Class C shares acquired through
reinvestment of dividends or capital gain distributions, plus (ii) increases
in the net asset value of an investor's Class C shares above the dollar amount
of all such investor's payments for the purchase of Class C shares held by the
investor at the time of redemption.
If the aggregate value of Class C shares redeemed has declined below their
original cost as a result of the Portfolio's performance, the applicable CDSC
may be applied to the then-current net asset value rather than the purchase
price.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of
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amounts representing shares acquired pursuant to the reinvestment of dividends
and distributions; then of amounts representing the increase in net asset
value of Class C shares above the total amount of payments for the purchase of
Class C shares made during the preceding year; then of amounts representing
shares purchased more than one year prior to the redemption; and, finally, of
amounts representing the cost of shares purchased within one year prior to the
redemption.
For example, assume an investor purchased 100 shares of the Portfolio at $10
per share for a cost of $1,000. Subsequently, the shareholder acquired 5
additional shares through dividend reinvestment. During the first year after
the purchase the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the
reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be charged at a rate of 1% for a total CDSC of $2.40.
WAIVER OF CDSC--CLASS A, B AND C SHARES
The CDSC applicable to Class A, B and C shares will be waived in connection
with (a) redemptions made within one year after the death or disability, as
defined in section 72(m)(7) of the Code, of the shareholder, (b) redemptions
by employees participating in eligible benefit plans, (c) redemptions as a
result of a combination of any investment company with the Portfolio by
merger, acquisition of assets or otherwise, (d) a distribution following
retirement under a tax-deferred retirement plan or upon attaining age 70 1/2
in the case of an IRA or Keogh plan or custodial account pursuant to section
403(b) of the Code, and (e) to the extent that shares redeemed have been
withdrawn from the Automatic Withdrawal Plan, up to a maximum amount of 12%
per year from a shareholder account based on the value of the account at the
time the automatic withdrawal is established. If the Fund's Trustees determine
to discontinue the waiver of the CDSC, the disclosure in the Portfolio's
prospectus will be revised appropriately. Any Portfolio shares subject to a
CDSC which were purchased prior to the termination of such waiver will have
the CDSC waived as provided in the Portfolio's prospectus at the time of the
purchase of such shares.
To qualify for a waiver of the CDSC, at the time of redemption an investor
must notify the Transfer Agent or the investor's Bear Stearns account
executive or the investor's Authorized Dealer must notify Bear Stearns. Any
such qualification is subject to confirmation of the investor's entitlement.
PROCEDURES
REDEMPTION THROUGH BEAR STEARNS OR AUTHORIZED DEALERS
Clients with a brokerage account may submit redemption requests to their
account executives or Authorized Dealers in person or by telephone, mail or
wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a
redemption request by repurchasing Fund shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by Bear
Stearns or the Authorized Dealer. Under normal circumstances, within three
days, redemption proceeds will be paid by check or credited to the
shareholder's brokerage account at the election of the shareholder. Bear
Stearns account executives or Authorized Dealers are responsible for promptly
forwarding redemption requests to the Transfer Agent.
If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of Bear Stearns or the Authorized Dealer and reasonably
believed by the Transfer Agent to be genuine. The Fund will require the
Transfer Agent to employ reasonable procedures, such as requiring a form of
personal identification, to confirm that instructions are genuine and, if it
does not follow such procedures, the Transfer Agent or the Fund may be liable
for any losses due to unauthorized or fraudulent instructions. Neither the
Fund nor the Transfer Agent will be liable for following telephone
instructions reasonably believed to be genuine.
REDEMPTION THROUGH THE TRANSFER AGENT
Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Fund shares through the Transfer Agent. Mail
redemption requests should be sent to the Transfer Agent at: PFPC Inc.,
Attention: The Bear Stearns Funds--The Insiders Select Fund, P.O. Box 8960,
Wilmington, Delaware 19899-8960.
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ADDITIONAL INFORMATION ABOUT REDEMPTIONS
A shareholder may have redemption proceeds of $500 or more wired to the
shareholder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's Bear Stearns account executive, to any
Authorized Dealer, or to the Transfer Agent if the shares are not held in a
brokerage account.
If share certificates have been issued, written redemption instructions,
indicating the portfolio from which shares are to be redeemed, and duly
endorsed share certificates, must be received by the Transfer Agent in proper
form and signed exactly as the shares are registered. If the proceeds of the
redemption would exceed $25,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the shareholder is a corporation,
partnership, trust or fiduciary, signature(s) must be guaranteed by any
eligible guarantor institution. A signature guarantee is designed to protect
the shareholders and the Portfolio against fraudulent transactions by
unauthorized persons. A signature guarantee may be obtained from a domestic
bank or trust company, broker, dealer, clearing agency or savings association
who are participants in a medallion program recognized by the Securities
Transfer Association. The three recognized medallion programs are Securities
Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program
(SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP).
Signature Guarantees which are not a part of these programs will not be
accepted. Please note that a notary public stamp or seal is not acceptable.
The Fund reserves the right to amend or discontinue its signature guarantee
policy at any time and, with regard to a particular redemption transaction, to
require a signature guarantee at its discretion. Any questions with respect to
signature-guarantees should be directed to the Transfer Agent by calling 1-
800-447-1139.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting Bear Stearns or Authorized Dealers by
telephone to request a redemption of Portfolio shares. In such cases,
investors should consider using the other redemption procedures described
herein. Use of these other redemption procedures may result in the redemption
request being processed at a later time than it would have been if telephone
redemption had been used. During the delay, the Portfolio's net asset value
may fluctuate.
AUTOMATIC WITHDRAWAL
Automatic Withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $25) on either a monthly or quarterly basis if the
investor has a $5,000 minimum account. An application for Automatic Withdrawal
can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal
may be ended at any time by the investor, the Fund or the Transfer Agent.
Shares for which certificates have been issued may not be redeemed through
Automatic Withdrawal. Purchases of additional shares concurrent with
withdrawals generally are undesirable.
Dividends, Distributions and Taxes
Dividends will be automatically reinvested in additional Portfolio shares at
net asset value, unless payment in cash is requested or dividends are
redirected into another fund pursuant to the Redirected Distribution Option.
The Portfolio ordinarily pays dividends from its net investment income and
distributes net realized securities gains, if any, once a year, but it may
make distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the 1940 Act. The Portfolio will not make distributions from net
realized securities gains unless capital loss carryovers, if any, have been
utilized or have expired. Dividends are automatically reinvested in additional
Portfolio shares at net asset value, unless payment in cash is requested or
dividends are redirected into another fund pursuant to the Redirected
Distribution Option. All expenses are accrued daily and deducted before
declaration of dividends to investors. Dividends paid by each class of each
Portfolio will be calculated at the same time and in the same manner and will
be of the same amount, except that the expenses attributable solely to a
particular class will be borne exclusively by such class. Class B and C shares
will receive lower per share dividends than Class A shares because of the
higher expenses borne by Class B and C shares. See "Fee Table."
Dividends derived from net investment income, together with distributions from
net realized short-term securities gains and all or a portion of any gains
realized from the sale or disposition of certain
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market discount bonds, paid by the Portfolio will be taxable to U.S.
shareholders as ordinary income, whether received in cash or reinvested in
additional shares of the Portfolio or redirected into another portfolio or
fund. Distributions from net realized long-term securities gains of the
Portfolio will be taxable to U.S. shareholders as long-term capital gains for
federal income tax purposes, regardless of how long shareholders have held
their Portfolio shares and whether such distributions are received in cash or
reinvested in, or redirected into other, shares. The Code provides that the
net capital gain of an individual generally will not be subject to federal
income tax at a rate in excess of 28% and certain capital gains of individuals
may be subject to a lower tax rate. Dividends and distributions may be subject
to state and local taxes.
The Portfolio may enter into short sales "against the box." See "Description
of the Portfolio--Investment Techniques." Any gains realized by the Portfolio
on such sales will be recognized at the time the Portfolio enters into the
short sale.
Dividends, together with distributions from net realized short-term securities
gains and all or a portion of any gains realized from the sale or other
disposition of market discount bonds, paid by the Portfolio to a foreign
investor generally are subject to U.S. nonresident withholding taxes at the
rate of 30%, unless the foreign investor claims the benefit of a lower rate
specified in a tax treaty. Distributions from net realized long-term
securities gains paid by the Portfolio to a foreign investor as well as the
proceeds of any redemptions from a foreign investor's account, regardless of
the extent to which gain or loss may be realized, generally will not be
subject to U.S. nonresident withholding tax. However, such distributions may
be subject to backup withholding, as described below, unless the foreign
investor certifies his non-U.S. residency status.
Notice as to the tax status of investors' dividends and distributions will be
mailed to them annually. Investors also will receive periodic summaries of
their accounts which will include information as to dividends and
distributions from securities gains, if any, paid during the year.
The Code provides for the "carryover" of some or all of the sales load imposed
on the Portfolio's Class A shares if an investor exchanges such shares for
shares of another fund or portfolio advised or sponsored by BSAM or its
affiliates within 91 days of purchase and such other fund reduces or
eliminates its otherwise applicable sales load for the purpose of the
exchange. In this case, the amount of the sales load charged the investor for
such shares, up to the amount of the reduction of the sales load charged on
the exchange, is not included in the basis of such shares for purposes of
computing gain or loss on the exchange, and instead is added to the basis of
the fund shares received on the exchange.
Generally, the Fund must withhold ("backup withholding") and remit to the U.S.
Treasury 31% of dividends, distributions from net realized securities gains
and the proceeds of any redemption, regardless of the extent to which gain or
loss may be realized, paid to a shareholder if such shareholder fails to
certify that the TIN furnished in connection with opening an account is
correct and that such shareholder has not received notice from the IRS of
being subject to backup withholding as a result of a failure to properly
report taxable dividend or interest income on a federal income tax return.
Furthermore, the IRS may direct the Fund to institute backup withholding if
the IRS determines that a shareholder's TIN is incorrect or if a shareholder
has failed to properly report taxable dividend and interest income on a
federal income tax return.
A TIN is either the Social Security number or employer identification number
of the record owner of the account. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner
of the account, and may be claimed as a credit on the record owner's federal
income tax return.
While the Portfolio is not expected to have any federal tax liability,
investors should expect to be subject to federal, state or local taxes in
respect of their investment in Portfolio shares.
Management of the Fund believes that the Portfolio has qualified for the
fiscal year ended March 31, 1997 as a "regulated investment company" under the
Code. The Portfolio intends to continue to so qualify if such qualification is
in the best interests of its shareholders. Such qualification relieves the
Portfolio of any liability for federal income tax to the extent its earnings
are distributed in accordance with applicable provisions of the Code. The
Portfolio may be subject to a non-deductible 4% excise tax, measured with
respect to certain undistributed amounts of taxable investment income and
capital gains.
Each investor should consult its tax adviser regarding specific questions as
to federal, state or local taxes applicable to an investment in the Portfolio.
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Performance Information
For purposes of advertising, performance for each class may be calculated on
the basis of average annual total return and/or total return. These total
return figures reflect changes in the price of the shares and assume that any
income dividends and/or capital gains distributions made by the Portfolio
during the measuring period were reinvested in shares of the same class. These
figures also take into account any applicable distribution and shareholder
servicing fees. As a result, at any given time, the performance of Class B and
Class C shares should be expected to be lower than that of Class A shares.
Performance for each class will be calculated separately.
Average annual total return is calculated pursuant to a standardized formula
which assumes that an investment in the Portfolio was purchased with an
initial payment of $1,000 and that the investment was redeemed at the end of a
stated period of time, after giving effect to the reinvestment of dividends
and distributions during the period. The return is expressed as a percentage
rate which, if applied on a compounded annual basis, would result in the
redeemable value of the investment at the end of the period. Advertisements of
the Portfolio's performance will include the Portfolio's average annual total
return for one, five and ten year periods, or for shorter periods depending
upon the length of time during which the Portfolio has operated. Computations
of average annual total return for periods of less than one year represent an
annualization of the Portfolio's actual total return for the applicable
period.
Total return is computed on a per share basis and assumes the reinvestment of
dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value (or maximum
public offering price in the case of Class A shares) per share at the
beginning of the period. Class B total return will reflect the deduction of
the CDSC. Advertisements may include the percentage rate of total return or
may include the value of a hypothetical investment at the end of the period
which assumes the application of the percentage rate of total return. Total
return for the Portfolio also may be calculated by using the net asset value
per share at the beginning of the period instead of the maximum offering price
per share at the beginning of the period for Class A shares or without giving
effect to any applicable CDSC at the end of the period for Class B or C
shares. Calculations based on the net asset value per share do not reflect the
deduction of the sales load on the Portfolio's Class A shares, which, if
reflected, would reduce the performance quoted.
Performance will vary from time to time and past results are not necessarily
representative of future results. Investors should remember that performance
is a function of portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses. Performance
information, such as that described above, may not provide a basis for
comparison with other investments or other investment companies using a
different method of calculating performance.
Comparative performance information may be used from time to time in
advertising or marketing the Portfolio's shares, including data from Lipper
Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index,
Wilshire 4500 Stock Index, Russell Small Cap Index, the Dow Jones Industrial
Average and other industry publications.
General Information
The Fund was organized as a business trust under the laws of The Commonwealth
of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust
Agreement") dated September 29, 1994. The Fund commenced operations on or
about April 3, 1995 in connection with the offer of shares of certain of its
other portfolios. The Fund is authorized to issue an unlimited number of
shares of beneficial interest, par value $0.001 per share. The Portfolio's
shares are classified into four classes-Class A, B, C and Y. Each share has
one vote and shareholders will vote in the aggregate and not by class, except
as otherwise required by law.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Portfolio. However, the
Trust Agreement disclaims shareholder liability for acts or obligations of the
Portfolio and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Fund or a
Trustee. The Trust
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Agreement provides for indemnification from the Portfolio's property for all
losses and expenses of any shareholder held personally liable for the
obligations of the Portfolio. Thus, the risk of a shareholder incurring
financial loss on account of a shareholder liability is limited to
circumstances in which the Portfolio itself would be unable to meet its
obligations, a possibility which management believes is remote. Upon payment
of any liability incurred by the Portfolio, the shareholder paying such
liability will be entitled to reimbursement from the general assets of the
Portfolio. The Fund's Trustees intend to conduct the operations of the
Portfolio in a way so as to avoid, as far as possible, ultimate liability of
the shareholders for liabilities of the Portfolio. As discussed under
"Management of the Fund" in the Portfolio's Statement of Additional
Information, the Portfolio ordinarily will not hold shareholder meetings;
however, shareholders under certain circumstances may have the right to call a
meeting of shareholders for the purpose of voting to remove Trustees.
To date, the Fund's Board has authorized the creation of 10 portfolios of
shares. All consideration received by the Fund for shares of one of the
portfolios and all assets in which such consideration is invested will belong
to that portfolio (subject only to the rights of creditors of the Fund) and
will be subject to the liabilities related thereto. The assets attributable
to, and the expenses of, one portfolio (and as to classes within a portfolio)
are treated separately from those of the other portfolios (and classes). The
Fund has the ability to create, from time to time, new portfolios of shares
without shareholder approval.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the holders of the outstanding voting securities of an investment
company, such as the Fund, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that
the interests of such portfolio in the matter are identical or that the matter
does not affect any interest of such portfolio. However, Rule 18f-2 exempts
the selection of independent accountants and the election of Trustees from the
separate voting requirements of Rule 18f-2.
The Transfer Agent maintains a record of share ownership and will send
confirmations and statements of account.
Shareholder inquiries may be made by writing to the Fund at PFPC Inc.,
Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware
19899-8960, by calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766-
4111.
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Appendix
INVESTMENT TECHNIQUES
In connection with its investment objective and policies, the Portfolio may
employ, among others, the following investment techniques which may involve
certain risks. Options transactions involve "derivative securities."
OPTIONS TRANSACTIONS
The Portfolio is permitted to invest up to 5% of its total assets, represented
by the premium paid, in the purchase of call and put options in respect of
specific securities (or groups or "baskets" of specific securities) in which
the Portfolio may invest. The Portfolio may write and sell covered call option
contracts on securities owned by the Portfolio not exceeding 20% of the value
of its net assets at the time such option contracts are written. The Portfolio
also may purchase call options to enter into closing purchase transactions.
The Portfolio also may write covered put option contracts to the extent of 20%
of the value of its net assets at the time such option contracts are written.
A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, the underlying security at the exercise price at
any time during the option period. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy,
the underlying security at the exercise price at any time during the option
period. A covered put option sold by the Portfolio exposes the Portfolio
during the term of the option to a decline in price of the underlying security
or securities. A put option sold by the Portfolio is covered when, among other
things, cash or liquid securities are placed in a segregated account with the
Fund's custodian to fulfill the obligation undertaken.
The Portfolio may purchase and sell call and put options on stock indexes
listed on U.S. securities exchanges or traded in the over-the-counter market.
A stock index fluctuates with changes in the market values of the stocks
included in the index. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular
stock, whether the Portfolio will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock.
Successful use by the Portfolio of options will be subject to the Adviser's
ability to predict correctly movements in the direction of individual stocks,
the stock market generally, foreign currencies or interest rates. To the
extent the Adviser's predictions are incorrect, the Portfolio may incur losses
which could adversely affect the value of a shareholder's investment.
LENDING PORTFOLIO SECURITIES
From time to time, the Portfolio may lend securities from its portfolio of
investments to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. Such loans may not exceed
33 1/3% of the value of the Portfolio's total assets. In connection with such
loans, the Portfolio will receive collateral consisting of cash, U.S.
Government securities or irrevocable letters of credit which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The Portfolio can increase its income
through the investment of such collateral. The Portfolio continues to be
entitled to payments in amounts equal to the interest, dividends and other
distributions payable on the loaned security and receives interest on the
amount of the loan. Such loans will be terminable at any time upon specified
notice. The Portfolio might experience risk of loss if the institution with
which it has engaged in a portfolio loan transaction breaches its agreement
with the Portfolio.
BORROWING MONEY
As a fundamental policy, the Portfolio is permitted to borrow to the extent
permitted under the 1940 Act. The 1940 Act permits an investment company to
borrow in an amount up to 33 1/3% of the value of such company's total assets.
However, the Portfolio currently intends to borrow money only for temporary or
emergency (not leveraging) purposes, in an amount up to 15% of the value of
its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time
the borrowing is made. While borrowings exceed 5% of the Portfolio's total
assets, the Portfolio will not make any additional investments.
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CERTAIN PORTFOLIO SECURITIES
CONVERTIBLE SECURITIES
Convertible securities are fixed-income securities that may be converted at
either a stated price or stated rate into a specified number of shares of
common stock of the same or a different issuer. Convertible securities have
general characteristics similar to both fixed-income and equity securities.
Although to a lesser extent than with fixed-income securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the
underlying common stock, and, therefore, also will react to variations in the
general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock
declines, convertible securities tend to trade increasingly on a yield basis,
and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments that
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may
default on their obligations. Convertible securities, however, generally offer
lower interest or dividend yields than non-convertible securities of similar
quality because of the potential for capital appreciation. A convertible
security, in addition to providing fixed income, offers the potential for
capital appreciation through the conversion feature, which enables the holder
to benefit from increases in the market price of the underlying common stock.
There can be no assurance of capital appreciation, however, because securities
prices fluctuate.
Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible
securities.
MONEY MARKET INSTRUMENTS
The Portfolio may invest, in the circumstances described under "Description of
the Portfolio--Management Policies," in the following types of money market
instruments, each of which at the time of purchase must have or be deemed to
have under rules of the Securities and Exchange Commission remaining
maturities of 13 months or less.
U.S. GOVERNMENT SECURITIES
The Portfolio may purchase securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, which include U.S. Treasury
securities that differ in their interest rates, maturities and times of
issuance. Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds
generally have initial maturities of greater than ten years. Some obligations
issued or guaranteed by U.S. Government agencies and sponsored enterprises,
for example, Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Federal Home Loan Banks, by the right of the
issuer to borrow from the U.S. Treasury; others, such as those issued by the
Federal National Mortgage Association, by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or sponsored
enterprise; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. These
securities bear fixed, floating or variable rates of interest. Principal and
interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law.
BANK OBLIGATIONS
The Portfolio may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations
of domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities
A-2
<PAGE>
issued by foreign branches of domestic banks, foreign subsidiaries of domestic
banks, and domestic and foreign branches of foreign banks, the Portfolio may
be subject to additional investment risks that are different in some respects
from those incurred by a fund which invests only in debt obligations of U.S.
domestic issuers. Such risks include possible future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which
might adversely affect the payment of principal and interest on these
securities and the possible seizure or nationalization of foreign deposits.
Certificates of deposit are negotiable certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by the Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. The Portfolio will not invest more than
15% of the value of its net assets in time deposits maturing in more than
seven days and in other securities that are illiquid.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument, subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. Certain costs may be
incurred by the Portfolio in connection with the sale of the securities if the
seller does not repurchase them in accordance with the repurchase agreement.
In addition, if bankruptcy proceedings are commenced with respect to the
seller of the securities, realization on the securities by the Portfolio may
be delayed or limited.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
Commercial paper consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by the
Portfolio will consist only of direct obligations which, at the time of their
purchase, are (a) rated not lower than Prime-1 by Moody's Investors Service
Inc. ("Moody's"), A-1 by Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. ("S&P"), F-1 by Fitch Investors Service, L.P.
("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), (b) issued by
companies having an outstanding unsecured debt issue currently rated not lower
than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated,
determined by the Adviser to be of comparable quality to those rated
obligations which may be purchased by the Portfolio. The Portfolio may
purchase floating and variable rate demand notes and bonds, which are
obligations ordinarily having stated maturities in excess of one year, but
which permit the holder to demand payment of principal at any time or at
specified intervals.
WARRANTS
The Portfolio may invest up to 5% of its net assets in warrants, except that
this limitation does not apply to warrants acquired in units or attached to
securities. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time.
INVESTMENT COMPANY SECURITIES
The Portfolio may invest in securities issued by other investment companies.
Under the 1940 Act, the Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Portfolio's total assets with
respect to any one investment company and (iii) 10% of the Portfolio's total
assets in the aggregate. Investments in the securities of other investment
companies will involve duplication of advisory fees and certain other
expenses.
A-3
<PAGE>
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of the value of its net assets in
securities as to which a liquid trading market does not exist, provided such
investments are consistent with the Portfolio's investment objective. Such
securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, repurchase agreements providing for settlement in more than seven days
after notice, and options traded in the over-the-counter market and securities
used to cover such options. As to these securities, the Portfolio is subject
to a risk that should the Portfolio desire to sell them when a ready buyer is
not available at a price the Portfolio deems representative of their value,
the value of the Portfolio's net assets could be adversely affected.
A-4
<PAGE>
The
Bear Stearns
Funds
575 Lexington Avenue
New York, NY 10022
1-800-766-4111
Distributor
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Investment Adviser
Bear Stearns Asset Management Inc.
575 Lexington Avenue
New York, NY 10022
Administrator
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
Transfer & Dividend
Disbursement Agent
PFPC Inc.
Bellevue Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Counsel
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE FOCUS LIST PORTFOLIO'S
PROSPECTUS AND IN THE FOCUS LIST PORTFOLIO'S SALES LITERATURE IN CONNECTION
WITH THE OFFER OF THE FOCUS LIST PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND. THE FOCUS LIST PORTFOLIO'S PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
BSF-P-005-05
<PAGE>
Rule 497(c)
Registration No. 33-84842
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
LARGE CAP VALUE PORTFOLIO
SMALL CAP VALUE PORTFOLIO
TOTAL RETURN BOND PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
DECEMBER 24, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
prospectus (the "Prospectus") dated December 24, 1997 of The Bear Stearns Funds
(the "Fund"), as each may be revised from time to time, offering shares of three
diversified portfolios (each, a "Portfolio"): Large Cap Value Portfolio and
Small Cap Value Portfolio (together, the "Equity Portfolios") and Total Return
Bond Portfolio (the "Bond Portfolio"). To obtain a free copy of such Prospectus,
please write to the Fund at PFPC Inc. ("PFPC"), Attention: [Name of Portfolio],
P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1-800-447-1139 or call
Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766-4111.
Bear Stearns Asset Management Inc. ("BSAM" or the "Adviser"), a
wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as each
Portfolio's investment adviser.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., is the administrator of the Portfolios.
Bear Stearns, an affiliate of BSAM, serves as distributor of each
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies............................ B-2
Management of the Fund.................................................. B-10
Management Arrangements................................................. B-13
Purchase and Redemption of Shares....................................... B-17
Determination of Net Asset Value........................................ B-19
Dividends, Distributions and Taxes...................................... B-21
Portfolio Transactions.................................................. B-28
Performance Information................................................. B-30
Code of Ethics.......................................................... B-32
Information About the Fund.............................................. B-32
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors...................................... B-35
Financial Statements.................................................... B-35
Appendix................................................................ B-36
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Description of the
Portfolios."
Portfolio Securities
Bank Obligations. (All Portfolios) Domestic commercial banks organized
under Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by each Portfolio are insured by the FDIC (although such
insurance may not be of material benefit to a Portfolio, depending on the
principal amount of the CDs of each bank held by such Portfolio) and are subject
to Federal examination and to a substantial body of Federal law and regulation.
As a result of Federal or state laws and regulations, domestic branches of
domestic banks whose CDs may be purchased by each Portfolio generally are
required, among other things, to maintain specified levels of reserves, are
limited in the amounts which they can loan to a single borrower and are subject
to other regulation designed to promote financial soundness. However, not all of
such laws and regulations apply to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries
of domestic banks and domestic and foreign branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, Federal branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State Branches generally
must be insured by the FDIC if such branches take deposits of less than
$100,000.
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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, BSAM carefully evaluates such investments on a case-by-case
basis.
Mortgage-Related Securities
U.S. Government Agency Securities. (Bond Portfolio) Mortgage-related
securities issued by the Government National Mortgage Association ("GNMA")
include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes")
which are guaranteed as to the timely payment of principal and interest by GNMA
and such guarantee is backed by the full faith and credit of the United States.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee.
U.S. Government Related Securities. (Bond Portfolio) Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States. The FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of
the United States created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When the FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
Repurchase Agreements. (All Portfolios) Each Portfolio's custodian or
sub-custodian will have custody of, and will hold in a segregated account,
securities acquired by the Portfolio under a repurchase agreement. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the Portfolio. In an attempt to reduce the risk of incurring a
loss on a repurchase agreement, each Portfolio will enter into repurchase
agreements only with domestic banks with total assets in excess of one billion
dollars, or primary government securities dealers reporting to the Federal
Reserve Bank of New York, with respect to securities of the type in which each
Portfolio may invest, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below the
resale price. BSAM will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase price. Each Portfolio
will consider on an ongoing basis the creditworthiness of the institutions with
which it enters into repurchase agreements.
Municipal Obligations. (Bond Portfolio) Municipal obligations are
classified as general obligation bonds, revenue bonds and notes. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
B-3
<PAGE>
specific revenue source, but not from the general taxing power. Industrial
development bonds, in most cases, are revenue bonds and generally do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities. Certain municipal
obligations are subject to redemption at a date earlier than their stated
maturity pursuant to call options, which may be separated from the related
municipal obligation and purchased and sold separately. The Bond Portfolio will
invest in municipal obligations, the ratings of which correspond with the
ratings of other permissible Bond Portfolio investments.
Commercial Paper and Other Short-Term Corporate Obligations. (All
Portfolios) Variable rate demand notes include variable amount master demand
notes, which are obligations that permit each Portfolio to invest fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
Portfolio, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. As mutually agreed between the parties, a Portfolio may
increase the amount under the notes at any time up to the full amount provided
by the note agreement, or decrease the amount, and the borrower may repay up to
the full amount of the note without penalty. Because these obligations are
direct lending arrangements between the lender and the borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value, plus accrued interest, at any time. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, a Portfolio's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. In connection with floating
and variable rate demand obligations, BSAM will consider, on an ongoing basis,
earning power, cash flow and other liquidity ratios of the borrower, and the
borrower's ability to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies, and an Equity Portfolio may
invest in them only if at the time of an investment the borrower meets the
criteria set forth in the Equity Portfolios' Prospectus for other commercial
paper issuers.
Illiquid Securities. (All Portfolios) When purchasing securities that
have not been registered under the Securities Act of 1933, as amended, and are
not readily marketable, each Portfolio will endeavor to obtain the right to
registration at the expense of the issuer. Generally, there will be a lapse of
time between a Portfolio's decision to sell any such security and the
registration of the security permitting sale. During any such period, the price
of the securities will be subject to market fluctuations. However, if a
substantial market of qualified institutional buyers develops for certain
unregistered securities purchased by a Portfolio pursuant to Rule 144A under the
Securities Act of 1933, as amended, such Portfolio intends to treat them as
liquid securities in accordance with procedures approved by the Fund's Board of
Trustees. Because it is not possible to predict with assurance how the market
for restricted securities pursuant to Rule 144A will develop, the Fund's Board
of Trustees has directed BSAM to monitor carefully each Portfolio's investments
in such securities with particular regard to trading activity, availability of
reliable price information and other relevant information. To the extent that,
for a period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, a Portfolio's investing in such securities may
have the effect of increasing the level of illiquidity in such Portfolio during
such period.
Ratings of Debt. (Bond Portfolio) Subsequent to its purchase by the
Bond Portfolio, a debt issue may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Bond Portfolio. Neither event
will require the sale of such securities by the Bond Portfolio,
B-4
<PAGE>
but BSAM will consider such event in determining whether the Bond Portfolio
should continue to hold the securities. To the extent that the ratings given
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), Fitch Investors
Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff") may change
as a result of changes in such organizations or their rating systems, the Bond
Portfolio will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Portfolio's Prospectus and this Statement of Additional Information.
Management Policies
Each Portfolio may engage in the following practices in furtherance of
its objective.
Options Transactions. (All Portfolios) Each Portfolio may engage in
options transactions, such as purchasing or writing covered call or put options.
The principal reason for writing covered call options, which are call options
with respect to which a Portfolio owns the underlying security or securities, is
to realize, through the receipt of premiums, a greater return than would be
realized on a Portfolio's securities alone. In return for a premium, the writer
of a covered call option forfeits the right to any appreciation in the value of
the underlying security above the strike price for the life of the option (or
until a closing purchase transaction can be effected). Nevertheless, the call
writer retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of the
premiums that a Portfolio may receive may be adversely affected as new or
existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written by the Portfolios ordinarily will have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the time the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. Each Portfolio may write (a) in-the-money call
options when BSAM 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 BSAM 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 BSAM expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the- money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as a Portfolio's obligation as the writer of an option
continues, such Portfolio may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the Portfolio to
deliver, in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or a Portfolio effects a closing purchase
transaction. A Portfolio can no longer effect a closing purchase transaction
with respect to an option once it has been assigned an exercise notice.
While it may choose to do otherwise, each Portfolio generally will
purchase or write only those options for which BSAM believes there is an
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<PAGE>
active secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer a Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
Stock Index Options. (Equity Portfolios) Each Equity Portfolio may
purchase and write put and call options on stock indexes listed on U.S. or
foreign securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are generally monthly, while
those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make delivery
of a stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option. The amount
of cash received will be equal to such difference between the closing price of
the index and the exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Futures Contracts and Options on Futures Contracts. (All Portfolios)
Each Portfolio may trade futures contracts and options on futures contracts in
U.S. domestic markets, such as the Chicago Board of Trade and the International
Monetary Market of the Chicago Mercantile Exchange, or, to the extent permitted
under applicable law, on exchanges located outside the United States, such as
the London International Financial Futures Exchange and the Sydney Futures
Exchange Limited. Foreign markets may offer advantages such as trading in
commodities that are not currently traded in the United States or arbitrage
possibilities not available in the United States.
Initially, when purchasing or selling futures contracts, a Portfolio
will be required to deposit with the Fund's custodian in the broker's name an
amount of cash or cash equivalents up to approximately 10% of the contract
amount. This amount is subject to change by the exchange or board of trade on
which the contract is traded and members of such exchange or board of trade may
impose their own higher requirements. This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio upon termination of the futures position,
assuming all contractual obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker will
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<PAGE>
be made daily as the price of the index or securities underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." At any time prior
to the expiration of a futures contract, the Portfolio may elect to close the
position by taking an opposite position, at the then prevailing price, which
will operate to terminate the Portfolio's existing position in the contract.
Although each Portfolio intends to purchase or sell futures contracts
only if there is an active market for such contracts, no assurance can be given
that a liquid market will exist for any particular contract at any particular
time. Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting a Portfolio
to substantial losses. If it is not possible, or the Portfolio determines not,
to close a futures position in anticipation of adverse price movements, the
Portfolio will be required to make daily cash payments of variation margin. In
such circumstances, an increase in the value of the portion of the Portfolio
being hedged, if any, may offset partially or completely losses on the futures
contract. However, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.
In addition, to the extent a Portfolio is engaging in a futures
transaction as a hedging device, due to the risk of an imperfect correlation
between securities owned by the Portfolio that are the subject of a hedging
transaction and the futures contract used as a hedging device, it is possible
that the hedge will not be fully effective in that, for example, losses on the
portfolio securities may be in excess of gains on the futures contract or losses
on the futures contract may be in excess of gains on the portfolio securities
that were the subject of the hedge. In futures contracts based on indexes, the
risk of imperfect correlation increases as the composition of each Equity
Portfolio's investments varies from the composition of the index. In an effort
to compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of futures contracts, a
Portfolio may buy or sell futures contracts in a greater or lesser dollar amount
than the dollar amount of the securities being hedged if the historical
volatility of the futures contract has been less or greater than that of the
securities. Such "over hedging" or "under hedging" may adversely affect a
Portfolio's net investment results if market movements are not as anticipated
when the hedge is established.
Upon exercise of an option on a futures contract, the writer of the
option will deliver to the holder of the option the futures position and the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. The potential loss related to the purchase of options
on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of each Portfolio.
Foreign Currency Transactions. (Equity Portfolios) If an Equity
Portfolio enters into a currency transaction, it will deposit, if so required by
applicable regulations, with its custodian cash, U.S. Government securities or
other high grade debt obligations, in a segregated account of the Equity
B-7
<PAGE>
Portfolio in an amount at least equal to the value of the Equity Portfolio's
total assets committed to the consummation of the forward contract. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Equity Portfolio's commitment with respect to the
contract.
At or before the maturity of a forward contract, the Equity Portfolio
either may sell a security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Equity Portfolio will obtain,
on the same maturity date, the same amount of the currency which it is obligated
to deliver. If the Equity Portfolio retains the portfolio security and engages
in an offsetting transaction, such Equity Portfolio, at the time of execution of
the offsetting transaction, will incur a gain or loss to the extent movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Equity Portfolio's entering into a forward contract for the
sale of a currency and the date it enters into an offsetting contract for the
purchase of the currency, the Equity Portfolio will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Equity
Portfolio will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The cost to each Equity Portfolio of engaging in currency transactions
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because transactions in
currency exchange usually are conducted on a principal basis, no fees or
commissions are involved. The use of forward currency exchange contracts does
not eliminate fluctuations in the underlying prices of the securities, but it
does establish a rate of exchange that can be achieved in the future. If a
devaluation generally is anticipated, an Equity Portfolio may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. The requirements for qualification as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"), may
cause the Fund to restrict the degree to which each Equity Portfolio engages in
currency transactions. See "Dividends, Distributions and Taxes."
Lending Portfolio Securities. (All Portfolios) To a limited extent,
each Portfolio may lend its portfolio securities to brokers, dealers and other
financial institutions, provided it receives cash collateral which at all times
is maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, a Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, a Portfolio considers collateral consisting of U.S. Government
securities or irrevocable letters of credit issued by banks whose securities
meet the standards for investment by such Portfolio to be the equivalent of
cash. From time to time, a Portfolio may return to the borrower or a third party
which is unaffiliated with such Portfolio, and which is acting as a "placing
broker," a part of the interest earned from the investment of collateral
received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
each Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) each Portfolio must be
able to terminate the loan at any time; (4) each Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) each Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may pass to
the borrower, the Fund's Board of Trustees must
B-8
<PAGE>
terminate the loan and regain the right to vote the securities if a material
event adversely affecting the investment occurs. These conditions may be subject
to future modification.
Investment Restrictions. Each Portfolio has adopted investment
restrictions numbered 1 through 10 as fundamental policies. These restrictions
cannot be changed, as to a Portfolio, without approval by the holders of a
majority (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of such Portfolio's outstanding voting shares. Investment
restrictions numbered 11 through 16 are not fundamental policies and may be
changed by vote of a majority of the Trustees at any time. No Portfolio may:
1. Invest more than 25% of the value of its total assets in the
securities of issuers in any single industry, provided that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or sponsored enterprises.
2. Invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of the Portfolio's total assets may
be invested, and securities issued or guaranteed by the U.S. Government, or its
agencies or sponsored enterprises may be purchased, without regard to any such
limitation.
3. Hold more than 10% of the outstanding voting securities of any
single issuer. This Investment Restriction applies only with respect to 75% of
the Portfolio's total assets.
4. Invest in commodities, except that each Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
5. Purchase, hold or deal in real estate, real estate limited
partnership interests, or oil, gas or other mineral leases or exploration or
development programs, but each Portfolio may purchase and sell securities that
are secured by real estate or issued by companies that invest or deal in real
estate or real estate investment trusts.
6. Borrow money, except to the extent permitted under the 1940 Act. The
1940 Act permits an investment company to borrow in an amount up to 33- 1/3% of
the value of such company's total assets. For purposes of this Investment
Restriction, the entry into options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or indexes
shall not constitute borrowing.
7. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Portfolio
may lend its portfolio securities in an amount not to exceed 33-1/3% of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the Securities and Exchange Commission
and the Fund's Board of Trustees.
8. Act as an underwriter of securities of other issuers, except to the
extent each Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
9. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act).
10. Purchase securities on margin, but each Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
B-9
<PAGE>
Non-Fundamental Restrictions.
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 Portfolios' Prospectus and Statement of Additional
Information.
13. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 15% of the value of its net assets would be so
invested.
14. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
The following investment restrictions numbered 15 and 16, which are not
fundamental policies, apply only to the Equity Portfolios. Neither of these
Portfolios may:
15. Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessor) if such purchase
would cause the value of the Equity Portfolio's investments in all such
companies to exceed 5% of the value of its total assets.
16. Invest in the securities of a company for the purpose of exercising
management or control, but each Equity Portfolio will vote the securities it
owns in its portfolio as a shareholder in accordance with its views.
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
MANAGEMENT OF THE FUND
Trustees and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Trustee who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Peter M. Bren (63) Trustee President of The Bren Co.,
126 East 56th Street since 1969; President of
New York, NY 10021 Koll, Bren Realty Advisors
and Senior Partner for
Lincoln Properties prior
thereto.
Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United States
Belleville, IL 62223 Senator of Illinois from
1981 to 1993.
John R. McKernan, Jr. (49) Trustee Chairman and Chief Executive
B-10
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
P.O. Box 15213 Portland, Officer of McKernan
ME 02110 Trustee Enterprises since January
1995; Governor of Maine
prior thereto.
M.B. Oglesby, Jr. (55) Trustee President and Chief
700 13th Street, N.W. Executive Officer,
Suite 400 Association of American
Washington, D.C. 20005 Railroads since June 1997;
Vice Chairman of Cassidy &
Associates from February
1996 to June 1997; Senior
Vice President of RJR
Nabisco, Inc. from April
1989 to February 1996;
Former Deputy Chief of
Staff-White House from 1988
to January 1989.
Michael Minikes (52) Trustee Senior Managing Director of
245 Park Avenue Chairman Bear Stearns since September
New York, NY 10167 1985; Chairman of BSFM since
December 1997; Treasurer of
Bear Stearns since January
1986; Treasurer of The Bear
Stearns Companies Inc. since
September 1985; Director of
The Bear Stearns Companies
Inc. since October 1989.
Robert S. Reitzes* (53) President President of Mutual
575 Lexington Avenue Funds-Bear Stearns Asset
New York, NY 10022 Management and Senior
Managing Director of Bear
Stearns since March 1994;
Co-Director of Research and
Senior Chemical Analyst of
C.J. Lawrence/Deutsche Bank
Securities Corp. from
January 1991 to March 1994.
William J. Montgoris (50) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer,
New York, NY 10167 Bear Stearns.
Stephen A. Bornstein (54) Vice President Managing Director, Legal
575 Lexington Avenue Department; General Counsel,
New York, NY 10022 Bear Stearns Asset
Management.
Frank J. Maresca (38) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September
New York, NY 10167 1994; Chief Executive
Officer and President of
BSFM since December 1997;
Associate Director of Bear
Stearns from September 1993
to September 1994; Vice
President of Bear Stearns
from March 1992 to September
1993.
Donalda L. Fordyce (38) Vice President Senior Managing Director of
575 Lexington Avenue Bear Stearns since March,
New York, NY 10022 1996; previously Vice
B-11
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
President, Asset Management
Group, Goldman, Sachs from
1986 to 1996.
Ellen T. Arthur (44) Secretary Associate Director of Bear
575 Lexington Avenue Stearns since January 1996;
New York, NY 10022 Secretary of BSAM since
December 1997; Senior
Counsel and Corporate Vice
President of PaineWebber
Incorporated from April 1989
to September 1995.
Vincent L. Pereira (32) Assistant Associate Director of Bear
245 Park Avenue Treasurer Stearns since September
New York, NY 10167 1995; Treasurer and
Secretary of BSFM since
December 1997; Vice
President of Bear Stearns
from May 1993 to September
1995; Assistant Vice
President of Mitchell
Hutchins Asset Management
Inc. from October 1992 to
May 1993.
Christina LaMastro (27) Assistant Legal Assistant of Bear
575 Lexington Avenue Secretary Stearns since May 1997;
New York, NY 10022 Assistant Secretary of BSAM
since December 1997;
Compliance Assistant at
Reich & Tang L.P. from April
1996 through April 1997;
Legal Assistant at Fulbright
& Jaworski L.P. from April
1993 through April 1996;
student at Drexel University
prior thereto.
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:
B-12
<PAGE>
<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 (2)
Alan J. Dixon $7,000 None None $ 6,500 (1)
John R. McKernan, Jr. $7,000 None None $12,000 (2)
M.B. Oglesby, Jr. $7,000 None None $12,000 (2)
Robert S. Reitzes None None None None
Michael Minikes None None None None
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to approximately $7,000 Board members of the
Fund, as a group.
Board members and officers of the Fund, as a group, owned less than 1%
of each Portfolio's shares outstanding on May 31, 1997.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution Plans" 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 sole
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Under the 1940 Act, shareholders of record of not less than
two-thirds of the outstanding shares of the Fund may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. Under the Fund's Agreement and Declaration of Trust, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of the
Fund's outstanding shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Management of the
Portfolios."
General. On December 3, 1997, BSFM, the registered investment adviser of
the Portfolios, changed its name to BSAM. On December 4, 1997, BSFM formed a new
corporate entity under the laws of Delaware to conduct mutual fund
administrative work for The Bear Stearns Funds and other affiliated and
non-affiliated investment companies.
Investment Advisory Agreement. BSAM provides investment advisory
services to each Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 22, 1995, as revised May 4, 1995, with the Fund. As
to each Portfolio, the Agreement is subject to annual approval by (i) the Fund's
Board of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Portfolio, provided that in either event
the continuance also is approved by a majority of the Board of
B-13
<PAGE>
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Fund or BSAM, by vote cast in person at a meeting called for the purpose of
voting on such approval. The Board of Trustees, including a majority of the
Trustees who are not "interested persons" of any party to the Agreement, last
approved the Agreement at a meeting held on January 28, 1997. The Agreement is
terminable, as to each Portfolio, without penalty, on 60 days' notice, by the
Fund's Board of Trustees or by vote of the holders of a majority of the
Portfolio's shares, or, on not less than 90 days' notice, by BSAM. As to the
relevant Portfolio, the Agreement will terminate automatically in the event of
its assignment (as defined in the 1940 Act).
BSAM is a wholly owned subsidiary of The Bear Stearns Companies Inc.
The following persons are directors and/or senior officers of BSAM: Mark A.
Kurland, President, Chairman of the Board and Director; Robert S. Reitzes,
Executive Vice President and Director; Donalda L. Fordyce, Vice President,
Chief Operating Officer and Director; Ellen T. Arthur, Secretary; and Warren
J. Spector and Robert M. Steinberg, Directors.
BSAM provides investment advisory services to each Portfolio in
accordance with its stated policies, subject to the approval of the Fund's Board
of Trustees. BSAM provides each Portfolio with portfolio managers who are
authorized by the Board of Trustees to execute purchases and sales of
securities. The portfolio managers of the Equity Portfolios are Robert S.
Reitzes, Mark A. Kurland, James G. McCluskey, Gail Sprute and Harris Cohen. The
portfolio manager of the Bond Portfolio is Peter E. Mahoney. All purchases and
sales are reported for the Board of Trustees' review at the meeting subsequent
to such transactions.
As compensation for BSAM's advisory services, each Equity Portfolio has
agreed to pay BSAM a monthly fee at the annual rate of 0.75 of 1% of the value
of such Equity Portfolio's average daily net assets. The Bond Portfolio has
agreed to pay BSAM a monthly fee at the annual rate of 0.45 of 1% of the value
of the Bond Portfolio's average daily net assets. For the period from April 3,
1995 (commencement of operations) through March 31, 1996, the investment
advisory fees payable by the Large Cap Value Portfolio, Small Cap Value
Portfolio and the Bond Portfolio amounted to $45,531, $88,955 and $51,869,
respectively. For the fiscal year ended March 31, 1997, the investment advisory
fees payable by the Large Cap Value Portfolio, Small Cap Value Portfolio and the
Bond Portfolio amounted to $151,578, $285,539 and $98,957, respectively. These
amounts were waived pursuant to an undertaking by BSAM, resulting in no fees
being paid by the Large Cap Value Portfolio, Small Cap Value Portfolio and the
Bond Portfolio. In addition, BSAM reimbursed $224,658, $191,607 and $282,573 for
Large Cap Value Portfolio, Small Cap Value Portfolio and the Bond Portfolio,
respectively, in order to maintain the voluntary expense limitation for the
period April 3, 1995 (commencement of operations) through March 31, 1996. BSAM
reimbursed $161,196, $86,666 and $280,261 for Large Cap Value Portfolio, Small
Cap Value Portfolio and the Bond Portfolio, respectively, in order to maintain
the voluntary expense limitation, for the fiscal year ended March 31, 1997.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated February 22, 1995, as
revised April 11, 1995, June 2, 1997 and September 8, 1997, with the Fund. As to
each Portfolio, the Administration Agreement will continue until February 22,
1998 and thereafter will be subject to annual approval by (i) the Fund's Board
of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Portfolio, provided that in either event
its continuance also is approved by a majority of the Fund's Board members who
are not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM,
by vote cast in person at a meeting called for the purpose of voting on such
approval. The Administration Agreement is terminable, as to each Portfolio,
without penalty, on 60 days' notice, by the Fund's Board or by vote of the
holders of a majority of the Portfolio's shares or, upon not less than 90 days'
notice, by BSFM. As to the relevant Portfolio, the
B-14
<PAGE>
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 0.15 of 1% of each Portfolio's
average daily net assets. For the period from April 3, 1995 (commencement of
operations) through March 31, 1996, the administration fees amounted to $9,106,
$17,782 and $17,290, respectively, for the Large Cap Value Portfolio, Small Cap
Value Portfolio and Bond Portfolio. For the fiscal year ended March 31, 1997,
the administration fees accrued amounted to $30,232, $57,108 and $32,986,
respectively, for the Large Cap Value Portfolio, Small Cap Value Portfolio and
Bond Portfolio.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement dated
February 22, 1995, as revised September 8, 1997 with the Fund. The
Administrative Services Agreement is terminable upon 60 days notice by either
the Fund or PFPC. PFPC may assign its rights or delegate its duties under the
Administrative Services Agreement to any wholly-owned direct or indirect
subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that
(i) PFPC gives the Fund 30 days notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the 1940 Act;
and (iii) PFPC and such delegate (or assignee) promptly provide information
requested by the Fund in connection with such delegation.
As compensation for PFPC's administrative services, the Fund has agreed
to pay PFPC a monthly fee at the rate set forth in the Portfolios' Prospectus.
For the period from April 3, 1995 (commencement of operations) through March 31,
1996, the administrative services fees payable by the Large Cap Value Portfolio,
Small Cap Value Portfolio and Bond Portfolio amounted to $62,405, $62,532 and
$63,913, respectively, as a result of a waiver of fees by PFPC. For the fiscal
year ended March 31, 1997, the administrative services fees for the Large Cap
Value Portfolio, Small Cap Value Portfolio and Bond Portfolio amounted to
$99,570, $119,822 and $99,469, respectively, as a result of a waiver of fees by
PFPC.
Distribution Plans. Rule 12b-1 (the "Rule") adopted by the Securities
and Exchange Commission under the 1940 Act provides, among other things, that an
investment company may bear expenses of distributing its shares only pursuant to
a plan adopted in accordance with the Rule. The Fund's Board of Trustees has
adopted a distribution and shareholder servicing plan with respect to Class A
and Class C shares and a distribution plan with respect to Class B shares (the
"Distribution Plans"). The Fund's Board of Trustees believes that there is a
reasonable likelihood that the Distribution Plans will benefit each Portfolio
and the holders of its Class A, Class B and Class C shares.
A quarterly report of the amounts expended under the Distribution Plans,
and the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, each Distribution Plan provides that it
may not be amended to increase materially the costs which holders of a class of
shares may bear pursuant to such Plan without approval of such effected
shareholders and that other material amendments of the Plan must be approved by
the Board of Trustees, and by the Trustees who are neither "interested persons"
(as defined in the 1940 Act) of the Fund nor have any direct or indirect
financial interest in the operation of the Plan or in the related Plan
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. In addition, because Class B shares automatically
convert into Class A shares after eight years, the Fund is required by a
Securities and Exchange Commission rule to obtain the approval of Class B as
well as Class A shareholders for a proposed amendment to each Distribution Plan
that would materially increase the amount to be paid by Class A shareholders
under such Plan. Such approval must be by a "majority" of the Class A and Class
B shares (as defined in the 1940 Act), voting
B-15
<PAGE>
separately by class. Each Distribution Plan and related agreements is subject to
annual approval by such vote cast in person at a meeting called for the purpose
of voting on such Plan. The Distribution Plan with respect to Class A and Class
C shares was so approved on January 28, 1997. The Distribution Plan with respect
to the Class B shares was so approved on September 8, 1997. Each Distribution
Plan is terminable at any time, as to each class of each Portfolio, by vote of a
majority of the Trustees who are not "interested persons" and who have no direct
or indirect financial interest in the operation of the Plan or in the Plan
agreements or by vote of holders of a majority of the relevant class' shares. A
Plan agreement is terminable, as to each class of each Portfolio, without
penalty, at any time, by such vote of the Trustees, upon not more than 60 days
written notice to the parties to such agreement or by vote of the holders of a
majority of the relevant class' shares. A Plan agreement will terminate
automatically, as to the relevant class of a Portfolio, in the event of its
assignment (as defined in the 1940 Act).
For the period from April 3, 1995 (commencement of operations) through
March 31, 1996, the Large Cap Value Portfolio, Small Cap Value Portfolio and
Bond Portfolio paid Bear Stearns $13,300, $22,762 and $14,093, respectively,
with respect to Class A shares and $23,333, $37,577 and $11,638, respectively,
with respect to Class C shares under the Plan. Of such amounts, the following
amounts were paid as indicated for Class A and Class C shares of each Portfolio:
<TABLE>
<CAPTION>
Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio
Class A Class C Class A Class C Class A Class C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Payments to
Brokers or Dealers $7,620 $10,955 $17,815 $26,976 $11,713 $4,734
Payments for $56,263 $60,759 $79,858 $99,631 $122,351 $52,251
Advertising
</TABLE>
For the fiscal year ended March 31, 1997, the Large Cap Value
Portfolio, Small Cap Value Portfolio and Bond Portfolio paid Bear Stearns
$27,440, $57,907 and $15,344, respectively, with respect to Class A shares and
$37,332, $111,111 and $12,483, respectively, with respect to Class C shares
under the Plan. Of such amounts, the following amounts were paid as indicated
for Class A and Class C shares of each Portfolio:
<TABLE>
<CAPTION>
Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio
Class A Class C Class A Class C Class A Class C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Payments to
Brokers or Dealers $29,650 $15,245 $69,195 $78,264 $14,296 $5,077
Payments for
Advertising $7,439 $4,959 $24,900 $26,299 $9,496 $3,764
</TABLE>
Shareholder Servicing Plan. The Fund has adopted a shareholder
servicing plan on behalf of the Portfolios' Class B shares and the Class C
shares of the Bond Portfolio (the "Shareholder Servicing Plan"). In accordance
with the Shareholder Servicing Plan, the Fund may enter into shareholder service
agreements under which the Portfolio pays fees of up to 0.25% of the average
daily net assets of Class B shares or Class C shares of the Bond Portfolio for
fees incurred in connection with the personal service and maintenance of
accounts holding Portfolio shares for responding to inquiries of, and furnishing
assistance to, shareholders regarding ownership of the shares or their accounts
or similar services not otherwise provided on behalf of the Portfolio.
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<PAGE>
Expenses. All expenses incurred in the operation of the Fund are borne
by the Fund, except to the extent specifically assumed by BSAM. The expenses
borne by the Fund include: organizational costs, taxes, interest, loan
commitment fees, interest and distributions paid on securities sold short,
brokerage fees and commissions, if any, fees of Board members who are not
officers, directors, employees or holders of 5% or more of the outstanding
voting securities of BSAM or its affiliates, Securities and Exchange Commission
fees, state Blue Sky qualification fees, advisory, administrative and fund
accounting fees, charges of custodians, transfer and dividend disbursing agents'
fees, certain insurance premiums, industry association fees, outside auditing
and legal expenses, costs of maintaining the Fund's existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
shareholders' reports and meetings, costs of preparing and printing certain
prospectuses and statements of additional information, and any extraordinary
expenses. Expenses attributable to a particular portfolio are charged against
the assets of that portfolio; other expenses of the Fund are allocated among the
portfolios on the basis determined by the Board of Trustees, including, but not
limited to, proportionately in relation to the net assets of each Portfolio.
Expense Limitation. BSAM agreed that if, in any fiscal year, the
aggregate expenses of a Portfolio, exclusive of taxes, brokerage commissions,
interest on borrowings and (with prior written consent of the necessary state
securities commissions) extraordinary expenses, exceed the expense limitation of
any state having jurisdiction over the Portfolio, the Fund may deduct from the
payment to be made to BSAM, such excess expense to the extent required by state
law. Such deduction or payment, if any, will be estimated daily, and reconciled
and effected or paid, as the case may be, on a monthly basis. No such expense
limitations currently apply to any Portfolio.
Activities of BSAM and its Affiliates and Other Accounts Managed by
BSAM. The involvement of BSAM, Bear Stearns and their affiliates in the
management of, or their interests in, other accounts and other activities of
BSAM and Bear Stearns may present conflicts of interest with respect to the
Portfolios or limit the Portfolios' investment activities. BSAM, Bear Stearns
and its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Portfolios and/or which
engage in and compete for transactions in the same types of securities,
currencies and instruments as the Portfolios. BSAM, Bear Stearns and its
affiliates will not have any obligation to make available any accounts managed
by them, for the benefit of the management of the Portfolios. The results of the
Portfolios' investment activities, therefore, may differ from those of Bear
Stearns and its affiliates and it is possible that the Portfolios could sustain
losses during periods in which BSAM, Bear Stearns and its affiliates and other
accounts achieve significant profits on their trading for proprietary and other
accounts. From time to time, the Portfolios' activities may be limited because
of regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements and should be read in conjunction
with the sections in the Portfolios' Prospectus entitled "How to Buy Shares" and
"How to Redeem Shares."
The Distributor. Bear Stearns serves as the Portfolios' distributor on
a best efforts basis pursuant to an agreement dated February 22, 1995, as
revised September 8, 1997, which is renewable annually. For the period April 3,
1995 (commencement of operations) through March 31, 1996, Bear Stearns retained
$72, $388 and $10,549 from the sales loads on Class A shares of the Large Cap
Value Portfolio, Small Cap Value Portfolio and the Bond Portfolio, respectively,
and $110, $583 and $185 from contingent deferred sales charges
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<PAGE>
("CDSC") on Class C shares of the Large Cap Value Portfolio, Small Cap Value
Portfolio and the Bond Portfolio, respectively. For the fiscal year ended March
31, 1997, Bear Stearns retained $41,212, $133,963 and $17,096 from the sales
loads on Class A shares of the Large Cap Value Portfolio, Small Cap Value
Portfolio and the Bond Portfolio, respectively, and $3,245, $7,666 and $116 from
CDSC on Class C shares of the Large Cap Value Portfolio, Small Cap Value
Portfolio and the Bond Portfolio, respectively. In some states, banks or other
institutions effecting transactions in Portfolio shares may be required to
register as dealers pursuant to state law.
Purchase Order Delays. The effective date of a purchase order may be
delayed if PFPC, the Portfolios' transfer agent, is unable to process the
purchase order because of an interruption of services at its processing
facilities. In such event, the purchase order would become effective at the
purchase price next determined after such services are restored.
Sales Loads--Class A. Set forth below is an example of the method of
computing the offering price of the Class A shares of each Portfolio. The
example assumes a purchase of Class A shares aggregating less than $50,000
subject to the schedule of sales charges set forth in the Prospectus at a price
based upon the net asset value of the Class A shares on March 31, 1997.
EQUITY PORTFOLIOS: Large Cap Value Small Cap Value
Portfolio Portfolio
--------- ---------
Net Asset Value per Share $17.17 $17.48
===== =====
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 1.00 1.02
---- ----
Per Share Offering Price to
the Public $18.17 $18.50
===== =====
BOND PORTFOLIO:
Net Asset Value per Share 12.03
=====
Per Share Sales Charge - 4.50%
of offering price (4.71% of
net asset value per share) 0.57
-----
Per Share Offering Price to
the Public $12.60
=====
Redemption Commitment. Each Portfolio has committed itself to pay in
cash all redemption requests by any shareholder of record, limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the value of the
Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Trustees reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b)
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<PAGE>
when trading in the markets each Portfolio ordinarily utilizes is restricted, or
when an emergency exists as determined by the Securities and Exchange Commission
so that disposal of a Portfolio's investments or determination of its net asset
value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit to protect Portfolio
shareholders.
Alternative Sales Arrangements - Class A, Class B, Class C and Class Y
Shares. The availability of three classes of shares to individual investors
permits an investor to choose the method of purchasing shares that is more
beneficial to the investor depending on the amount of the purchase, the length
of time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Portfolio shares may receive different compensation with respect to one
class of shares than the other. Bear Stearns will not accept any order of
$500,000 or more of Class B shares or $1 million or more of Class C shares, on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of a Portfolio instead. A fourth class of shares may be
purchased only by certain institutional investors at net asset value per share
(the "Class Y shares").
The four classes of shares each represent an interest in the same
portfolio investments of a Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by incremental expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
The methodology for calculating the net asset value, dividends and
distributions of each Portfolio's Class A, B, C and Y shares recognizes two
types of expenses. General expenses that do not pertain specifically to a class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Portfolio's total assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution Plan
and Shareholder Servicing Plan fees, (b) incremental transfer and shareholder
servicing agent fees and expenses, (c) registration fees and (d) shareholder
meeting expenses, to the extent that such expenses pertain to a specific class
rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "How to Buy Shares."
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<PAGE>
Valuation of Portfolio Securities. Equity Portfolio securities,
including covered call options written by an Equity Portfolio, are valued at the
last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an exchange
or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available. Any
assets or liabilities initially expressed in terms of foreign currency will be
converted into U.S. dollars at the prevailing market rates for purposes of
calculating net asset value. Because of the need to obtain prices as of the
close of trading on various exchanges throughout the world for such foreign
securities, the calculation of net asset value does not take place
contemporaneously with the determination of prices of such securities. Forward
currency contracts will be valued at the current cost of offsetting the
contract. Short-term investments are carried at amortized cost, which
approximates value. Any securities or other assets for which recent market
quotations are not readily available are valued at fair value as determined in
good faith by the Fund's Board of Trustees. Expenses and fees, including the
investment advisory, administration and distribution fees, are accrued daily and
taken into account for the purpose of determining the net asset value of an
Equity Portfolio's shares. Because of the differences in operating expenses
incurred by each class, the per share net asset value of each class will differ.
Substantially all of the Bond Portfolio's investments (including
short-term investments) are valued each business day by one or more independent
pricing services (the "Service") approved by the Fund's Board of Trustees.
Securities valued by the Service for which quoted bid prices in the judgment of
the Service are readily available and are representative of the bid side of the
market are valued at the mean between the quoted bid prices (as obtained by the
Service from dealers in such securities) and asked prices (as calculated by the
Service based upon its evaluation of the market for such securities). Any assets
or liabilities initially expressed in terms of foreign currency will be
converted into U.S. dollars at the prevailing market rates for purposes of
calculating net asset value. Because of the need to obtain prices as of the
close of trading on various exchanges throughout the world for such foreign
securities, the calculation of net asset value does not take place
contemporaneously with the determination of prices of such securities. Other
investments valued by the Service are carried at fair value as determined by the
Service, based on methods which include consideration of: yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
are not valued by the Service are carried at amortized cost, which approximate
value. Other investments that are not valued by the Service are valued at the
average of the most recent bid and asked prices in the market in which such
investments are primarily traded, or at the last sales price for securities
traded primarily on an exchange or the national securities market. In the
absence of reported sales of investments traded primarily on an exchange or the
national securities market, the average of the most recent bid and asked prices
is used. Bid price is used when no asked price is available. Expenses and fees,
including the investment advisory, administration and distribution fees, are
accrued daily and taken into account for the purpose of determining the net
asset value of the Bond Portfolio's shares. Because of the differences in
operating expenses incurred by each class, the per share net asset value of each
class will differ.
Each Portfolio's restricted securities, as well as securities or other
assets for which market quotations are not readily available, or are not valued
by a pricing service approved by the Board of Trustees, are valued at fair value
as determined in good faith by the Board of Trustees. The Board of Trustees will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Board of Trustees generally will take
the following factors into consideration: restricted
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<PAGE>
securities which are, or are convertible into, securities of the same class of
securities for which a public market exists usually will be valued at market
value less the same percentage discount at which purchased. This discount will
be revised periodically by the Board of Trustees if the Board of Trustees
believe that it no longer reflects the value of the restricted securities.
Restricted securities not of the same class as securities for which a public
market exists usually will be valued initially at cost. Any subsequent
adjustment from cost will be based upon considerations deemed relevant by the
Board of Trustees.
New York Stock Exchange Closings. The holidays (as observed) on which
the New York Stock Exchange is closed currently are: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Dividends,
Distributions and Taxes."
The following is only a summary of certain additional tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company. Each Portfolio has
elected to be taxed as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, a Portfolio is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by a Portfolio made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and will, therefore, satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) for taxable
years beginning on or before August 5, 1997, 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
B-21
<PAGE>
options or futures thereon). Because of the Short-Short Gain Test, a Portfolio
may have to limit the sale of appreciated securities that it has held for less
than three months. However, the Short-Short Gain Test will not prevent a
Portfolio from disposing of investments at a loss, since the recognition of a
loss before the expiration of the three-month holding period is disregarded for
this purpose. Interest (including original issue discount) received by a
Portfolio at maturity or upon the disposition of a security held for less than
three months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of the Short-Short Gain Test.
However, income that is attributable to realized market appreciation will be
treated as gross income from such sale or other disposition of securities for
this purpose. The Short-Short Gain Test will not apply to taxable years
beginning after August 5, 1997.
In general, gain or loss recognized by a Portfolio on the disposition
of an asset will be a capital gain or loss. In addition, gain will be recognized
as a result of certain constructive sales, including short sales "against-the-
box." However, gain recognized on the disposition of a debt obligation purchased
by a Portfolio at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the
Portfolio held the debt obligation. In addition, under the rules of Code section
988, gain or loss recognized on the disposition of a debt obligation denominated
in a foreign currency or an option with respect thereto (but only to the extent
attributable to changes in foreign currency exchange rates), and gain or loss
recognized on the disposition of a foreign currency forward contract, futures
contract, option or similar financial instrument, or of foreign currency itself,
except for regulated futures contracts or non-equity options subject to Code
section 1256 (unless a Portfolio elects otherwise), will generally be treated as
ordinary income or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Portfolio's net investment in
the transaction and: (1) the transaction consists of the acquisition of property
by the Portfolio and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning of
section 1092 of the Code; (3) 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 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 capitalized interest on acquisition
indebtedness under Code section 263(g). Built-in losses will be preserved where
a Portfolio has a built-in loss with respect to property that becomes a part of
a conversion transaction. No authority exists that indicates that the converted
character of the income will not be passed through to a Portfolio's
shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by a Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (depending on the
type of the Portfolio) (1) the asset is used to close a "short sale" (which
includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (2) the asset is otherwise
held by the Portfolio as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Portfolio grants a qualified covered
call option (which, among other things, must not be deep-in-the-money) with
respect thereto, or (3) the asset is stock and the Portfolio grants an
in-the-money qualified covered call option with respect thereto. However, for
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<PAGE>
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, a Portfolio
may be required to defer the recognition of a loss on the disposition of an
asset held as part of a straddle to the extent of any unrecognized gain on the
offsetting position.
Any gain recognized by a Portfolio on the lapse of, or any gain or loss
recognized by a Portfolio from a closing transaction with respect to, an option
written by the Portfolio will be treated as a short-term capital gain or loss.
For purposes of the Short-Short Gain Test, the holding period of an option
written by a Portfolio will commence on the date it is written and end on the
date it lapses or the date a closing transaction is entered into. Accordingly,
for taxable years beginning on or before August 5, 1997, a Portfolio may be
limited in its ability to write options which expire within three months and to
enter into closing transactions at a gain within three months of the writing of
options.
Certain transactions that may be engaged in by a Portfolio (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. A Portfolio,
however, may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments of the
Portfolio that are not Section 1256 contracts. Generally, 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.
A Portfolio may purchase securities of certain foreign investment funds
or trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a Portfolio invests in a PFIC, it may elect to
treat the PFIC as a qualified electing fund (a "QEF"), in which event the
Portfolio will each year have ordinary income equal to its pro rata share of the
PFIC's ordinary earnings for the year and long-term capital gain equal to its
pro rata share of the PFIC's net capital gain for the year, regardless of
whether the Portfolio receives distributions of any such ordinary earnings or
capital gains from the PFIC. In the alternative, for tax years beginning after
December 31, 1997, a Portfolio that invests in stock of a PFIC may make a
mark-to-market election with respect to such stock. Pursuant to such election,
the Portfolio will include as ordinary income any excess of the fair market
value of such stock at the close of any taxable year over the Portfolio's
adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a taxable year, such
excess will be deductible as ordinary loss in the amount equal to the lesser of
the amount of such excess or the net mark-to-market gains on the stock that the
Portfolio included in income in previous years. The Portfolio's holding period
with respect to the PFIC stock subject to the election will commence on the
first day of the next taxable year. If the Portfolio makes the election in the
first taxable year it holds PFIC stock, it will not incur the tax described
below. If a Portfolio does not elect to treat the PFIC as a QEF and does not
make a mark-to-market election, then, in general, (1) any gain recognized by the
Portfolio upon sale or other
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<PAGE>
disposition of its interest in the PFIC or any excess distribution received by
the Portfolio from the PFIC will be allocated ratably over the Portfolio's
holding period of its interest in the PFIC, (2) the portion of such gain or
excess distribution so allocated to the year in which the gain is recognized or
the excess distribution is received shall be included in the Portfolio's gross
income for such year as ordinary income (and the distribution of such portion by
the Portfolio to shareholders will be taxable as an ordinary income dividend,
but such portion will not be subject to tax at the Portfolio level), (3) the
Portfolio shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Portfolio to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the
Portfolio thereon) will again be taxable to the shareholders as an ordinary
income dividend.
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
(including, to the extent provided in Treasury regulations, losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each
Portfolio must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
each of which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option.
If for any taxable year a Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to a tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies. A 4% non-deductible
excise tax is imposed on a regulated investment company that fails to distribute
in each calendar year an amount equal to 98% of its ordinary income for the year
and 98% of its 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,
B-24
<PAGE>
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 and ordinary gains and losses arising as a
result of a PFIC mark-to-market election (or upon actual disposition of the PFIC
stock subject to such election) incurred after October 31 of any year (or after
the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Portfolio may in certain circumstances be required
to liquidate portfolio investments to make sufficient distribution to avoid
excise tax liability.
Portfolio Distributions. Each Portfolio anticipates distributing
substantially all of its investment company taxable income for each taxable
year. Such distributions will be taxable to shareholders as ordinary income and
treated as dividends for federal income tax purposes, but will qualify for the
70% dividends-received deduction for corporate shareholders only to the extent
discussed below. Dividends paid on Class A, B, C, and Y shares are calculated at
the same time and in the same manner. In general, dividends on Class B and C
shares are expected to be lower than those on Class A shares due to the higher
distribution expenses borne by the Class B and C shares. Dividends may also
differ between classes as a result of differences in other class specific
expenses.
A Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. Each Portfolio currently intends to
distribute any such amounts. Net capital gain that is distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term capital
gain, regardless of the length of time the shareholder has held his shares or
whether such gain was recognized by a Portfolio prior to the date on which the
shareholder acquired his shares. The Code provides, however, that under certain
conditions only 50% (58% for alternative minimum tax purposes) of the capital
gain recognized upon a Portfolio's disposition of domestic "small business"
stock will be subject to tax.
Conversely, if a Portfolio elects to retain its net capital gain, the
Portfolio will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If a Portfolio elects to retain
its net capital gain, it is expected that the Portfolio also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of his pro rata share of such gain, with the result that
each shareholder will be required to report his pro rata share of such gain on
his tax return as long-term capital gain, will receive a refundable tax credit
for his pro rata share of tax paid by the Portfolio on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Equity Portfolios with respect to
a taxable year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
B-25
<PAGE>
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Equity Portfolios from
domestic corporations for the taxable year. Generally, a dividend received by an
Equity Portfolio will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Portfolio has held for less
than 46 days (91 days in the case of certain preferred stock), excluding for
this purpose under the rules of Code section 246(c)(3) and (4) 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. The 46-day holding period must be
satisfied during the 90-day period beginning 45 days prior to each applicable
ex-dividend date; the 91-day holding period must be satisfied during the 180-day
period beginning 90 days before each applicable ex-dividend date. 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 a Portfolio from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle the Portfolios to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Portfolio's assets to be invested in various
countries is not known.
Distributions by the Portfolios that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the Portfolios will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares or shares of another Portfolio (or another fund).
Shareholders receiving a distribution in the form of additional shares will be
treated as receiving a distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. In addition, if
the net asset value at the time a shareholder purchases shares of a Portfolio
reflects undistributed net investment income or recognized
B-26
<PAGE>
capital gain net income, or unrealized appreciation in the value of the assets
of the Portfolio, distributions of such amounts will be taxable to the
shareholder in the manner described above, although they economically constitute
a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a
Portfolio into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders (and made by the Portfolio) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
A Portfolio will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain dividends,
and the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Portfolio that it is not subject to backup withholding or that it is an exempt
recipient (such as a corporation).
Sale or Redemption of Shares. A shareholder will recognize gain or loss
on the sale or redemption of shares of a Portfolio in an amount equal to the
difference between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so recognized may
be disallowed if the shareholder purchases other shares of the Portfolio within
30 days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares of a
Portfolio will be considered capital gain or loss and will be long-term capital
gain or loss if the shares were held for longer than one year. Long-term capital
gain recognized by an individual shareholder will be taxed at the lowest rates
applicable to capital gains if the holder has held such shares for more than 18
months at the time of the sale. 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 at least 11.6%
lower than the maximum rate applicable to ordinary income. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the Portfolio or another fund at a
reduced sales load pursuant to a right to reinvest at such reduced sales load
acquired in connection with the acquisition of the shares disposed of, then the
sales load on the shares disposed of (to the extent of the reduction in the
sales load on the shares subsequently acquired) shall not be taken into account
in determining gain or loss on the shares disposed of but shall be treated as
incurred on the acquisition of the shares subsequently acquired.
Foreign Shareholders. Taxation of a shareholder who, as to the United
States, is a nonresident alien individual, foreign trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder") depends on whether
the income from a Portfolio is "effectively connected" with a U.S. trade or
business carried on by such shareholder.
B-27
<PAGE>
If the income from a Portfolio is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to a foreign shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower applicable treaty rate) upon the gross amount of the
dividend. Such foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Portfolio, capital gain
dividends, and amounts retained by the Portfolio that are designated as
undistributed capital gains.
If the income from a Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Portfolio may be
required to withhold U.S. federal income tax at the rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Portfolio with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Portfolios, including the applicability of foreign taxes.
Effect of Future Legislation; State and Local Tax Considerations. The
foregoing general discussion of U.S. federal income tax consequences is based on
the Code and the Treasury Regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in the Portfolios.
PORTFOLIO TRANSACTIONS
BSAM assumes general supervision over placing orders on behalf of the
Bond Portfolio for the purchase or sale of investment securities. Purchases and
sales of portfolio securities usually are principal transactions. Bond Portfolio
securities ordinarily are purchased directly from the issuer or from an
underwriter or a market maker for the securities. Usually no brokerage
commissions are paid by the Bond Portfolio for such purchases. Purchases of
portfolio securities from underwriters include a commission or concession paid
by the issuer to the underwriter and the purchase price paid to market makers
for the securities may include the spread between the bid and asked price. Bond
Portfolio transactions are allocated to various dealers by the its portfolio
managers in their best judgment.
BSAM assumes general supervision over placing orders on behalf of each
Equity Portfolio for the purchase or sale of investment securities. Allocation
of brokerage transactions, including their frequency, is made in BSAM'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 BSAM's research facilities with statistical
B-28
<PAGE>
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 BSAM and BSAM's fees are not reduced as a consequence of the receipt of such
supplemental information. A commission paid to such brokers may be higher than
that which another qualified broker would have charged for effecting the same
transaction, provided that BSAM, as applicable, determines in good faith that
such commission is reasonable in terms of the transaction or the overall
responsibility of BSAM to the Portfolio and its other clients and that the total
commissions paid by the Portfolio will be reasonable in relation to the benefits
to the Portfolio over the long-term.
Such supplemental information may be useful to BSAM in serving each
Equity Portfolio and the other funds which it advises and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to BSAM in carrying out its obligations to each Equity 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 BSAM being
engaged simultaneously in the purchase or sale of the same security. Certain of
BSAM's transactions in securities of foreign issuers may not benefit from the
negotiated commission rates available to each Equity Portfolio for transactions
in securities of domestic issuers. When transactions are executed in the
over-the-counter market, each Portfolio will deal with the primary market makers
unless a more favorable price or execution otherwise is obtainable. Foreign
exchange transactions of each Equity Portfolio are made with banks or
institutions in the interbank market at prices reflecting a mark-up or mark-down
and/or commission.
Portfolio turnover may vary from year to year as well as within a year.
The portfolio turnover rate for the Large Cap Value Portfolio, Small Cap Value
Portfolio and Bond Portfolio for the period April 3, 1995 (commencement of
operations) through March 31, 1996 was 45%, 41% and 107%, respectively. The
portfolio turnover rate for the fiscal year ended March 31, 1997 was 137%, 57%
and 263%, respectively. In periods in which extraordinary market conditions
prevail, BSAM will not be deterred from changing investment strategy as rapidly
as needed, in which case higher portfolio turnover rates can be anticipated
which would result in greater brokerage expenses. The overall reasonableness of
brokerage commissions paid is evaluated by BSAM based upon its knowledge of
available information as to the general level of commissions paid by other
institutional investors for comparable services.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the Securities and Exchange Commission
thereunder, the Board of Trustees has determined that transactions for each
Portfolio may be executed through Bear Stearns if, in the judgment of BSAM, the
use of Bear Stearns is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers, and if, in the
transaction, Bear Stearns charges the Portfolio a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. In
addition, under rules recently adopted by the Securities and Exchange
Commission, Bear Stearns may directly execute such transactions for each
Portfolio on the floor of any national securities exchange, provided (i) the
Board of Trustees has expressly authorized Bear Stearns to effect such
transactions, and (ii) Bear Stearns annually advises the Board of Trustees of
the aggregate compensation it earned on such transactions. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.
For the period April 3, 1995 (commencement of operations) through March
31, 1996, Large Cap Value Portfolio and Small Cap Value Portfolio paid total
brokerage commissions of $26,576 and $64,825, respectively, of which
B-29
<PAGE>
approximately $1,200 and $1,700 was paid to Bear Stearns, respectively. The
Large Cap Value Portfolio and Small Cap Value Portfolio paid 4.52% and 2.62%,
respectively, of its commissions to Bear Stearns, and, with respect to all the
securities transactions for each Equity Portfolio, 1.95% and 0.72% of the
transactions, respectively, involved commissions being paid to Bear Stearns. No
brokerage commissions were paid by the Bond Portfolio.
For the fiscal year ended March 31, 1997, Large Cap Value Portfolio and
Small Cap Value Portfolio paid total brokerage commissions of $59,523 and
$102,411, respectively, of which approximately $1,300 and $9,000, respectively,
was paid to Bear Stearns. The Large Cap Value Portfolio and Small Cap Value
Portfolio paid 2.18% and 8.79%, respectively, of its commissions to Bear
Stearns, and, with respect to all the securities transactions for each Equity
Portfolio, 2.93% and 8.89% of the transactions, respectively, involved
commissions being paid to Bear Stearns. For the fiscal year ended March 31,
1997, the Large Cap Value Portfolio and Small Cap Value Portfolio paid an
average commission rate per share of $0.0550 and $0.0593, respectively. The
percentage of commissions for which they received research services paid by the
Large Cap Value Portfolio and Small Cap Value Portfolio was 98.2% and 95.6%,
respectively, of the total brokerage commissions paid by each Portfolio.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Performance
Information."
Current yield for the 30-day period ended March 31, 1997 for Class A,
Class C and Class Y of the Bond Portfolio was 6.38%, 6.28% and 6.99%,
respectively. The current yield for each class reflects the waiver and
reimbursement of certain fees and expenses by the investment adviser, without
which the Portfolio's current yield for such period would have been 3.87% for
Class A, 3.67% for Class C and 4.42% for Class Y. Current yield of the Bond
Portfolio is computed pursuant to a formula which operates as follows: The
amount of the Bond Portfolio's expenses accrued for the 30-day period (net of
reimbursements) is subtracted from the amount of the dividends and interest
earned by the Bond Portfolio during the period. That result is then divided by
the product of: (a) the average daily number of shares outstanding during the
period that were entitled to receive dividends, and (b) the maximum offering
price per share on the last day of the period less any undistributed earned
income per share reasonably expected to be declared as a dividend shortly
thereafter. The quotient is then added to 1, and that sum is raised to the 6th
power, after which 1 is subtracted. The current yield is then arrived at by
multiplying the result by 2.
Average annual total return of each Portfolio is calculated by
determining the ending redeemable value of an investment purchased at net asset
value (maximum offering price in the case of Class A) per share with a
hypothetical $1,000 payment made at the beginning of the period (assuming the
reinvestment of dividends and distributions), dividing by the amount of the
initial investment, taking the "n"th root of the quotient (where "n" is the
number of years in the period) and subtracting 1 from the result. A class'
average annual total return figures calculated in accordance with such formula
assume that in the case of Class A the maximum sales load has been deducted from
the hypothetical initial investment at the time of purchase or in the case of
Class B the maximum applicable CDSC has been paid upon redemption at the end of
the period.
Total return of each Portfolio is calculated by subtracting the amount
of the Portfolio's net asset value (maximum offering price in the case of Class
B-30
<PAGE>
A) per share at the beginning of a stated period from the net asset value per
share at the end of the period (after giving effect to the reinvestment of
dividends and distributions during the period and any applicable CDSC), and
dividing the result by the net asset value (maximum offering price in the case
of Class A) per share at the beginning of the period. Total return also may be
calculated based on the net asset value per share at the beginning of the period
instead of the maximum offering price per share at the beginning of the period
for Class A shares or without giving effect to any applicable CDSC at the end of
the period for Class B and C shares. In such cases, the calculation would not
reflect the deduction of the sales load with respect to Class A shares or any
applicable CDSC with respect to Class B and C shares, which, if reflected, would
reduce the performance quoted.
The chart below sets forth average annual total return from inception*
through March 31, 1997 and total return for one-year and inception* through
March 31, 1997 for Class A, Class C and Class Y:
<TABLE>
<CAPTION>
TOTAL RETURN - INCEPTION* THROUGH MARCH 31, 1997
Class A Class C Class Y
-------------------------------------- -------------------------- -----------
Name of Portfolio Based on Maximum Based on Net Based on Based on Net Based on
- -----------------
Offering Price Asset Value Maximum Asset Value Net
-------------- ----------- ------- -----------
CDSC Asset Value
---- -----------
<S> <C> <C> <C> <C> <C>
Large Cap Value Portfolio 38.92% 45.85% N/A 44.40% 26.19%
Small Cap Value Portfolio 42.96% 50.09% N/A 48.45% 38.57%
Total Return Bond Portfolio 9.08% 13.33% N/A 12.45% 7.82%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN - ONE-YEAR ENDED MARCH 31, 1997
Class A Class C Class Y
-------------------------------------- -------------------------- -----------
Name of Portfolio Based on Maximum Based on Net Based on Based on Net Based on
- -----------------
Offering Price Asset Value Maximum Asset Value Net
-------------- ----------- ------- -----------
CDSC Asset Value
---- -----------
<S> <C> <C> <C> <C> <C>
Large Cap Value Portfolio 9.96% 15.44% N/A 14.87% 16.04%
Small Cap Value Portfolio 6.41% 11.71% N/A 11.12% 12.19%
Total Return Bond Portfolio 0.49% 4.40% N/A 3.99% 4.77%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN - INCEPTION* THROUGH MARCH 31, 1997
Class A Class C Class Y
-------------------------------------- -------------------------- -----------
Name of Portfolio Based on Maximum Based on Net Based on Based on Net Based on
- -----------------
Offering Price Asset Value Maximum Asset Value Net
-------------- ----------- ------- -----------
CDSC Asset Value
---- -----------
<S> <C> <C> <C> <C> <C>
Large Cap Value Portfolio 17.94% 20.86% N/A 20.23% 16.12%
Small Cap Value Portfolio 19.63% 22.58% N/A 21.90% 20.17%
Total Return Bond Portfolio 4.45% 6.47% N/A 6.06% 4.93%
</TABLE>
* Class A and Class C shares of Large Cap Value Portfolio commenced
investment operations on April 4, 1995. Class A and Class C shares of
Small Cap Value Portfolio commenced investment operations on April 3,
1995. Class A and Class C shares of the Bond Portfolio commenced
investment operations on April 5, 1995. The initial public offering of
the Class Y shares of Large Cap Value Portfolio, Small Cap Value
Portfolio and Bond Portfolio commenced on September 11, June 22, and
September 8, 1995, respectively.
B-31
<PAGE>
CODE OF ETHICS
The Fund, on behalf of each Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Fund and employees of the
Fund and BSAM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security for his or her account or for any account
in which he or she has any direct or indirect beneficial interest, without prior
approval by the Fund or without the applicability of certain exemptions; (2) the
recommendation of a securities transaction without disclosing his or her
interest in the security or issuer of the security; (3) the commission of fraud
in connection with the purchase or sale of a security held by or to be acquired
by each Portfolio; and (4) the purchase of any securities in an initial public
offering or private placement transaction eligible for purchase or sale by each
Portfolio without prior approval by the Fund. Certain transactions are exempt
from item (1) of the previous sentence, including: (1) any securities
transaction, or series of related transactions, involving 500 or fewer shares of
(i) an issuer with an average monthly trading volume of 100 million shares or
more, or (ii) an issuer that has a market capitalization of $1 billion or
greater; and (2) transactions in exempt securities or the purchase or sale of
securities purchased or sold in exempt transactions.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of each Portfolio first, shall avoid potential or
actual conflicts of interest with each Portfolio, and shall not take unfair
advantage of their relationship with each Portfolio. Under certain
circumstances, the Adviser to each Portfolio may aggregate or bunch trades with
other clients provided that no client is materially disadvantaged. Access
persons are required by the Code of Ethics to file quarterly reports of personal
securities investment transactions. However, an access person is not required to
report a transaction over which he or she had no control. Furthermore, a trustee
of the Fund who is not an "interested person" (as defined in the 1940 Act) of
the Fund is not required to report a transaction if such person did not know or,
in the ordinary course of his duties as a Trustee of the Fund, should have
known, at the time of the transaction, that, within a 15 day period before or
after such transaction, the security that such person purchased or sold was
either purchased or sold, or was being considered for purchase or sale, by each
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "General Information."
Each Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Portfolio shares have no preemptive, subscription or conversion rights and are
freely transferable.
The Fund will send annual and semi-annual financial statements to all
its shareholders.
As of December 26, 1997, the following shareholders owned, directly or
indirectly, 5% or more of the indicated class of the Portfolio's shares.
Percent of Large Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 22.4%
FBO 200-40406-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-32
<PAGE>
Bear, Stearns Securities Corp. 5.8%
FBO 086-15297-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Large Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 18.6%
FBO 038-04569-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 5.6%
FBO 049-40734-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
EAMCO 7.3%
FBO 02130004
Attn: Mutual Funds Desk
c/o Riggs Bank N.A.
P.O. Box 96211
Washington, DC 20090-6211
Chase Manhatten Bank 14.7%
Trust Sassco Fashion Ltd
401k Sp.
Account 4 Dtd 7/1/97
Attn: Robert Grey
770 Broadway, 10th Floor
New York, NY 10003
Percent of Small Cap
Value Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Mainstreet Trust Company N.A. 5.7%
Custodian for API Trust Growth Fund
P.O. Box 5228
Martinsville, VA 24115
Bear, Stearns Securities Corp. 6.0%
FBO 042-13302-18
1 Metrotech Center North
Brooklyn, NY 12201-3859
B-33
<PAGE>
Percent of Small Cap
Value Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear Stearns Securities Corp. 5.2%
FBO 984-00106-16
1 Metrotech Center North
Brooklyn, NY 01201-3859
Percent of Small Cap
Value Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Custodial Trust Company 24.1%
101 Carnegie Center
Princeton, NJ 08540
Bear, Stearns Securities Corp. 5.0%
FBO 047-23948-16
1 Metrotech Center North
Brooklyn, NY 11201-3859
Percent of Total
Return Bond Portfolio
Name and Address Class A Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 28.0%
FBO 051-29339-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. 7.3%
FBO 051-26459-12
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 6.7%
FBO 044-34756-29
1 Metrotech Center North
Brooklyn, NY 12201-3859
Percent of Total
Return Bond Portfolio
Name and Address Class C Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 11.4%
FBO 498-00055-18
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 9.2%
FBO 220-43677-14
1 Metrotech Center North
Brooklyn, NY 11201-3859
B-34
<PAGE>
Bear, Stearns Securities Corp. 9.2%
FBO 220-43671-10
1 Metrotech Center North
Brooklyn, NY 11201-3859
Bear, Stearns Securities Corp. 7.2%
FBO 498-00056-17
1 Metrotech Center North
Brooklyn, NY 11201-3859
Ted A. Kahtner 8.1%
R/O IRA
330 Karen Drive
Elizabeth, PA 15037-2409
Percent of Total
Return Bond Portfolio
Name and Address Class Y Shares Outstanding
- ---------------- --------------------------
Bear, Stearns Securities Corp. 70.3%
FBO 049-41095-15
1 Metrotech Center North
Brooklyn, NY 11201-3859
A shareholder who beneficially owns, directly or indirectly, more than
25% of a Portfolio's voting Securities may be deemed a "control person" (as
defined in the 1940 Act) of a Portfolio.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New
Jersey 08540, an affiliate of Bear Stearns, is each Portfolio's custodian. Under
a custody agreement with each Portfolio, CTC holds each Portfolio's securities
and keeps all necessary accounts and records. For its services, CTC receives
from each Portfolio an annual fee of the greater of 0.015% of the value of the
domestic assets held in custody or $5,000, such fee to be payable monthly based
upon the total market value of such assets, as determined on the last business
day of the month. In addition, CTC receives certain securities transactions
charges which are payable monthly. PFPC, Bellevue Corporate Center, 400 Bellevue
Parkway, Wilmington, Delaware 19809, is each Portfolio's transfer agent,
dividend disbursing agent and registrar. Neither CTC nor PFPC has any part in
determining the investment policies of any Portfolio or which securities are to
be purchased or sold by any Portfolio.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, as counsel for the Fund, has provided legal advice as to certain legal
matters regarding the shares of beneficial interest being sold pursuant to the
Portfolios' Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281-1434, independent auditors, have been selected as auditors of the Fund.
FINANCIAL STATEMENTS
The Portfolios' annual report to shareholders for the fiscal year ended
March 31, 1997 is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference into this
Statement of Additional Information.
B-35
<PAGE>
APPENDIX
Description of certain ratings assigned by S&P, Moody's, Fitch and
Duff:
S&P
Bond Ratings
- ------------
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
- -----------------------
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
Bond Ratings
- ------------
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
B-36
<PAGE>
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
- -----------------------
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
B-37
<PAGE>
Fitch
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
B-38
<PAGE>
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
Bond Ratings
- ------------
AAA
Bonds rated AAA are considered highest credit quality. The risk factors
are negligible, being only slightly more than for risk-free U.S. Treasury
debt.
AA
Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB
Bonds rated BBB are considered to have below average protection factors
but still considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating category.
Commercial Paper Rating
- -----------------------
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
B-39
<PAGE>
Rule 497(c)
Registration No. 33-84842
THE BEAR STEARNS FUNDS
S&P STARS PORTFOLIO
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
December 24, 1997
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated December 24, 1997 of S&P STARS Portfolio (the "STARS Portfolio"
or the "Portfolio"), a portfolio of The Bear Stearns Funds (the "Fund"), as each
may be revised from time to time. To obtain a free copy of such Prospectus,
please write to the Fund at PFPC Inc. ("PFPC"), Attention: S&P STARS Portfolio,
P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1- 800-447-1139 or call
Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766- 4111.
Bear Stearns Asset Management Inc. ("BSAM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., serves as the investment adviser to the
Portfolio.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., is the administrator of the Portfolio.
Bear Stearns, an affiliate of BSAM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies.......................... B-2
Management of the Fund................................................ B-7
Management Arrangements............................................... B-10
Purchase and Redemption of Shares..................................... B-14
Determination of Net Asset Value...................................... B-16
Dividends, Distributions and Taxes.................................... B-16
Portfolio Transactions................................................ B-24
Performance Information............................................... B-25
Code of Ethics........................................................ B-26
Information About the Fund............................................ B-27
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors.................................... B-28
Financial Statements.................................................. B-28
B-1
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
STARS Portfolio."
Portfolio Securities
Bank Obligations. Domestic commercial banks organized under Federal law
are supervised and examined by the Comptroller of the Currency and are required
to be members of the Federal Reserve System and to have their deposits insured
by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic banks
organized under state law are supervised and examined by state banking
authorities but are members of the Federal Reserve System only if they elect to
join. In addition, state banks whose certificates of deposit ("CDs") may be
purchased by the Portfolio are insured by the FDIC (although such insurance may
not be of material benefit to the Portfolio, depending on the principal amount
of the CDs of each bank held by the Portfolio) and are subject to Federal
examination and to a substantial body of Federal law and regulation. As a result
of Federal or state laws and regulations, domestic branches of domestic banks
whose CDs may be purchased by the Portfolio generally are required, among other
things, to maintain specified levels of reserves, are limited in the amounts
which they can loan to a single borrower and are subject to other regulation
designed to promote financial soundness. However, not all of such laws and
regulations apply to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries
of domestic banks and domestic and foreign branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, Federal branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of Federal and State Branches generally
must be insured by the FDIC if such branches take deposits of less than
$100,000.
B-2
<PAGE>
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, BSAM 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. BSAM 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, BSAM 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
BSAM to monitor carefully the Portfolio's investments in such securities with
particular regard to trading activity, availability of reliable price
information and other relevant information. To the extent that, for a period of
time, qualified institutional buyers cease purchasing restricted securities
pursuant to Rule 144A, the Portfolio's investing in such securities may have
B-3
<PAGE>
the effect of increasing the level of illiquidity in the Portfolio during such
period.
Management Policies
Options Transactions. The Portfolio may engage in options transactions
of the type described in the Portfolio's Prospectus.
The principal reason for writing covered call options, which are call
options with respect to which the Portfolio owns the underlying security or
securities, is to realize, through the receipt of premiums, a greater return
than would be realized on the Portfolio's securities alone. Similarly, the
principal reason for writing covered put options is to realize income in the
form of premiums. In return for a premium, the writer of a covered call option
forfeits the right to any appreciation in the value of the underlying security
above the strike price for the life of the option (or until a closing purchase
transaction can be effected). Nevertheless, the call writer retains the risk of
a decline in the price of the underlying security. The size of the premiums that
the Portfolio may receive may be adversely affected as new or existing
institutions, including other investment companies, engage in or increase their
option-writing activities.
Options written by the Portfolio ordinarily will have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the time the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Portfolio may write (a) in-the-money call
options when BSAM 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 BSAM 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 BSAM 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 BSAM believes there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, at times have rendered certain clearing facilities
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no
B-4
<PAGE>
assurance that similar events, or events that otherwise may interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If as a
covered call option writer the Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Stock Index Options. The Portfolio may engage in stock index option
transactions of the type described in the Portfolio's Prospectus. A stock index
fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are generally monthly, while
those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make delivery
of a stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option. The amount
of cash received will be equal to such difference between the closing price of
the index and the exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Lending Portfolio Securities. To a limited extent, the Portfolio may
lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, the Portfolio can
increase its income through the investment of the cash collateral. For purposes
of this policy, the Portfolio considers collateral consisting of U.S. Government
securities or irrevocable letters of credit issued by banks whose securities
meet the standards for investment by the Portfolio to be the equivalent of cash.
From time to time, the Portfolio may return to the borrower or a third party
which is unaffiliated with the Portfolio, and which is acting as a "placing
broker," a part of the interest earned from the investment of collateral
received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may pass to
the borrower, the Fund's Board of Trustees must terminate the loan and regain
the right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification.
B-5
<PAGE>
Investments in Warrants. The Portfolio does not presently intend to
invest in warrants. However, any future investment in warrants will be
limited to 5% of its net assets.
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 sponsored enterprises.
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.
B-6
<PAGE>
Non-Fundamental Restrictions.
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.
126 East 56th Street since 1969; President of
New York, NY 10021 Koll, Bren Realty Advisors
and Senior Partner for
Lincoln Properties prior
thereto.
Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United States
Belleville, IL 62223 Senator of Illinois from
1981 to 1993.
John R. McKernan, Jr. (49) Trustee Chairman and Chief Executive
P.O. Box 15213 Officer of McKernan
Portland, ME 04112 Enterprises Inc. since
January 1995; Governor of
Maine prior thereto.
M.B. Oglesby, Jr. (55) Trustee President and Chief
700 13th St., N.W., Suite 400 Executive Officer,
Washington, D.C. 20005 Association of American
Railroads since June 1997;
Vice Chairman of
B-7
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Cassidy & Associates from
February 1996 to June 1997;
Senior Vice President of RJR
Nabisco, Inc. from April
1989 to February 1996;
Former Deputy Chief of
Staff-White House from 1988
to January 1989.
Michael Minikes (52) Trustee Senior Managing Director of
245 Park Avenue Chairman Bear Stearns since September
New York, NY 10167 1985; Chairman of BSFM since
December 1997; Treasurer of
Bear Stearns since January
1986; Treasurer of The Bear
Stearns Companies Inc. since
September 1985; Director of
The Bear Stearns Companies
Inc. since October 1989.
Robert S. Reitzes* (53) President President of Mutual
575 Lexington Avenue Funds-Bear Stearns Asset
New York, NY 10022 Management and Senior
Managing Director of Bear
Stearns since March 1994;
Co-Director of Research and
Senior Chemical Analyst of
C.J. Lawrence/Deutsche Bank
Securities Corp. from
January 1991 to March 1994.
William J. Montgoris (50) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer,
New York, NY 10167 Bear Stearns.
Stephen A. Bornstein (54) Vice President Managing Director, Legal
575 Lexington Avenue Department; General Counsel,
New York, NY 10022 Bear Stearns Asset
Management.
Frank J. Maresca (39) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September
New York, NY 10167 1994; Chief Executive
Officer and President of
BSFM since December 1997;
Associate Director of Bear
Stearns from September 1993
to September 1994; Vice
President of Bear Stearns
from March 1992 to September
1993.
Donalda L. Fordyce (38) Vice President Senior Managing Director of
575 Lexington Avenue Bear Stearns since March,
New York, NY 10022 1996; previously,
B-8
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Vice President, Asset
Management Group, Goldman
Sachs from 1986 to 1996.
Ellen T. Arthur (44) Secretary Associate Director of Bear
575 Lexington Avenue Stearns since January 1996;
New York, NY 10022 Secretary of BSAM since
December 1997; 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 Treasurer and Secretary of
BSFM since December 1997;
Vice President of Bear
Stearns from May 1993 to
September 1995; Assistant
Vice President of Mitchell
Hutchins from October 1992
to May 1993.
Christina LaMastro (27) Assistant Legal Assistant of Bear
575 Lexington Avenue Secretary Stearns since May 1997;
New York, NY 10022 Assistant Secretary of BSAM
since December 1997;
Compliance Assistant at
Reich & Tang L.P. from April
1996 through April 1997;
Legal Assistant at Fulbright
& Jaworski L.P. from April
1993 through April 1996;
student at Drexel University
prior thereto.
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:
B-9
<PAGE>
<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 (2)
Alan J. Dixon $7,000 None None $6,500 (1)
John R. McKernan, Jr. $7,000 None None $12,000 (2)
M.B. Oglesby, Jr. $7,000 None None $12,000 (2)
Robert S. Reitzes None None None None
Michael Minikes None None None None
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to approximately $7,000 for Board members of the Fund, as a
group.
Board members and officers of the Fund, as a group, owned less than 1% of
the Portfolio's shares outstanding on May 31, 1997.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution Plans" remains in effect, the Fund's Trustees who are
not "interested persons" of the Fund, as defined in the 1940 Act, will be
selected and nominated by the Trustees who are not "interested persons" of the
Fund.
No meetings of shareholders of the Fund will be held for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Under the 1940 Act, shareholders of record of not less than two-thirds
of the outstanding shares of the Fund may remove a Trustee through a declaration
in writing or by vote cast in person or by proxy at a meeting called for that
purpose. Under the Fund's Agreement and Declaration of Trust, the Trustees are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any such Trustee when requested in writing to do so by
the shareholders of record of not less than 10% of the Fund's outstanding
shares.
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolios' Prospectus entitled "Management of the STARS
Portfolio."
General.
On December 3, 1997, BSFM, the registered investment adviser of the
Portfolio, changed its name to BSAM. On December 4, 1997, BSFM formed a new
corporate entity under the laws of Delaware to conduct mutual fund
administrative work for The Bear Stearns Funds and other affiliated and
non-affiliated investment companies.
Prior to June 25, 1997, the Portfolio invested all of its assets into the S&P
STARS Master Series of S&P STARS Fund (the "Master Series"), rather than
directly in a portfolio of securities in an arrangement typically referred to as
a "master-feeder" structure. Active portfolio management was performed at the
Master Series level and BSFM was retained by the Master Series rather than the
Portfolio. At a meeting held on 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
B-10
<PAGE>
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. BSAM 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 BSAM, 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 BSAM. The
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
BSAM is a wholly owned subsidiary of The Bear Stearns Companies Inc. The
following persons are directors and/or senior officers of BSAM: Mark A.
Kurland, President, Chairman of the Board and Director; Robert S. Reitzes,
Executive Vice President and Director; Donalda L. Fordyce, Vice President,
Chief Operating Officer and Director; Ellen T. Arthur, Secretary; and Warren
J. Spector and Robert M. Steinberg, Directors.
BSAM provides investment advisory services to the Portfolio in accordance
with its stated policies, subject to the approval of the Fund's Board of
Trustees. BSAM 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 (now, BSAM) 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, as
revised April 11, 1995, June 2, 1997, and September 8, 1997, with the Fund. The
Administration Agreement will continue until February 22, 1998 and thereafter
will be subject to annual approval by (i) the Fund's Board or (ii) vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, provided that in either event its continuance also is approved by
a majority of the Fund's Board members who are not "interested persons" (as
defined in the 1940 Act) of the Fund or BSFM, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Administration
Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board
or by vote of the holders of a majority of the Portfolio's shares or upon not
less than 90 days' notice by BSFM. The Administration Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
B-11
<PAGE>
As compensation for BSFM's administrative services, the Fund has agreed to
pay BSFM a monthly fee at the annual rate of 0.15 of 1% of the Portfolio's
average daily net assets. 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 dated
February 22, 1995, as revised September 8, 1997, with the Fund. The
Administrative Services Agreement is terminable upon 60 days' notice by either
the Fund or PFPC. PFPC may assign its rights or delegate its duties under the
Administrative Services Agreement to any wholly-owned direct or indirect
subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that
(i) PFPC gives the Fund 30 days' notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the 1940 Act;
and (iii) PFPC and such delegate (or assignee) promptly provide information
requested by the Fund in connection with such delegation.
Under the terms of the Administrative Services Agreement, PFPC is entitled
to receive a monthly fee equal to an annual rate of 0.10 of 1% of the
Portfolio's average daily net assets up to $200 million, 0.075% of 1% of the
next $200 million, .05% of 1% of the next $200 million and 0.03 of 1% of net
assets above $600 million, subject to a minimum annual fee of approximately
$100,000 for the Portfolio.
Prior to June 25, 1997, PFPC Inc. provided administrative services to the
Portfolio. As compensation for PFPC's administrative services, the Fund agreed
to pay PFPC $5,500 per month. For the period from April 3, 1995 (commencement of
operations) through March 31, 1996, the administrative fee payable by the
Portfolio amounted to $60,000. This amount was reduced to $58,660 as a result of
a waiver of fees by PFPC. For the fiscal year ended March 31, 1997, the
administrative fee payable by the Portfolio amounted to $65,999.
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 Plan. Rule 12b-1 (the "Rule") adopted by the Securities and
Exchange Commission under the 1940 Act provides, among other things, that an
investment company may bear expenses of distributing its shares only pursuant to
a plan adopted in accordance with the Rule. The Fund's Board of Trustees has
adopted a distribution and shareholder servicing plan with respect to Class A
and Class C shares and a distribution plan with respect to Class B shares (the
"Distribution Plans"). The Fund's Board of Trustees believes that there is a
reasonable likelihood that the Distribution Plans will benefit the Portfolio and
the holders of its Class A, Class B and Class C shares.
A quarterly report of the amounts expended under each Distribution Plan,
and the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, each Distribution Plan provides that it
may not be amended to increase materially the costs which holders of a class of
shares may bear pursuant to such Plan without approval of such effected
shareholders and that other material amendments of the Distribution
B-12
<PAGE>
Plan must be approved by the Board of Trustees, and by the Trustees who are
neither "interested persons" (as defined in the 1940 Act) of the Fund nor have
any direct or indirect financial interest in the operation of the Plan or in the
related Plan agreements, by vote cast in person at a meeting called for the
purpose of considering such amendments. In addition, because Class B shares
automatically convert into Class A shares after eight years, the Fund is
required by a Securities and Exchange Commission rule to obtain the approval of
Class B as well as Class A shareholders for a proposed amendment to each
Distribution Plan that would materially increase the amount to be paid by Class
A shareholders under such Plans. Such approval must be by a "majority" of the
Class A and Class B shares (as defined in the 1940 Act), voting separately by
class. Each Distribution Plan and related agreements is subject to annual
approval by such vote cast in person at a meeting called for the purpose of
voting on such Plan. The Distribution Plan with respect to Class A and Class C
shares was so approved on January 28, 1997. The Distribution Plan with respect
to the Class B shares was so approved on September 8, 1997. Each Distribution
Plan is terminable at any time, as to each class of the Portfolio, by vote of a
majority of the Trustees who are not "interested persons" and who have no direct
or indirect financial interest in the operation of the Distribution Plan or in
the Plan agreements or by vote of holders of a majority of the relevant class'
shares. A Plan agreement is terminable, as to each class of the Portfolio,
without penalty, at any time, by such vote of the Trustees, upon not more than
60 days written notice to the parties to such agreement or by vote of the
holders of a majority of the relevant class' shares. A Plan agreement will
terminate automatically, as to the relevant class of the Portfolio, in the event
of its assignment (as defined in the 1940 Act).
For the fiscal year ended March 31, 1997, the Portfolio paid Bear Stearns
$276,327 with respect to Class A shares and $324,164 with respect to Class C
shares under the Plan. All such amounts were paid to brokers or dealers.
Shareholder Servicing Plan. The Fund has adopted a shareholder servicing
plan on behalf of the Portfolio's Class B shares (the "Shareholder Servicing
Plan"). In accordance with the Shareholder Servicing Plan, the Fund may enter
into shareholder service agreements under which the Portfolio pays fees of up to
0.25% of the average daily net assets of Class B shares for fees incurred in
connection with the personal service and maintenance of accounts holding
Portfolio shares for responding to inquiries of, and furnishing assistance to,
shareholders regarding ownership of the shares or their accounts or similar
services not otherwise provided on behalf of the Portfolio.
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 BSAM or its
affiliates, Securities and Exchange Commission fees, state Blue Sky
qualification fees, advisory fees, administrative and fund accounting fees,
charges of custodians, transfer and dividend disbursing agents' fees, certain
insurance premiums, industry association fees, outside auditing and legal
expenses, costs of maintaining the existence of the Fund, costs attributable to
investor services (including, without limitation, telephone and personnel
expenses), costs of shareholders' reports and meetings, costs of preparing and
printing certain prospectuses and statements of additional information, and any
extraordinary expenses. Expenses attributable to a particular portfolio of the
Fund are charged against the assets of that portfolio; other expenses of the
Fund are allocated among the portfolios on the basis determined by the Board,
including, but not limited to, proportionately in relation to the net assets of
each portfolio.
Expense Limitation. BSAM agreed that if, in any fiscal year, the aggregate
expenses of a Portfolio, exclusive of taxes, brokerage commissions, interest
on borrowings and (with prior written consent of the necessary state
B-13
<PAGE>
securities commissions) extraordinary expenses, exceed the expense limitation of
any state having jurisdiction over the Portfolio, the Fund may deduct from the
payment to be made to BSAM, such excess expense to the extent required by state
law. Such deduction or payment, if any, will be estimated daily, and reconciled
and effected or paid, as the case may be, on a monthly basis. No such expense
limitations currently apply to the Portfolio.
Activities of BSAM and its Affiliates and Other Accounts Managed by BSAM.
The involvement of BSAM, Bear Stearns and their affiliates in the management of,
or their interests in, other accounts and other activities of BSAM and Bear
Stearns may present conflicts of interest with respect to the Portfolio or limit
the Portfolio's investment activities. BSAM, Bear Stearns and its affiliates
engage in proprietary trading and advise accounts and funds which have
investment objectives similar to those of the Portfolio and/or which engage in
and compete for transactions in the same types of securities, currencies and
instruments as the Portfolio. BSAM, Bear Stearns and its affiliates will not
have any obligation to make available any accounts managed by them, for the
benefit of the management of the Portfolio. The results of the Portfolio's
investment activities, therefore, may differ from those of Bear Stearns and its
affiliates and it is possible that the Portfolio could sustain losses during
periods in which BSAM, Bear Stearns and its affiliates and other accounts
achieve significant profits on their trading for proprietary and other accounts.
From time to time, the Portfolio's activities may be limited because of
regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
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, as revised
September 8, 1997, which is renewable annually. For the period from April 3,
1995 (commencement of operations) through March 31, 1996, Bear Stearns retained
$32,434 from the sales loads on Class A shares and $25,670 from contingent
deferred sales charges ("CDSC") on Class C shares. For the fiscal year ended
March 31, 1997, Bear Stearns retained approximately $904,000 from the sales
loads on Class A shares and approximately $30,000 from CDSC on Class C shares.
In some states, banks or other institutions effecting transactions in Portfolio
shares may be required to register as dealers pursuant to state law.
Purchase Order Delays. The effective date of a purchase order may be
delayed if PFPC, the Portfolio's transfer agent, is unable to process the
purchase order because of an interruption of services at its processing
facilities. In such event, the purchase order would become effective at the
purchase price next determined after such services are restored.
Sales Loads--Class A. Set forth below is an example of the method of
computing the offering price of the Class A shares of the Portfolio. The example
assumes a purchase of Class A shares aggregating less than $50,000 subject to
the schedule of sales charges set forth in the Prospectus at a price based upon
the net asset value of the Class A shares on March 31, 1997.
Net Asset Value per Share $16.13
======
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 0.94
------
B-14
<PAGE>
Per Share Offering Price to
the Public $17.07
======
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the Portfolio's investments or determination of its net asset
value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit to protect the
Portfolio's shareholders.
Alternative Sales Arrangements - Class A, Class B, Class C and Class Y
Shares. The availability of three classes of shares to individual investors
permits an investor to choose the method of purchasing shares that is more
beneficial to the investor depending on the amount of the purchase, the length
of time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Portfolio shares may receive different compensation with respect to one
class of shares than the other. Bear Stearns will not accept any order of
$500,000 or more of Class B shares or $1 million or more of Class C shares, on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of a Portfolio instead. A fourth class of shares may be
purchased only by certain institutional investors at net asset value per share
(the "Class Y shares").
The four classes of shares each represent an interest in the same
portfolio investments of a Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by incremental expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
The methodology for calculating the net asset value, dividends and
distributions of each Portfolio's Class A, B, C and Y shares recognizes two
types of expenses. General expenses that do not pertain specifically to a class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Portfolio's total assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (a) Distribution Plan
and Shareholder Servicing Plan fees, (b) incremental transfer and shareholder
servicing agent fees and expenses, (c) registration fees and (d) shareholder
meeting expenses, to the extent that such expenses pertain to a specific class
rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of a Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
B-15
<PAGE>
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Portfolio securities, including
covered call options written by the Portfolio, are valued at the last sale price
on the securities exchange or national securities market on which such
securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Short-term
investments are carried at amortized cost, which approximates value. Any
securities or other assets for which recent market quotations are not readily
available are valued at fair value as determined in good faith by the Fund's
Board of Trustees. Expenses and fees, including the management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Portfolio's shares. Because of
the differences in operating expenses incurred by each class, the per share net
asset value of each class will differ.
The Portfolio's restricted securities, as well as securities or other
assets for which market quotations are not readily available, or are not valued
by a pricing service approved by the Board of Trustees, are valued at fair value
as determined in good faith by the Board of Trustees. The Board of Trustees will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Board of Trustees generally will take
the following factors into consideration: restricted securities which are, or
are convertible into, securities of the same class of securities for which a
public market exists usually will be valued at market value less the same
percentage discount at which purchased. This discount will be revised
periodically by the Board of Trustees if the Board of Trustees believe that it
no longer reflects the value of the restricted securities. Restricted securities
not of the same class as securities for which a public market exists usually
will be valued initially at cost. Any subsequent adjustment from cost will be
based upon considerations deemed relevant by the Board of Trustees.
New York Stock Exchange Closings. The holidays (as observed) on which
the New York Stock Exchange is closed currently are: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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
B-16
<PAGE>
interest, dividends and other taxable ordinary income, net of expenses) and
capital gain net income (i.e., the excess of capital gains over capital losses)
that it distributes to shareholders, provided that it distributes at least 90%
of its investment company taxable income (i.e., net investment income and the
excess of net short-term capital gain over net long-term capital loss) for the
taxable year (the "Distribution Requirement"), and satisfies certain other
requirements of the Code that are described below. Distributions by the
Portfolio made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and will, therefore,
satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) for taxable
years beginning on or before August 5, 1997, 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. The
Short-Short Gain Test will not apply to taxable years beginning after August 5,
1997.
In general, gain or loss recognized by the Portfolio on the disposition
of an asset will be a capital gain or loss. In addition, gain will be recognized
as a result of certain constructive sales, including short sales "against the
box." 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
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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; (3) the transaction is
one that was marketed or sold to the Portfolio on the basis that it would have
the economic characteristics of a loan but the interest-like return would be
taxed as capital gain; or (4) the transaction is described as a conversion
transaction in the Treasury Regulations. The amount of the gain recharacterized
generally will not exceed the amount of the interest that would have accrued on
the net investment for the relevant period at a yield equal to 120% of the
federal long-term, mid-term, or short-term rate, depending upon the type of
instrument at issue, reduced by an amount equal to: (1) prior inclusions of
ordinary income items from the conversion transaction and (2) the capital
interest on acquisition indebtedness under Code section 263(g). Built-in losses
will be preserved where the Portfolio has a built-in loss with respect to
property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed to
the Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (depending on the
type of Portfolio) (1) the asset is used to close a "short sale" (which includes
for certain purposes the acquisition of a put option) or is substantially
identical to another asset so used, (2) the asset is otherwise held by the
Portfolio as part of a "straddle" (which term generally excludes a situation
where the asset is stock and the Portfolio grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto, or (3) the asset is stock and the Portfolio grants an in-the-money
qualified covered call option with respect thereto. However, for purposes of the
Short-Short Gain Test, the holding period of the asset disposed of may be
reduced only in the case of clause (1) above. In addition, the Portfolio may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by the Portfolio on the lapse of, or any gain or
loss recognized by the Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an option
written by the Portfolio will commence on the date it is written and end on the
date it lapses or the date a closing transaction is entered into. Accordingly,
for taxable years beginning on or before August 5, 1997, 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
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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.
Generally, 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 the year, regardless of
whether the Portfolio receives distributions of any such ordinary earnings or
capital gains from the PFIC. In the alternative, for tax years beginning after
December 31, 1997, a portfolio that invests in stock of a PFIC may make a
mark-to-market election with respect to such stock. Pursuant to such election,
the Portfolio will include as ordinary income any excess of the fair market
value of such stock at the close of any taxable year over the Portfolio's
adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a taxable year, such
excess will be deductible as ordinary loss in the amount equal to the lesser of
the amount of such excess or the net mark-to-market gains on the stock that the
Portfolio included in income in previous years. The Portfolio's holding period
with respect to the PFIC stock subject to the election will commence on the
first day of the next taxable year. If the Portfolio makes the election in the
first taxable year it holds PFIC stock, it will not incur the tax described
below. If the Portfolio does not elect to treat the PFIC as a QEF and does not
make a mark-to-market election, then, in general, (1) any gain recognized by the
Portfolio upon sale or other disposition of its interest in the PFIC or any
excess distribution received by the Portfolio from the PFIC will be allocated
ratably over the Portfolio's holding period of its interest in the PFIC, (2) the
portion of such gain or excess distribution so allocated to the year in which
the gain is recognized or the excess distribution is received shall be included
in the Portfolio's gross income for such year as ordinary income (and the
distribution of such portion by the Portfolio to shareholders will be taxable as
an ordinary income dividend, but such portion will not be subject to tax at the
Portfolio level), (3) the Portfolio shall be liable for tax on the portions of
such gain or excess distribution so allocated to prior years in an amount equal
to, for each such prior year, (i) the amount of gain or excess distribution
allocated to such prior year multiplied by the highest tax rate (individual or
corporate) in effect for such prior year plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Portfolio to shareholders of the portions of such gain or
excess distribution so allocated to prior years (net of the tax payable by the
Portfolio thereon) will again be taxable to the shareholders as an ordinary
income dividend.
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
(includng, to the extent provided in Treasury regulations, losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.
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In addition to satisfying the requirements described above, the
Portfolio must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
the Portfolio's taxable year, at least 50% of the value of the Portfolio's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to each of which the Portfolio has not invested more than 5% of the
value of the Portfolio's total assets in securities of such issuer and does not
hold more than 10% of the outstanding voting securities of such issuer), and no
more than 25% of the value of its total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to a tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
its ordinary income for such calendar year and 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 and ordinary gains or losses arising as a
result of a PFIC mark-to-market election (or upon an actual disposition of the
PFIC stock subject to such election) 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
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below. Dividends paid on Class A, B, C, and Y shares are calculated at the same
time and in the same manner. In general, dividends on Class B and C shares are
expected to be lower than those on Class A shares due to the higher distribution
expenses borne by the Class B and C shares. Dividends may also differ between
classes as a result of differences in other class specific expenses.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The Portfolio currently intends to
distribute any such amounts. Net capital gain that is distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term capital
gain, regardless of the length of time the shareholder has held his shares or
whether such gain was recognized by the Portfolio prior to the date on which the
shareholder acquired his shares. The Code provides, however, that under certain
conditions only 50% (58% for alternative minimum tax purposes) of the capital
gain recognized upon the Portfolio's disposition of domestic "small business"
stock will be subject to tax.
Conversely, if the Portfolio elects to retain its net capital gain, the
Portfolio will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If the Portfolio elects to
retain its net capital gain, it is expected that the Portfolio also will elect
to have shareholders of record on the last day of its taxable year treated as if
each received a distribution of his pro rata share of such gain, with the result
that each shareholder will be required to report his pro rata share of such gain
on his tax return as long-term capital gain, will receive a refundable tax
credit for his pro rata share of tax paid by the Portfolio on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Portfolio with respect to a
taxable year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Portfolio from domestic
corporations for the taxable year. Generally, 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) 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. The 46-day holding period must be
satisfied during the 90-day period beginning 45 days prior to each applicable
ex-dividend date; the 91-day holding period must be satisfied during the 180-day
period beginning 90 days before each applicable ex-dividend date. 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
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rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, a corporate shareholder will generally be required
to take the full amount of any dividend received from the Portfolio into account
(without a dividends-received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by the Portfolio from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle the Portfolio to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Portfolio's assets to be invested in various
countries is not known.
Distributions by the Portfolio that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares or shares of another portfolio (or another fund).
Shareholders receiving a distribution in the form of additional shares will be
treated as receiving a distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. In addition, if
the net asset value at the time a shareholder purchases shares of the Portfolio
reflects undistributed net investment income or recognized capital gain net
income, or unrealized appreciation in the value of the assets of the Portfolio,
distributions of such amounts will be taxable to the shareholder in the manner
described above, although they economically constitute a return of capital to
the shareholder.
Ordinarily, shareholders are required to take distributions by the
Portfolio into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders (and made by the Portfolio) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Portfolio will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain dividends,
and the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Portfolio that it is not subject to backup withholding or that it is an exempt
recipient (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
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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. Long-term capital gain recognized
by an individual shareholder will be taxed at the lowest rates applicable to
capital gains if the holder has held such shares for more than 18 months at the
time of the sale. 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 at least 11.6% lower than the maximum rate
applicable to ordinary income. Capital losses in any year are deductible only to
the extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000
of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the Portfolio or another fund at a
reduced sales load pursuant to a right to reinvest at such reduced sales load
acquired in connection with the acquisition of the shares disposed of, then the
sales load on the shares disposed of (to the extent of the reduction in the
sales load on the shares subsequently acquired) shall not be taken into account
in determining gain or loss on the shares disposed of but shall be treated as
incurred on the acquisition of the shares subsequently acquired.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower applicable treaty rate) upon the gross amount of
the dividend. Such foreign shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of the Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Portfolio will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Portfolio may be
required to withhold U.S. federal income tax at the rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Portfolio with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
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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
BSAM 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 BSAM'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 BSAM'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 BSAM and BSAM's fees
are not reduced as a consequence of the receipt of such supplemental
information. A commission paid to such brokers may be higher than that which
another qualified broker would have charged for effecting the same transaction,
provided that BSAM, as applicable, determines in good faith that such commission
is reasonable in terms of the transaction or the overall responsibility of BSAM
to the Portfolio and its other clients and that the total commissions paid by
the Portfolio will be reasonable in relation to the benefits to the Portfolio
over the long-term.
Such supplemental information may be useful to BSAM in serving both the
Portfolio and the other funds which it advises and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to BSAM in carrying out its obligations to the Portfolio. Sales of Portfolio
shares by a broker may be taken into consideration, and brokers also will be
selected because of their ability to handle special executions such as are
involved in large block trades or broad distributions, provided the primary
consideration is met. Large block trades may, in certain cases, result from two
or more funds advised or administered by BSAM being engaged simultaneously in
the purchase or sale of the same security. Certain of BSAM's transactions in
securities of foreign issuers may not benefit from the negotiated commission
rates available to the Portfolio for transactions in securities of domestic
issuers. When transactions are executed in the over-the-counter market, the
Portfolio will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
Portfolio turnover may vary from year to year as well as within a year.
The turnover rate for the 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. BSAM 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
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market conditions prevail, BSAM 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 BSAM 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 BSAM, 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 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.
For the fiscal year ended March 31, 1997, the Master Series paid an
average commission rate per share of $0.0595. The percentage of commissions for
which it received research services paid by the Master Series was 98.6% of the
total brokerage commissions paid by the Master Series.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased at net asset value (maximum offering
price in the case of Class A) per share with a hypothetical $1,000 payment made
at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result. A class's average annual total return figures
calculated in accordance with such formula assume that in the case of Class A
the maximum sales load has been deducted from the hypothetical initial
investment at the time of purchase or in the case of Class B the maximum
applicable CDSC has been paid upon redemption at the end of the period.
The average annual total return for Class A for the period April 5, 1995
(commencement of investment operations) to March 31, 1997 was 19.30% after
reflecting the maximum initial sales charge of 4.75%. Based on net asset value
per share, the average annual total return for Class A was 22.26% for the same
period. The average annual total return for Class C was 21.60% for
B-25
<PAGE>
this period. Average annual total return for Class Y for the period August 7,
1995 (commencement of initial public offering) to March 31, 1997 was 16.20%.
Total return is calculated by subtracting the amount of the Portfolio's
net asset value (maximum offering price in the case of Class A) per share at the
beginning of a stated period from the net asset value per share at the end of
the period (after giving effect to the reinvestment of dividends and
distributions during the period and any applicable CDSC), and dividing the
result by the net asset value (maximum offering price in the case of Class A)
per share at the beginning of the period. Total return also may be calculated
based on the net asset value per share at the beginning of the period instead of
the maximum offering price per share at the beginning of the period for Class A
shares or without giving effect to any applicable CDSC at the end of the period
for Class B and C shares. In such cases, the calculation would not reflect the
deduction of the sales load with respect to Class A shares or any applicable
CDSC with respect to Class B and C shares, which, if reflected, would reduce the
performance quoted.
The total return for Class A, after reflecting the maximum initial sales
charge of 4.75%, for the year ended March 31, 1997 and the period April 5, 1995
(commencement of investment operations) to March 31, 1997 was 11.34% and 42.11%,
respectively. Based on net asset value per share, the total return for Class A
was 16.87% and 49.22%, respectively, for the same periods. The total return for
Class C was 16.33% and 47.64%, respectively, for the periods. The total return
for Class Y for the year ended March 31, 1997 and the period August 7, 1995
(commencement of initial public offering) to March 31, 1997 was 17.48% and
28.16%, respectively.
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the 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 BSAM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security for his or her account in which he or she
has any direct or indirect beneficial interest, without prior approval by the
Fund or without the applicability of certain exemptions; (2) the recommendation
of a securities transaction without disclosing his or her interest in the
security or issuer of the security; (3) the commission of fraud in connection
with the purchase or sale of a security held by or to be acquired by the
Portfolio; and (4) the purchase of any securities in an initial public offering
or private placement transaction eligible for purchase or sale by the Portfolio
without prior approval by the Fund. Certain transactions are exempt from item
(1) of the previous sentence, including: (1) any securities transaction, or
series of related transactions, involving 500 or fewer shares of an (i) issuer
with an average monthly trading volume of 100 million shares or more, or (ii) an
issuer that has a market capitalization of $1 billion or greater; and (2)
transactions in exempt securities or the purchase or sale of securities
purchased or sold in exempt transactions.
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 1940 Act) of the
Trust is not required to report a transaction
B-26
<PAGE>
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 FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "General Information."
Bear Stearns and S&P entered into a License Agreement dated October 1,
1994 that provides for, among other matters: (i) the grant by S&P to Bear
Stearns of the exclusive right until March 31, 2001, and the non-exclusive right
thereafter, to use certain of S&P's proprietary trade names and trademarks for
investment companies based, in whole or in part, on the STARS System, (ii) such
right to become non-exclusive at an earlier date, if the Portfolio and certain
other investment companies which, in the future, may be sponsored by Bear
Stearns fail to reach certain aggregate asset sizes, measured annually
commencing on April 1, 1996, (iii) such right to terminate at S&P's option upon
certain events, such as breach by Bear Stearns of the material terms of the
License Agreement, S&P ceasing to publish STARS, the adoption of adverse
legislation or regulation (none of which currently is foreseen) affecting S&P's
ability to license its trade names or trademarks as contemplated by the License
Agreement, or the existence of certain litigation (none of which is known to
exist or to be threatened), (iv) the payment by Bear Stearns of annual license
fees in amounts equal to a range of .30% to .375% of the net assets of the
Portfolio and other investment companies subject to the License Agreement and
(v) a partial reduction of the license fees to offset certain marketing expenses
incurred by Bear Stearns in connection with the Portfolio.
STARS is the centerpiece of OUTLOOK, S&P's flagship investment
newsletter that has a high net worth readership of 25,000 weekly subscribers.
STARS reaches more than 72,000 brokers and investment professionals on their
desktop computers through MarketScope, S&P's on-line, real-time equity
evaluation service, which is accessed more than one million times daily.
S&P has more than 130 years' experience in providing financial
information and analysis, offers more than 60 products and employs more than 50
experienced equity analysts. These analysts consider fundamental factors that
are expected to impact growth. These factors include company operations and
industry and macroeconomic conditions. Among the fundamental factors are the
company's balance sheet, ability to finance growth, competitive market
advantages, earnings per share growth and strength of management.
Each Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Portfolio shares have no preemptive, subscription or conversion rights and are
freely transferable.
The Fund will send annual and semi-annual financial statements to all
its shareholders.
B-27
<PAGE>
As of December 26, 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 65.2%
101 Carnegie Center
Princeton, NJ 08540
A shareholder who beneficially owns, directly or indirectly, more than
25% of the Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act) of the Portfolio.
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 provided legal advice as to certain legal
matters regarding the shares of beneficial interest being sold pursuant to the
Portfolio's Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New York, New York,
10281, independent auditors, have been selected as auditors of the Fund.
FINANCIAL STATEMENTS
The Portfolio's Annual Report to Shareholders for the fiscal year ended
March 31, 1997 is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and reports of
independent auditors appearing therein are incorporated by reference into this
Statement of Additional Information.
B-28
<PAGE>
Rule 497(c)
Registration No. 33-84842
- --------------------------------------------------------------------------------
THE BEAR STEARNS FUNDS
THE INSIDERS SELECT FUND
CLASS A, CLASS B, CLASS C AND CLASS Y
PART B
(STATEMENT OF ADDITIONAL INFORMATION)
DECEMBER 24, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current relevant
Prospectus dated December 24, 1997 of The Insiders Select Fund (the "Portfolio")
of The Bear Stearns Funds (the "Fund"), as each may be revised from time to
time. To obtain a free copy of such prospectus, please write to the Fund at PFPC
Inc. ("PFPC"), Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington,
Delaware 19899-8960, call 1-800-447-1139 or call Bear, Stearns & Co. Inc. ("Bear
Stearns") at 1-800-766-4111.
Bear Stearns Asset Management Inc. ("BSAM" or the "Adviser"), a
wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the
Portfolio's investment adviser.
Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary
of The Bear Stearns Companies Inc., is the administrator of the Portfolio.
Bear Stearns, an affiliate of BSAM, serves as distributor of the
Portfolio's shares.
TABLE OF CONTENTS
Page
Investment Objective and Management Policies............................ B-2
Management of the Fund.................................................. B-9
Management Arrangements................................................. B-12
Purchase and Redemption of Shares....................................... B-15
Determination of Net Asset Value........................................ B-17
Dividends, Distributions and Taxes...................................... B-17
Portfolio Transactions.................................................. B-25
Performance Information................................................. B-26
Code of Ethics.......................................................... B-27
Information About the Fund.............................................. B-28
Custodian, Transfer and Dividend Disbursing Agent,
Counsel and Independent Auditors...................................... B-29
Financial Statements.................................................... B-29
B-1
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Description of the
Portfolio."
Portfolio Securities
Bank Obligations. Domestic commercial banks organized under Federal law
are supervised and examined by the Comptroller of the Currency and are required
to be members of the Federal Reserve System and to have their deposits insured
by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic banks
organized under state law are supervised and examined by state banking
authorities but are members of the Federal Reserve System only if they elect to
join. In addition, state banks whose certificates of deposit ("CDs") may be
purchased by the Portfolio are insured by the FDIC (although such insurance may
not be of material benefit to the Portfolio, depending on the principal amount
of the CDs of each bank held by the Portfolio) and are subject to Federal
examination and to a substantial body of Federal law and regulation. As a result
of Federal or state laws and regulations, domestic branches of domestic banks
whose CDs may be purchased by the Portfolio generally are required, among other
things, to maintain specified levels of reserves, are limited in the amounts
which they can loan to a single borrower and are subject to other regulation
designed to promote financial soundness. However, not all of such laws and
regulations apply to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries
of domestic banks and domestic and foreign branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, Federal branches licensed by the Comptroller of the
Currency and branches licensed by certain states ("State Branches") may be
required to: (1) pledge to the regulator, by depositing assets with a designated
bank within the state, a certain percentage of their assets as fixed from time
to time by the appropriate regulatory authority; and (2) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The
B-2
<PAGE>
deposits of Federal and State Branches generally must be insured by the FDIC if
such branches take deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, BSAM carefully evaluates such investments on a case-by-case
basis.
Repurchase Agreements. The Portfolio's custodian or sub-custodian will
have custody of, and will hold in a segregated account, securities acquired by
the Portfolio under a repurchase agreement. Repurchase agreements are considered
by the staff of the Securities and Exchange Commission to be loans by the
Portfolio. In an attempt to reduce the risk of incurring a loss on a repurchase
agreement, the Portfolio will enter into repurchase agreements only with
domestic banks with total assets in excess of one billion dollars, or primary
government securities dealers reporting to the Federal Reserve Bank of New York,
with respect to securities of the type in which the Portfolio may invest, and
will require that additional securities be deposited with it if the value of the
securities purchased should decrease below the resale price. The Adviser will
monitor on an ongoing basis the value of the collateral to assure that it always
equals or exceeds the repurchase price. The Portfolio will consider on an
ongoing basis the credit worthiness of the institutions with which it enters
into repurchase agreements.
Commercial Paper and Other Short-Term Corporate Obligations. Variable
rate demand notes include variable amount master demand notes, which are
obligations that permit the Portfolio to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. These notes permit daily changes in the amounts
borrowed. As mutually agreed between the parties, the Portfolio may increase the
amount under the notes at any time up to the full amount provided by the note
agreement, or decrease the amount, and the borrower may repay up to the full
amount of the note without penalty. Because these obligations are direct lending
arrangements between the lender and the borrower, it is not contemplated that
such instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value, plus accrued interest, at any time. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, the
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. In connection with floating and variable rate
demand obligations, the Adviser will consider, on an ongoing basis, earning
power, cash flow and other liquidity ratios of the borrower, and the borrower's
ability to pay principal and interest on demand. Such obligations frequently are
not rated by credit rating agencies, and the Portfolio may invest in them only
if at the time of an investment the borrower meets the criteria set forth in the
Portfolio's Prospectus for other commercial paper issuers.
Illiquid Securities. When purchasing securities that have not been
registered under the Securities Act of 1933, as amended, and are not readily
marketable, the Portfolio will endeavor to obtain the right to registration at
the expense of the issuer. Generally, there will be a lapse of time between the
Portfolio's decision to sell any such security and the registration of the
security permitting sale. During any such period, the price of the securities
will be subject to market fluctuations. However, if a substantial market of
qualified institutional buyers develops for certain unregistered securities
purchased by the Portfolio pursuant to Rule 144A under the Securities Act of
1933, as amended ("Rule 144A"), the Portfolio intends to treat them as liquid
securities in accordance with procedures approved by the Fund's Board of
Trustees. Because it is not possible to predict with assurance how the market
for restricted securities pursuant to
B-3
<PAGE>
Rule 144A will develop, the Fund's Board of Trustees has directed the Adviser to
monitor carefully the Portfolio's investments in such securities with particular
regard to trading activity, availability of reliable price information and other
relevant information. To the extent that, for a period of time, qualified
institutional buyers cease purchasing restricted securities pursuant to Rule
144A, the Portfolio's investing in such securities may have the effect of
increasing the level of illiquidity in the Portfolio during such period.
Management Policies
The Portfolio engages in the following practices in furtherance of its
objective.
Options Transactions. The Portfolio may engage in options transactions,
such as purchasing or writing covered call or covered put options. The principal
reason for writing covered call options, which are call options with respect to
which the Portfolio owns the underlying security or securities, is to realize,
through the receipt of premiums, a greater return than would be realized on the
Portfolio's securities alone. In return for a premium, the writer of a covered
call option forfeits the right to any appreciation in the value of the
underlying security above the strike price for the life of the option (or until
a closing purchase transaction can be effected). Nevertheless, the call writer
retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of the
premiums that the Portfolio may receive may be adversely affected as new or
existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options written by the Portfolio ordinarily will have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the time the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at- the-money" and
"out-of-the-money," respectively. The Portfolio may write: (a) in-the-money call
options when the Adviser expects that the price of the underlying security will
remain stable or decline moderately during the option period, (b) at-the-money
call options when the Adviser expects that the price of the underlying security
will remain stable or advance moderately during the option period and (c)
out-of-the-money call options when the Adviser expects that the premiums
received from writing the call option plus the appreciation in market price of
the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In these
circumstances, if the market price of the underlying security declines and the
security is sold at this lower price, the amount of any realized loss will be
offset wholly or in part by the premium received. Out-of-the-money, at-the-money
and in-the-money put options (the reverse of call options as to the relation of
exercise price to market price) may be utilized in the same market environments
that such call options are used in equivalent transactions.
So long as the Portfolio's obligation as the writer of an option
continues, the Portfolio may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Portfolio to deliver, in the
case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or the Portfolio effects a closing purchase transaction. The
Portfolio can no longer effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice.
B-4
<PAGE>
While it may choose to do otherwise, the Portfolio generally will
purchase or write only those options for which the Adviser believes there is an
active secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer the Portfolio is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
Stock Index Options. The Portfolio may purchase and write put and
call options on stock indexes listed on U.S. or foreign securities exchanges
or traded in the over-the-counter market. A stock index fluctuates with
changes in the market values of the stocks included in the index.
Options on stock indexes are similar to options on stock except: (a)
the expiration cycles of stock index options are generally monthly, while those
of stock options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of a stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option. The amount of cash
received will be equal to such difference between the closing price of the index
and the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange or it may let the option expire unexercised.
Futures Contracts and Options on Futures Contracts. The Portfolio may
trade futures contracts and options on futures contracts in U.S. domestic
markets, such as the Chicago Board of Trade and the International Monetary
Market of the Chicago Mercantile Exchange.
Initially, when purchasing or selling futures contracts the Portfolio
will be required to deposit with the Fund's custodian in the broker's name an
amount of cash or cash equivalents up to approximately 10% of the contract
amount. This amount is subject to change by the exchange or board of trade on
which the contract is traded and members of such exchange or board of trade may
impose their own higher requirements. This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio upon termination of the futures position,
assuming all contractual obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker will be made daily as the
price of the index or securities underlying the futures contract fluctuates,
making the long and
B-5
<PAGE>
short positions in the futures contract more or less valuable, a process known
as "marking-to-market." At any time prior to the expiration of a futures
contract, the Portfolio may elect to close the position by taking an opposite
position, at the then prevailing price, which will operate to terminate the
Portfolio's existing position in the contract.
Although the Portfolio intends to purchase or sell futures contracts
only if there is an active market for such contracts, no assurance can be given
that a liquid market will exist for any particular contract at any particular
time. Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Portfolio
to substantial losses. If it is not possible, or the Portfolio determines not to
close a futures position in anticipation of adverse price movements, the
Portfolio will be required to make daily cash payments of variation margin. In
such circumstances, an increase in the value of the portion of the portfolio
being hedged, if any, may offset partially or completely losses on the futures
contract. However, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.
In addition, to the extent the Portfolio is engaging in a futures
transaction as a hedging device, due to the risk of an imperfect correlation
between securities owned by the Portfolio that are the subject of a hedging
transaction and the futures contract used as a hedging device, it is possible
that the hedge will not be fully effective in that, for example, losses on the
portfolio securities may be in excess of gains on the futures contract or losses
on the futures contract may be in excess of gains on the portfolio securities
that were the subject of the hedge. In futures contracts based on indexes, the
risk of imperfect correlation increases as the composition of the Portfolio's
investments varies from the composition of the index. In an effort to compensate
for the imperfect correlation of movements in the price of the securities being
hedged and movements in the price of futures contracts, the Portfolio may buy or
sell futures contracts in a greater or lesser dollar amount than the dollar
amount of the securities being hedged if the historical volatility of the
futures contract has been less or greater than that of the securities. Such
"over hedging" or "under hedging" may adversely affect the Portfolio's net
investment results if market movements are not as anticipated when the hedge is
established.
Upon exercise of an option, the writer of the option will deliver to
the holder of the option the futures position and the accumulated balance in the
writer's futures margin account, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
The potential loss related to the purchase of options on futures contracts is
limited to the premium paid for the option (plus transaction costs). Because the
value of the option is fixed at the time of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected in
the net asset value of each Portfolio.
Lending Portfolio Securities. To a limited extent, the Portfolio may
lend its portfolio securities to brokers, dealers and other financial
institutions, provided it receives cash collateral which at all times is
maintained in an amount equal to at least 100% of the current market value of
the securities loaned. By lending its portfolio securities, the
B-6
<PAGE>
Portfolio can increase its income through the investment of the cash collateral.
For purposes of this policy, the Portfolio considers collateral consisting of
U.S. Government securities or irrevocable letters of credit issued by banks
whose securities meet the standards for investment by the Portfolio to be the
equivalent of cash. From time to time, the Portfolio may return to the borrower
or a third party which is unaffiliated with the Portfolio, and which is acting
as a "placing broker," a part of the interest earned from the investment of
collateral received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Portfolio must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions payable on the loaned securities, and any increase in market
value; (5) the Portfolio may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may pass to
the borrower, the Fund's Board of Trustees must terminate the loan and regain
the right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification.
Investment Restrictions. The Portfolio has adopted investment
restrictions numbered 1 through 8 as fundamental policies. These restrictions
cannot be changed without approval by the holders of a majority (as defined in
the Investment Company Act of 1940, as amended (the "1940 Act")) of the
Portfolio's outstanding voting shares. Investment restrictions numbered 9
through 14 are not fundamental policies and may be changed by vote of a majority
of the Trustees at any time. The Portfolio may not:
1. Invest more than 25% of the value of its total assets in the
securities of issuers in any single industry, provided that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
2. Invest in commodities, except that the Portfolio may purchase and
sell options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
3. Purchase, hold or deal in real estate, real estate limited
partnership interests, or oil, gas or other mineral leases or exploration or
development programs, but the Portfolio may purchase and sell securities that
are secured by real estate or issued by companies that invest or deal in real
estate or real estate investment trusts.
4. Borrow money, except to the extent permitted under the 1940 Act. The
1940 Act permits an investment company to borrow in an amount up to 33 1/3% of
the value of such company's total assets. For purposes of this Investment
Restriction, the entry into options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or indexes
shall not constitute borrowing.
5. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, the Portfolio may
lend its portfolio securities in an amount not to exceed 33 1/3% of the value of
its total assets. Any loans of portfolio securities will be made according to
guidelines established by the Securities and Exchange Commission and the Fund's
Board of Trustees.
B-7
<PAGE>
6. Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the Securities Act of
1933, as amended, by virtue of disposing of portfolio securities.
7. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act).
8. Purchase securities on margin, but the Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
Non-Fundamental Restrictions.
9. Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessor) if such purchase
would cause the value of the Portfolio's investments in all such companies to
exceed 5% of the value of its total assets.
10. Invest in the securities of a company for the purpose of exercising
management or control, but the Portfolio will vote the securities it owns in its
portfolio as a shareholder in accordance with its views.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
12. Purchase, sell or write puts, calls or combinations thereof, except
as described in the Portfolio's Prospectus and Statement of Additional
Information.
13. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 15% of the value of its net assets would be so
invested.
14. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of the Portfolio's shares in certain
states. Should the Fund determine that a commitment is no longer in the best
interest of the Portfolio and its shareholders, the Fund reserves the right to
revoke the commitment by terminating the sale of Fund shares in the state
involved.
B-8
<PAGE>
MANAGEMENT OF THE FUND
Trustees and officers of the Fund, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Trustee who is an "interested person" of the Fund, as defined
in the 1940 Act, is indicated by an asterisk.
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
Peter M. Bren (63) Trustee President of The Bren Co.,
126 East 56th Street since 1969; President of
New York, NY 10021 Koll, Bren Realty Advisors
and Senior Partner for
Lincoln Properties prior
thereto.
Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a law
7535 Claymont Court firm in St. Louis since
Apt. #2 January 1993; United States
Belleville, IL 62223 Senator of Illinois from
1981 to 1993.
John R. McKernan, Jr. (49) Trustee Chairman and Chief Executive
P.O. Box 15213 Portland, Officer of McKernan
ME 02110 Trustee Enterprises since January
1995; Governor of Maine
prior thereto.
M.B. Oglesby, Jr. (55) Trustee President and Chief
700 13th Street, N.W. Executive Officer,
Suite 400 Association of American
Washington, D.C. 20005 Railroads since June 1997;
Vice Chairman of Cassidy &
Associates from February
1996 to June 1997; Senior
Vice President of RJR
Nabisco, Inc. from April
1989 to February 1996;
Former Deputy Chief of
Staff-White House from 1988
to January 1989.
Michael Minikes (52) Trustee Senior Managing Director of
245 Park Avenue Chairman Bear Stearns since September
New York, NY 10167 1985; Chairman of BSFM since
December 1997; Treasurer of
Bear Stearns since January
1986; Treasurer of The Bear
Stearns Companies Inc. since
September 1985; Director of
The Bear Stearns Companies
Inc. since October 1989.
Robert S. Reitzes* (53) President President of Mutual
575 Lexington Avenue Funds-Bear Stearns Asset
New York, NY 10022 Management and Senior
Managing Director of Bear
Stearns since March 1994;
Co-Director of Research and
Senior Chemical Analyst of
C.J. Lawrence/Deutsche Bank
Securities Corp. from
January 1991 to March 1994.
B-9
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
William J. Montgoris (50) Executive Vice Chief Financial Officer and
245 Park Avenue President Chief Operating Officer,
New York, NY 10167 Bear Stearns.
Stephen A. Bornstein (54) Vice President Managing Director, Legal
575 Lexington Avenue Department; General Counsel,
New York, NY 10022 Bear Stearns Asset
Management.
Frank J. Maresca (38) Vice President Managing Director of Bear
245 Park Avenue and Treasurer Stearns since September
New York, NY 10167 1994; Chief Executive
Officer and President of
BSFM since December 1997;
Associate Director of Bear
Stearns from September 1993
to September 1994; Vice
President of Bear Stearns
from March 1992 to September
1993.
Donalda L. Fordyce (38) Vice President Senior Managing Director of
575 Lexington Avenue Bear Stearns since March,
New York, NY 10022 1996; previously Vice
President, Asset Management
Group, Goldman, Sachs from
1986 to 1996.
Ellen T. Arthur (44) Secretary Associate Director of Bear
575 Lexington Avenue Stearns since January 1996;
New York, NY 10022 Secretary of BSAM since
December 1997; Senior
Counsel and Corporate Vice
President of PaineWebber
Incorporated from April 1989
to September 1995.
Vincent L. Pereira (32) Assistant Associate Director of Bear
245 Park Avenue Treasurer Stearns since September
New York, NY 10167 1995; Treasurer and
Secretary of BSFM since
December 1997; Vice
President of Bear Stearns
from May 1993 to September
1995; Assistant Vice
President of Mitchell
Hutchins Asset Management
Inc. from October 1992 to
May 1993.
Christina LaMastro (27) Assistant Legal Assistant of Bear
575 Lexington Avenue Secretary Stearns since May 1997;
New York, NY 10022 Assistant Secretary of BSAM
since December 1997;
Compliance Assistant at
Reich & Tang L.P. from April
1996 through April 1997;
Legal Assistant at Fulbright
& Jaworski L.P. from April
1993 through April 1996;
B-10
<PAGE>
NAME AND ADDRESS POSITION PRINCIPAL OCCUPATION
(AND AGE) WITH FUND DURING PAST FIVE YEARS
--------- --------- ----------------------
student at Drexel University
prior thereto.
The Fund pays its non-affiliated Board members an annual retainer of
$5,000 and a per meeting fee of $500 and reimburses them for their expenses. The
Fund does not compensate its officers. The aggregate amount of compensation paid
to each Board member by the Fund and by all other funds in the Bear Stearns
Funds for which such person is a Board member (the number of 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 (2)
Alan J. Dixon $7,000 None None $ 6,500 (1)
John R. McKernan, Jr. $7,000 None None $12,000 (2)
M.B. Oglesby, Jr. $7,000 None None $12,000 (2)
Robert S. Reitzes None None None None
Michael Minikes None None None None
</TABLE>
- ---------------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to approximately $7,000 for Board members of
the Fund, as a group.
Board members and officers of the Fund, as a group, owned less than 1%
of the Portfolio's shares outstanding on May 31, 1997.
For so long as the Plan described in the section captioned "Management
Arrangements--Distribution Plans" 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 sole
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.
B-11
<PAGE>
MANAGEMENT ARRANGEMENTS
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Management of the
Portfolio."
General. On December 3, 1997, BSFM, the registered investment adviser of
the Portfolio, changed its name to BSAM. On December 4, 1997, BSFM formed a new
corporate entity under the laws of Delaware to conduct mutual fund
administrative work for The Bear Stearns Funds and other affiliated and
non-affiliated investment companies.
Investment Advisory Agreement. BSAM provides investment advisory
services to the Portfolio pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 22, 1995, as revised May 4, 1995, with the Fund. The
Agreement is subject to annual approval by: (i) the Fund's Board of Trustees or
(ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the Portfolio, provided that in either event the continuance also
is approved by a majority of the Board of Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Fund or BSAM, by vote cast in
person at a meeting called for the purpose of voting on such approval. The Board
of Trustees, including a majority of the Trustees who are not "interested
persons" of any party to the Agreement, last approved the Agreement at a meeting
as to the Portfolio, held on January 28, 1997. The Agreement is terminable, as
to the Portfolio, without penalty, on 60 days 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 BSAM. As to the Portfolio, the Agreement
will terminate automatically in the event of its assignment (as defined in the
1940 Act).
BSAM is a wholly owned subsidiary of The Bear Stearns Companies Inc.
The following persons are directors and/or senior officers of BSAM: Mark A.
Kurland, President, Chairman of the Board and Director; Robert S. Reitzes,
Executive Vice President and Director; Donalda L. Fordyce, Vice President,
Chief Operating Officer and Director; Ellen T. Arthur, Secretary; and Warren
J. Spector and Robert M. Steinberg, Directors.
As compensation for BSAM's advisory services, the Fund has agreed to pay
BSAM a monthly fee at the annual rate of 1% of value of the Portfolio's average
daily net assets which will be adjusted monthly ("Monthly Performance
Adjustment") depending on the extent to which the Portfolio's investment
performance exceeded or was exceeded by the percentage change in the investment
record of the S&P 500 Index. The Monthly Performance Adjustment may increase or
decrease the total advisory fee payable to BSAM by up to 0.50% per year of the
value of the Portfolio's average daily net assets. For the period from June 16,
1995 (commencement of investment operations) through March 31, 1996, the
investment advisory fees payable amounted to $116,606. For the fiscal year ended
March 31, 1997, the investment advisory fees payable amounted to $182,313. These
amounts were waived pursuant to a voluntary undertaking by BSAM, resulting in no
fees being paid by the Portfolio. In addition, the Adviser reimbursed $243,945,
in order to maintain the voluntary expense limitation.
The Board of Trustees has approved an amendment to the Investment
Advisory Agreement that would provide for the Monthly Performance Adjustment to
be based on the performance of Portfolio shares compared to the performance of
the S&P MidCap 400 Index, rather than the S&P 500 Index. This amendment is
subject to approval at a Special Meeting to be held on January 9, 1998, by the
holders of a majority (as defined in the 1940 Act) of the Portfolio's
outstanding voting shares.
Administration Agreement. BSFM provides certain administrative services
to the Fund pursuant to the Administration Agreement dated February 22, 1995,
B-12
<PAGE>
as revised April 11, 1995, June 2, 1997, and September 8, 1997, with the Fund.
The Administration Agreement will continue until February 22, 1998 and
thereafter will be subject to annual approval by (i) the Fund's Board or (ii)
vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the Portfolio, provided that in either event its continuance also
is approved by a majority of the Fund's Board members who are not "interested
persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in
person at a meeting called for the purpose of voting on such approval. The
Administration Agreement is terminable without penalty, on 60 days notice, by
the Fund's Board or by vote of the holders of a majority of the Portfolio's
shares or upon not less than 90 days notice by BSFM. The Administration
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
As compensation for BSFM's administrative services, the Fund has agreed
to pay BSFM a monthly fee at the annual rate of 0.15 of 1% of the Portfolio's
average daily net assets. For the period from June 16, 1995 (commencement of
operations) through March 31, 1996 and the fiscal year ended March 31, 1997, the
administration fees accrued amounted to $21,806 and $35,873 and the amount paid
was $18,824 and $32,547, respectively.
Administrative Services Agreement. PFPC provides certain administrative
services to the Fund pursuant to the Administrative Services Agreement dated
February 22, 1995, as revised September 8, 1997, with the Fund. The
Administrative Services Agreement is terminable upon 60 days' notice by either
the Fund or PFPC. PFPC may assign its rights or delegate its duties under the
Administrative Services Agreement to any wholly-owned direct or indirect
subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that
(i) PFPC gives the Fund 30 days notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the 1940 Act;
and (iii) PFPC and such delegate (or assignee) promptly provide information
requested by the Fund in connection with such delegation.
As compensation for PFPC's administrative services, the Fund has agreed
to pay PFPC a monthly fee at the rate set forth in the Portfolio's Prospectus.
For the period from June 16, 1995 (commencement of investment operations)
through March 31, 1996 and the fiscal year ended March 31, 1997, the
administrative fees payable by the Portfolio amounted to $104,500 and $141,467,
respectively. These amounts were reduced to $44,282 and $107,174, respectively,
as a result of a waiver of fees by PFPC.
Distribution Plans. Rule 12b-1 (the "Rule") adopted by the Securities
and Exchange Commission under the 1940 Act provides, among other things, that an
investment company may bear expenses of distributing its shares only pursuant to
a plan adopted in accordance with the Rule. The Fund's Board of Trustees has
adopted a distribution and shareholder servicing plan with respect to Class A
and Class C shares and a distribution plan with respect to Class B Shares (the
"Distribution Plans"). The Fund's Board of Trustees believes that there is a
reasonable likelihood that the Distribution Plans will benefit the Portfolio and
the holders of its Class A, Class B and Class C shares.
A quarterly report of the amounts expended under the Distribution Plans,
and the purposes for which such expenditures were incurred, must be made to the
Trustees for their review. In addition, each Distribution Plan provides that it
may not be amended to increase materially the costs which holders of a class of
shares may bear pursuant to such Plan without approval of such effected
shareholders and that other material amendments of the Plan must be approved by
the Board of Trustees, and by the Trustees who are neither "interested persons"
(as defined in the 1940 Act) of the Fund nor have any direct or indirect
financial interest in the operation of the Plan or in the related Plan
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. In addition, because Class B shares automatically
convert into Class A shares after eight years, the Fund is
B-13
<PAGE>
required by a Securities and Exchange Commission rule to obtain the approval of
Class B as well as Class A shareholders for a proposed amendment to each
Distribution Plan that would materially increase the amount to be paid by Class
A shareholders under such Plan. Such approval must be by a "majority" of the
Class A and Class B shares (as defined in the 1940 Act), voting separately by
class. Each Distribution Plan and related agreements is subject to annual
approval by such vote cast in person at a meeting called for the purpose of
voting on such Plan. The Distribution Plan with respect to Class A and Class C
shares was so approved on January 28, 1997. The Distribution Plan with respect
to the Class B shares was so approved on September 8, 1997. Each Distribution
Plan is terminable at any time, as to each class of the Portfolio, by vote of a
majority of the Trustees who are not "interested persons" and who have no direct
or indirect financial interest in the operation of the Plan or in the Plan
agreements or by vote of holders of a majority of the relevant class' shares. A
Plan agreement is terminable, as to each class of the Portfolio, without
penalty, at any time, by such vote of the Trustees, upon not more than 60 days
written notice to the parties to such agreement or by vote of the holders of a
majority of the relevant class' shares. A Plan agreement will terminate
automatically, as to the relevant class of the Portfolio, in the event of its
assignment (as defined in the 1940 Act).
For the fiscal year ended March 31, 1997, the Portfolio paid Bear
Stearns $65,276 with respect to Class A shares and $94,265 with respect to Class
C shares under the Plan. With respect to Class A, of the $56,284 paid under the
Plan, $4,029 was paid to brokers or dealers and $4,963 was paid for advertising.
With respect to Class C, the entire amount paid under the Plan was paid to
brokers or dealers.
Shareholder Servicing Plan. The Fund has adopted a shareholder servicing
plan on behalf of the Portfolio's Class B shares (the "Shareholder Servicing
Plan"). In accordance with the Shareholder Servicing Plan, the Fund may enter
into shareholder service agreements under which the Portfolio pays fees of up to
0.25% of the average daily net assets of Class B shares for fees incurred in
connection with the personal service and maintenance of accounts holding
Portfolio shares for responding to inquiries of, and furnishing assistance to,
shareholders regarding ownership of the shares or their accounts or similar
services not otherwise provided on behalf of the Portfolio.
Expenses. All expenses incurred in the operation of the Fund are borne
by the Fund, except to the extent specifically assumed by BSAM. The expenses
borne by the Fund include: organizational costs, taxes, interest, loan
commitment fees, interest and distributions paid on securities sold short,
brokerage fees and commissions, if any, fees of Board members who are not
officers, directors, employees or holders of 5% or more of the outstanding
voting securities of BSAM or its affiliates, Securities and Exchange Commission
fees, state Blue Sky qualification fees, advisory, administrative and fund
accounting fees, charges of custodians, transfer and dividend disbursing agents'
fees, certain insurance premiums, industry association fees, outside auditing
and legal expenses, costs of maintaining the Fund's existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
shareholders' reports and meetings, costs of preparing and printing certain
prospectuses and statements of additional information, and any extraordinary
expenses. Expenses attributable to a particular portfolio are charged against
the assets of that portfolio; other expenses of the Fund are allocated among the
portfolios on the basis determined by the Board, including, but not limited to,
proportionately in relation to the net assets of each portfolio.
Expense Limitation. BSAM has agreed that if, in any fiscal year, the
aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest
on borrowings and (with the prior written consent of the necessary state
B-14
<PAGE>
securities commissions) extraordinary expenses, exceed the expense limitation of
any state having jurisdiction over the Portfolio, the Fund may deduct from the
payment to be made to BSAM, such excess expense to the extent required by state
law. Such deduction or payment, if any, will be estimated daily, and reconciled
and effected or paid, as the case may be, on a monthly basis. No such expense
limitations currently apply to the Portfolio.
Activities of BSAM and its Affiliates and Other Accounts Managed by
BSAM. The involvement of BSAM, Bear Stearns and their affiliates in the
management of, or their interests in, other accounts and other activities of
BSAM and Bear Stearns may present conflicts of interest with respect to the
Portfolio or limit the Portfolio's investment activities. BSAM, Bear Stearns and
its affiliates engage in proprietary trading and advise accounts and funds which
have investment objectives similar to those of the Portfolio and/or which engage
in and compete for transactions in the same types of securities, currencies and
instruments as the Portfolio. BSAM, Bear Stearns and its affiliates will not
have any obligation to make available any accounts managed by them, for the
benefit of the management of the Portfolio. The results of the Portfolio's
investment activities, therefore, may differ from those of Bear Stearns and its
affiliates and it is possible that the Portfolio could sustain losses during
periods in which BSAM, Bear Stearns and its affiliates and other accounts
achieve significant profits on their trading for proprietary and other accounts.
From time to time, the Portfolio's activities may be limited because of
regulatory restrictions applicable to Bear Stearns and its affiliates, and/or
their internal policies designed to comply with such restrictions.
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, as revised
September 8, 1997, which is renewable annually. For the period from June 16,
1995 (commencement of operations) through March 31, 1996 and the fiscal year
ended March 31, 1997, Bear Stearns retained $502,600 and $163,000, respectively,
from the sales loads on Class A shares and $9,000 and $14,300, respectively,
from contingent deferred sales charges ("CDSC") on Class C shares. In some
states, banks or other institutions effecting transactions in Portfolio shares
may be required to register as dealers pursuant to state law.
Purchase Order Delays. The effective date of a purchase order may be
delayed if PFPC, the Portfolio's transfer agent, is unable to process the
purchase order because of an interruption of services at its processing
facilities. In such event, the purchase order would become effective at the
purchase price next determined after such services are restored.
Sales Loads--Class A. Set forth below is an example of the method of
computing the offering price of the Class A shares of the Portfolio. The example
assumes a purchase of Class A shares aggregating less than $50,000 subject to
the schedule of sales charges set forth in the Prospectus at a price based upon
the net asset value of the Class A shares on March 31, 1997.
Net Asset Value per Share $14.58
======
Per Share Sales Charge - 5.50%
of offering price (5.82% of
net asset value per share) 0.85
======
Per Share Offering Price to
the Public $15.43
======
B-15
<PAGE>
Redemption Commitment. The Portfolio has committed itself to pay in cash
all redemption requests by any shareholder of record, limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the value of the
Portfolio's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission. In the case of requests for redemption in excess of such amount, the
Board of Trustees reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In this event, the securities would be valued in the same
manner as the Portfolio is valued. If the recipient sold such securities,
brokerage charges would be incurred. Were the Portfolio to redeem securities in
kind, it first would seek to distribute readily marketable securities.
Suspension of Redemptions. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Securities and Exchange Commission so
that disposal of the Portfolio's investments or determination of its net asset
value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit to protect Portfolio
shareholders.
Alternative Sales Arrangements - Class A, Class B, Class C and Class Y
Shares. The availability of three classes of shares to individual investors
permits an investor to choose the method of purchasing shares that is more
beneficial to the investor depending on the amount of the purchase, the length
of time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Portfolio shares may receive different compensation with respect to one
class of shares than the other. Bear Stearns will not accept any order of
$500,000 or more of Class B shares or $1 million or more of Class C shares, on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of the Portfolio instead. A fourth class of shares may
be purchased only by certain institutional investors at net asset value per
share (the "Class Y shares").
The four classes of shares each represent an interest in the same
portfolio investments of a Portfolio. However, each class has different
shareholder privileges and features. The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by incremental expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
The methodology for calculating the net asset value, dividends and
distributions of the Portfolio's Class A, B, C and Y shares recognizes two types
of expenses. General expenses that do not pertain specifically to a class are
allocated pro rata to the shares of each class, based on the percentage of the
net assets of such class to the Portfolio's total assets, and then equally to
each outstanding share within a given class. Such general expenses include (i)
management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, (iv) fees to
independent trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such
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expenses include (a) Distribution Plan and Shareholder Servicing Plan fees, (b)
incremental transfer and shareholder servicing agent fees and expenses, (c)
registration fees and (d) shareholder meeting expenses, to the extent that such
expenses pertain to a specific class rather than to the Portfolio as a whole.
None of the instructions described elsewhere in the Prospectus or
Statement of Additional Information for the purchase, redemption, reinvestment,
exchange, or transfer of shares of the Portfolio, the selection of classes of
shares, or the reinvestment of dividends apply to Class Y shares.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "How to Buy Shares."
Valuation of Portfolio Securities. Portfolio securities, including
covered call options written by the Portfolio, are valued at the last sale price
on the securities exchange or national securities market on which such
securities primarily are traded. Securities not listed on an exchange or
national securities market, or securities in which there were no transactions,
are valued at the average of the most recent bid and asked prices, except in the
case of open short positions where the asked price is used for valuation
purposes. Bid price is used when no asked price is available. Short-term
investments are carried at amortized cost, which approximates value. Any
securities or other assets for which recent market quotations are not readily
available are valued at fair value as determined in good faith by the Fund's
Board of Trustees. Expenses and fees, including the management fee and
distribution and service fees, are accrued daily and taken into account for the
purpose of determining the net asset value of the Portfolio's shares. Because of
the differences in operating expenses incurred by each class, the per share net
asset value of each class will differ.
Restricted securities, as well as securities or other assets for which
market quotations are not readily available, or are not valued by a pricing
service approved by the Board of Trustees, are valued at fair value as
determined in good faith by the Board of Trustees. The Board of Trustees will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Trustees generally will take the
following factors into consideration: restricted securities which are, or are
convertible into, securities of the same class of securities for which a public
market exists usually will be valued at market value less the same percentage
discount at which purchased. This discount will be revised periodically by the
Board of Trustees if the Trustees believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Trustees.
New York Stock Exchange Closings. The holidays (as observed) on
which the New York Stock Exchange is closed currently are: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Martin Luther King Jr. Day, Thanksgiving and Christmas Day.
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."
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The following is only a summary of certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussions here and in
the Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The Portfolio has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Portfolio is not subject to
federal income tax on the portion of its net investment income (i.e., taxable
interest, dividends and other taxable ordinary income, net of expenses) and
capital gain net income (i.e., the excess of capital gains over capital losses)
that it distributes to shareholders, provided that it distributes at least 90%
of its investment company taxable income (i.e., net investment income and the
excess of net short-term capital gain over net long-term capital loss) for the
taxable year (the "Distribution Requirement"), and satisfies certain other
requirements of the Code that are described below. Distributions by the
Portfolio made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and will, therefore,
satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) for taxable
years beginning on or before August 5, 1997, 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. The
Short-Short Gain Test will not apply to taxable years beginning after August 5,
1997.
In general, a gain or loss recognized by the Portfolio on the
disposition of an asset will be a capital gain or a capital loss. In addition,
gain will be recognized as a result of certain constructive sales, including
short sales "against the box." However, a 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
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which accrued during the period of time the Portfolio held the debt obligation.
In addition, under the rules of Code section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, except for regulated futures
contracts or non-equity options subject to Code section 1256 (unless a Portfolio
elects otherwise), will generally be treated as ordinary income or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the Portfolio's net investment in
the transaction and: (1) the transaction consists of the acquisition of property
by the Portfolio and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning of
section 1092 of the Code; (2) the transaction is one that was marketed or sold
to the Portfolio on the basis that it would have the economic characteristics of
a loan but the interest-like return would be taxed as capital gain; or (4) the
transaction is described as a conversion transaction in the Treasury
Regulations. The amount of the gain recharacterized generally will not exceed
the amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the federal long-term, mid-term, or
short-term rate, depending upon the type of instrument at issue, reduced by an
amount equal to: (1) prior inclusions of ordinary income items from the
conversion transaction and (2) the capital interest on acquisition indebtedness
under Code section 263(g). Built-in losses will be preserved where the Portfolio
has a built-in loss with respect to property that becomes a part of a conversion
transaction. No authority exists that indicates that the converted character of
the income will not be passed to the Portfolio's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (depending on the
type of the Portfolio) (1) the asset is used to close a "short sale" (which
includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (2) the asset is otherwise
held by the Portfolio as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Portfolio grants a qualified covered
call option (which, among other things, must not be deep-in-the-money) with
respect thereto, or (3) the asset is stock and the Portfolio grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, the
Portfolio may be required to defer the recognition of a loss on the disposition
of an asset held as part of a straddle to the extent of any unrecognized gain on
the offsetting position.
Any gain recognized by the Portfolio on the lapse of, or any gain or
loss recognized by the Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an option
written by the Portfolio will commence on the date it is written and end on the
date it lapses or the date a closing transaction is entered into. Accordingly,
for taxable years beginning on or before August 5, 1997, 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
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treatment as "Section 1256 contracts." Section 1256 contracts are treated as if
they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any other gain or loss
that was previously recognized upon the termination of Section 1256 contracts
during that taxable year. Any capital gains or losses for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss arising as
a consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The Portfolio, however, may elect not to have this special tax treatment
apply to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Portfolio that are not Section 1256 contracts. Generally,
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 the year, regardless of
whether the Portfolio receives distributions of any such ordinary earnings or
capital gains from the PFIC. In the alternative, for tax years beginning after
December 31, 1997, a portfolio that invests in stock of a PFIC may make a
mark-to-market election with respect to such stock. Pursuant to such election,
the Portfolio will include as ordinary income any excess of the fair market
value of such stock at the close of any taxable year over the Portfolio's
adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a taxable year, such
excess will be deductible as ordinary loss in the amount equal to the lesser of
the amount of such excess or the net mark-to-market gains on the stock that the
Portfolio included in income in previous years. The Portfolio's holding period
with respect to the PFIC stock subject to the election will commence on the
first day of the next taxable year. If the Portfolio makes the election in the
first taxable year it holds PFIC stock, it will not incur the tax described
below. If the Portfolio does not elect to treat the PFIC as a QEF and does not
make a mark-to-market election, then, in general, (1) any gain recognized by the
Portfolio upon sale or other disposition of its interest in the PFIC or any
excess distribution received by the Portfolio from the PFIC will be allocated
ratably over the Portfolio's holding period of its interest in the PFIC, (2) the
portion of such gain or excess distribution so allocated to the year in which
the gain is recognized or the excess distribution is received shall be included
in the Portfolio's gross income for such year as ordinary income (and the
distribution of such portion by the Portfolio to shareholders will be taxable as
an ordinary income dividend, but such portion will not be subject to tax at the
Portfolio level), (3) the Portfolio shall be liable for tax on the portions of
such gain or excess distribution so allocated to prior years in an amount equal
to, for each such prior year, (i) the amount of gain or excess distribution
allocated to such prior year multiplied by the highest tax rate (individual or
corporate) in effect for such prior year plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Portfolio to shareholders of the portions of such gain or
excess distribution so allocated to prior years (net of the tax payable by
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the Portfolio thereon) will again be taxable to the shareholders as an
ordinary income dividend.
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
(including, to the extent provided in Treasury regulations, losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the
Portfolio must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
the Portfolio's taxable year, at least 50% of the value of the Portfolio's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to each of which the Portfolio has not invested more than 5% of the
value of the Portfolio's total assets in securities of such issuer and does not
hold more than 10% of the outstanding voting securities of such issuer), and no
more than 25% of the value of its total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to a tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies. A 4% non-deductible excise tax is
imposed on a regulated investment company that fails to distribute in each
calendar year an amount equal to 98% of its ordinary income for such calendar
year and 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 and ordinary gains or losses arising as a
result of a PFIC mark-to-market election (or upon an actual disposition of the
PFIC stock subject to such election) 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
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to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Portfolio may in certain circumstances be
required to liquidate portfolio investments to make sufficient distribution to
avoid excise tax liability.
Portfolio Distributions
The Portfolio anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but will qualify for the 70% dividends-received
deduction for corporate shareholders only to the extent discussed below.
Dividends paid on Class A, B, C, and Y shares are calculated at the same time
and in the same manner. In general, dividends on Class B and C shares are
expected to be lower than those on Class A shares due to the higher distribution
expenses borne by the Class B and C shares. Dividends may also differ between
classes as a result of differences in other class specific expenses.
The Portfolio may either retain or distribute to shareholders its net
capital gain for each taxable year. The Portfolio currently intends to
distribute any such amounts. Net capital gain that is distributed and 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% (58% for alternative minimum tax purposes) of the capital
gain recognized upon the Portfolio's disposition of domestic "small business"
stock will be subject to tax.
Conversely, if the Portfolio elects to retain its net capital gain, the
Portfolio will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If the Portfolio elects to
retain its net capital gain, it is expected that the Portfolio also will elect
to have shareholders of record on the last day of its taxable year treated as if
each received a distribution of his pro rata share of such gain, with the result
that each shareholder will be required to report his pro rata share of such gain
on his tax return as long-term capital gain, will receive a refundable tax
credit for his pro rata share of tax paid by the Portfolio on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Portfolio with respect to a
taxable year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Portfolio from domestic
corporations for the taxable year. Generally, 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) 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. The 46-day holding period must be
satisfied during the 90-day period beginning 45 days
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prior to each applicable ex-dividend date; the 91-day holding period must be
satisfied during the 180-day period beginning 90 days before each applicable
ex-dividend date. 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 the Portfolio into account
(without a dividends-received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by the Portfolio from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle the Portfolio to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Portfolio's assets to be invested in various
countries is not known.
Distributions by the Portfolio that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the Portfolio will be treated in the manner described
above regardless of whether such distributions are paid in cash or reinvested in
additional Portfolio shares or shares of another portfolio (or another fund).
Shareholders receiving a distribution in the form of additional shares will be
treated as receiving a distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. In addition, if
the net asset value at the time a shareholder purchases shares of the Portfolio
reflects undistributed net investment income or recognized capital gain net
income, or unrealized appreciation in the value of the assets of the Portfolio,
distributions of such amounts will be taxable to the shareholder in the manner
described above, although they economically constitute a return of capital to
the shareholder.
Ordinarily, shareholders are required to take distributions by the
Portfolio into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders (and made by the Portfolio) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Portfolio will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain dividends,
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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 a gain or loss on the sale or redemption of
shares of the Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Portfolio within 30 days before or
after the sale or redemption. In general, any gain or loss arising from (or
treated as arising from) the sale or redemption of shares of the Portfolio will
be considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. Long-term capital gain recognized
by an individual shareholder will be taxed at the lowest rates applicable to
capital gains if the holder has held such shares for more than 18 months at the
time of the sale. 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 at least 11.6% lower than the maximum rate
applicable to ordinary income. Capital losses in any year are deductible only to
the extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000
of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the
Portfolio,(2) disposes of such shares less than 91 days after they are acquired,
and (3) subsequently acquires shares of the Portfolio or another fund at a
reduced sales load pursuant to a right to reinvest at such reduced sales load
acquired in connection with the acquisition of the shares disposed of, then the
sales load on the shares disposed of (to the extent of the reduction in the
sales load on the shares subsequently acquired) shall not be taken into account
in determining gain or loss on the shares disposed of but shall be treated as
incurred on the acquisition of the shares subsequently acquired.
Foreign Shareholders
Taxation of a shareholder who, as to the U.S., is a non-resident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("Foreign Shareholder") depends on whether the income from a Portfolio is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Portfolio is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower applicable treaty rate) upon the gross amount of
the dividend. Such Foreign Shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of a Portfolio,
capital gain dividends, and amounts retained by the Portfolio that are
designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
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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
Portfolio, including the applicability of foreign taxes.
Effect of Future Legislation; State and Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in the Portfolio.
PORTFOLIO TRANSACTIONS
BSAM 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 BSAM'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 BSAM'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 BSAM and BSAM's fees
are not reduced as a consequence of the receipt of such supplemental
information. A commission paid to such brokers may be higher than that which
another qualified broker would have charged for effecting the same transaction,
provided that BSAM, as applicable, determines in good faith that such commission
is reasonable in terms of the transaction or the overall responsibility of BSAM
to the Portfolio and its other clients and that the total commissions paid by
the Portfolio will be reasonable in relation to the benefits to the Portfolio
over the long-term.
Such supplemental information may be useful to BSAM in serving both the
Portfolio and the other funds which it advises and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
to BSAM in carrying out its obligations to the Portfolio. Sales of Portfolio
shares by a broker may be taken into consideration, and brokers also will be
selected because of their ability to handle special executions such as are
involved in large block trades or broad distributions, provided the primary
consideration is met. Large block trades may, in certain cases, result from two
or more funds advised by BSAM being engaged simultaneously in the purchase or
sale of the same security. Certain of BSAM's transactions in securities of
foreign issuers may not benefit from the negotiated commission rates available
to the Portfolio for transactions in securities of domestic issuers. When
transactions are executed in the over-the-counter market, the
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Portfolio will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
Portfolio turnover may vary from year to year as well as within a year.
The turnover rate for the Portfolio for the period June 16, 1995 (commencement
of investment operations) through March 31, 1996 and the fiscal year ended March
31, 1997 was 93.45% and 128.42%, respectively. In periods in which extraordinary
market conditions prevail, the Adviser will not be deterred from changing
investment strategy as rapidly as needed, in which case higher turnover rates
can be anticipated which would result in greater brokerage expenses. The overall
reasonableness of brokerage commissions paid is evaluated by the Adviser based
upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the Securities and Exchange Commission
thereunder, the Board of Trustees has determined that transactions for the
Portfolio may be executed through Bear Stearns if, in the judgment of BSFM, the
use of Bear Stearns is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers, and if, in the
transaction, Bear Stearns charges the Portfolio a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. In
addition, under rules recently adopted by the Securities and Exchange
Commission, Bear Stearns may directly execute such transactions for the
Portfolio on the floor of any national securities exchange, provided (i) the
Board of Trustees has expressly authorized Bear Stearns to effect such
transactions, and (ii) Bear Stearns annually advises the Board of Trustees of
the aggregate compensation it earned on such transactions. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.
For the period June 16, 1995 (commencement of operations) through March
31, 1996, the Portfolio paid total brokerage commissions of $38,019, of which
$26,339 was paid to Bear Stearns. The Portfolio paid 69.28% of its commissions
to Bear Stearns, and, with respect to all the securities transactions for the
Portfolio, 39.40% of the transactions involved commissions being paid to Bear
Stearns.
For the fiscal year ended March 31, 1997, the Portfolio paid total
brokerage commissions of $39,790, of which $8,925 was paid to Bear Stearns. The
Portfolio paid 22.43% of its commissions to Bear Stearns, and, with respect to
all the securities transactions for the Portfolio, 22.18% of the transactions
involved commissions being paid to Bear Stearns. The Portfolio paid an average
commission rate per share of $0.0264. The percentage of commissions for which it
received research services paid by the Portfolio was 0% of the total brokerage
commissions paid by the Portfolio.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "Performance
Information."
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased at net asset value (maximum offering
price in the case of Class A) per share with a hypothetical $1,000 payment made
at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result. A class' average annual total return figures
calculated in accordance with such formula assume
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that in the case of Class A the maximum sales load has been deducted from the
hypothetical initial investment at the time of purchase or in the case of Class
B the maximum applicable CDSC has been paid upon redemption at the end of the
period.
The average annual total return for Class A (at maximum offering price)
for the period June 16, 1995 (commencement of investment operations) through
March 31, 1997 was 16.52%. Based on net asset value per share, the average
annual total return for Class A was 19.72% for this period. The average annual
total return for Class C was 19.13% for this period. The average annual total
return for Class Y for the period June 20, 1995 (commencement of initial public
offering) through March 31, 1997 was 19.69%.
Total return is calculated by subtracting the amount of the Portfolio's
net asset value (maximum offering price in the case of Class A) per share at the
beginning of a stated period from the net asset value per share at the end of
the period (after giving effect to the reinvestment of dividends and
distributions during the period and any applicable CDSC), and dividing the
result by the net asset value (maximum offering price in the case of Class A)
per share at the beginning of the period. Total return also may be calculated
based on the net asset value per share at the beginning of the period instead of
the maximum offering price per share at the beginning of the period for Class A
shares or without giving effect to any applicable CDSC at the end of the period
for Class B and C shares. In such cases, the calculation would not reflect the
deduction of the sales load with respect to Class A shares or any applicable
CDSC with respect to Class B and C shares, which, if reflected, would reduce the
performance quoted.
The total return for Class A (at maximum offering price) for the period
June 16, 1995 (commencement of investment operations) through March 31, 1997 was
31.57%. Based on net asset value per share, the total return for Class A was
38.13% for this period. The total return for Class C was 36.91% for this period.
The total return for Class Y for the period June 20, 1995 (commencement of
initial public offering) through March 31, 1997 was 37.79%.
The total return for Class A (at maximum offering price) for the fiscal
year ended March 31, 1997 was 12.69%. Based on net asset value per share, the
total return for Class A was 18.31% for this period. The total return for Class
C was 17.69% for this period. The total return for Class Y for this period was
18.81%.
CODE OF ETHICS
The Fund, on behalf of the Portfolio, has adopted an amended and
restated Code of Ethics (the "Code of Ethics"), which established standards by
which certain access persons of the Fund must abide relating to personal
securities trading conduct. Under the Code of Ethics, access persons which
include, among others, trustees and officers of the Trust and employees of the
Fund and BSAM, are prohibited from engaging in certain conduct, including: (1)
the purchase or sale of any security for his or her account or for any account
in which he or she has any direct or indirect beneficial interest, without prior
approval by the Fund or without the applicability of certain exemptions; (2) the
recommendation of a securities transaction without disclosing his or her
interest in the security or issuer of the security; (3) the commission of fraud
in connection with the purchase or sale of a security held by or to be acquired
by the Portfolio; and (4) the purchase of any securities in an initial public
offering or private placement transaction eligible for purchase or sale by the
Portfolio without prior approval by the Fund. Certain transactions are exempt
from item (1) of the previous sentence, including: (1) any securities
transaction, or series of related transactions, involving 500 or fewer shares of
(i) an issuer with an average monthly trading volume of 100 million shares or
more, or (ii) an issuer that has a market capitalization of $1 billion or
greater; and (2) transactions in exempt
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securities or the purchase or sale of securities purchased or sold in exempt
transactions.
The Code of Ethics specifies that access persons shall place the
interests of the shareholders of the Portfolio first, shall avoid potential or
actual conflicts of interest with the Portfolio, and shall not take unfair
advantage of their relationship with the Portfolio. Under certain circumstances,
the Investment Manager to the Portfolio may aggregate or bunch trades with other
clients provided that no client is materially disadvantaged. Access persons are
required by the Code of Ethics to file quarterly reports of personal securities
investment transactions. However, an access person is not required to report a
transaction over which he or she had no control. Furthermore, a trustee of the
Fund who is not an "interested person" (as defined in the 1940 Act) of the Fund
is not required to report a transaction if such person did not know or, in the
ordinary course of his duties as a trustee of the Fund, should have known, at
the time of the transaction, that, within a 15 day period before or after such
transaction, the security that such person purchased or sold was either
purchased or sold, or was being considered for purchase or sale, by the
Portfolio. The Code of Ethics specifies that certain designated supervisory
persons and/or designated compliance officers shall supervise implementation and
enforcement of the Code of Ethics and shall, at their sole discretion, grant or
deny approval of transactions required by the Code of Ethics.
INFORMATION ABOUT THE FUND
The following information supplements and should be read in conjunction
with the section in the Portfolio's Prospectus entitled "General Information."
Each Portfolio share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Portfolio shares have no preemptive, subscription or conversion rights and are
freely transferable.
The Fund will send annual and semi-annual financial statements to all
its shareholders.
As of December 26, 1997, the following shareholders owned, directly or
indirectly, 5% or more of the indicated class of the Portfolio's outstanding
shares.
Percent of Class Y
Name and Address Shares Outstanding
- ---------------- ------------------
Master Works 401k Trustee 32.8%
FBO Barra 401k Plan
Attn: Funds Group
P.O. Box 6200
San Francisco, CA 94162-1761
A shareholder who beneficially owns, directly or indirectly, more than
25% of a Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act) of the Portfolio.
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CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New
Jersey 08540, an affiliate of Bear Stearns, is the Portfolio's custodian. Under
the custody agreement with the Portfolio, CTC holds the Portfolio's securities
and keeps all necessary accounts and records. For its services, CTC receives an
annual fee of the greater of 0.015% of the value of the domestic assets held in
custody or $5,000, such fee to be payable monthly based upon the total market
value of such assets, as determined on the last business day of the month. In
addition, CTC receives certain securities transactions charges which are payable
monthly. PFPC, Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington,
Delaware 19809, is the Portfolio's transfer agent, dividend disbursing agent and
registrar. Neither CTC nor PFPC has any part in determining the investment
policies of the Portfolio or which securities are to be purchased or sold by the
Portfolio.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York
10022, as counsel for the Fund, has provided legal advice as to certain legal
matters regarding the shares of beneficial interest being sold pursuant to the
Portfolio's Prospectus.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281-1434, independent auditors, have been selected as auditors of the Fund.
FINANCIAL STATEMENTS
The Portfolio's Annual Report to Shareholders for the fiscal year ended
March 31, 1997 is a separate document supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference into this
Statement of Additional Information.
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