-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N+FJ0Le8DXdapEyMGhdHdOIT5OHOVR1NNyN5Np5jpe4U9fXAFezfzIy5lVQHFfIu AR7BmX8DdB8j+WEptNsJRg== 0000899681-96-000180.txt : 19960621 0000899681-96-000180.hdr.sgml : 19960621 ACCESSION NUMBER: 0000899681-96-000180 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19960620 EFFECTIVENESS DATE: 19960620 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEAR STEARNS FUNDS CENTRAL INDEX KEY: 0000931145 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-84842 FILM NUMBER: 96583323 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08798 FILM NUMBER: 96583324 BUSINESS ADDRESS: STREET 1: 245 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10167 MAIL ADDRESS: STREET 2: 245 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10167 485BPOS 1 POST-EFFECTIVE AMENDMENT NO. 9 Registration Nos. 33-84842 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ Pre-Effective Amendment No. / / Post-Effective Amendment No. 9 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ Amendment No. 9 /X/ (Check appropriate box or boxes) THE BEAR STEARNS FUNDS (Exact Name of Registrant as Specified in Charter) 245 Park Avenue New York, New York 10167 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (212) 272-2000 Stephen A. Bornstein, Esq. Bear, Stearns & Co. Inc. 245 Park Avenue New York, New York 10167 (Name and Address of Agent for Service) copy to: Stuart H. Coleman, Esq. Stroock & Stroock & Lavan 7 Hanover Square New York, New York 10004-2696 This Registration Statement also has been executed by the Principal Executive Officer, Principal Financial Officer and Board of Trustees of the S&P STARS Fund. It is proposed that this filing will become effective (check appropriate box) X immediately upon filing pursuant to paragraph (b) ----- on (date) pursuant to paragraph (b) ----- 60 days after filing pursuant to paragraph (a)(i) ----- on (date) pursuant to paragraph (a)(i) ----- 75 days after filing pursuant to paragraph (a)(ii) ----- on (date) pursuant to paragraph (a)(ii) of Rule 485. ----- If appropriate, check the following box: this post-effective amendment designates a new ----- effective date for a previously filed post-effective amendment. Registrant has registered an indefinite number of shares of its beneficial interest under the Securities Act of 1933 pursuant to Section 24(f) of the Investment Company Act of 1940. Registrant's Rule 24f-2 Notice for the fiscal year ended March 31, 1996 was filed on May 29, 1996. Cross-Reference Sheet Pursuant to Rule 495(a)
Large Cap Value, Small Cap Value and S&P STARS The Insiders Total Return Portfolio Select Fund Items in Bond Portfolios Class A Class A and Part A of Class A and and Class Class C FORM N-1A CAPTION CLASS C SHARES C SHARES SHARES 1 Cover Cover Cover Cover 2 Synopsis 3 3 3 3 Condensed Financial 5 4 4 Information 4 General Description 6 5 5 of Registrant 5 Management of the Fund 12 11 10 5(a) Management's * * * Discussion of Fund's Performance 6 Capital Stock and 25 23 25 Other Securities 7 Purchase of 14 13 15 Securities Being Offered 8 Redemption or 20 19 20 Repurchase 9 Pending Legal * * * Proceedings The Large Cap Value, Insiders Items in Small Cap Value S&P STARS Select Part A of and Total Return Portfolio Fund Form Bond Portfolios Class Y Class Y N-1A CAPTION CLASS Y SHARES SHARES SHARES 1 Cover Cover Cover Cover 2 Synopsis 3 3 3 3 Condensed Financial 4 4 4 Information 4 General Description of 5 5 4 Registrant 5 Management of the Fund 11 10 10 The Large Cap Value, Insiders Items in Small Cap Value S&P STARS Select Part A of and Total Return Portfolio Fund Form Bond Portfolios Class Y Class Y N-1A CAPTION CLASS Y SHARES SHARES SHARES 5(a) Management's Discussion * * * of Fund's Performance 6 Capital Stock and Other 19 17 19 Securities 7 Purchase of Securities 12 12 14 Being Offered 8 Redemption or Repurchase 15 14 16 9 Pending Legal * * * Proceedings The Large Cap Value, Insiders Items in Small Cap Value Select Part B of and Total Return S&P STARS Fund Form Bond Portfolios Portfolio All N-1A CAPTION ALL CLASSES ALL CLASSES CLASSES 10 Cover Page B-1 B-1 B-1 11 Table of Contents B-1 B-1 B-1 12 General Information and * * * History 13 Investment Objectives B-2 B-2 B-2 and Policies 14 Management of the Fund B-14 B-10 B-12 15 Control Persons and B-14 B-10 B-12 Principal Holders of Securities 16 Investment Advisory and B-18 B-15 B-16 Other Services 17 Brokerage Allocation B-28 B-23 B-25 18 Capital Stock and Other B-32 B-26 B-27 Securities 19 Purchase, Redemption B-22, B-24 B-19, B-20 B-20, and Pricing of B-21 Securities Being Offered 20 Tax Status B-26 B-21 B-22 The Large Cap Value, Insiders Items in Small Cap Value Select Part B of and Total Return S&P STARS Fund Form Bond Portfolios Portfolio All N-1A CAPTION ALL CLASSES ALL CLASSES CLASSES 21 Underwriters B-1 B-1 B-1 22 Calculations of B-30 B-25 B-26 Performance Data 23 Financial Statements B-36 B-28 B-29 Items in Part C of FORM N-1A ALL PORTFOLIOS 24 Financial Statements and C-1 Exhibits 25 Persons Controlled by or C-3 Under Common Control with Registrant 26 Number of Holders of C-3 Securities 27 Indemnification C-4 28 Business and Other C-4 Connections of Investment Adviser 29 Principal Underwriter C-5 30 Location of Accounts and C-6 Records 31 Management Services C-6 32 Undertakings C-6 * Omitted since answer is negative or inapplicable.
THE BEAR STEARNS FUNDS 245 PARK AVENUE NEW YORK, NY 10167 1-800-766-4111 PROSPECTUS The Bear Stearns Funds Large Cap Value Portfolio - Small Cap Value Portfolio - Total Return Bond Portfolio The Bear Stearns Funds (the "Fund") is an open-end management investment company, known as a mutual fund. The Fund permits you to invest in separate portfolios. By this Prospectus, shares of three diversified portfolios (each, a "Portfolio") are offered: the Large Cap Value Portfolio and the Small Cap Value Portfolio (together, the "Equity Portfolios") and the Total Return Bond Portfolio (the "Bond Portfolio"). Each Equity Portfolio's investment objective is capital appreciation. The Bond Portfolio's investment objective is to maximize total return, consistent with preservation of capital. The Bond Portfolio will invest primarily in investment grade, U.S. dollar denominated fixed-income securities of domestic and foreign issuers. Under normal market conditions, the Bond Portfolio will invest in a portfolio of securities with a dollar-weighted average maturity ranging from four to thirteen years and a duration of not less than 65% of the Salomon Brothers Broad Investment Grade ("BIG") Bond Index and not more than 135% of the Salomon Brothers BIG Bond Index. By this Prospectus, each Portfolio is offering two Classes of shares. Class A shares are subject to a sales charge imposed at the time of purchase and Class C shares are subject to a 1% contingent deferred sales charge imposed on redemptions made within the first year of purchase. Other differences between the Classes include the services offered to and the expenses borne by each Class and certain voting rights, as described herein. These alternatives are offered so an investor may choose the method of purchasing shares that is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other circumstances. Each Portfolio issues another Class of shares which has different expenses which would affect performance. Investors desiring to obtain information about this Class of shares should call 1-800-766-4111 or ask their sales representative or the Portfolio's distributor. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's investment adviser. Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as each Portfolio's distributor. ---------------- This Prospectus sets forth concisely information about each Portfolio that you should know before investing. It should be read and retained for future reference. Part B (also known as the Statement of Additional Information), dated June 20, 1996, which may be revised from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, write to the address or call one of the telephone numbers listed under "General Information" in this Prospectus. ---------------- Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. The net asset value of funds of this type will fluctuate. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AN D EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. June 20, 1996 Table of Contents PAGE Fee Table........................... 3 Condensed Financial Information..... 5 Alternative Purchase Methods........ 6 Description of the Fund............. 6 Risk Factors........................ 10 Management of the Fund.............. 12 How to Buy Shares................... 14 Shareholder Services................ 19 How to Redeem Shares................ 20 Dividends, Distributions and Taxes.. 23 Performance Information............. 24 General Information................. 25 Appendix............................ A-1 FEE TABLE - ------------------------------------------------------------------------------- SMALL CAP LARGE CAP TOTAL RETURN VALUE VALUE BOND PORTFOLIO PORTFOLIO PORTFOLIO CLASS A CLASS A CLASS A - ------------------------------------------------------------------------------ Shareholder Transaction Expenses Maximum Sales Load Imposed on Purchases (as a percentage of offering price).......... 4.75% 4.75% 3.75% Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of the amount subject to charge).................... * * * Annual Portfolio Operating Expenses (as a percentage of average daily net assets) Management Fees (after fee waiver)**......... 0.00% 0.00% 0.00% 12b-1 Fees................................... 0.50% 0.50% 0.35% Other Expenses (after expense reimbursement)**............................. 1.00% 1.00% 0.45% Total Portfolio Operating Expenses (after fee waiver and expense reimbursement)**.......... 1.50% 1.50% 0.80% Example: You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period: 1 Year...................................... $62 $62 $45 3 Years..................................... $93 $93 $62 5 Years..................................... $125 $125 $80 10 Years..................................... $218 $218 $133 - ----- * In certain situations, where no sales charge is assessed at the time of purchase, a contingent deferred sales charge of up to 1.00% may be imposed on redemptions within the first year after purchase. See "How to Buy Shares-Class A Shares." ** BSFM has undertaken to waive its investment advisory fee and assume certain expenses of each Portfolio other than brokerage commissions, extraordinary items, interest and taxes to the extent Total Portfolio Operating Expenses exceed 1.50% and 0.80% for each Equity Portfolio and the Bond Portfolio, respectively. The expenses noted above for the Bond Portfolio have been restated and reduced from the prior year. For the fiscal year ended March 31, 1996, Other Expenses and Total Portfolio Operating Expenses for the Bond Portfolio, after fee waivers and expense reimbursements then in effect, were 0.50% and 0.85%, respectively. With respect to all Portfolios, without such waiver and expense reimbursement, Management Fees stated above would have been 0.75% and 0.45%, for each Equity Portfolio and Bond Portfolio, respectively. Other Expenses would have been 4.59%, 2.57%, and 2.92% for Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively, and Total Portfolio Operating Expenses would have been 5.84%, 3.82% and 3.72% for Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively. FEE TABLE (continued) - ------------------------------------------------------------------------------- SMALL CAP LARGE CAP TOTAL RETURN VALUE VALUE BOND PORTFOLIO PORTFOLIO PORTFOLIO CLASS C CLASS C CLASS C - ------------------------------------------------------------------------------ Shareholder Transaction Expenses Maximum Sales Load Imposed on Purchases (as a percentage of offering price).......... - - - Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of the amount subject to charge).................... 1.00% 1.00% 1.00% Annual Portfolio Operating Expenses (as a percentage of average daily net assets) Management Fees (after fee waiver)*.......... 0.00% 0.00% 0.00% 12b-1 Fees................................... 1.00% 1.00% 0.75% Other Expenses (after expense reimbursement)*.............................. 1.00% 1.00% 0.45% Total Portfolio Operating Expenses (after fee waiver and expense reimbursement)*........... 2.00% 2.00% 1.20% Example: You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period: 1 Year...................................... $ 30 $ 30 $ 22 3 Years..................................... $ 63 $ 63 $ 38 5 Years..................................... $108 $108 $ 66 10 Years..................................... $233 $233 $145 You would pay the following expenses on the same investment, assuming no redemption: 1 Year...................................... $ 20 $ 20 $ 12 3 Years..................................... $ 63 $ 63 $ 38 5 Years..................................... $108 $108 $ 66 10 Years..................................... $233 $233 $145 - ----- * BSFM has undertaken to waive its investment advisory fee and assume certain expenses of each Portfolio other than brokerage commissions, extraordinary items, interest and taxes to the extent Total Portfolio Operating Expenses exceed 2.00% and 1.20% for each Equity Portfolio and the Bond Portfolio, respectively. The expenses noted above for the Bond Portfolio have been restated and reduced from the prior year. For the fiscal year ended March 31, 1996, Other Expenses and Total Portfolio Operating Expenses for the Bond Portfolio, after fee waivers and expense reimbursements then in effect, were 0.50% and 1.25%, respectively. With respect to all Portfolios, without such waiver and expense reimbursement, Management Fees stated above would have been 0.75% and 0.45%, for each Equity Portfolio and Bond Portfolio, respectively. Other Expenses would have been 4.64%, 2.64% and 3.00% for Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively, and Total Portfolio Operating Expenses would have been 6.39%, 4.39% and 4.20% for Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively. The amounts listed in the example should not be considered as representative of past or future expenses and actual expenses may be greater or less than those indicated. Moreover, while the example assumes a 5% annual return, each Portfolio's actual performance will vary and may result in an actual return greater or less than 5%. The purpose of the foregoing tables is to assist you in understanding the costs and expenses borne by each Portfolio and investors, the payment of which will reduce investors' annual return. In addition to the expenses noted above, the Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." Long-term investors could pay more in 12b-1 fees than the economic equivalent of paying a front-end sales charge. For a description of the expense reimbursement or waiver arrangements in effect, see "Management of the Fund." Condensed Financial Information The information in the table below covering each Portfolio's investment results for the period indicated has been audited by Deloitte & Touche LLP. Further financial data and related notes appear in the Portfolios' Annual Report for the fiscal year ended March 31, 1996 which is incorporated by reference into the Portfolios' Statement of Additional Information which is available upon request. Financial Highlights Contained below is per share operating performance data, total investment return, ratios to average net assets and other supplemental data for a Class A and Class C share of each Portfolio for the period from commencement of investment operations through March 31, 1996. This information has been derived from information provided in each Portfolio's financial statements.
Large Cap Small Cap Total Return Value Value Bond Portfolio(1) Portfolio(2) Portfolio(3) ---------------- ------------------- ----------------- Class A Class C Class A Class C Class A Class C ------- ------- --------- --------- ------- -------- Per Share Operating Performance* Net asset value, beginning of period....... $12.00 $12.00 $12.00 $12.00 $12.00 $12.00 ------- --------- -------- --------- ------- -------- Net investment income/(loss) (4)........... 0.06 (0.01) (0.07) (0.10) 0.71 0.67 Net realized and unrealized gain on investments (5)............................ 3.10 3.10 4.17 4.11 0.30 0.30 ------- --------- ------- --------- ------- -------- Net increase in net assets resulting from operations.................. 3.16 3.09 4.10 4.01 1.01 0.97 ------- --------- ------- --------- ------- -------- Dividends and distributions to shareholders from: Net investment income...................... (0.02) - - - (0.71) (0.67) Net realized capital gains................. (0.01) (0.01) (0.23) (0.22) (0.04) (0.04) ------- --------- ------- -------- ------- -------- (0.03) (0.01) (0.23) (0.22) (0.75) (0.71) ------- --------- ------- -------- ------- -------- Net asset value, end of period............. $15.13 $15.08 $15.87 $15.79 $12.26 $12.26 ======= ========= ======= ======== ======= ======== Total investment return (6)................ 26.35% 25.71% 34.36% 33.59% 8.54% 8.13% ======= ========= ======= ======== ======= ======== Ratios/Supplemental Data Net assets, end of period (000's omitted).. $3,616 $3,520 $6,474 $6,753 $4,467 $1,775 Ratio of expenses to average net assets (4)(7).......................... 1.50% 2.00% 1.50% 2.00% 0.85% 1.25% Ratio of net investment income/(loss) to average net assets (4)(7).................. 0.46% (0.06%) (0.66%) (1.09%) 5.76% 5.38% Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements (7)...... 4.34% 4.39% 2.32% 2.39% 2.87% 2.95% Portfolio turnover rate (8)................ 45.28% 45.28% 40.79% 40.79% 107.35% 107.35% Average commission rate per share.......... $0.06 $0.06 $0.06 $0.06 - - - ------ * Calculated based on shares outstanding on the first and last day of the period, except for dividends and distributions, if any, which are based on actual shares outstanding on the dates of distributions. (1) Commenced its investment operations on April 4, 1995. (2) Commenced its investment operations on April 3, 1995. (3) Commenced its investment operations on April 5, 1995. (4) Reflects waivers and reimbursements. (5) The amount shown for a share outstanding throughout the respective period is not in accord with the change in the aggregate gains and losses in investments during the respective period because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset value during the period. (6) Total return does not consider the effects of sales loads or contingent deferred sales charges. Total return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total returns are not annualized. (7) Annualized. (8) Not annualized.
Further information about performance is contained in the Portfolios' Annual Report, which may be obtained without charge by writing to the address or calling one of the telephone numbers listed under "General Information." Alternative Purchase Methods By this Prospectus, each Portfolio offers you two methods of purchasing its shares. By this Prospectus, each Portfolio offers investors two methods of purchasing its shares; investors may choose the Class of shares that best suits their needs, given the amount of purchase, the length of time the investor expects to hold the shares and any other relevant circumstances. Each Portfolio share represents an identical pro rata interest in the Portfolio's investment portfolio. Class A shares of each Equity Portfolio and the Bond Portfolio are sold at net asset value per share plus a maximum initial sales charge of 4.75% and 3.75%, respectively, of the public offering price imposed at the time of purchase. The initial sales charge may be reduced or waived for certain purchases. See "How to Buy Shares-Class A Shares." The Class A shares of each Equity Portfolio and the Bond Portfolio are subject to an annual distribution and shareholder servicing fee at the rate of .50 of 1% and .35 of 1%, respectively, of the value of the average daily net assets. See "Management of the Fund-Distribution and Shareholder Servicing Plan." Class C shares of each Portfolio are subject to a 1% contingent deferred sales charge ("CDSC") which is assessed only if Class C shares are redeemed within one year of purchase. See "How to Redeem Shares-Class C Shares." These shares of each Equity Portfolio and the Bond Portfolio also are subject to an annual distribution and shareholder servicing fee at the rate of 1% and .75 of 1%, respectively, of the value of the average daily net assets of Class C. See "Management of the Fund-Distribution and Shareholder Servicing Plan." The distribution and shareholder servicing fee paid by Class C will cause such Class to have a higher expense ratio and to pay lower dividends than Class A. The decision as to which Class of shares is more beneficial to each investor depends on the amount and the intended length of time of the investor's investment. Each investor should consider whether, during the anticipated life of the investor's investment in the Fund, the accumulated distribution and shareholder servicing fee and CDSC, if any, on Class C shares would be less than the initial sales charge on Class A shares purchased at the same time, and to what extent, if any, such differential would be offset by the return of Class A. Additionally, investors qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time might consider purchasing Class A shares because the accumulated continuing distribution and shareholder servicing fees on Class C shares may exceed the initial sales charge on Class A shares during the life of the investment. Finally, each investor should consider the effect of the CDSC period in the context of the investor's own investment time frame. Generally, Class A shares may be more appropriate for investors who invest $1,000,000 and $500,000 or more in an Equity Portfolio's or the Bond Portfolio's shares, respectively, but will not be appropriate for investors who invest less than $50,000 in a Portfolio's shares, unless they intend to hold those shares for more than ten years. Description of the Fund General The Fund is a "series fund." The Fund is a "series fund," which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the Investment Company Act of 1940, as amended (the "1940 Act"), and for other purposes, and a shareholder of one Portfolio is not deemed to be a shareholder of any other Portfolio. As described below, for certain matters Fund shareholders vote together as a group; as to others they vote separately by Portfolio. By this Prospectus, shares of the Portfolios are being offered. From time to time, other portfolios may be established and sold pursuant to other offering documents. See "General Information." Investment Objective Each Equity Portfolio seeks to provide capital appreciation. The Bond Portfolio seeks to maximize total return, consistent with preservation of capital. Each Equity Portfolio's investment objective is capital appreciation. The Bond Portfolio's investment objective is to maximize total return, consistent with preservation of capital. See "-Management Policies" below. Each Portfolio's investment objective cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of such Portfolio's outstanding voting shares. There can be no assurance that a Portfolio's investment objective will be achieved. Management Policies Equity Portfolios Each Equity Portfolio invests primarily in equity securities that, at the time of purchase, were identified by BSFM as value companies. The Large Cap Value Portfolio invests, under normal market conditions, substantially all of its assets in equity securities of issuers with market capitalizations of $1 billion or more and identified by BSFM as value companies. The Small Cap Value Portfolio invests, under normal market conditions, substantially all of its assets in equity securities of issuers with market capitalizations of $500 million or less and identified by BSFM as value companies. To determine whether a company's stock falls within the value classification, BSFM analyzes it based on fundamental factors such as price to book value ratios, price to earnings ratios, earnings growth, dividend payout ratios, return on equity, and the company's beta (a measure of stock price volatility relative to the market generally). In general, BSFM believes that companies with relatively low price to book ratios, low price to earnings ratios or higher than average dividend payments in relation to price should be classified as value companies. For potential investments, BSFM also, among other matters, may review new management and upcoming corporate restructuring plans, consider the general business cycle and the company's position within the specific industry and consider the responsiveness of the company to identified problems in an effort to assess the likelihood of future appreciation of the company's securities. BSFM anticipates that at least 85% of the value of each Equity Portfolio's total assets (except when maintaining a temporary defensive position) will be invested in equity securities of domestic and foreign issuers. Each Equity Portfolio expects, under normal market conditions, to invest less than 10% of its assets in the equity securities of foreign issuers. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which each Equity Portfolio may invest will be rated at least investment grade by a nationally recognized st atistical rating organization at the time of purchase. Each Equity Portfolio may invest, in anticipation of investing cash positions, in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase agreements, as set forth in the Appendix. Under normal market conditions, each Equity Portfolio expects to have less than 15% of its assets invested in money market instruments. However, when BSFM determines that adverse market conditions exist, each Equity Portfolio may adopt a temporary defensive posture and invest all of its assets in money market instruments. Bond Portfolio The Bond Portfolio invests primarily in bonds, debentures and other debt instruments. The Bond Portfolio invests at least 65% of the value of its total assets (except when maintaining a temporary defensive position) in bonds (which it defines as bonds, debentures and other fixed-income securities). The Bond Portfolio is permitted to invest in a broad range of investment grade, U.S. dollar denominated fixed-income securities and securities with debt-like characteristics (e.g., bearing interest or having stated principal) of domestic and foreign issuers. These debt securities include bonds, debentures, notes, money market instruments (including foreign bank obligations, such as time deposits, certificates of deposit and bankers' acceptances, commercial paper and other short-term corporate debt obligations, and repurchase agreements), mortgage-related securities (including interest-only and principal-only stripped mortgage-backed securities), asset-backed securities, municipal obligations and convertible debt obligations. The issuers may include domestic and foreign corporations, partnerships or trusts, and governments or their political subdivisions, agencies or instrumentalities. Under normal market conditions, the Bond Portfolio seeks to provide performance results that equal or exceed the Salomon Brothers BIG Bond Index, which is a market-capitalization weighted index that includes U.S. Treasury, Government-sponsored, mortgage and investment grade fixed-rate corporate fixed-income securities with a maturity of one year or longer and a minimum of $50 million amount outstanding at the time of inclusion in the Salomon Brothes BIG Bond Index. As of March 31, 1996, the weighted average maturity of securities comprising the Salomon Brothers BIG Bond Index was approximately nine years and their effective duration was approximately five years. Under normal market conditions, the Bond Portfolio invests in a portfolio of securities with a dollar-weighted average maturity ranging from four to thirteen years and a duration of not less than 65% of the Salomon Brothers BIG Bond Index and not more than 135% of the Salomon Brothers BIG Bond Index. As a measure of a fixed-income security's cash flow, duration is an alternative to the concept of "term to maturity" in assessing the price volatility associated with changes in interest rates. Generally, the longer the duration, the more volatility an investor should expect. For example, the market price of a bond with a duration of five years would be expected to decline 5% if interest rates rose 1%. Conversely, the market price of the same bond would be expected to increase 5% if interest rates fell 1%. The market price of a bond with a duration of ten years would be expected to increase or decline twice as much as the market price of a bond with a five year duration. Duration measures a security's maturity in terms of the average time required to receive the present value of all interest and principal payments as opposed to its term to maturity. The maturity of a security measures only the time until final payment is due; it does not take account of the pattern of a security's cash flows over time, which would include how cash flow is affected by prepayments and by changes in interest rates. Incorporating a security's yield, coupon interest payments, final maturity and option features into one measure, duration is computed by determining the weighted average maturity of a bond's cash flows, where the present values of the cash flows serve as weights. In computing the duration of the Bond Portfolio, BSFM will estimate the duration of obligations that are subject to prepayment or redemption by the issuer, taking into account the influence of interest rates on prepayments, coupon flows and other factors which may affect the maturity of the security. This method of computing duration is known as effective duration. BSFM anticipates actively managing the Bond Portfolio's assets in response to change in the business cycle. BSFM seeks to identify and respond to phases in the business cycle-simplistically, the expansion, topping out, recession and trough phases-and to invest the Bond Portfolio's assets by shifting among market sectors, maturities and relative credit quality in a way which it believes will achieve the Bond Portfolio's objective in a relatively conservative manner taking into account the volatility and risk associated with investing in a portfolio of relatively longer-term fixed-income securities. Wh ile the Bond Portfolio seeks, as part of its investment objective, to preserve capital, investors should recognize that the net asset value per share of the Bond Portfolio should be expected to be more volatile than the net asset value per share of a fund that invested in portfolio securities with a shorter duration. At least 70% of the value of the Bond Portfolio's net assets must consist of securities which, in the case of bonds and other debt instruments, are rated no lower than A by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), Fitch Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff") or, if unrated, deemed to be of comparable quality by BSFM. Up to 30% of the value of the Bond Portfolio's net assets may consist of securities which, in the case of bonds and other debt instruments, are rated no lower than Baa by Moody's and BBB by S&P, Fitch and Duff or, if unrated, deemed to be of comparable quality by BSFM. The Bond Portfolio may invest in short-term fixed-income obligations which are rated in the two highest rating categories by Moody's, S&P, Fitch or Duff. See "Risk Factors-Fixed-Income Securities" below, and "Appendix" in the Statement of Additional Information. Investment Techniques Each Portfolio may engage in options and futures transactions, short selling and lending portfolio securities, each of which involves risk. Each Equity Portfolio also may engage in foreign currency exchange transactions, which also involve risk. Each Portfolio may engage in various investment techniques, such as options and futures transactions, short selling and lending portfolio securities, each of which involves risk. Each Equity Portfolio also may engage in foreign currency exchange transactions, which also involve risk. Options and futures transactions, as well as investments in certain asset-backed, mortgage-backed and government securities, involve "derivative securities." Short selling is discussed below. For a discussion of these other investment techniques and their related risks, see "Appendix-Investment Techniques" and "Risk Factors" below. Short sales are transactions in which a Portfolio sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio. Until the security is replaced, the Portfolio is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Short selling by the Bond Portfolio will be used primarily in conjunction with a long transaction, but not necessarily in the same instrument or an instrument with a similar maturity or interest rate, to effect a hedged position to take advantage of spreads in the market place. Until the Portfolio replaces a borrowed security in connection with a short sale, the Portfolio will: (a) maintain daily a segregated account, containing cash, cash equivalents or U.S. Government securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position in accordance with positions taken by the Staff of the Securities and Exchange Commission. A Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. A Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Portfolio may be required to pay in connection with a short sale. Each Portfolio may purchase call options to provide a hedge against an increase in the price of a security sold short by the Portfolio. See "Appendix-Investment Techniques-Options Transactions." Each Portfolio anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net assets. No Portfolio may sell short the securities of any single issuer listed on a national securities exchange to the extent of more than 5% of the value of its net assets. No Portfolio may sell short the securities of any class of an issuer to the extent, at the time of the transaction, of more than 2% of the outstanding securities of that class. In addition to the short sales discussed above, each Portfolio may make short sales "against the box," a transaction in which the Portfolio enters into a short sale of a security which the Portfolio owns. The proceeds of the short sale will be held by a broker until the settlement date at which time the Portfolio delivers the security to close the short position. The Portfolio receives the net proceeds from the short sale. The Portfolio at no time will have more than 15% of the value of its net assets in deposits on short sales against the box. It currently is anticipated that the Portfolio will make short sales against the box for purposes of protecting the value of the Portfolio's net assets. Certain Fundamental Policies Certain of each Portfolio's investment policies are fundamental policies that can be changed only by shareholder vote. Each Portfolio may (i) borrow money to the extent permitted under the 1940 Act; (ii) invest up to 5% of the value of its total assets in the obligations of any issuer, except that up to 25% of the value of the Portfolio's total assets may be invested, and securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities may be purchased, without regard to any such limitation; and (iii) invest up to 25% of the value of its total assets in the securities of issuers in a single industry, provided that there is no such limitation on investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. This paragraph describes fundamental policies that cannot be changed as to a Portfolio without approval by the holders of a majority (as defined in the 1940 Act) of such Portfolio's outstanding voting shares. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Certain Additional Non-Fundamental Policies Each Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to secure permitted borrowings; and (ii) invest up to 15% of the value of its net assets in repurchase agreements providing for settlement in more than seven days after notice and in other illiquid securities. In addition, each Equity Portfolio may purchase securities of any company having less than three years' continuous operation (including operations of any predecessors) if such purchase does not cause the value of such Equity Portfolio's investments in all such companies to exceed 5% of the value of its total assets. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Risk Factors No investment is free from risk. Investing in a Portfolio will subject investors to certain risks which should be considered. Net Asset Value Fluctuations-(All Portfolios) Each Portfolio's net asset value per share is not fixed and should be expected to fluctuate. Investors should purchase Portfolio shares only as a supplement to an overall investment program and only if investors are willing to undertake the risks involved. Equity Securities-(Equity Portfolios) Investors should be aware that equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and that fluctuations can be pronounced. The securities of smaller cap companies may be subject to more abrupt or erratic market movements than larger cap companies, both because the securities typically are traded in lower volume and because the issuers typically are subject to a greater degree to changes in earnings and prospects. Changes in the value of the equity securities in an Equity Portfolio's portfolio will result in changes in the value of the Equity Portfolio's shares and thus the Equity Portfolio's yield and total return to investors. Fixed-Income Securities-(Bond Portfolio) Investors should be aware that even though interest-bearing securities are investments which promise a stable stream of income, the prices of such securities typically are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. Thus, if interest rates have increased from the time a security was purchased, such security, if sold, might be sold at a price less than its cost. Similarly, if interest rates have declined from the time a security was purchased, such security, if sold, might be sold at a price greater than its cost. In either instance, if the security was purchased at face value and held to maturity, no gain or loss would be realized. Certain securities purchased by the Bond Portfolio, such as those with interest rates that fluctuate directly or indirectly based on multiples of a stated index, are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and possibly loss of principal. The values of fixed-income securities also may be affected by changes in the credit rating or financial condition of the issuing entities. Once the rating of a security purchased by the Bond Portfolio has been adversely changed, the Bond Portfolio will consider all circumstances deemed relevant in determining whether to continue to hold the security. Holding such securities that have been downgraded below investment grade can subject the Bond Portfolio to additional risk. Certain securities purchased by the Bond Portfolio, such as those rated Baa by Moody's or BBB by S&P, Fitch or Duff, may be subject to such risk with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated fixed-income securities. Debt securities which are rated Baa by Moody's are considered medium grade obligations; they are neither highly protected nor poorly secured, and are considered by Moody's to have speculative characteristics. Debt securities rated BBB by S&P are regarded as having adequate capacity to pay interest and repay principal, and while such debt securities ordinarily exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt securities in this category than in higher rated categories. Fitch considers the obligor's ability to pay interest and repay principal on debt securities rated BBB to be adequate; adverse changes in economic conditions and circumstances, however, are more likely to have an adverse impact on these debt securities and, therefore, impair timely payment. Debt securities rated BBB by Duff are considered to have below average protection factors but still considered sufficient for prudent investment. No assurance can be given as to the liquidity of the market for certain mortgage-backed securities, such as collateralized mortgage obligations and stripped mortgage-backed securities. Determination as to the liquidity of interest-only and principal-only fixed mortgage-backed securities issued by the U.S. Government or its agencies and instrumentalities will be made in accordance with guidelines established by the Fund's Board of Trustees. In accordance with such guidelines, BSFM will monitor investments in such securities with particular regard to trading activity, availability of reliable price information and other relevant information. The Bond Portfolio intends to treat other stripped mortgage-backed securities as illiquid securities. See "Appendix-Certain Portfolio Securities-Illiquid Securities." Federal income tax law requires the holder of a zero coupon security or of certain pay-in-kind bonds to accrue income with respect to these securities prior to the receipt of cash payments. If the Bond Portfolio invests in such securities it may be required, to maintain its qualification as a regulated investment company and avoid liability for Federal income taxes, to distribute the income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. Certain Investment Techniques-(All Portfolios) The use of investment techniques such as engaging in options and futures transactions, engaging in foreign currency exchange transactions, short selling and lending portfolio securities involves greater risk than that incurred by many other funds with a similar objective. Using these techniques may produce higher than normal portfolio turnover and may affect the degree to which the Portfolio's net asset value fluctuates. Higher portfolio turnover rates are likely to result in comparatively greater brokerage commissions or transaction costs. See "Appendix-Investment Techniques." Each Portfolio's ability to engage in certain short-term transactions may be limited by the requirement that, to qualify as a regulated investment company, it must earn less than 30% of its gross income from the disposition of securities held for less than three months. This 30% test limits the extent to which the Portfolio may sell securities held for less than three months, effect short sales of securities held for less than three months, write options expiring in less than three months and invest in certain futures contracts, among other strategies. With the exception of the above requirement, the amount of portfolio activity will not be a limiting factor when making portfolio decisions. Under normal market conditions, the portfolio turnover rate of each Portfolio generally will not exceed 100%. See "Portfolio Transactions" in the Portfolios' Statement of Additional Information. Investing in Foreign Securities-(All Portfolios) Foreign securities markets generally are not as developed or efficient as those in the United States. Securities of some foreign issuers are less liquid and more volatile than securities of comparable U.S. issuers. Similarly, volume and liquidity in most foreign securities markets are less than in the United States and, at times, volatility of price can be greater than in the United States. The issuers of some of these securities, such as foreign bank obligations, may be subject to less stringent or different regulations than are U.S. issuers. In addition, there may be less publicly available information about a non-U.S. issuer, and non-U.S. issuers generally are not subject to uniform accounting and financial reporting standards, practices and requirements comparable to those applicable to U.S. issuers. Because stock certificates and other evidences of ownership of such securities usually are held outside the United States, each Portfolio will be subject to additional risks which include possible adverse political and economic developments, possible seizure or nationalization of foreign deposits and possible adoption of governmental restrictions that might adversely affect the payment of principal, interest and dividends on the foreign securities or might restrict the payment of principal, interest and dividends to investors located outside the country of the issuers, whether from currency blockage or otherwise. Custodial expenses for a portfolio of non-U.S. securities generally are higher than for a portfolio of U.S. securities. Since foreign securities often are purchased with and payable in currencies of foreign countries, the value of these assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. Some currency exchange costs may be incurred when a Portfolio changes investments from one country to another. Furthermore, some of these securities may be subject to brokerage taxes levied by foreign governments, which have the effect of increasing the cost of such investment and reducing the realized gain or increasing the realized loss on such securities at the time of sale. Income received by a Portfolio from sources within foreign countries may be reduced by withholding or other taxes imposed by such countries, although applicable tax conventions may reduce or eliminate such taxes. All such taxes paid by a Portfolio will reduce its net income available for distribution to investors. Foreign Currency Exchange-(Equity Portfolios) Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or perceived changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention by U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the United States or abroad. The foreign currency market offers less protection against defaults in the forward trading of currencies than is available when trading in currencies occurs on an exchange. Since a forward currency contract is not guaranteed by an exchange or clearinghouse, a default on the contract would deprive an Equity Portfolio of unrealized profits or force the Equity Portfolio to cover its commitments for purchase or resale, if any, at the current market price. Foreign Commodity Transactions-(Equity Portfolios) Unlike trading on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the Commodity Futures Trading Commission (the "CFTC") and may be subject to greater risks than trading on domestic exchanges. See "Appendix-Investment Techniques." For example, some foreign exchanges are principal markets so that no common clearing facility exists and a trader may look only to the broker for performance of the contract. In addition, unless an Equity Portfolio hedges against fluctuations in the exchange rate between the U.S. dollar and the currencies in which trading is done on foreign exchanges, any profits that the Equity Portfolio might realize in trading could be eliminated by adverse changes in the exchange rate, or the Equity Portfolio could incur losses as a result of those changes. Simultaneous Investments-(All Portfolios) Investment decisions for each Portfolio are made independently from those of other investment companies or accounts advised by BSFM. However, if such other investment companies or accounts are prepared to invest in, or desire to dispose of, securities of the type in which a Portfolio invests at the same time as the Portfolio, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by a Portfolio or the price paid or received by the Portfolio. Management of the Fund Board of Trustees The Trustees are responsible for the overall management and supervision of each Portfolio's business. The Fund's business affairs are managed under the general supervision of its Board of Trustees. The Portfolios' Statement of Additional Information contains the name and general business experience of each Trustee. Investment Adviser The Portfolios' investment adviser, BSFM, manages each Portfolio's investments. The Portfolios' investment adviser is BSFM, a wholly-owned subsidiary of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear Stearns, is a leading United States investment banking, securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. BSFM is a registered investment adviser and offers, either directly or through affiliates, investment advisory and administrative services to open-end and closed-end investment funds and other managed pooled investment vehicles with net assets at March 31, 1996 of over $1.9 billion. BSFM supervises and assists in the overall management of the Portfolios' affairs under an Investment Advisory Agreement between BSFM and the Fund, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. Each Equity Portfolio's principal portfolio manager is Neil T. Eigen. Mr. Eigen joined Bear Stearns Asset Management in 1990 as Director of Equity Investments-Bear Stearns Asset Management and Senior Managing Director of Bear Stearns. The Bond Portfolio's principal portfolio manager is Peter E. Mahoney. Mr. Mahoney rejoined Bear Stearns in November 1995 as a Managing Director of Bear Stearns and Director of Fixed Income Investments of Bear Stearns Asset Management, positions he held during his employment with Bear Stearns from June 1987 through November 1994. From November 1994 to November 1995 he was a financial consultant. Each Equity Portfolio pays BSFM an advisory fee at an annual rate equal to .75 of 1% of the Equity Portfolio's average daily net assets and the Bond Portfolio pays BSFM an advisory fee at the annual rate of .45 of 1% of the Bond Portfolio's average daily net assets. Under the terms of the Investment Advisory Agreement, each Equity Portfolio has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the Equity Portfolio's average daily net assets and the Bond Portfolio has agreed to pay BSFM a monthly fee at the annual rate of .45 of 1% of the Bond Portfolio's average daily net assets. From April 3, 1995 (commencement of operations) through March 31, 1996, no fees were paid by the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio pursuant to an undertaking by BSFM. Each Portfolio's administrator is BSFM. Each Portfolio pays BSFM an administration fee at the annual rate of .15 of 1% of its average daily net assets. Under the terms of an Administration Agreement with the Fund, BSFM generally supervises all aspects of the operation of each Portfolio, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. For providing administrative services to each Portfolio, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of each Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Fund, PFPC Inc. provides certain administrative services to each Portfolio. For providing these services, the Fund has agreed to pay PFPC Inc. an annual fee, as set forth below: - --------------------------------------------------------------------- ANNUAL FEE AS A PERCENTAGE OF PORTFOLIO'S AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS - --------------------------------------------------------------------- First $200 million..................... .10 of 1% Next $200 million up to $400 million .. .075 of 1% Next $200 million up to $600 million .. .05 of 1% Assets in excess of $600 million ...... .03 of 1% The above-referenced fees are subject to a monthly minimum fee of $11,000 per Portfolio. From April 3, 1995 (commencement of operations) through March 31, 1996, the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio each paid PFPC Inc. a monthly fee at the effective annual rate of .90 of 1%, .48 of 1% and .55 of 1%, respectively of the Portfolio's average daily net assets. From time to time, BSFM may waive receipt of its fees and/or voluntarily assume certain Portfolio expenses, which would have the effect of lowering the Portfolio's expense ratio and increasing yield to investors at the time such amounts are waived or assumed, as the case may be. No Portfolio will pay BSFM at a later time for any amounts it may waive, nor will a Portfolio reimburse BSFM for any amounts it may assume. From time to time PFPC Inc. may waive a portion of its fee. Effective May 1, 1996, and until further notice, PFPC Inc. will reduce each Portfolio's monthly minimum to $7,500 for net assets of less than $25 million; $9,167 for net assets of $25 million to $50 million; $11,000 for net assets in excess of $50 million. PFPC Inc. reserves the right to revoke this voluntary fee waiver at any time. Brokerage commissions may be paid to Bear Stearns for executing transactions if the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers. The allocation of brokerage transactions also may take into account a broker's sales of each Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional Information. Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or derivatives thereof as part of the Fund name for as long as the Investment Advisory Agreement is in effect. Distributor Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as each Portfolio's principal underwriter and distributor of each Portfolio's shares pursuant to an agreement which is renewable annually. Bear Stearns is entitled to receive the sales load described under "How to Buy Shares" and payments under each Portfolio's Distribution and Shareholder Servicing Plan described below. Custodian and Transfer Agent Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is each Portfolio's custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each Portfolio's transfer agent, dividend disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also provides certain administrative services to each Portfolio. Distribution and Shareholder Servicing Plan Each Portfolio has adopted a Rule 12b-1 Plan. Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), each Portfolio pays Bear Stearns for distributing Portfolio shares and for providing personal services to, and/or maintaining accounts of, Portfolio shareholders a fee as follows of the average daily net assets of the respective Class: - ------------------------------------ CLASS A CLASS C - ------------------------------------ Equity Portfolios... .50% 1.00% Bond Portfolio...... .35% .75% Under the Plan, Bear Stearns may pay third parties in respect of these services such amount as it may determine. The fees paid to Bear Stearns under the Plan are payable without regard to actual expenses incurred. The Fund understands that these third parties also may charge fees to their clients who are beneficial owners of Portfolio shares in connection with their client accounts. These fees would be in addition to any amounts which may be received by them from Bear Stearns under the Plan. Expense Limitation BSFM has undertaken until such time as it gives investors at least 60 days' notice to the contrary that, if in any fiscal year, certain expenses, including the investment advisory fee and fees under the Plan, exceed 0.80% of the average daily net assets of the Bond Portfolio-Class A, 1.20% of the average daily net assets of the Bond Portfolio-Class C, 1.50% of the average daily net assets of each Equity Portfolio-Class A and 2.00% of the average daily net assets of each Equity Portfolio-Class C for the fiscal year, BSFM may waive a portion of its investment advisory fee or bear other expenses to the extent of the excess expense. How to Buy Shares General An initial investment is $1,000, $500 for retirement plans; subsequent investments must be at least $250, $100 for retirement plans; specify the Class you wish to purchase. The minimum initial investment is $1,000, or $500 if the investment is for Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant. Subsequent investments ordinarily must be at least $250 or $100 for retirement plans. Share certificates are issued only upon written request. No certificates are issued for fractional shares. The Fund reserves the right to reject any purchase order. The Fund reserves the right to vary the initial and subsequent investment minimum requirements at any time. Investments by employees of Bear Stearns and its affiliates are not subject to minimum investment requirements. Purchases of a Portfolio's shares may be made through a brokerage account maintained with Bear Stearns or through certain investment dealers who are members of the National Association of Securities Dealers, Inc. who have sales agreements with Bear Stearns (an "Authorized Dealer"). Purchases of a Portfolio's shares also may be made directly through the Transfer Agent. When purchasing Portfolio shares, investors must specify which Class is being purchased. Purchases are effected at the public offering price next determined after a purchase order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent (the "trade date"). Payment for Portfolio shares generally is due to Bear Stearns or the Authorized Dealer on the third business day (the "settlement date") after the trade date. Investors who make payment before the settlement date may permit the payment to be held in their brokerage accounts or may designate a temporary investment for payment until the settlement date. If a temporary investment is not designated, Bear Stearns or the Authorized Dealer will benefit from the temporary use of the funds if payment is made before the settlement date. Purchases can be made through Bear Stearns account executives, Authorized Dealers or the Transfer Agent. Purchases through Bear Stearns account executives or Authorized Dealers may be made by check (except that a check drawn on a foreign bank will not be accepted), Federal Reserve draft or by wiring Federal Funds with funds held in brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal Reserve drafts should be made payable as follows: (i) to Bear Stearns or an investor's Authorized Dealer or (ii) to "The Bear Stearns Funds-[Name of Portfolio]" if purchased directly from the Portfolio, and should be directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds-[Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960. Payment by check or Federal Reserve draft must be received within three business days of receipt of the purchase order by Bear Stearns or an Authorized Dealer. Orders placed directly with the Transfer Agent must be accompanied by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding payment promptly to the Fund. The Fund will charge $7.50 for each wire redemption. The payment proceeds of a redemption of shares recently purchased by check may be delayed as described under "How to Redeem Shares." Investors who are not Bear Stearns clients may purchase Portfolio shares through the Transfer Agent. To make an initial investment in a Portfolio, an investor must establish an account with the Portfolio by furnishing necessary information to the Fund. An account with a Portfolio may be established by completing and signing the Account Information Form indicating which Class of shares is being purchased, a copy of which is attached to this Prospectus, and mailing it, together with a check to cover the purchase, to PFPC Inc., Attention: The Bear Stearns Funds-[Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960. Subsequent purchases of shares may be made by checks made payable to the Fund and directed to the address set forth in the preceding paragraph. The Portfolio account number should appear on the check. Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer Agent before the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., New York time) on any day the relevant Portfolio calculates its net asset value are priced according to the net asset value determined on that date. Purchase orders received after the close of trading on the New York Stock Exchange are priced as of the time the net asset value is next determined. Net asset value is computed daily as of the close of regular trading on the New York Stock Exchange. Shares of the Portfolios are sold on a continuous basis. Net asset value per share is determined as of the close of regular trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New York time) on each business day. The net asset value per share of each Class of each Portfolio is computed by dividing the value of the Portfolio's net assets represented by such Class (i.e., the value of its assets less liabilities) by the total number of shares of such Class outstanding. Each Equity Portfolio's investments are valued based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by, or in accordance with procedures established by, the Fund's Board of Trustees. Substantially all of the Bond Portfolio's investments are valued each business day at fair value as determined by one or more independent pricing services (the "Service") approved by the Fund's Board of Trustees. Procedures of the Service are reviewed under the general supervision of the Fund's Board of Trustees. The remaining assets of the Bond Portfolio are valued using available market quotations or at fair value as determined in good faith by, or in accordance with procedures established by, the Fund's Board of Trustees. For further information regarding the methods employed in valuing each Portfolio's investments, see "Determination of Net Asset Value" in the Portfolios' Statement of Additional Information. Federal regulations require that investors provide a certified Taxpayer Identification Number (a "TIN") upon opening or reopening an account. See "Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the Fund could subject the investor to a $50 penalty imposed by the Internal Re venue Service (the "IRS"). Class A Shares The sales charge may vary depending on the dollar amount invested in each Portfolio. The public offering price for Class A shares of each Equity Portfolio is the net asset value per share of that Class plus a sales load, which is imposed in accordance with the following schedule:
- ------------------------------------------------------------------------------------- TOTAL SALES LOAD ------------------------------- AS A % OF AS A % OF DEALER CONCESSIONS OFFERING PRICE NET ASSET VALUE AS A % AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE* - ------------------------------------------------------------------------------------- Less than $50,000................. 4.75% 4.99% 4.25% $50,000 to less than $100,000..... 4.25 4.44 3.75 $100,000 to less than $250,000.... 3.75 3.90 3.25 $250,000 to less than $500,000.... 3.25 3.36 3.00 $500,000 to less than $750,000.... 2.75 2.83 2.50 $750,000 to less than $1,000,000.. 2.25 2.30 2.00 $1,000,000 and above.............. 0.00 0.00 0.00 The public offering price for Class A shares of the Bond Portfolio is the net asset value per share of that Class plus a sales load, which is imposed in accordance with the following schedule: - ------------------------------------------------------------------------------------------ TOTAL SALES LOAD --------------------------------- AS A % OF AS A % OF DEALER CONCESSIONS OFFERING PRICE NET ASSET VALUE AS A % AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE* - ------------------------------------------------------------------------------------------ Less than $50,000................. 3.75% 3.90% 3.25% $50,000 to less than $100,000..... 3.25 3.36 2.75 $100,000 to less than $250,000.... 2.75 2.83 2.25 $250,000 to less than $500,000.... 2.25 2.30 2.00 $500,000 to less than $750,000.... 2.00 2.04 1.75 $750,000 to less than $1,000,000.. 1.50 1.52 1.25 $1,000,000 and above.............. 0.00 0.00 0.00 - -------------- * Until further notice to the contrary, the full amount of the sales load will be reallowed as a dealer concession.
There is no initial sales charge on purchases of $1,000,000 or more of Class A shares. However, if an investor purchases Class A shares without an initial sales charge as part of an investment of at least $1,000,000 and redeems those shares within one year after purchase, a CDSC of 1.00% and .50% for each Equity Portfolio and the Bond Portfolio, respectively, will be imposed at the time of redemption. The terms contained in the section of the Fund's Prospectus entitled "How to Redeem Shares-Contingent Deferred Sales Charge-Class C Shares" are applicable to the Class A shares subject to a CDSC. Letter of Intent and Right of Accumulation apply to such purchases of Class A shares. The dealer concession may be changed from time to time but will remain the same for all dealers. From time to time, Bear Stearns may make or allow additional payments or promotional incentives to dealers that sell Class A shares. In some instances, these incentives may be offered only to certain dealers who have sold or may sell significant amounts of Class A shares. Dealers may receive a larger percentage of the sales load from Bear Stearns than they receive for selling most other funds. Through September 30, 1996, Bear Stearns, at its expense, has agreed to pay Authorized Dealers a fee in respect of the aggregate of all shares of the Portfolios and each other investment company sponsored by Bear Stearns sold to their customers though September 26, 1995. The fee paid is based on the aggregate net asset value of all shares of the Portfolios and each other investment company sponsored by Bear Stearns purchased by customers of the Authorized Dealer during the period ended September 26, 1995, reduced for redemptions during the year ending September 30, 1996. For amounts greater than $1 million but less than $5 million, the fee is .05% of such amount; for amounts greater than $5 million, the fee is .10% of such amount. Any such amount is expected to be paid, on a pro rata basis, quarterly. Class A shares may be sold at net asset value to (a) Bear Stearns, its affiliates or their respective officers, directors or employees (including retired employees), any partnership of which Bear Stearns is a general partner, any Trustee or officer of the Fund and designated family members of any of the above individuals; (b) qualified retirement plans of Bear Stearns; (c) any employee or registered representative of any Authorized Dealer or their respective spouses and minor children; (d) trustees or directors of investment companies for which Bear Stearns or an affiliate acts as sponsor; (e) any state, county or city, or any instrumentality, department, authority or agency thereof, which is prohibited by applicable investment laws from paying a sales load or commission in connection with the purchase of Portfolio shares; (f) any institutional investment clients including corporate sponsored pension and profit-sharing plans, other benefit plans and insurance companies; and (g) any pension funds, state and municipal governments or funds, Taft-Hartley plans and qualified non-profit organizations, foundations and endowments; (h) trust institutions (including bank trust departments) investing on their own behalf or on behalf of their clients; and (i) accounts as to which an Authorized Dealer charges an asset management fee. To take advantage of these exemptions, a purchaser must indicate its eligibility for an exemption to Bear Stearns along with its Account Information Form. Such purchaser agrees to notify Bear Stearns if, at any time of any additional purchases, it is no longer eligible for an exemption. Bear Stearns reserves the right to request certification or additional information from a purchaser in order to verify that such purchaser is eligible for an exemption. Bear Stearns reserves the right to limit the participation in Class A shares of each Portfolio of its employees. Dividends and distributions reinvested in Class A shares of a Portfolio will be made at the net asset value per share on the reinvestment date. Class A shares of each Portfolio also may be purchased at net asset value, with the proceeds from the redemption of shares of an investment company sold with a sales charge or commission and not distributed by Bear Stearns. However, if such investor redeems those shares within one year after purchase, a CDSC of 1.00% will be imposed at the time of redemption. This includes shares of a mutual fund which were subject to a contingent deferred sales charge upon redemption. The purchase must be made within 60 days of the redemption, and Bear Stearns must be notified by the investor in writing, or by the investor's investment professional, at the time the purchase is made. Bear Stearns will offer to pay Authorized Dealers an amount up to 1.00% of the net asset value of shares purchased by the dealers' clients or customers in this manner. Class C Shares The public offering price for Class C shares is the next determined net asset value per share of that Class. No initial sales charge is imposed at the time of purchase. A CDSC is imposed, however, on redemptions of Class C shares made within the first year of purchase. See "How to Redeem Shares." Right of Accumulation-Class A Shares Investors in Class A shares may qualify for a reduced sales charge. Pursuant to the Right of Accumulation, certain investors are permitted to purchase Class A shares of any Portfolio at the sales charge applicable to the total of (a) the dollar amount then being purchased plus (b) the current public offering price of all Class A shares of the Portfolios, shares of the Fund's other portfolios and shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, then held by the investor. The following purchases of Class A shares may be aggregated for the purposes of determining the amount of purchase and the corresponding sales load: (a) individual purchases on behalf of a single purchaser, the purchaser's spouse and their children under the age of 21 years including shares purchased in connection with a retirement account exclusively for the benefit of such individual(s), such as an IRA, and purchases made by a company controlled by such individual(s); (b) individual pu rchases by a trustee or other fiduciary account, including an employee benefit plan (such as employer-sponsored pension, profit-sharing and stock bonus plans, including plans under Section 401(k) of the Code, and medical, life and disability insurance trusts); or (c) individual purchases by a trustee or other fiduciary purchasing shares concurrently for two or more employee benefit plans of a single employer or of employers affiliated with each other. Subsequent purchases made under the conditions set forth above will be subject to the minimum subsequent investment of $250 and will be entitled to the Right of Accumulation. Letter of Intent-Class A Shares By checking the appropriate box in the Letter of Intent section of the Account Information Form, investors become eligible for the reduced sales load applicable to the total number of Class A shares of each Portfolio, Class A shares of the Fund's other portfolios and shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, purchased in a 13-month period pursuant to the terms and under the conditions set forth herein. A minimum initial purchase of $1,000 is required. The Transfer Agent will hold in escrow 5% of the amount indicated in the Account Information Form for payment of a higher sales load if the investor does not purchase the full amount indicated in the Account Information Form. The escrow will be released when the investor fulfills the terms of the Letter of Intent by purchasing the specified amount. If an investor's purchases qualify for a further sales load reduction, the sales load will be adjusted to reflect the total purchase at the end of 13 months. If total purchases are less than the amount specified, the investor will be requested to remit an amount equal to the difference between the sales load actually paid and the sales load applicable to the aggregate purchases actually made. If such remittance is not received within 20 days, the Transfer Agent, as attorney-in-fact, will redeem an appropriate number of shares held in escrow to realize the difference. Checking a box in the Letter of Intent section of the Account Information Form does not bind an investor to purchase, or a Portfolio to sell, the full amount indicated at the sales load in effect at the time of signing, but the investor must complete the intended purchase to obtain the reduced sales load. At the time an investor purchases shares of any of the above-listed funds, the investor must indicate its intention to do so under the Letter of Intent section of the Account Information Form. Systematic Investment Plan Each Portfolio offers shareholders convenient features and benefits, including the Systematic Investment Plan. The Systematic Investment Plan permits investors to purchase shares of a Portfolio (minimum initial investment of $250 and minimum subsequent investments of $100 per transaction) at regular intervals selected by the investor. Provided the investor's bank or other financial institution allows automatic withdrawals, Portfolio shares may be purchased by transferring funds from the account designated by the investor. At the investor's option, the account designated will be debited in the specified amount, and Portfolio shares will be purchased once a month, on the twentieth day. Only an account maintained at a domestic financial institution which is an Automated Clearing House member may be so designated. Investors desiring to participate in the Systematic Investment Plan should call the Transfer Agent at 1-800-447-1139 (in Delaware call collect 302-791-1031) to obtain the appropriate forms. The Systematic Investment Plan does not assure a profit and does not protect against loss in declining markets. Since the Systematic Investment Plan involves the continuous invest- ment in a Portfolio regardless of fluctuating price levels of the Portfolio's shares, investors should consider their financial ability to continue to purchase through periods of low price levels. The Fund may modify or terminate the Systematic Investment Plan at any time or charge a service fee. No such fee currently is contemplated. Shareholder Services Exchange Privilege The Exchange Privilege permits easy purchases of other funds in the Bear Stearns family. The Exchange Privilege enables an investor to purchase, in exchange for shares of a Class of a Portfolio, shares of the same Class of the Fund's other portfolios or shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale in the investor's state of residence. These funds have different investment objectives which may be of interest to investors. To use this Privilege, investors should consult their account ex ecutive at Bear Stearns, their account executive at an Authorized Dealer or the Transfer Agent to determine if it is available and whether any conditions are imposed on its use. To use this Privilege, exchange instructions must be given to the Transfer Agent in writing or by telephone. A shareholder wishing to make an exchange may do so by sending a written request to the Transfer Agent at the address given above in "How to Buy Shares-General." Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the account application that they do not wish to use this privilege. Shareholders holding share certificates are not eligible to exchange shares of a Portfolio by phone because share certificates must accompany all exchange requests. To add this feature to an existing account that previously di d not provide for this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 (in Delaware call collect 302-791-1031) to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing. If the exchanging shareholder does not currently own shares of the portfolio or fund whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and Authorized Dealer of record as the account from which shares are exchanged, unless otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as described below. To participate in the Systematic Investment Plan or establish automatic withdrawal for the new account, however, an exchanging shareholder must file a specific written request. The Exchange Privilege may be modified or terminated at any time, or from time to time, by the Fund on 60 days' notice to the affected portfolio or fund shareholders. The Fund, BSFM and Bear Stearns will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine. In attempting to confirm that telephone instructions are genuine, the Fund will use such procedures as are considered reasonable, including recording those instructions and requesting information as to account registration (such as the name in which an account is registered, the account number, recent transactions in the account, and the account holder's Social Security number, address and/or bank). Before any exchange, the investor must obtain and should review a copy of the current prospectus of the portfolio or fund into which the exchange is being made. Prospectuses may be obtained free of charge from Bear Stearns, any Authorized Dealer or the Transfer Agent. Except in the case of Personal Retirement Plans, the shares being exchanged must have a current value of at least $250; furthermore, when establishing a new account by exchange, the shares being exchanged must have a value of at least the minimum initial investment required for the portfolio or fund into which the exchange is being made; if making an exchange to an existing account, the dollar value must equal or exceed the applicable minimum for subsequent investments. If any amount remains in the investment portfolio from which the exchange is being made, such amount must not be below the minimum account value required by the Portfolio or Fund. Shares will be exchanged at the next determined net asset value; however, except in the instances described below, a sales load may be charged with respect to exchanges of Class A shares into portfolios or funds sold with a sales load. Generally, a sales load will be charged if the shares being exchanged were subject to a sales load which is lower than the sales load to which the shares being purchased are subject or were not subject to any sales load. No CDSC will be imposed on Class C shares at the time of an exchange. The CDSC applicable on redemption of the acquired Class C shares will be calculated from the date of the initial purchase of the Class C shares exchanged. If an investor is exchanging Class A shares into a portfolio or fund that charges a sales load, the investor may qualify for share prices which do not include the sales load or which reflect a reduced sales load, if the shares of the portfolio or fund from which the investor is exchanging were: (a) purchased with a sales load; (b) acquired by a previous exchange from shares purchased with a sales load; or (c) acquired through reinvestment of dividends or distributions paid with respect to the foregoing categories of shares. To qualify, at the time of the exchange the investor must notify Bear Stearns, the Authorized Dealer or the Transfer Agent. Any such qualification is subject to confirmation of the investor's holdings through a check of appropriate records. No fees currently are charged shareholders di rectly in connection with exchanges, although the Fund reserves the right, upon not less than 60 days' written notice, to charge shareholders a $5.00 fee in accordance with rules promulgated by the Securities and Exchange Commission. The Fund reserves the right to reject any exchange request in whole or in part. The Exchange Privilege may be modified or terminated at any time upon notice to shareholders. The exchange of shares of one portfolio or fund for shares of another is treated for Federal income tax purposes as a sale of the shares given in exchange by the shareholder and, therefore, an exchanging shareholder may realize a taxable gain or loss. Redirected Distribution Option The Redirected Distribution Option permits investment of investors' dividends and distributions in shares of other funds in the Bear Stearns family. The Redirected Distribution Option enables a shareholder to invest automatically dividends and/or capital gain distributions, if any, paid by a Portfolio in shares of the same Class of another portfolio of the Fund or a fund advised or sponsored by Bear Stearns of which the shareholder is an investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be purchased at the then-current net asset value. If an investor is investing in a Class that charges a CDSC, the shares purchased will be subject on redemption to the CDSC, if any, applicable to the purchased shares. This privilege is available only for existing accounts and may not be used to open new accounts. Minimum subsequent investments do not apply. The Fund may modify or terminate this privilege at any time or charge a service fee. No such fee currently is contemplated. How to Redeem Shares General The redemption price will be based on the net asset value next computed after receipt of a redemption request; in certain instances a CDSC will be charged. Investors may request redemption of Portfolio shares at any time. Redemption requests may be made as described below. When a request is received in proper form, the Portfolio will redeem the shares at the next determined net asset value. If the investor holds Portfolio shares of more than one Class, any request for redemption must specify the Class of shares being redeemed. If the investor fails to specify the Class of shares to be redeemed or if the investor owns fewer shares of the Class than specified to be redeemed, the redemption request may be delayed until the Transfer Agent receives further instructions from the investor, the investor's Bear Stearns account executive or the investor's Authorized Dealer. The Fund imposes no charges (other than any applicable CDSC) when shares are redeemed directly through Bear Stearns. Each Portfolio ordinarily will make payment for all shares redeemed within three days after receipt by the Transfer Agent of a redemption request in proper form, except as provided by the rules of the Securities and Exchange Commission. However, if an investor has purchased Portfolio shares by check and subsequently submits a redemption request by mail, the redemption proceeds will not be transmitted until the check used for investment has cleared, which may take up to 15 days. The Fund will reject requests to redeem shares by telephone or wire for a period of 15 days after receipt by the Transfer Agent of the purchase check against which such redemption is requested. This procedure does not apply to shares purchased by wire payment. The Fund reserves the right to redeem investor accounts at its option upon not less than 60 days' written notice if the account's net asset value is $750 or less, for reasons other than market conditions, and remains so during the notice period. Shareholders who have redeemed Class A shares may reinstate their Portfolio account without a sales charge up to the dollar amount redeemed by purchasing Class A shares of the same Portfolio within 60 days of the redemption. To take advantage of this reinstatement privilege, shareholders must notify their Bear Stearns account executive, Authorized Dealer or the Transfer Agent at the time the privilege is exercised. Contingent Deferred Sales Charge-Class C Shares Class C shares of each Portfolio are subject to a CDSC of 1% upon redemption within one year of purchase. A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C shares within one year of the date of purchase. No CDSC will be imposed to the extent that the net asset value of the Class C shares redeemed does not exceed (i) the current net asset value of Class C shares acquired through reinvestment of dividends or capital gain distributions, plus (ii) increases in the net asset value of an investor's Class C shares above the dollar amount of all such investor's payments for the purchase of Class C shares held by the investor at the time of redemption. If the aggregate value of Class C shares redeemed has declined below their original cost as a result of the Portfolio's performance, the applicable CDSC may be applied to the then-current net asset value rather than the purchase price. In determining whether a CDSC is applicable to a redemption, the calculation will be made in a manner that results in the lowest possible rate. It will be assumed that the redemption is made first of amounts representing shares acquired pursuant to the reinvestment of dividends and distributions; then of amounts representing the increase in net asset value of Class C shares above the total amount of payments for the purchase of Class C shares made during the preceding year; then of amounts representing shares purchased more than one year prior to the redemption; and, finally, of amounts representing the cost of shares purchased within one year prior to the redemption. For example, assume an investor purchased 100 shares of an Equity Portfolio at $10 per share for a cost of $1,000. Subsequently, the shareholder acquired 5 additional shares through dividend reinvestment. During the first year after the purchase the investor decided to redeem $500 of his or her investment. Assuming at the time of the redemption the net asset value had appreciated to $12 per share, the value of the investor's shares would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the value of the reinvested dividend shares and the amount which represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged at a rate of 1% for a total CDSC of $2.40. The CDSC applicable to Class C shares will be waived in connection with (a) redemptions made within one year after the death or disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended (the "Code"), of the shareholder, (b) redemptions by employees participating in Eligible Benefit Plans, (c) redemptions as a result of a combination of any investment company with a Portfolio by merger, acquisition of assets or otherwise, and (d) a distribution following retirement under a tax-deferred retirement plan or upon attaining age 701/2 in the case of an IRA or Keogh plan or custodial account pursuant to Section 403(b) of the Code. If the Fund's Trustees determine to discontinue the waiver of the CDSC, the disclosure in the Portfolios' prospectus will be revised appropriately. Any Portfolio shares subject to a CDSC which were purchased prior to the termination of such waiver will have the CDSC waived as provided in the Portfolio's prospectus at the time of the purchase of such shares. To qualify for a waiver of the CDSC, at the time of redemption an investor must notify the Transfer Agent or the investor's Bear Stearns account executive or the investor's Authorized Dealer must notify the Distributor. Any such qualification is subject to confirmation of the investor's entitlement. Procedures Shareholders may redeem shares in several ways. Redemption through Bear Stearns or Authorized Dealers Clients with a brokerage account may submit redemption requests to their account executives or Authorized Dealers in person or by telephone, mail or wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request by repurchasing Fund shares from a redeeming shareholder at the shares' net asset value next computed after receipt of the request by Bear Stearns or the Authorized Dealer. Under normal circumstances, within three days, redemption proceeds will be paid by check or credited to the shareholder's brokerage account at the election of the shareholder. Bear Stearns account executives or Authorized Dealers are responsible for promptly forwarding redemption requests to the Transfer Agent. If an investor authorizes telephone redemption, the Transfer Agent may act on telephone instructions from any person representing himself or herself to be a representative of Bear Stearns or the Authorized Dealer and reasonably believed by the Transfer Agent to be genuine. The Fund will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Transfer Agent or the Fund may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Fund nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Redemption through the Transfer Agent Shareholders who are not clients with a brokerage account who wish to redeem shares must redeem their shares through the Transfer Agent by mail; other shareholders also may redeem Fund shares through the Transfer Agent. Mail redemption requests should be sent to the Transfer Agent at: PFPC Inc., Attention: The Bear Stearns Funds-[Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960. Additional Information about Redemptions A shareholder may have redemption proceeds of $500 or more wired to the shareholder's brokerage account or a commercial bank account designated by the shareholder. A transaction fee of $7.50 will be charged for payments by wire. Questions about this option, or redemption requirements generally, should be referred to the shareholder's Bear Stearns account executive, to any Authorized Dealer, or to the Transfer Agent if the shares are not held in a brokerage account. Written redemption instructions, indicating the Portfolio from which shares are to be redeemed, and duly endorsed stock certificates, if previously issued, must be received by the Transfer Agent in proper form and signed exactly as the shares are registered. All signatures must be guaranteed. The Transfer Agent has adopted standards and procedures pursuant to which signature-guarantees in proper form generally will be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations, as well as from participants in the New York Stock Exchange Medallion Signature Program, the Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion Program ("STAMP"). Such guarantees must be signed by an authorized signatory thereof with "Signature Guaranteed" appearing with the shareholder's signature. If the signature is guaranteed by a broker or dealer, such broker or dealer must be a member of a clearing corporation and maintain net capital of at least $100,000. Signature-guarantees may not be provided by notaries public. Redemption requests by corporate and fiduciary shareholders must be accompanied by appropriate documentation establishing the authority of the person seeking to act on behalf of the account. Investors may obtain from the Fund or the Transfer Agent forms of resolutions and other documentation which have been prepared in advance to assist compliance with the Portfolio's procedures. Any questions with respect to signature-guarantees should be directed to the Transfer Agent by calling 1-800-447-1139 (in Delaware call collect 302-791-1031). During times of drastic economic or market conditions, investors may experience difficulty in contacting Bear Stearns or Authorized Dealers by telephone to request a redemption of Portfolio shares. In such cases, investors should consider using the other redemption procedures described herein. Use of these other redemption procedures may result in the redemption request being processed at a later time than it would have been if telephone redemption had been used. During the delay, each Portfolio's net asset value may fluctuate. Automatic Withdrawal Automatic Withdrawal permits investors to request withdrawal of a specified dollar amount (minimum of $25) on either a monthly or quarterly basis if the investor has a $5,000 minimum account. An application for Automatic Withdrawal can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal may be ended at any time by the investor, the Fund or the Transfer Agent. Shares for which certificates have been issued may not be redeemed through Automatic Withdrawal. Purchases of additional shares concurrent with withdrawals generally are undesirable. Class C shares withdrawn pursuant to the Automatic Withdrawal will be subject to any applicable CDSC. Purchases of additional Class A shares where the sales load is imposed concurrently with withdrawals of Class A shares generally are undesirable. Dividends, Distributions and Taxes Dividends will be automatically reinvested in additional Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. The Bond Portfolio declares dividends from net investment income on each day the New York Stock Exchange is open for business. These dividends usually are paid on or about the twentieth day of each month. The earnings for Saturdays, Sundays and holidays are declared as dividends on the preceding business day. Shares begin accruing income dividends on the day the purchase order is effective. If all shares in an account are redeemed at any time, all dividends to which the shareholder is entitled will be paid along with the proceeds of the redemption. Each Equity Portfolio ordinarily pays dividends from its net investment income at least once a year. Each Portfolio distributes net realized securities gains, if any, once a year, but it may make distributions on a more frequent basis to comply with the distribution requirements of the Code, in all events in a manner consistent with the provisions of the 1940 Act. No Portfolio will make distributions from net realized securities gains unless capital loss carryovers, if any, have been utilized or have expired. Dividends are automatically reinvested in additional Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. All expenses are accrued daily and deducted before declaration of dividends to investors. Dividends paid by each Class of each Portfolio will be calculated at the same time and in the same manner and will be of the same amount, except that the expenses attributable solely to a particular Class of a Portfolio will be borne exclusively by such Class. Class C shares will receive lower per share dividends than Class A shares because of the higher expenses borne by Class C. See "Fee Table." Dividends derived from net investment income, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or disposition of certain market discount bonds, paid by a Portfolio will be taxable to U.S. shareholders as ordinary income, whether received in cash or reinvested in additional shares of the Portfolio or redirected into another portfolio or fund. Distributions from net realized long-term securities gains of a Portfolio will be taxable to U.S. shareholders as long-term capital gains for Federal income tax purposes, regardless of how long shareholders have held their Portfolio's shares and whether such distributions are received in cash or reinvested in, or redirected into other, shares. The Code provides that the net capital gain of an individual generally will not be subject to Federal income tax at a rate in excess of 28%. Dividends and distributions may be subject to state and local taxes. Dividends, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or other disposition of certain market discount bonds, paid by a Portfolio to a foreign investor generally are subject to U.S. nonresident withholding taxes at the rate of 30%, unless the foreign investor claims the benefit of a lower rate specified in a tax treaty. Distributions from net realized long-term securities gains paid by a Portfolio to a foreign investor as well as the proceeds of any redemptions from a foreign investor's account, regardless of the extent to which gain or loss may be realized, generally will not be subject to U.S. nonresident withholding tax. However, such distributions may be subject to backup withholding, as described below, unless the foreign investor certifies his non-U.S. residency status. Notice as to the tax status of investors' dividends and distributions will be mailed to them annually. Investors also will receive periodic summaries of their accounts which will include information as to dividends and distributions from securities gains, if any, paid during the year. The Code provides for the "carryover" of some or all of the sales load imposed on a Portfolio's Class A shares if an investor exchanges such shares for shares of another fund or portfolio advised or sponsored by BSFM or its affiliates within 91 days of purchase and such other fund reduces or eliminates its otherwise applicable sales load for the purpose of the exchange. In this case, the amount of the sales load charged the investor for such shares, up to the amount of the reduction of the sales load charge on the exchange, is not included in the basis of such shares for purposes of computing gain or loss on the exchange, and instead is added to the basis of the fund shares received on the exchange. Federal regulations generally require the Fund to withhold ("backup withholding") and remit to the U.S. Treasury 31% of dividends, distributions from net realized securities gains and the proceeds of any redemption, regardless of the extent to which gain or loss may be realized, paid to a shareholder if such shareholder fails to certify either that the TIN furnished in connection with opening an account is correct or that such shareholder has not received notice from the IRS of being subject to backup withholding as a result of a failure to properly report taxable dividend or interest income on a Federal income tax return. Furthermore, the IRS may notify the Fund to institute backup withholding if the IRS determines a shareholder's TIN is incorrect or if a shareholder has failed to properly report taxable dividend and interest income on a Federal income tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account, and may be claimed as a credit on the record owner's Federal income tax return. No Portfolio is expected to have any Federal tax liability; although investors should expect to be subject to Federal, state or local taxes in respect of their investment in Portfolio shares. Management of the Fund believes that each Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Code. Each Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Such qualification relieves a Portfolio of any liability for Federal income tax to the extent its earnings are distributed in accordance with applicable provisions of the Code. In addition, each Portfolio is subject to a non-deductible 4% excise tax, measured with respect to certain undistributed amounts of taxable investment income and capital gains. Each investor should consult its tax adviser regarding specific questions as to Federal, state or local taxes. Performance Information Each Portfolio may advertise its performance in a number of ways. For purposes of advertising, performance for each Class of each Portfolio may be calculated on the basis of average annual total return and/or total return. These total return figures reflect changes in the price of the shares and assume that any income dividends and/or capital gains distributions made by a Portfolio during the measuring period were reinvested in shares of the same Class. These figures also take into account any applicable distribution and shareholder servicing fees. As a result, at any given time, the performance of Class C should be expected to be lower than that of Class A. Performance for each Class will be calculated separately. Performance of the Bond Portfolio also may be advertised on the basis of current yield. Current yield refers to the Bond Portfolio's annualized net investment income per share over a 30-day period, expressed as a percentage of the net asset value per share at the end of the period. For purposes of calculating current yield, the amount of net investment income per share during that 30-day period, computed in accordance with regulatory requirements, is compounded by assuming that it is reinvested at a constant rate over a six-month period. An identical result is then assumed to have occurred during a second six-month period which, when added to the result for the first six months, provides an "annualized" yield for an entire one-year period. Average annual total return is calculated pursuant to a standardized formula which assumes that an investment in the Portfolio was purchased with an initial payment of $1,000 and that the investment was redeemed at the end of a stated period of time, after giving effect to the reinvestment of dividends and distributions during the period. The return is expressed as a percentage rate which, if applied on a compounded annual basis, would result in the redeemable value of the investment at the end of the period. Advertisements of each Portfolio's performance will include such Portfolio's average annual total return for one, five and ten year periods, or for shorter periods depending upon the length of time during which the Portfolio has operated. Computations of average annual total return for periods of less than one year represent an annualization of such Portfolio's actual total return for the applicable period. Total return is computed on a per share basis and assumes the reinvestment of dividends and distributions. Total return generally is expressed as a percentage rate which is calculated by combining the income and principal changes for a specified period and dividing by the net asset value (or maximum public offering price in the case of Class A shares) per share at the beginning of the period. Class C total return will reflect the deduction of the CDSC. Advertisements may include the percentage rate of total return or may include the value of a hypothetical investment at the end of the period which assumes the application of the percentage rate of total return. Total return for each Portfolio also may be calculated by using the net asset value per share at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class C shares. Calculations based on the net asset value per share do not reflect the deduction of the sales load on the Portfolio's Class A shares, which, if reflected, would reduce the performance quoted. Performance will vary from time to time and past results are not necessarily representative of future results. Investors should remember that performance is a function of portfolio management in selecting the type and quality of portfolio securities and is affected by operating expenses. Performance information, such as that described above, may not provide a basis for comparison with other investments or other investment companies using a different method of calculating performance. Comparative performance information may be used from time to time in advertising or marketing each Equity Portfolio's shares, including data from Lipper Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index, Wilshire 4500 Stock Index, Russell Small Cap Index, the Dow Jones Industrial Average and other industry publications. Performance information that may be used in advertising or marketing the Bond Portfolio's shares can include data from Lipper Analytical Services, Inc., Morningstar, Inc., Bond Buyer's 20-Bond Index, Moody's Bond Survey Bond Index, Lehman Brothers Aggregate Bond Index, Salomon Brothers Broad Investment-Grade Index and components thereof, Mutual Fund Values; Mutual Fund Forecaster, Mutual Fund Investing and other industry publications. General Information The Fund was organized as an unincorporated business trust under the laws of the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994, and commenced operations on or about April 3, 1995. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. Each Portfolio's shares are classified into three Classes-Class A, Class C and Class Y. Each share has one vote and shareholders will vote in the aggregate and not by Class, except as otherwise required by law. Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Portfolio of which they are shareholders. However, the Trust Agreement disclaims shareholder liability for acts or obligations of the relevant Portfolio and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or a Trustee. The Trust Agreement provides for indemnification from the respective Portfolio's property for all losses and expenses of any shareholder held personally liable for the obligations of a Portfolio. Thus, the risk of a shareholder incurring financial loss on account of a shareholder liability is limited to circumstances in which the Portfolio itself would be unable to meet its obligations, a possibility which management believes is remote. Upon payment of any liability incurred by a Portfolio, the shareholder paying such liability will be entitled to reimbursement from the general assets of such Portfolio. The Fund's Trustees intend to conduct the operations of each Portfolio in a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Portfolio. As discussed under "Management of the Fund" in the Portfolios' Statement of Additional In formation, each Portfolio ordinarily will not hold shareholder meetings; however, shareholders under certain circumstances may have the right to call a meeting of shareholders for the purpose of voting to remove Trustees. To date, the Fund's Board has authorized the creation of five portfolios of shares. All consideration received by the Fund for shares of one of the portfolios and all assets in which such consideration is invested will belong to that portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, one portfolio (and as to classes within a portfolio) are treated separately from those of the other portfolios (and classes). The Fund has the ability to create, from time to time, new portfolios of shares without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, the Rule exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of the Rule. The Transfer Agent maintains a record of share ownership and will send confirmations and statements of account. Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Attention: [Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 (in Delaware call collect 302-791-1031) or by calling Bear Stearns at 1-800-766-4111. Appendix Investment Techniques In connection with its investment objective and policies, each Portfolio may employ, among others, the following investment techniques which may involve certain risks. Options and futures transactions involve "derivative securities." Options Transactions-(All Portfolios) Each Portfolio may engage in options transactions. Each Portfolio is permitted to invest up to 5% of its assets, represented by the premium paid, in the purchase of call and put options in respect of specific securities (or groups or "baskets" of specific securities) in which the Portfolio may invest. Each Portfolio may write and sell covered call option contracts on securities owned by the Portfolio not exceeding 20% of the value of its net assets at the time such option contracts are written. Each Portfolio also may purchase call options to enter into closing purchase transactions. Each Portfolio also may write covered put option contracts to the extent of 20% of the value of its net assets at the time such option contracts are written. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at the exercise price at any time during the option period. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at the exercise price at any time during the option period. A covered put option sold by a Portfolio exposes the Portfolio during the term of the option to a decline in price of the underlying security or securities. A put option sold by the Portfolio is covered when, among other things, cash or liquid securities are placed in a segregated account with the Fund's custodian to fulfill the obligation undertaken. Each Equity Portfolio also may purchase and sell call and put options on foreign currency for the purpose of hedging against changes in future currency exchange rates. Call options convey the right to buy the underlying currency at a price which is expected to be lower than the spot price of the currency at the time the option expires. Put options convey the right to sell the underlying currency at a price which is anticipated to be higher than the spot price of the currency at the time the option expires. Each Equity Portfolio may purchase and sell call and put options on stock indexes listed on U.S. securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether an Equity Portfolio will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Successful use by each Equity Portfolio of options will be subject to BSFM's ability to predict correctly movements in the direction of individual stocks, the stock market generally, foreign currencies or interest rates. The Bond Portfolio's successful use of options will be subject to BSFM's ability to predict correctly movements in interest rates. To the extent BSFM's predictions are incorrect, a Portfolio may incur losses which could adversely affect the value of a shareholder's investment. Futures Contracts and Options on Futures Contracts-(All Portfolios) Each Portfolio may engage in futures transactions. Each Portfolio may enter into interest rate futures contracts and options with respect thereto. Each Equity Portfolio also may enter into stock index futures contracts and currency futures contracts, and options with respect thereto, in U.S. domestic markets or on exchanges located outside the United States. See "-Options Transactions" above. These transactions will be entered into as a substitute for comparable market positions in the underlying securities or for hedging purposes. Although no Portfolio would be a commodity pool, it would be subject to rules of the CFTC limiting the extent to which it could engage in these transactions. Each Portfolio's commodities transactions must constitute bona fide hedging or other permissible transactions pursuant to regulations promulgated by the CFTC. In addition, a Portfolio may not engage in such transactions if the sum of the amount of initial margin deposits and premiums paid for unexpired commodity options, other than for bona fide hedging transactions, would exceed 5% of the liquidation value of the Portfolio's assets, after taking into account unrealized profits and unrealized losses on such contracts it has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5%. To the extent a Portfolio engages in the use of futures and options on futures for other than bona fide hedging purposes, the Portfolio may be subject to additional risk. Engaging in these transactions involves risk of loss to a Portfolio which could adversely affect the value of a shareholder's investment. Although each Portfolio intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Portfolio to substantial losses. In addition, an Equity Portfolio engaging in futures transactions in foreign markets may involve greater risks than trading on domestic exchanges. Successful use of futures by an Equity Portfolio or the Bond Portfolio also is subject to BSFM's ability to predict correctly movements in the direction of the market or foreign currencies, or interest rates, respectively, and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if a Portfolio has hedged against the possibility of a decline in the market adversely affecting the value of securities held in its portfolio and prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market. The Portfolio may have to sell securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Securities and Exchange Commission, each Portfolio may be required to segregate cash or high quality money market instruments in connection with its commodities transactions in an amount generally equal to the value of the underlying co mmodity. The segregation of such assets will have the effect of limiting the Portfolio's ability otherwise to invest those assets. Forward Commitments-(Bond Portfolio) The Bond Portfolio may purchase when-issued securities and enter into forward commitment transactions. The Bond Portfolio may purchase securities on a when-issued or forward commitment basis, which means that the price is fixed at the time of commitment, but delivery and payment ordinarily take place a number of days after the date of the commitment to purchase. The Bond Portfolio will make commitments to purchase such securities only with the intention of actually acquiring the securities, but the Bond Portfolio may sell these securities before the settlement date if it is deemed advisable. The Bond Portfolio will not accrue income in respect of a security purchased on a forward commitment ba sis prior to its stated delivery date. Securities purchased on a when-issued or forward commitment basis and certain other securities held by the Bond Portfolio are subject to changes in value (both generally changing in the same way, i.e., appreciating when interest rates decline and depreciating when interest rates rise) based upon the public's perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. Securities purchased on a when-issued or forward commitment basis may expose the Bond Portfolio to risk because they may experience such fluctuations prior to their actual delivery. Purchasing securities on a when-issued or forward commitment basis can involve the additional risk that the yield available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. A segregated account of the Bond Portfolio consisting of cash, cash equivalents or U.S. Government securities or other high quality liquid debt securities of the type in which the Bond Portfolio invests at least equal at all times to the amount of the when-issued or forward commitments will be established and maintained at the Fund's custodian bank. Purchasing securities on a forward commitment basis when the Bond Portfolio is fully or almost fully invested may result in greater potential fluctuation in the value of the Bond Portfolio's net assets and its net asset value per share. Future Developments-(All Portfolios) Each Portfolio may take advantage of opportunities in the area of options and futures contracts, options on futures contracts and any other derivative investments which are not presently contemplated for use by a Portfolio or which are not currently available but which may be developed, to the extent such opportunities are both consistent with a Portfolio's investment objective and legally permissible for such Portfolio. Before entering into such transactions or making any such investment, the Portfolio will provide appropriate disclosure in its prospectus. Lending Portfolio Securities-(All Portfolios) Each Portfolio may earn additional income by lending its portfolio securities. From time to time, each Portfolio may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. Such loans may not exceed 331/3% of the value of a Portfolio's total assets. In connection with such loans, a Portfolio will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. Each Portfolio can increase its income through the investment of such collateral. A Portfolio continues to be entitled to payments in amounts equal to the interest, dividends and other distributions payable on the loaned security and receives interest on the amount of the loan. Such loans will be terminable at any time upon specified notice. A Portfolio might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with such Portfolio. Borrowing Money-(All Portfolios) Each Portfolio may borrow money. As a fundamental policy, each Portfolio is permitted to borrow to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 331/3% of the value of such company's total assets. However, each Portfolio currently intends to borrow money only for temporary or emergency (not leveraging) purposes, in an amount up to 15% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of a Portfolio's total assets, such Portfolio will not make any additional investments. Certain Portfolio Securities American, European and Continental Depositary Receipts-(Equity Portfolios) Each Equity Portfolio may invest in securities of foreign issuers in the form of American, European and Continental Depositary Receipts. Each Equity Portfolio's assets may be invested in the securities of foreign issuers in the form of American Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are receipts issued in Europe typically by non-United States banks and trust companies that evidence ownership of either foreign or domestic securities. Generally, ADRs in registered form are designed for use in the United States securities markets and EDRs and CDRs in bearer form are designed for use in Europe. Each Equity Portfolio may invest in ADRs, EDRs and CDRs through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. Mortgage-Related Securities-(Bond Portfolio) The Bond Portfolio may invest in mortgage-related securities which are collateralized by pools of mortgage loans. Mortgage-related securities are a form of derivative securities collateralized by pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association and government-related organizations such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, as well as by private issuers such as commercial banks, savings and loan institutions, mortgage banks and private mortgage insurance companies, and similar foreign entities. The mortgage-related securities in which the Bond Portfolio may invest include those with fixed, floating and variable interest rates, those with interest rates that change based on multiples of changes in interest rates and those with interest rates that change inversely to changes in interest rates, as well as stripped mortgage-backed securities which are derivative multiclass mortgage securities. Stripped mortgage-backed securities usually are structured with two classes that receive different proportions of interest and principal distributions on a pool of mortgage-backed securities or whole loans. A common type of stripped mortgage-backed security will have one class receiving some of the interest and most of the principal from the mortgage collateral, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). Although certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not so secured. If the Bond Portfolio purchases a mortgage-related security at a premium, all or part of the premium may be lost if there is a decline in the market value of the security, whether resulting from changes in interest rates or prepayments in the underlying mortgage collateral. As with other interest-bearing securities, the prices of certain of these securities are inversely affected by changes in interest rates. However, though the value of a mortgage-related security may decline when interest rates rise, the converse is not necessarily true, since in periods of declining interest rates the mortgages underlying the security are more likely to prepay. For this and other reasons, a mortgage-related security's stated maturity may be shortened by unscheduled prepayments on the underlying mortgages, and, therefore, it is not possible to predict accurately the security's return to the Bond Portfolio. Moreover, with respect to stripped mortgage-backed securities, if the underlying mortgage securities experience gr eater than anticipated prepayments of principal, the Bond Portfolio may fail to fully recoup its initial investment in these securities even if the securities are rated in the highest rating category by a nationally recognized statistical rating organization. In addition, regular payments received in respect of mortgage-related securities include both interest and principal. No assurance can be given as to the return the Bond Portfolio will receive when these amounts are reinvested. For further discussion concerning the investment considerations involved, see "Description of the Fund-Risk Factors-Fixed-Income Securities" above and "Illiquid Securities" below and "Investment Objective and Management Policies-Portfolio Securities-Mortgage-Related Securities" in the Statement of Additional Information. Asset-Backed Securities-(Bond Portfolio) The Bond Portfolio may invest in asset-backed securities. The Bond Portfolio may invest in asset-backed securities which are a form of derivative securities. The securitization techniques used for asset-backed securities are similar to those used for mortgage-related securities. These securities include debt securities and securities with debt-like characteristics. The collateral for these securities has included home equity loans, automobile and credit card receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. Convertible Securities-(All Portfolios) Each Portfolio may invest in convertible securities. Convertible securities may be converted at a stated price within a specified period of time into a specified number of shares of common stock of the same or a different issuer. Convertible securities are senior to common stock in a corporation's capital structure, but usually are subordinated to non-convertible debt securities. While providing a fixed-income stream (generally higher in yield than the income derivable from a common stock but lower than that afforded by a non-convertible debt security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation of the common stock into which it is convertible. The Bond Portfolio also may invest in debt securities with warrants attached or in units with warrants. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specified amount of the corporation's capital stock at a set price for a specified period of time. In connection with its purchases of convertible securities (which include debt securities with warrants), the Bond Portfolio from time to time may hold common stock received upon the conversion of the security or the exercise of the warrant. The Bond Portfolio does not intend to retain the common stock in its portfolio and will sell it as promptly as it can and in a manner which it believes will reduce the risk to the Bond Portfolio of loss in connection with the sale. In general, the market value of a convertible security is the higher of its "investment value" (i.e., its value as a fixed-income security) or its "conversion value" (i.e., the value of the underlying shares of common stock if the security is converted). As a fixed-income security, the market value of a convertible security generally increases when interest rates decline and generally decreases when interest rates rise. However, the price of a convertible security also is influenced by the market value of the security's underlying common stock. Thus, the price of a convertible security generally increases as the market value of the underlying stock increases, and generally decreases as the market value of the underlying stock declines. Investments in convertible securities generally entail less risk than investments in the common stock of the same issuer. Municipal Obligations-(Bond Portfolio) The Bond Portfolio may invest in municipal obligations. Municipal obligations are debt obligations issued by states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, or multistate agencies or authorities. While in general, municipal obligations are tax exempt securities having relatively low yields as compared to taxable, non-municipal obligations of similar quality, certain issues of municipal obligations, both taxable and non-taxable, offer yields comparable and in some cases greater than the yields available on other permissible investments. Municipal obligations generally include debt obligations issued to obtain funds for various public purposes as well as certain industrial development bonds issued by or on behalf of public authorities. Dividends received by shareholders which are attributable to interest income received by it from municipal obligations generally will be subject to Federal income tax. Municipal obligations bear fixed, floating or variable rates of interest, which are determined in some instances by formulas under which the municipal obligation's interest rate will change directly or inversely to changes in interest rates or an index, or multiples thereof, in many cases subject to a maximum and minimum. The Bond Portfolio currently intends to invest no more than 25% of its assets in municipal obligations. However, this percentage may be varied from time to time without shareholder approval. Zero Coupon and Stripped Securities-(Bond Portfolio) The Bond Portfolio may invest in zero coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have been stripped of their unmatured interest coupons. The Bond Portfolio may invest in zero coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have been stripped of their unmatured interest coupons, the coupons themselves and receipts or certificates representing interests in such stripped debt obligations and coupons. The Bond Portfolio also may invest in zero coupon securities issued by corporations and financial institutions which constitute a proportionate ownership of the issuer's pool of underlying U.S. Treasury securities. A zero coupon security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The amount of the discount fluctuates with the market price of the security. The market prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically and are likely to respond to a greater degree to changes in interest rates than non-zero coupon securities having similar maturities and credit qualities. Foreign Government Obligations; Securities of Supranational Entities-(Bond Portfolio) The Bond Portfolio may invest in obligations issued or guaranteed by one or more foreign governments. The Bond Portfolio may invest in U.S. dollar denominated obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions, agencies or instrumentalities that are determined by BSFM to be of comparable quality to the other obligations in which the Bond Portfolio may invest. Such securities also include debt obligations of supranational entities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Coal and Steel Community, the Asian Development Bank and the InterAmerican Development Bank. The percentage of the Bond Portfolio's assets invested in securities issued by foreign governments will vary depending on the relative yields of such securities, the economic and financial markets of the countries in which the investments are made and the interest rate climate of such countries. Money Market Instruments Each Portfolio may invest in a variety of money market instruments. Each Portfolio may invest, in the circumstances described under "Description of the Fund-Management Policies," in the following types of money market instruments, each of which at the time of purchase must have or be deemed to have under rules of the Securities and Exchange Commission remaining maturities of 13 months or less. U.S. Treasury Securities-(All Portfolios) U.S. Treasury securities include Treasury Bills, Treasury Notes and Treasury Bonds that differ in their interest rates, maturities and times of issuance. Treasury Bills have initial maturities of one year or less; Treasury Notes have initial maturities of one to ten years; and Treasury Bonds generally have initial maturities of greater than ten years. U.S. Government Securities-(All Portfolios) In addition to U.S. Treasury securities, U.S. Government securities include securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, for example, Government National Mortgage As sociation pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the Treasury; others, such as those issued by the Federal National Mortgage Association, by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. Principal and interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law. Bank Obligations-(All Portfolios) Each Portfolio may invest in bank obligations, including certificates of deposit, time deposits, bankers' acceptances and other short-term obligations of domestic banks, foreign subsidiaries of domestic banks, foreign branches of domestic banks, and domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, a Portfolio may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, the possible imposition of foreign withholding taxes on interest income payable on the securities, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on these securities and the possible seizure or nationalization of foreign deposits. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by each Portfolio will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. No Portfolio will invest more than 15% of the value of its net assets in time deposits maturing in more than seven days and in other securities that are illiquid. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Repurchase Agreements-(All Portfolios) Repurchase agreements involve the acquisition by a Portfolio of an underlying debt instrument, subject to an obligation of the seller to repurchase, and such Portfolio to resell, the instrument at a fixed price usually not more than one week after its purchase. Certain costs may be incurred by a Portfolio in connection with the sale of the securities if the seller does not repurchase them in accordance with the repurchase agreement. In addition, if bankruptcy proceedings are commenced with respect to the seller of the securities, realization on the securities by a Portfolio may be delayed or limited. Commercial Paper and Other Short-Term Corporate Obligations-(All Portfolios) Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by each Portfolio will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's, A-1 by S&P, F-1 by Fitch or Duff-1 by Duff, (b) issued by companies having an outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by BSFM to be of comparable quality to those rated obligations which may be purchased by a Portfolio. Each Portfolio may purchase floating and variable rate demand notes and bonds, which are obligations ordinarily having stated maturities in excess of one year, but which permit the holder to demand payment of principal at any time or at specified intervals. Warrants-(Equity Portfolios) Each Equity Portfolio may invest up to 5% of its net assets in warrants. Each Equity Portfolio may invest up to 5% of its net assets in warrants, except that this limitation does not apply to warrants acquired in units or attached to securities. Included in such amount, but not to exceed 2% of the value of an Equity Portfolio's net assets, may be warrants which are not listed on the New York or American Stock Exchange. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specified amount of the corporation's capital stock at a set price for a specified period of time. Investment Company Securities-(All Portfolios) Each Portfolio may invest in securities of other investment companies. Each Portfolio may invest in securities issued by other investment companies. Under the 1940 Act, a Portfolio's investment in such securities currently is limited to, subject to certain exceptions, (i) 3% of the total voting stock of any one investment company, (ii) 5% of such Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Investments in the securities of other investment companies will involve duplication of advisory fees and certain other expenses. Illiquid Securities-(All Portfolios) Each Portfolio may purchase illiquid securities. Each Portfolio may invest up to 15% of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. Such securities may include securities that are not readily marketable, such as certain securities that are subject to legal or contractual restrictions on resale, repurchase agreements providing for settlement in more than seven days after notice, options traded in the over-the-counter market and securities used to cover such options, and certain asset-backed and mortgage-backed securities, such as certain collateralized mortgage obligations and stripped mortgage-backed securities. As to these securities, each Portfolio is subject to a risk that should such Portfolio desire to sell them when a ready buyer is not available at a price the Portfolio deems representative of their value, the value of such Portfolio's net assets could be adversely affected. Ratings-(All Portfolios) The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to the quality of the obligations which they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Therefore, although these ratings may be an initial criterion for selection of portfolio investments, BSFM also will evaluate such obligations and the ability of their issuers to pay interest and principal. Each Portfolio will rely on BSFM's judgment, analysis and experience in evaluating the creditworthiness of an issuer. In this evaluation, BSFM will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, the quality of the issuer's management and regulatory matters. It also is possible that a rating agency might not timely change the rating on a particular issue to reflect subsequent events. Once the rating of a security held by a Portfolio has been changed, BSFM will consider all circumstances deemed relevant in determining whether such Portfolio should continue to hold the security. The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Distributor Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 Investment Adviser Bear Stearns Funds Management Inc. 245 Park Avenue New York, NY 10167 Custodian Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 Transfer & Dividend Disbursement Agent PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 Counsel Stroock & Stroock & Lavan 7 Hanover Square New York, NY 10004-2696 Independent Auditors Deloitte & Touche LLP Two World Financial Center New York, NY 10281-1434 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIOS' PROSPECTUS AND IN THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE PORTFOLIOS' SHARES, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THE PORTFOLIOS' PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. BSF-P-002-03 THE BEAR STEARNS FUNDS 245 PARK AVENUE NEW YORK, NY 10167 1-800-766-4111 PROSPECTUS The Bear Stearns Funds Large Cap Value Portfolio - Small Cap Value Portfolio - Total Return Bond Portfolio Class Y Shares Only The Bear Stearns Funds (the "Fund") is an open-end management investment company, known as a mutual fund. The Fund permits you to invest in separate portfolios. By this Prospectus, Class Y shares of three diversified portfolios (each, a "Portfolio") are offered: the Large Cap Value Portfolio and the Small Cap Value Portfolio (together, the "Equity Portfolios") and the Total Return Bond Portfolio (the "Bond Portfolio"). Each Equity Portfolio's investment objective is capital appreciation. The Bond Portfolio's investment objective is to maximize total return, consistent with preservation of capital. The Bond Portfolio will invest primarily in investment grade, U.S. dollar denominated fixed-income securities of domestic and foreign issuers. Under normal market co nditions, the Bond Portfolio will invest in a portfolio of securities with a dollar-weighted average maturity ranging from four to thirteen years and a duration of not less than 65% of the Salomon Brothers Broad Investment Grade ("BIG") Bond Index and not more than 135% of the Salomon Brothers BIG Bond Index. Class Y shares are sold at net asset value without a sales charge to investors whose minimum investment is $2.5 million. Each Portfolio issues other Classes of shares which have sales charges and different expenses which would affect performance. Investors desiring to obtain information about these other Classes of shares should call 1-800-766-4111 or ask their sales representative or the Portfolio's distributor. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's investment adviser. Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as each Portfolio's distributor. ---------------- This Prospectus sets forth concisely information about each Portfolio that you should know before investing. It should be read and retained for future reference. Part B (also known as the Statement of Additional Information), dated June 20, 1996, which may be revised from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, write to the address or call one of the telephone numbers listed under "General Information" in this Prospectus. ---------------- Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. The net asset value of funds of this type will fluctuate. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AN D EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. June 20, 1996 Table of Contents PAGE Fee Table........................... 3 Condensed Financial Information..... 4 Description of the Fund............. 5 Risk Factors........................ 8 Management of the Fund.............. 11 How to Buy Shares................... 12 Shareholder Services................ 14 How to Redeem Shares................ 15 Dividends, Distributions and Taxes.. 17 Performance Information............. 18 General Information................. 19 Appendix............................ A-1
Fee Table - ------------------------------------------------------------------------------------------ SMALL CAP LARGE CAP TOTAL RETURN VALUE VALUE BOND PORTFOLIO PORTFOLIO PORTFOLIO CLASS Y CLASS Y CLASS Y - ------------------------------------------------------------------------------------------ Shareholder Transaction Expenses Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................. None None None Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of the amount subject to charge).......................................... None None None Annual Portfolio Operating Expenses (as a percentage of average daily net assets) Management Fees (after fee waiver)*................. 0.00% 0.00% 0.00% 12b-1 Fees.......................................... None None None Other Expenses (after expense reimbursement)*....... 1.00% 1.00% 0.45% Total Portfolio Operating Expenses (after fee waiver and expense reimbursement)*......................... 1.00% 1.00% 0.45% Example: You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period: 1 Year............................................. $10 $ 10 $ 5 3 Years............................................ $32 $ 32 $14 5 Years............................................ $55 $ 55 $25 10 Years............................................ $122 $122 $57 - ----- * BSFM has undertaken to waive its investment advisory fee and assume certain expenses of each Portfolio other than brokerage commissions, extraordinary items, interest and taxes to the extent Total Portfolio Operating Expenses exceed 1.00% and 0.45% for each Equity Portfolio and the Bond Portfolio, respectively. Without such waiver and expense reimbursement, Management Fees stated above would be 0.75% and 0.45%, for each Equity Portfolio and Bond Portfolio, respectively. Other Expenses would be 4.66%, 2.70% and 2.89% for Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, re spectively, and Total Portfolio Operating Expenses would be 5.41%, 3.45% and 3.34% for Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively. The amounts listed in the example should not be considered as representative of past or future expenses and actual expenses may be greater or less than those indicated. Moreover, while the example assumes a 5% annual return, each Portfolio's actual performance will vary and may result in an actual return greater or less than 5%. The purpose of the foregoing table is to assist you in understanding the costs and expenses borne by each Portfolio and investors, the payment of which will reduce investors' annual return. In addition to the expenses noted above, the Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For a description of the expense reimbursement or waiver arrangements in effect, see "Management of the Fund."
Condensed Financial Information The information in the table below covering each Portfolio's investment results for the period indicated has been audited by Deloitte & Touche LLP. Further financial data and related notes appear in the Portfolios' Annual Report for the fiscal year ended March 31, 1996 which is incorporated by reference into the Portfolios' Statement of Additional Information which is available upon request. Financial Highlights Contained below is per share operating performance data, total investment return, ratios to average net assets and other supplemental data for a Class Y share of each Portfolio for the period from commencement of initial public offering through March 31, 1996. This information has been derived from information provided in each Portfolio's financial statements.
Large Total Cap Small Cap Return Value Value Bond Portfolio Portfolio Portfolio - ------------------------------------------------------------- ---------- ---------- ---------- Class Y(1) Class Y(2) Class Y(3) - ------------------------------------------------------------- ---------- ---------- ---------- Per Share Operating Performance* Net asset value, beginning of period......................... $13.98 $13.09 $12.35 ---------- ---------- -------- Net investment income (4).................................... 0.07 - 0.41 Net realized and unrealized gain/(loss) on investments (5)... 1.16 3.05 (0.05) ---------- ---------- -------- Net increase in net assets resulting from operations......... 1.23 3.05 0.36 ---------- ---------- -------- Dividends and distributions to shareholders from: Net investment income........................................ (0.08) - (0.41) Net realized capital gains................................... (0.01) (0.29) (0.04) ---------- ---------- --------- (0.09) (0.29) (0.45) ---------- ---------- --------- Net asset value, end of period............................... $15.12 $15.85 $12.26 ========== ========== ========= Total investment return (6).................................. 8.75% 23.52% 2.92% ========== ========== ========= Ratios/Supplemental Data Net assets, end of period (000's omitted).................... $3,413 $8,989 $12,199 Ratio of expenses to average net assets (4)(7)............... 1.00% 1.00% 0.45% Ratio of net investment income to average net assets (4)(7).. 0.76% - 5.93% Decrease reflected in above expense ratios and net investment income due to waivers and reimbursements (7)................. 4.41% 2.45% 2.89% Portfolio turnover rate (8).................................. 45.28% 40.79% 107.35% Average commission rate per share............................ $0.06 $0.06 - - ----------- * Calculated based on shares outstanding on the first and last day of the period, except for dividends and distributions, if any, which are based on actual shares outstanding on the dates of distributions. (1) Commenced its initial public offering on August 11, 1995. (2) Commenced its initial public offering on June 22, 1995 (3) Commenced its initial public offering on September 8, 1995. (4) Reflects waivers and reimbursements. (5) The amount shown for a share outstanding throughout the respective period is not in accord with the change in the aggregate gains and losses in investments during the respective period because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the period. (6) Total return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total returns are not annualized. (7) Annualized. (8) Not annualized.
Further information about performance is contained in the Portfolios' Annual Report, which may be obtained without charge by writing to the address or calling one of the telephone numbers listed under "General Information." Description of the Fund General The Fund is a "series fund." The Fund is a "series fund," which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the Investment Company Act of 1940, as amended (the "1940 Act"), and for other purposes, and a shareholder of one Portfolio is not deemed to be a shareholder of any other Portfolio. As described below, for certain matters Fund shareholders vote together as a group; as to others they vote separately by Portfolio. By this Prospectus, shares of the Portfolios are being offered. From time to time, other portfolios may be established and sold pursuant to other offering documents. See "General Information." Investment Objective Each Equity Portfolio seeks to provide capital appreciation. The Bond Portfolio seeks to maximize total return, consistent with preservation of capital. Each Equity Portfolio's investment objective is capital appreciation. The Bond Portfolio's investment objective is to maximize total return, consistent with preservation of capital. See "-Management Policies" below. Each Portfolio's investment objective cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of such Portfolio's outstanding voting shares. There can be no assurance that a Portfolio's investment objective will be achieved. Management Policies Equity Portfolios Each Equity Portfolio invests primarily in equity securities that, at the time of purchase, were identified by BSFM as value companies. The Large Cap Value Portfolio invests, under normal market conditions, substantially all of its assets in equity securities of issuers with market capitalizations of $1 billion or more and identified by BSFM as value companies. The Small Cap Value Portfolio invests, under normal market conditions, substantially all of its assets in equity securities of issuers with market capitalizations of $500 million or less and identified by BSFM as value companies. To determine whether a company's stock falls within the value classification, BSFM analyzes it based on fundamental factors such as price to book value ratios, price to earnings ratios, earnings growth, dividend payout ratios, return on equity, and the company's beta (a measure of stock price volatility relative to the market generally). In general, BSFM believes that companies with relatively low price to book ratios, low price to earnings ratios or higher than average dividend payments in relation to price should be classified as value companies. For potential investments, BSFM also, among other matters, may review new management and upcoming corporate restructuring plans, consider the general business cycle and the company's position within the specific industry and consider the responsiveness of the company to identified problems in an effort to assess the likelihood of future appreciation of the company's securities. BSFM anticipates that at least 85% of the value of each Equity Portfolio's total assets (except when maintaining a temporary defensive position) will be invested in equity securities of domestic and foreign issuers. Each Equity Portfolio expects, under normal market conditions, to invest less than 10% of its assets in the equity securities of foreign issuers. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which each Equity Portfolio may invest will be rated at least investment grade by a nationally recognized st atistical rating organization at the time of purchase. Each Equity Portfolio may invest, in anticipation of investing cash positions, in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bo nds and other short-term debt instruments, and repurchase agreements, as set forth in the Appendix. Under normal market conditions, each Equity Portfolio expects to have less than 15% of its assets invested in money market instruments. However, when BSFM determines that adverse market conditions exist, each Equity Portfolio may adopt a temporary defensive posture and invest all of its assets in money market instruments. Bond Portfolio The Bond Portfolio invests primarily in bonds, debentures and other debt instruments. The Bond Portfolio invests at least 65% of the value of its total assets (except when maintaining a temporary defensive position) in bonds (which it defines as bonds, debentures and other fixed-income securities). The Bond Portfolio is permitted to invest in a broad range of investment grade, U.S. dollar denominated fixed-income securities and securities with debt-like characteristics (e.g., bearing interest or having stated principal) of domestic and foreign issuers. These debt securities include bonds, debentures, notes, money market instruments (including foreign bank obligations, such as time deposits, certificates of deposit and bankers' acceptances, commercial paper and other short-term corporate debt obligations, and repurchase agreements), mortgage-related securities (including interest-only and principal-only stripped mortgage-backed securities), asset-backed securities, municipal obligations and convertible debt obligations. The issuers may include domestic and foreign corporations, partnerships or trusts, and governments or their political subdivisions, agencies or instrumentalities. Under normal market conditions, the Bond Portfolio seeks to provide performance results that equal or exceed the Salomon Brothers BIG Bond Index, which is a market-capitalization weighted index that includes U.S. Treasury, Government-sponsored, mortgage and investment grade fixed-rate corporate fixed-income securities with a maturity of one year or longer and a minimum of $50 million amount outstanding at the time of inclusion in the Salomon Brothers BIG Bond Index. As of March 31, 1996, the weighted average maturity of securities comprising the Salomon Brothers BIG Bond Index was approximately nine years and their effective duration was approximately five years. Under normal market conditions, the Bond Portfolio invests in a portfolio of securities with a dollar-weighted average maturity ranging from four to thirteen years and a duration of not less than 65% of the Salomon Brothers BIG Bond Index and not more than 135% of the Salomon Brothers BIG Bond Index. As a measure of a fixed-income security's cash flow, duration is an alternative to the concept of "term to maturity" in assessing the price volatility associated with changes in interest rates. Generally, the longer the duration, the more volatility an investor should expect. For example, the market price of a bond with a duration of five years would be expected to decline 5% if interest rates rose 1%. Conversely, the market price of the same bond would be expected to increase 5% if interest rates fell 1%. The market price of a bond with a duration of ten years would be expected to increase or decline twice as much as the market price of a bond with a five year duration. Duration measures a security's maturity in terms of the average time required to receive the present value of all interest and principal payments as opposed to its term to maturity. The maturity of a security measures only the time until final payment is due; it does not take account of the pattern of a security's cash flows over time, which would include how cash flow is affected by prepayments and by changes in interest rates. Incorporating a security's yield, coupon interest payments, final maturity and option features into one measure, duration is computed by determining the weighted average maturity of a bond's cash flows, where the present values of the cash flows serve as weights. In computing the duration of the Bond Portfolio, BSFM will estimate the duration of obligations that are subject to prepayment or redemption by the issuer, taking into account the influence of interest rates on prepayments, coupon flows and other factors which may affect the maturity of the security. This method of computing duration is known as effective duration. BSFM anticipates actively managing the Bond Portfolio's assets in response to change in the business cycle. BSFM seeks to identify and respond to phases in the business cycle-simplistically, the expansion, topping out, recession and trough phases-and to invest the Bond Portfolio's assets by shifting among market sectors, maturities and relative credit quality in a way which it believes will achieve the Bond Portfolio's objective in a relatively conservative manner taking into account the volatility and risk associated with investing in a portfolio of relatively longer-term fixed-income securities. While the Bond Portfolio seeks, as part of its investment objective, to preserve capital, investors should recognize that the net asset value per share of the Bond Portfolio should be expected to be more volatile than the net asset value per share of a fund that invested in portfolio securities with a shorter duration. At least 70% of the value of the Bond Portfolio's net assets must consist of securities which, in the case of bonds and other debt instruments, are rated no lower than A by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), Fitch Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff") or, if unrated, deemed to be of comparable quality by BSFM. Up to 30% of the value of the Bond Portfolio's net assets may consist of securities which, in the case of bonds and other debt instruments, are rated no lower than Baa by Moody's and BBB by S&P, Fitch and Duff or, if unrated, deemed to be of comparable quality by BSFM. The Bond Portfolio may invest in short-term fixed-income obligations which are rated in the two highest rating categories by Moody's, S&P, Fitch or Duff. See "Risk Factors-Fixed-Income Securities" below, and "Appendix" in the Statement of Additional Information. Investment Techniques Each Portfolio may engage in options and futures transactions, short selling and lending portfolio securities, each of which involves risk. Each Equity Portfolio also may engage in foreign currency exchange transactions, which also involve risk. Each Portfolio may engage in various investment techniques, such as options and futures transactions, short selling and lending portfolio securities, each of which involves risk. Each Equity Portfolio also may engage in foreign currency exchange transactions, which also involve risk. Options and futures transactions, as well as investments in certain asset-backed, mortgage-backed and government securities, involve "derivative securities." Short selling is discussed below. For a discussion of these other investment techniques and their related risks, see "Appendix-Investment Techniques" and "Risk Factors" below. Short sales are transactions in which a Portfolio sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio. Until the security is replaced, the Portfolio is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Short selling by the Bond Portfolio will be used primarily in conjunction with a long transaction, but not necessarily in the same instrument or an instrument with a similar maturity or interest rate, to effect a hedged position to take advantage of spreads in the market place. Until the Portfolio replaces a borrowed security in connection with a short sale, the Portfolio will: (a) maintain daily a segregated account, containing cash, cash equivalents or U.S. Government securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position in accordance with positions taken by the Staff of the Securities and Exchange Commission. A Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. A Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Portfolio may be required to pay in connection with a short sale. Each Portfolio may purchase call options to provide a hedge against an increase in the price of a security sold short by the Portfolio. See "Appendix-Investment Techniques-Options Transactions." Each Portfolio anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net assets. No Portfolio may sell short the securities of any single issuer listed on a national securities exchange to the extent of more than 5% of the value of its net assets. No Portfolio may sell short the securities of any class of an issuer to the extent, at the time of the transaction, of more than 2% of the outstanding securities of that class. In addition to the short sales discussed above, each Portfolio may make short sales "against the box," a transaction in which the Portfolio enters into a short sale of a security which the Portfolio owns. The proceeds of the short sale will be held by a broker until the settlement date at which time the Portfolio delivers the security to close the short position. The Portfolio receives the net proceeds from the short sale. The Portfolio at no time will have more than 15% of the value of its net assets in deposits on short sales against the box. It currently is anticipated that the Portfolio will make short sales against the box for purposes of protecting the value of the Portfolio's net assets. Certain Fundamental Policies Certain of each Portfolio's investment policies are fundamental policies that can be changed only by shareholder vote. Each Portfolio may (i) borrow money to the extent permitted under the 1940 Act; (ii) invest up to 5% of the value of its total assets in the obligations of any issuer, except that up to 25% of the value of the Portfolio's total assets may be invested, and securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities may be purchased, without regard to any such limitation; and (iii) invest up to 25% of the value of its total assets in the securities of issuers in a single industry, provided that there is no such limitation on investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. This paragraph describes fundamental policies that cannot be changed as to a Portfolio without approval by the holders of a majority (as defined in the 1940 Act) of such Portfolio's outstanding voting shares. See "Investment Objective and Management Po licies-Investment Restrictions" in the Statement of Additional Information. Certain Additional Non-Fundamental Policies Each Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to secure permitted borrowings; and (ii) invest up to 15% of the value of its net assets in repurchase agreements providing for settlement in more than seven days after notice and in other illiquid securities. In addition, each Equity Portfolio may purchase securities of any company having less than three years' continuous operation (including operations of any predecessors) if such purchase does not cause the value of such Equity Portfolio's investments in all such companies to exceed 5% of the value of its total assets. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Risk Factors No investment is free from risk. Investing in a Portfolio will subject investors to certain risks which should be considered. Net Asset Value Fluctuations-(All Portfolios) Each Portfolio's net asset value per share is not fixed and should be expected to fluctuate. Investors should purchase Portfolio shares only as a supplement to an overall investment program and only if investors are willing to undertake the risks involved. Equity Securities-(Equity Portfolios) Investors should be aware that equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and that fluctuations can be pronounced. The securities of smaller cap companies may be subject to more abrupt or erratic market movements than larger cap companies, both because the securities typically are traded in lower volume and because the issuers typically are subject to a greater degree to changes in earnings and prospects. Changes in the value of the equity securities in an Equity Portfolio's portfolio will result in changes in the value of the Equity Portfolio's shares and thus the Equity Portfolio's yield and total return to investors. Fixed-Income Securities-(Bond Portfolio) Investors should be aware that even though interest-bearing securities are investments which promise a stable stream of income, the prices of such securities typically are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. Thus, if interest rates have increased from the time a security was purchased, such security, if sold, might be sold at a price less than its cost. Similarly, if interest rates have declined from the time a security was purchased, such security, if sold, might be sold at a price greater than its cost. In either instance, if the security was purchased at face value and held to maturity, no gain or loss would be realized. Certain securities purchased by the Bond Portfolio, such as those with interest rates that fluctuate directly or indirectly based on multiples of a stated index, are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and possibly loss of principal. The values of fixed-income securities also may be affected by changes in the credit rating or financial condition of the issuing entities. Once the rating of a security purchased by the Bond Portfolio has been adversely changed, the Bond Portfolio will consider all circumstances deemed relevant in determining whether to continue to hold the security. Holding such securities that have been downgraded below investment grade can subject the Bond Portfolio to additional risk. Certain securities purchased by the Bond Portfolio, such as those rated Baa by Moody's or BBB by S&P, Fitch or Duff, may be subject to such risk with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated fixed-income securities. Debt securities which are rated Baa by Moody's are considered medium grade obligations; they are neither highly protected nor poorly secured, and are considered by Moody's to have speculative characteristics. Debt securities rated BBB by S&P are regarded as having adequate capacity to pay interest and repay principal, and while such debt securities ordinarily exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt securities in this category than in higher rated categories. Fitch considers the obligor's ability to pay interest and repay principal on debt securities rated BBB to be adequate; adverse changes in economic conditions and circumstances, however, are more likely to have an adverse impact on these debt securities and, therefore, impair timely payment. Debt securities rated BBB by Duff are considered to have below average protection factors but still considered sufficient for prudent investment. No assurance can be given as to the liquidity of the market for certain mortgage-backed securities, such as collateralized mortgage obligations and stripped mortgage-backed securities. Determination as to the liquidity of interest-only and principal-only fixed mortgage-backed securities issued by the U.S. Government or its agencies and instrumentalities will be made in accordance with guidelines established by the Fund's Board of Trustees. In accordance with such guidelines, BSFM will monitor investments in such securities with particular regard to trading activity, availability of reliable price information and other relevant information. The Bond Portfolio intends to treat other stripped mortgage-backed securities as illiquid securities. See "Appendix-Certain Portfolio Securities-Illiquid Securities." Federal income tax law requires the holder of a zero coupon security or of certain pay-in-kind bonds to accrue income with respect to these securities prior to the receipt of cash payments. If the Bond Portfolio invests in such securities it may be required, to maintain its qualification as a regulated investment company and avoid liability for Federal income taxes, to distribute the income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. Certain Investment Techniques-(All Portfolios) The use of investment techniques such as engaging in options and futures transactions, engaging in foreign currency exchange transactions, short selling and lending portfolio securities involves greater risk than that incurred by many other funds with a similar objective. Using these techniques may produce higher than normal portfolio turnover and may affect the degree to which the Portfolio's net asset value fluctuates. Higher portfolio turnover rates are likely to result in comparatively greater brokerage commissions or transaction costs. See "Appendix-Investment Techniques." Each Portfolio's ability to engage in certain short-term transactions may be limited by the requirement that, to qualify as a regulated investment company, it must earn less than 30% of its gross income from the disposition of securities held for less than three months. This 30% test limits the extent to which the Portfolio may sell securities held for less than three months, effect short sales of securities held for less than three months, write options expiring in less than three months and invest in certain futures contracts, among other strategies. With the exception of the above requirement, the amount of portfolio activity will not be a limiting factor when making portfolio decisions. Under normal market conditions, the portfolio turnover rate of each Portfolio generally will not exceed 100%. See "Portfolio Transactions" in the Portfolios' Statement of Additional Information. Investing in Foreign Securities-(All Portfolios) Foreign securities markets generally are not as developed or efficient as those in the United States. Securities of some foreign issuers are less liquid and more volatile than securities of comparable U.S. issuers. Similarly, volume and liquidity in most foreign securities markets are less than in the United States and, at times, volatility of price can be greater than in the United States. The issuers of some of these securities, such as foreign bank obligations, may be subject to less stringent or different regulations than are U.S. issuers. In addition, there may be less publicly available information about a non-U.S. issuer, and non-U.S. issuers generally are not subject to uniform accounting and financial reporting standards, practices and requirements comparable to those applicable to U.S. issuers. Because stock certificates and other evidences of ownership of such securities usually are held outside the United States, each Portfolio will be subject to additional risks which include possible adverse political and economic developments, possible seizure or nationalization of foreign deposits and possible adoption of governmental restrictions that might adversely affect the payment of principal, interest and dividends on the foreign securities or might restrict the payment of principal, interest and dividends to investors located outside the country of the issuers, whether from currency blockage or otherwise. Custodial expenses for a portfolio of non-U.S. securities generally are higher than for a portfolio of U.S. securities. Since foreign securities often are purchased with and payable in currencies of foreign countries, the value of these assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. Some currency exchange costs may be incurred when a Portfolio changes investments from one country to another. Furthermore, some of these securities may be subject to brokerage taxes levied by foreign governments, which have the effect of increasing the cost of such investment and reducing the realized gain or increasing the realized loss on such securities at the time of sale. Income received by a Portfolio from sources within foreign countries may be reduced by withholding or other taxes imposed by such countries, although applicable tax conventions may reduce or eliminate such taxes. All such taxes paid by a Portfolio will reduce its net income available for distribution to investors. Foreign Currency Exchange-(Equity Portfolios) Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or perceived changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention by U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the United States or abroad. The foreign currency market offers less protection against defaults in the forward trading of currencies than is available when trading in currencies occurs on an exchange. Since a forward currency contract is not guaranteed by an exchange or clearinghouse, a default on the contract would deprive an Equity Portfolio of unrealized profits or force the Equity Portfolio to cover its commitments for purchase or resale, if any, at the current market price. Foreign Commodity Transactions-(Equity Portfolios) Unlike trading on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the Commodity Futures Trading Commission (the "CFTC") and may be subject to greater risks than trading on domestic exchanges. See "Appendix-Investment Techniques." For example, some foreign exchanges are principal markets so that no common clearing facility exists and a trader may look only to the broker for performance of the contract. In addition, unless an Equity Portfolio hedges against fluctuations in the exchange rate between the U.S. dollar and the currencies in which trading is done on foreign exchanges, any profits that the Equity Portfolio might realize in trading could be eliminated by adverse changes in the exchange rate, or the Equity Portfolio could incur losses as a result of those changes. Simultaneous Investments-(All Portfolios) Investment decisions for each Portfolio are made independently from those of other investment companies or accounts advised by BSFM. However, if such other investment companies or accounts are prepared to invest in, or desire to dispose of, securities of the type in which a Portfolio invests at the same time as the Portfolio, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by a Portfolio or the price paid or received by the Portfolio. Management of the Fund Board of Trustees The Trustees are responsible for the overall management and supervision of each Portfolio's business. The Fund's business affairs are managed under the general supervision of its Board of Trustees. The Portfolios' Statement of Additional Information contains the name and general business experience of each Trustee. Investment Adviser The Portfolios' investment adviser, BSFM, manages each Portfolio's investments. The Portfolios' investment adviser is BSFM, a wholly-owned subsidiary of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear Stearns, is a leading United States investment banking, securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. BSFM is a registered investment adviser and offers, either directly or through affiliates, investment advisory and administrative services to open-end and closed-end investment funds and other managed pooled investment vehicles with net assets at March 31, 1996 of over $1.9 billion. BSFM supervises and assists in the overall management of the Portfolios' affairs under an Investment Advisory Agreement between BSFM and the Fund, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. Each Equity Portfolio's principal portfolio manager is Neil T. Eigen. Mr. Eigen joined Bear Stearns Asset Management in 1990 as Director of Equity Investments-Bear Stearns Asset Management and Senior Managing Director of Bear Stearns. The Bond Portfolio's principal portfolio manager is Peter E. Mahoney. Mr. Mahoney rejoined Bear Stearns in November 1995 as a Managing Director of Bear Stearns and Director of Fixed Income Investments of Bear Stearns Asset Management, positions he held during his employment with Bear Stearns from June 1987 through November 1994. From November 1994 to November 1995 he was a financial consultant. Each Equity Portfolio pays BSFM an advisory fee at an annual rate equal to .75 of 1% of the Equity Portfolio's average daily net assets and the Bond Portfolio pays BSFM an advisory fee at the annual rate of .45 of 1% of the Bond Portfolio's average daily net assets. Under the terms of the Investment Advisory Agreement, each Equity Portfolio has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the Equity Portfolio's average daily net assets and the Bond Portfolio has agreed to pay BSFM a monthly fee at the annual rate of .45 of 1% of the Bond Portfolio's average daily net assets. From April 3, 1995 (commencement of operations) through March 31, 1996, no fees were paid by the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, pursuant to an undertaking by BSFM. Each Portfolio's administrator is BSFM. Each Portfolio pays BSFM an administration fee at the annual rate of .15 of 1% of its average daily net assets. Under the terms of an Administration Agreement with the Fund, BSFM generally supervises all aspects of the operation of each Portfolio, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. For providing administrative services to each Portfolio, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of each Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Fund, PFPC Inc. provides certain administrative services to each Portfolio. For providing these services, the Fund has agreed to pay PFPC Inc. an annual fee, as set forth below: - -------------------------------------------------------------------- PORTFOLIO'S ANNUAL FEE AS A PERCENTAGE OF AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS - -------------------------------------------------------------------- First $200 million.................... .10 of 1% Next $200 million up to $400 million.. .075 of 1% Next $200 million up to $600 million.. .05 of 1% Assets in excess of $600 million...... .03 of 1% The above-referenced fees are subject to a monthly minimum fee of $11,000 per Portfolio. From April 3, 1995 (commencement of operations) through March 31, 1996, the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, each paid PFPC Inc. a monthly fee at the effective annual rate .90 of 1%, .48 of 1% and .55 of 1%, respectively, of the Portfolio's average daily net assets. From time to time, BSFM may waive receipt of its fees and/or voluntarily assume certain Portfolio expenses, which would have the effect of lowering the Portfolio's expense ratio and increasing yield to investors at the time such amounts are waived or assumed, as the case may be. No Portfolio will pay BSFM at a later time for any amounts it may waive, nor will a Portfolio reimburse BSFM for any amounts it may assume. From time to time, PFPC Inc. may waive a portion of its fee. Effective May 1, 1996, and until further notice, PFPC Inc. will reduce its monthly minimum for each Portfolio to $7,500 for net assets of less than $25 million; $9,167 for net assets of $25 million to $50 million; $11,000 for net assets in excess of $50 million. PFPC Inc. reserves the right to revoke this voluntary fee waiver at any time. Brokerage commissions may be paid to Bear Stearns for executing transactions if the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers. The allocation of brokerage transactions also may take into account a broker's sales of each Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional Information. Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or derivatives thereof as part of the Fund name for as long as the Investment Advisory Agreement is in effect. Distributor Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as each Portfolio's principal underwriter and distributor of each Portfolio's shares pursuant to an agreement which is renewable annually. Custodian and Transfer Agent Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is each Portfolio's custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each Portfolio's transfer agent, dividend disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also provides certain administrative services to each Portfolio. Expense Limitation BSFM has undertaken until such time as it gives investors at least 60 days' notice to the contrary that, if in any fiscal year, certain expenses, including the investment advisory fee, exceed 0.45% of the average daily net assets of the Bond Portfolio-Class Y and 1.00% of the average daily net assets of each Equity Portfolio-Class Y for the fiscal year, BSFM may waive a portion of its investment advisory fee or bear other expenses to the extent of the excess expense. How to Buy Shares General The minimum initial investment is $2.5 million. Subsequent investments may be made in any amount. Share certificates are issued only upon written request. The Fund reserves the right to reject any purchase order. The Fund reserves the right to vary the initial and subsequent investment minimum requirements at any time. Investments by employees of Bear Stearns and its affiliates are not subject to the minimum investment requirement. In addition, accounts under the discretionary management of Bear Stearns and its affiliates are not subject to the minimum investment requirement. Purchases of a Portfolio's shares may be made through a brokerage account maintained with Bear Stearns or through certain investment dealers who are members of the National Association of Securities Dealers, Inc. who have sales agreements with Bear Stearns (an "Authorized Dealer"). Purchases of a Portfolio's shares also may be made directly through the Transfer Agent. Investors must specify that Class Y is being purchased. Purchases are effected at Class Y's net asset value per share next determined after a purchase order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent (the "trade date"). Payment for Portfolio shares generally is due to Bear Stearns or the Authorized Dealer on the third business day (the "settlement date") after the trade date. Investors who make payment before the settlement date may permit the payment to be held in their brokerage accounts or may designate a temporary investment for payment until the settlement date. If a temporary investment is not designated, Bear Stearns or the Authorized Dealer will benefit from the temporary use of the funds if payment is made before the settlement date. Purchases can be made through Bear Stearns account executives, Authorized Dealers or the Transfer Agent. Purchases through Bear Stearns account executives or Authorized Dealers may be made by check (except that a check drawn on a foreign bank will not be accepted), Federal Reserve draft or by wiring Federal Funds with funds held in brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal Reserve drafts should be made payable as follows: (i) to Bear Stearns or an investor's Authorized Dealer or (ii) to "The Bear Stearns Funds-[Name of Portfolio]-Class Y" if purchased directly from the Portfolio, and should be directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds-[Name of Portfolio]-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Payment by check or Federal Reserve draft must be received within three business days of receipt of the purchase order by Bear Stearns or an Authorized Dealer. Orders placed directly with the Transfer Agent must be accompanied by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding payment promptly to the Fund. The Fund will charge $7.50 for each wire redemption. The payment proceeds of a redemption of shares recently purchased by check may be delayed as described under "How to Redeem Shares." Investors who are not Bear Stearns clients may purchase Portfolio shares through the Transfer Agent. To make an initial investment in a Portfolio, an investor must establish an account with the Portfolio by furnishing necessary information to the Fund. An account with a Portfolio may be established by completing and signing the Account Information Form indicating which Class of shares is being purchased, a copy of which is attached to this Prospectus, and mailing it, together with a check to cover the purchase, to PFPC Inc., Attention: The Bear Stearns Funds-[Name of Portfolio]-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Subsequent purchases of shares may be made by checks made payable to the Fund and directed to the address set forth in the preceding paragraph. The Portfolio account number should appear on the check. Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer Agent before the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., New York time) on any day the relevant Portfolio calculates its net asset value are priced according to the net asset value determined on that date. Purchase orders received after the close of trading on the New York Stock Exchange are priced as of the time the net asset value is next determined. Net asset value is computed daily as of the close of regular trading on the New York Stock Exchange. Shares of the Portfolios are sold on a continuous basis. Net asset value per share is determined as of the close of regular trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New York time) on each business day. The net asset value per share of Class Y of each Portfolio is computed by dividing the value of the Portfolio's net assets represented by Class Y (i.e., the value of its assets less liabilities) by the total number of shares of Class Y outstanding. Each Equity Portfolio's investments are valued based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by, or in accordance with procedures established by, the Fund's Board of Trustees. Substantially all of the Bond Portfolio's investments are valued each business day at fair value as determined by one or more independent pricing services (the "Service") approved by the Fund's Board of Trustees. Procedures of the Service are reviewed under the general supervision of the Fund's Board of Trustees. The remaining assets of the Bond Portfolio are valued using available market quotations or at fair value as determined in good faith by, or in accordance with procedures established by, the Fund's Board of Trustees. For further information regarding the methods employed in valuing each Portfolio's investments, see "Determination of Net Asset Value" in the Portfolios' Statement of Additional Information. Federal regulations require that investors provide a certified Taxpayer Identification Number (a "TIN") upon opening or reopening an account. See "Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the Fund could subject the investor to a $50 penalty imposed by the Internal Revenue Service (the "IRS"). Shareholder Services Exchange Privilege The Exchange Privilege permits easy purchases of other funds in the Bear Stearns family. The Exchange Privilege enables an investor to purchase, in exchange for Class Y shares of a Portfolio, Class Y shares of the Fund's other portfolios or shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale in the investor's state of residence. These funds have different investment objectives which may be of interest to investors. To use this Privilege, investors should consult their account executive at Bear Stearns, their account executive at an Authorized Dealer or the Transfer Agent to determine if it is available and whether any conditions are imposed on its use. To use this Privilege, exchange instructions must be given to the Transfer Agent in writing or by telephone. A shareholder wishing to make an exchange may do so by sending a written request to the Transfer Agent at the address given above in "How to Buy Shares-General." Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the account application that they do not wish to use this privilege. Shareholders holding share certificates are not eligible to exchange shares of a Portfolio by phone because share certificates must accompany all exchange requests. To add this feature to an existing account that previously di d not provide for this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 (in Delaware call collect 302-791-1031) to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing. If the exchanging shareholder does not currently own Class Y shares of the portfolio or fund whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and Authorized Dealer of record as the account from which shares are exchanged, un less otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as described below. The Exchange Privilege may be modified or terminated at any time, or from time to time, by the Fund on 60 days' notice to the affected portfolio or fund shareholders. The Fund, BSFM and Bear Stearns will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine. In attempting to confirm that telephone instructions are genuine, the Fund will use such procedures as are considered reasonable, including recording those instructions and requesting information as to account registration (such as the name in which an account is registered, the account number, recent transactions in the account, and the account holder's Social Security number, address and/or bank). Before any exchange, the investor must obtain and should review a copy of the current prospectus of the portfolio or fund into which the exchange is being made. Prospectuses may be obtained free of charge from Bear Stearns, any Authorized Dealer or the Transfer Agent. When establishing a new account by exchange, the Class Y shares being exchanged must have a value of at least the minimum initial investment required for the portfolio or fund into which the exchange is being made; if making an exchange to an existing account, the dollar value must equal or exceed the applicable minimum for subsequent investments. If any amount remains in the investment portfolio from which the exchange is being made, such amount must not be below the minimum account value required by the Portfolio or Fund. Class Y shares will be exchanged at the next determined net asset value. No fees currently are charged shareholders directly in connection with exchanges, although the Fund reserves the right, upon not less than 60 days' written notice, to charge shareholders a $5.00 fee in accordance with rules promulgated by the Securities and Exchange Commission. The Fund reserves the right to reject any exchange request in whole or in part. The Exchange Privilege may be modified or terminated at any time upon notice to shareholders. The exchange of Class Y shares of one portfolio or fund for Class Y shares of another is treated for Federal income tax purposes as a sale of the Class Y shares given in exchange by the shareholder and, therefore, an exchanging shareholder may realize a taxable gain or loss. Redirected Distribution Option The Redirected Distribution Option permits investment of investors' dividends and distributions in shares of other funds in the Bear Stearns family. The Redirected Distribution Option enables a shareholder to invest automatically dividends and/or capital gain distributions, if any, paid by a Portfolio in Class Y shares of another portfolio of the Fund or a fund advised or sponsored by Bear Stearns of which the shareholder is an investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be purchased at the then-current net asset value. This privilege is available only for existing accounts and may not be used to open new accounts. Minimum subsequent investments do not apply. The Fund may modify or terminate this privilege at any time or charge a service fee. No such fee currently is contemplated. How to Redeem Shares General The redemption price will be based on the net asset value next computed after receipt of a redemption request. Investors may request redemption of Portfolio shares at any time. Redemption requests may be made as described below. When a request is received in proper form, the Portfolio will redeem the shares at the next determined net asset value. If the investor holds Portfolio shares of more than one Class, any request for redemption must specify the Class of shares being redeemed. If the investor fails to specify the Class of shares to be redeemed or if the investor owns fewer shares of the Class than specified to be redeemed, the redemption request may be delayed until the Transfer Agent receives further instructions from the investor, the investor's Bear Stearns account executive or the investor's Authorized Dealer. The Fund imposes no charges when shares are redeemed directly through Bear Stearns. Each Portfolio ordinarily will make payment for all shares redeemed within three days after receipt by the Transfer Agent of a redemption request in proper form, except as provided by the rules of the Securities and Exchange Commission. However, if an investor has purchased Portfolio shares by check and subsequently submits a redemption request by mail, the redemption proceeds will not be transmitted until the check used for investment has cleared, which may take up to 15 days. The Fund will reject requests to redeem shares by telephone or wire for a period of 15 days after receipt by the Transfer Agent of the purchase check against which such redemption is requested. This procedure does not apply to shares purchased by wire payment. The Fund reserves the right to redeem investor accounts at its option upon not less than 60 days' written notice if the account's net asset value is $750 or less, for reasons other than market conditions, and remains so during the notice period. Procedures Shareholders may redeem shares in several ways. Redemption through Bear Stearns or Authorized Dealers Clients with a brokerage account may submit redemption requests to their account executives or Authorized Dealers in person or by telephone, mail or wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request by repurchasing Fund shares from a redeeming shareholder at the shares' net asset value next computed after receipt of the request by Bear Stearns or the Authorized Dealer. Under normal circumstances, within three days, redemption proceeds will be paid by check or credited to the shareholder's brokerage account at the election of the shareholder. Bear Stearns account executives or Authorized Dealers are responsible for promptly forwarding redemption requests to the Transfer Agent. If an investor authorizes telephone redemption, the Transfer Agent may act on telephone instructions from any person representing himself or herself to be a representative of Bear Stearns or the Authorized Dealer and reasonably believed by the Transfer Agent to be genuine. The Fund will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Transfer Agent or the Fund may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Fund nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Redemption through the Transfer Agent Shareholders who are not clients with a brokerage account who wish to redeem shares must redeem their shares through the Transfer Agent by mail; other shareholders also may redeem Fund shares through the Transfer Agent. Mail redemption requests should be sent to the Transfer Agent at: PFPC Inc., Attention: The Bear Stearns Funds-[Name of Portfolio]-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Additional Information about Redemptions A shareholder may have redemption proceeds of $500 or more wired to the shareholder's brokerage account or a commercial bank account designated by the shareholder. A transaction fee of $7.50 will be charged for payments by wire. Questions about this option, or redemption requirements generally, should be referred to the shareholder's Bear Stearns account executive, to any Authorized Dealer, or to the Transfer Agent if the shares are not held in a brokerage account. Written redemption instructions, indicating the Portfolio from which shares are to be redeemed, and duly endorsed stock certificates, if previously issued, must be received by the Transfer Agent in proper form and signed exactly as the shares are registered. All signatures must be guaranteed. The Transfer Agent has adopted standards and procedures pursuant to which signature-guarantees in proper form generally will be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations, as well as from participants in the New York Stock Exchange Medallion Signature Program, the Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion Program ("STAMP"). Such guarantees must be signed by an authorized signatory thereof with "Signature Guaranteed" appearing with the shareholder's signature. If the signature is guaranteed by a broker or dealer, such broker or dealer must be a member of a clearing corporation and maintain net capital of at least $100,000. Signature-guarantees may not be provided by notaries public. Redemption requests by corporate and fiduciary shareholders must be accompanied by appropriate documentation establishing the authority of the person seeking to act on behalf of the account. Investors may obtain from the Fund or the Transfer Agent forms of resolutions and other documentation which have been prepared in advance to assist compliance with the Portfolio's procedures. Any questions with respect to signature-guarantees should be directed to the Transfer Agent by calling 1-800-447-1139 (in Delaware call collect 302-791-1031). During times of drastic economic or market conditions, investors may experience difficulty in contacting Bear Stearns or Authorized Dealers by telephone to request a redemption of Portfolio shares. In such cases, investors should consider using the other redemption procedures described herein. Use of these other redemption procedures may result in the redemption request being processed at a later time than it would have been if telephone redemption had been used. During the delay, each Portfolio's net asset value may fluctuate. Dividends, Distributions and Taxes Dividends will be automatically reinvested in additional Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. The Bond Portfolio declares dividends from net investment income on each day the New York Stock Exchange is open for business. These dividends usually are paid on or about the twentieth day of each month. The earnings for Saturdays, Sundays and holidays are declared as dividends on the preceding business day. Shares begin accruing income dividends on the day the purchase order is effective. If all shares in an account are redeemed at any time, all dividends to which the shareholder is entitled will be paid along with the proceeds of the redemption. Each Equity Portfolio ordinarily pays dividends from its net investment income at least once a year. Each Portfolio distributes net realized securities gains, if any, once a year, but it may make distributions on a more frequent basis to comply with the distribution requirements of the Code, in all events in a manner consistent with the provisions of the 1940 Act. No Portfolio will make distributions from net realized securities gains unless capital loss carryovers, if any, have been utilized or have expired. Dividends are automatically reinvested in additional Class Y shares of the Portfolio at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. All expenses are accrued daily and deducted before declaration of dividends to investors. Dividends derived from net investment income, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or disposition of certain market discount bonds, paid by a Portfolio will be taxable to U.S. shareholders as ordinary income, whether received in cash or reinvested in additional shares of the Portfolio or redirected into another portfolio or fund. Distributions from net realized long-term securities gains of a Portfolio will be taxable to U.S. shareholders as long-term capital gains for Federal income tax purposes, regardless of how long shareholders have held their Portfolio's shares and whether such distributions are received in cash or reinvested in, or redirected into other, shares. The Code provides that the net capital gain of an individual generally will not be subject to Federal income tax at a rate in excess of 28%. Dividends and distributions may be subject to state and local taxes. Dividends, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or other disposition of certain market discount bonds, paid by a Portfolio to a foreign investor generally are subject to U.S. nonresident withholding taxes at the rate of 30%, unless the foreign investor claims the benefit of a lower rate specified in a tax treaty. Distributions from net realized long-term securities gains paid by a Portfolio to a foreign investor as well as the proceeds of any redemptions from a foreign investor's account, regardless of the extent to which gain or loss may be realized, generally will not be subject to U.S. nonresident withholding tax. However, such distributions may be subject to backup withholding, as described below, unless the foreign investor certifies his non-U.S. residency status. Notice as to the tax status of investors' dividends and distributions will be mailed to them annually. Investors also will receive periodic summaries of their accounts which will include information as to dividends and distributions from securities gains, if any, paid during the year. Federal regulations generally require the Fund to withhold ("backup withholding") and remit to the U.S. Treasury 31% of dividends, distributions from net realized securities gains and the proceeds of any redemption, regardless of the extent to which gain or loss may be realized, paid to a shareholder if such shareholder fails to certify either that the TIN furnished in connection with opening an account is correct or that such shareholder has not received notice from the IRS of being subject to backup withholding as a result of a failure to properly report taxable dividend or interest income on a Federal income tax return. Furthermore, the IRS may notify the Fund to institute backup withholding if the IRS determines a shareholder's TIN is incorrect or if a shareholder has failed to properly report taxable dividend and interest income on a Federal income tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account, and may be claimed as a credit on the record owner's Federal income tax return. No Portfolio is expected to have any Federal tax liability; although investors should expect to be subject to Federal, state or local taxes in respect of their investment in Portfolio shares. Management of the Fund believes that each Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Code. Each Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Such qualification relieves a Portfolio of any liability for Federal income tax to the extent its earnings are distributed in accordance with applicable provisions of the Code. In addition, each Portfolio is subject to a non-deductible 4% excise tax, measured with respect to certain undistributed amounts of taxable investment income and capital gains. Each investor should consult its tax adviser regarding specific questions as to Federal, state or local taxes. Performance Information Each Portfolio may advertise its performance in a number of ways. For purposes of advertising, performance for Class Y of each Portfolio may be calculated on the basis of average annual total return and/or total return. These total return figures reflect changes in the price of the shares and assume that any income dividends and/or capital gains distributions made by a Portfolio during the measuring period were reinvested in Class Y shares. Performance of the Bond Portfolio also may be advertised on the basis of current yield. Current yield refers to the Bond Portfolio's annualized net investment income per share over a 30-day period, expressed as a percentage of the net asset value per share at the end of the period. For purposes of calculating current yield, the amount of net investment income per share during that 30-day period, computed in accordance with regulatory requirements, is compounded by assuming that it is reinvested at a constant rate over a six-month period. An identical result is then assumed to have occurred during a second six-month period which, when added to the result for the first six months, provides an "annualized" yield for an entire one-year period. Average annual total return is calculated pursuant to a standardized formula which assumes that an investment in the Portfolio was purchased with an initial payment of $1,000 and that the investment was redeemed at the end of a stated period of time, after giving effect to the reinvestment of dividends and distributions during the period. The return is expressed as a percentage rate which, if applied on a compounded annual basis, would result in the redeemable value of the investment at the end of the period. Advertisements of each Portfolio's performance will include such Portfolio's average annual total return for one, five and ten year periods, or for shorter periods depending upon the length of time during which the Portfolio has operated. Computations of average annual total return for periods of less than one year represent an annualization of such Portfolio's actual total return for the applicable period. Total return is computed on a per share basis and assumes the reinvestment of dividends and distributions. Total return generally is expressed as a percentage rate which is calculated by combining the income and principal changes for a specified period and dividing by the net asset value per share at the beginning of the period. Advertisements may include the percentage rate of total return or may include the value of a hypothetical investment at the end of the period which assumes the application of the percentage rate of total return. Performance will vary from time to time and past results are not necessarily representative of future results. Investors should remember that performance is a function of portfolio management in selecting the type and quality of portfolio securities and is affected by operating expenses. Performance information, such as that described above, may not provide a basis for comparison with other investments or other investment companies using a different method of calculating performance. Comparative performance information may be used from time to time in advertising or marketing each Equity Portfolio's shares, including data from Lipper Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index, Wilshire 4500 Stock Index, Russell Small Cap Index, the Dow Jones Industrial Average and other industry publications. Performance information that may be used in advertising or marketing the Bond Portfolio's shares can include data from Lipper Analytical Services, Inc., Morningstar, Inc., Bond Buyer's 20-Bond Index, Moody's Bond Survey Bond Index, Lehman Brothers Aggregate Bond Index, Salomon Brothers Broad Investment-Grade Index and components thereof, Mutual Fund Values; Mutual Fund Forecaster, Mutual Fund Investing and other industry publications. General Information The Fund was organized as an unincorporated business trust under the laws of the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994, and commenced operations on or about April 3, 1995. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. Each Portfolio's shares are classified into three Classes-Class A, Class C and Class Y. Each share has one vote and shareholders will vote in the aggregate and not by Class, except as otherwise required by law. Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Portfolio of which they are shareholders. However, the Trust Agreement disclaims shareholder liability for acts or obligations of the relevant Portfolio and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or a Trustee. The Trust Agreement provides for indemnification from the respective Portfolio's property for all losses and expenses of any shareholder held personally liable for the obligations of a Portfolio. Thus, the risk of a shareholder incurring financial loss on account of a shareholder liability is limited to circumstances in which the Portfolio itself would be unable to meet its obligations, a possibility which management believes is remote. Upon payment of any liability incurred by a Portfolio, the shareholder paying such liability will be entitled to reimbursement from the general assets of such Portfolio. The Fund's Trustees intend to conduct the operations of each Portfolio in a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Portfolio. As discussed under "Management of the Fund" in the Portfolios' Statement of Additional Information, each Portfolio ordinarily will not hold shareholder meetings; however, shareholders under certain circumstances may have the right to call a meeting of shareholders for the purpose of voting to remove Trustees. To date, the Fund's Board has authorized the creation of five portfolios of shares. All consideration received by the Fund for shares of one of the portfolios and all assets in which such consideration is invested will belong to that portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, one portfolio (and as to classes within a portfolio) are treated separately from those of the other portfolios (and classes). The Fund has the ability to create, from time to time, new portfolios of shares without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, the Rule exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of the Rule. The Transfer Agent maintains a record of share ownership and will send confirmations and statements of account. Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Attention: [Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 (in Delaware call collect 302-791-1031) or by calling Bear Stearns at 1-800-766-4111. Appendix Investment Techniques In connection with its investment objective and policies, each Portfolio may employ, among others, the following investment techniques which may involve certain risks. Options and futures transactions involve "derivative securities." Options Transactions-(All Portfolios) Each Portfolio may engage in options transactions. Each Portfolio is permitted to invest up to 5% of its assets, represented by the premium paid, in the purchase of call and put options in respect of specific securities (or groups or "baskets" of specific securities) in which the Portfolio may invest. Each Portfolio may write and sell covered call option contracts on securities owned by the Portfolio not exceeding 20% of the value of its net assets at the time such option contracts are written. Each Portfolio also may purchase call options to enter into closing purchase transactions. Each Portfolio also may write covered put option contracts to the extent of 20% of the value of its net assets at the time such option contracts are written. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at the exercise price at any time during the option period. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at the exercise price at any time during the option period. A covered put option sold by a Portfolio exposes the Portfolio during the term of the option to a decline in price of the underlying security or securities. A put option sold by the Portfolio is covered when, among other things, cash or liquid securities are placed in a segregated account with the Fund's custodian to fulfill the obligation undertaken. Each Equity Portfolio also may purchase and sell call and put options on foreign currency for the purpose of hedging against changes in future currency exchange rates. Call options convey the right to buy the underlying currency at a price which is expected to be lower than the spot price of the currency at the time the option expires. Put options convey the right to sell the underlying currency at a price which is anticipated to be higher than the spot price of the currency at the time the option expires. Each Equity Portfolio may purchase and sell call and put options on stock indexes listed on U.S. securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether an Equity Portfolio will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Successful use by each Equity Portfolio of options will be subject to BSFM's ability to predict correctly movements in the direction of individual stocks, the stock market generally, foreign currencies or interest rates. The Bond Portfolio's successful use of options will be subject to BSFM's ability to predict correctly movements in interest rates. To the extent BSFM's predictions are incorrect, a Portfolio may incur losses which could adversely affect the value of a shareholder's investment. Futures Contracts and Options on Futures Contracts-(All Portfolios) Each Portfolio may engage in futures transactions. Each Portfolio may enter into interest rate futures contracts and options with respect thereto. Each Equity Portfolio also may enter into stock index futures contracts and currency futures contracts, and options with respect thereto, in U.S. domestic markets or on exchanges located outside the United States. See "-Options Transactions" above. These transactions will be entered into as a substitute for comparable market positions in the underlying securities or for hedging purposes. Although no Portfolio would be a commodity pool, it would be subject to rules of the CFTC limiting the extent to which it could engage in these transactions. Each Portfolio's commodities transactions must constitute bona fide hedging or other permissible transactions pursuant to regulations promulgated by the CFTC. In addition, a Portfolio may not engage in such transactions if the sum of the amount of initial margin deposits and premiums paid for unexpired commodity options, other than for bona fide hedging transactions, would exceed 5% of the liquidation value of the Portfolio's assets, after taking into account unrealized profits and unrealized losses on such contracts it has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5%. To the extent a Portfolio engages in the use of futures and options on futures for other than bona fide hedging purposes, the Portfolio may be subject to additional risk. Engaging in these transactions involves risk of loss to a Portfolio which could adversely affect the value of a shareholder's investment. Although each Portfolio intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Portfolio to substantial losses. In addition, an Equity Portfolio engaging in futures transactions in foreign markets may involve greater risks than trading on domestic exchanges. Successful use of futures by an Equity Portfolio or the Bond Portfolio also is subject to BSFM's ability to predict correctly movements in the direction of the market or foreign currencies, or interest rates, respectively, and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if a Portfolio has hedged against the possibility of a decline in the market adversely affecting the value of securities held in its portfolio and prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market. The Portfolio may have to sell securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Securities and Exchange Commission, each Portfolio may be required to segregate cash or high quality money market instruments in connection with its commodities transactions in an amount generally equal to the value of the underlying co mmodity. The segregation of such assets will have the effect of limiting the Portfolio's ability otherwise to invest those assets. Forward Commitments-(Bond Portfolio) The Bond Portfolio may purchase when-issued securities and enter into forward commitment transactions. The Bond Portfolio may purchase securities on a when-issued or forward commitment basis, which means that the price is fixed at the time of commitment, but delivery and payment ordinarily take place a number of days after the date of the commitment to purchase. The Bond Portfolio will make commitments to purchase such securities only with the intention of actually acquiring the securities, but the Bond Portfolio may sell these securities before the settlement date if it is deemed advisable. The Bond Portfolio will not accrue income in respect of a security purchased on a forward commitment ba sis prior to its stated delivery date. Securities purchased on a when-issued or forward commitment basis and certain other securities held by the Bond Portfolio are subject to changes in value (both generally changing in the same way, i.e., appreciating when interest rates decline and depreciating when interest rates rise) based upon the public's perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. Securities purchased on a when-issued or forward commitment basis may expose the Bond Portfolio to risk because they may experience such fluctuations prior to their actual delivery. Purchasing securities on a when-issued or forward commitment basis can involve the additional risk that the yield available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. A segregated account of the Bond Portfolio consisting of cash, cash equivalents or U.S. Government securities or other high quality liquid debt securities of the type in which the Bond Portfolio invests at least equal at all times to the amount of the when-issued or forward commitments will be established and maintained at the Fund's custodian bank. Purchasing securities on a forward commitment basis when the Bond Portfolio is fully or almost fully invested may result in greater potential fluctuation in the value of the Bond Portfolio's net assets and its net asset value per share. Future Developments-(All Portfolios) Each Portfolio may take advantage of opportunities in the area of options and futures contracts, options on futures contracts and any other derivative investments which are not presently contemplated for use by a Portfolio or which are not currently available but which may be developed, to the extent such opportunities are both consistent with a Portfolio's investment objective and legally permissible for such Portfolio. Before entering into such transactions or making any such investment, the Portfolio will provide appropriate disclosure in its prospectus. Lending Portfolio Securities-(All Portfolios) Each Portfolio may earn additional income by lending its portfolio securities. From time to time, each Portfolio may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. Such loans may not exceed 331/3% of the value of a Portfolio's total assets. In connection with such loans, a Portfolio will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. Each Portfolio can increase its income through the investment of such collateral. A Portfolio continues to be entitled to payments in amounts equal to the interest, dividends and other distributions payable on the loaned security and receives interest on the amount of the loan. Such loans will be terminable at any time upon specified notice. A Portfolio might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with such Portfolio. Borrowing Money-(All Portfolios) Each Portfolio may borrow money. As a fundamental policy, each Portfolio is permitted to borrow to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 331/3% of the value of such company's total assets. However, each Portfolio currently intends to borrow money only for temporary or emergency (not leveraging) purposes, in an amount up to 15% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of a Portfolio's total assets, such Portfolio will not make any additional investments. Certain Portfolio Securities American, European and Continental Depositary Receipts-(Equity Portfolios) Each Equity Portfolio may invest in securities of foreign issuers in the form of American, European and Continental Depositary Receipts. Each Equity Portfolio's assets may be invested in the securities of foreign issuers in the form of American Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are receipts issued in Europe typically by non-United States banks and trust companies that evidence ownership of either foreign or domestic securities. Generally, ADRs in registered form are designed for use in the United States securities markets and EDRs and CDRs in bearer form are designed for use in Europe. Each Equity Portfolio may invest in ADRs, EDRs and CDRs through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. Mortgage-Related Securities-(Bond Portfolio) The Bond Portfolio may invest in mortgage-related securities which are collateralized by pools of mortgage loans. Mortgage-related securities are a form of derivative securities collateralized by pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association and government-related organizations such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, as well as by private issuers such as commercial banks, savings and loan institutions, mortgage banks and private mortgage insurance companies, and similar foreign entities. The mortgage-related securities in which the Bond Portfolio may invest include those with fixed, floating and variable interest rates, those with interest rates that change based on multiples of changes in interest rates and those with interest rates that change inversely to changes in interest rates, as well as stripped mortgage-backed securities which are derivative multiclass mortgage securities. Stripped mortgage-backed securities usually are structured with two classes that receive different proportions of interest and principal distributions on a pool of mortgage-backed securities or whole loans. A common type of stripped mortgage-backed security will have one class receiving some of the interest and most of the principal from the mortgage collateral, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). Although certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not so secured. If the Bond Portfolio purchases a mortgage-related security at a premium, all or part of the premium may be lost if there is a decline in the market value of the security, whether resulting from changes in interest rates or prepayments in the underlying mortgage collateral. As with other interest-bearing securities, the prices of certain of these securities are inversely affected by changes in interest rates. However, though the value of a mortgage-related security may decline when interest rates rise, the converse is not necessarily true, since in periods of declining interest rates the mortgages underlying the security are more likely to prepay. For this and other reasons, a mortgage-related security's stated maturity may be shortened by unscheduled prepayments on the underlying mortgages, and, therefore, it is not possible to predict accurately the security's return to the Bond Portfolio. Moreover, with respect to stripped mortgage-backed securities, if the underlying mortgage securities experience gr eater than anticipated prepayments of principal, the Bond Portfolio may fail to fully recoup its initial investment in these securities even if the securities are rated in the highest rating category by a nationally recognized statistical rating organization. In addition, regular payments received in respect of mortgage-related securities include both interest and principal. No assurance can be given as to the return the Bond Portfolio will receive when these amounts are reinvested. For further discussion concerning the investment considerations involved, see "Description of the Fund-Risk Factors-Fixed-Income Securities" above and "Illiquid Securities" below and "Investment Objective and Management Policies-Portfolio Securities-Mortgage-Related Securities" in the Statement of Additional Information. Asset-Backed Securities-(Bond Portfolio) The Bond Portfolio may invest in asset-backed securities. The Bond Portfolio may invest in asset-backed securities which are a form of derivative securities. The securitization techniques used for asset-backed securities are similar to those used for mortgage-related securities. These securities include debt securities and securities with debt-like characteristics. The collateral for these securities has included home equity loans, automobile and credit card receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of asset-backed securities backed by automobile receivables permit the servicers of such receivables to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of asset-backed securities backed by automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. Convertible Securities-(All Portfolios) Each Portfolio may invest in convertible securities. Convertible securities may be converted at a stated price within a specified period of time into a specified number of shares of common stock of the same or a different issuer. Convertible securities are senior to common stock in a corporation's capital structure, but usually are subordinated to non-convertible debt securities. While providing a fixed-income stream (generally higher in yield than the income derivable from a common stock but lower than that afforded by a non-convertible debt security), a convertible security also affords an investor the opportunity, through its conversion feature, to participate in the capital appreciation of the common stock into which it is convertible. The Bond Portfolio also may invest in debt securities with warrants attached or in units with warrants. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specified amount of the corporation's capital stock at a set price for a specified period of time. In connection with its purchases of convertible securities (which include debt securities with warrants), the Bond Portfolio from time to time may hold common stock received upon the conversion of the security or the exercise of the warrant. The Bond Portfolio does not intend to retain the common stock in its portfolio and will sell it as promptly as it can and in a manner which it believes will reduce the risk to the Bond Portfolio of loss in connection with the sale. In general, the market value of a convertible security is the higher of its "investment value" (i.e., its value as a fixed-income security) or its "conversion value" (i.e., the value of the underlying shares of common stock if the security is converted). As a fixed-income security, the market value of a convertible security generally increases when interest rates decline and generally decreases when interest rates rise. However, the price of a convertible security also is influenced by the market value of the security's underlying common stock. Thus, the price of a convertible security generally increases as the market value of the underlying stock increases, and generally decreases as the market value of the underlying stock declines. Investments in convertible securities generally entail less risk than investments in the common stock of the same issuer. Municipal Obligations-(Bond Portfolio) The Bond Portfolio may invest in municipal obligations. Municipal obligations are debt obligations issued by states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, or multistate agencies or authorities. While in general, municipal obligations are tax exempt securities having relatively low yields as compared to taxable, non-municipal obligations of similar quality, certain issues of municipal obligations, both taxable and non-taxable, offer yields comparable and in some cases greater than the yields available on other permissible investments. Municipal obligations generally include debt obligations issued to obtain funds for various public purposes as well as certain industrial development bonds issued by or on behalf of public authorities. Dividends received by shareholders which are attributable to interest income received by it from municipal obligations generally will be subject to Federal income tax. Municipal obligations bear fixed, floating or variable rates of interest, which are determined in some instances by formulas under which the municipal obligation's interest rate will change directly or inversely to changes in interest rates or an index, or multiples thereof, in many cases subject to a maximum and minimum. The Bond Portfolio currently intends to invest no more than 25% of its assets in municipal obligations. However, this percentage may be varied from time to time without shareholder approval. Zero Coupon and Stripped Securities-(Bond Portfolio) The Bond Portfolio may invest in zero coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have been stripped of their unmatured interest coupons. The Bond Portfolio may invest in zero coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have been stripped of their unmatured interest coupons, the coupons themselves and receipts or certificates representing interests in such stripped debt obligations and coupons. The Bond Portfolio also may invest in zero coupon securities issued by corporations and financial institutions which constitute a proportionate ownership of the issuer's pool of underlying U.S. Treasury securities. A zero coupon security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The amount of the discount fluctuates with the market price of the security. The market prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically and are likely to respond to a greater degree to changes in interest rates than non-zero coupon securities having similar maturities and credit qualities. Foreign Government Obligations; Securities of Supranational Entities-(Bond Portfolio) The Bond Portfolio may invest in obligations issued or guaranteed by one or more foreign governments. The Bond Portfolio may invest in U.S. dollar denominated obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions, agencies or instrumentalities that are determined by BSFM to be of comparable quality to the other obligations in which the Bond Portfolio may invest. Such securities also include debt obligations of supranational entities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Coal and Steel Community, the Asian Development Bank and the InterAmerican Development Bank. The percentage of the Bond Portfolio's assets invested in securities issued by foreign governments will vary depending on the relative yields of such securities, the economic and financial markets of the countries in which the investments are made and the interest rate climate of such countries. Money Market Instruments Each Portfolio may invest in a variety of money market instruments. Each Portfolio may invest, in the circumstances described under "Description of the Fund-Management Policies," in the following types of money market instruments, each of which at the time of purchase must have or be deemed to have under rules of the Securities and Exchange Commission remaining maturities of 13 months or less. U.S. Treasury Securities-(All Portfolios) U.S. Treasury securities include Treasury Bills, Treasury Notes and Treasury Bonds that differ in their interest rates, maturities and times of issuance. Treasury Bills have initial maturities of one year or less; Treasury Notes have initial maturities of one to ten years; and Treasury Bonds generally have initial maturities of greater than ten years. U.S. Government Securities-(All Portfolios) In addition to U.S. Treasury securities, U.S. Government securities include securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the Treasury; others, such as those issued by the Federal National Mortgage Association, by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. Principal and interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law. Bank Obligations-(All Portfolios) Each Portfolio may invest in bank obligations, including certificates of deposit, time deposits, bankers' acceptances and other short-term obligations of domestic banks, foreign subsidiaries of domestic banks, foreign branches of domestic banks, and domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, a Portfolio may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, the possible imposition of foreign withholding taxes on interest income payable on the securities, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on these securities and the possible seizure or nationalization of foreign deposits. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by each Portfolio will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. No Portfolio will invest more than 15% of the value of its net assets in time deposits maturing in more than seven days and in other securities that are illiquid. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Repurchase Agreements-(All Portfolios) Repurchase agreements involve the acquisition by a Portfolio of an underlying debt instrument, subject to an obligation of the seller to repurchase, and such Portfolio to resell, the instrument at a fixed price usually not more than one week after its purchase. Certain costs may be incurred by a Portfolio in connection with the sale of the securities if the seller does not repurchase them in accordance with the repurchase agreement. In addition, if bankruptcy proceedings are commenced with respect to the seller of the securities, realization on the securities by a Portfolio may be delayed or limited. Commercial Paper and Other Short-Term Corporate Obligations-(All Portfolios) Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by each Portfolio will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's, A-1 by S&P, F-1 by Fitch or Duff-1 by Duff, (b) issued by companies having an outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by BSFM to be of comparable quality to those rated obligations which may be purchased by a Portfolio. Each Portfolio may purchase floating and variable rate demand notes and bonds, which are obligations ordinarily having stated maturities in excess of one year, but which permit the holder to demand payment of principal at any time or at specified intervals. Warrants-(Equity Portfolios) Each Equity Portfolio may invest up to 5% of its net assets in warrants. Each Equity Portfolio may invest up to 5% of its net assets in warrants, except that this limitation does not apply to warrants acquired in units or attached to securities. Included in such amount, but not to exceed 2% of the value of an Equity Portfolio's net assets, may be warrants which are not listed on the New York or American Stock Exchange. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specified amount of the corporation's capital stock at a set price for a specified period of time. Investment Company Securities-(All Portfolios) Each Portfolio may invest in securities of other investment companies. Each Portfolio may invest in securities issued by other investment companies. Under the 1940 Act, a Portfolio's investment in such securities currently is limited to, subject to certain exceptions, (i) 3% of the total voting stock of any one investment company, (ii) 5% of such Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Investments in the securities of other investment companies will involve duplication of advisory fees and certain other expenses. Illiquid Securities-(All Portfolios) Each Portfolio may purchase illiquid securities. Each Portfolio may invest up to 15% of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. Such securities may include securities that are not readily marketable, such as certain securities that are subject to legal or contractual restrictions on resale, repurchase agreements providing for settlement in more than seven days after notice, options traded in the over-the-counter market and securities used to cover such options, and certain asset-backed and mortgage-backed securities, such as certain collateralized mortgage obligations and stripped mortgage-backed securities. As to these securities, each Portfolio is subject to a risk that should such Portfolio desire to sell them when a ready buyer is not available at a price the Portfolio deems representative of their value, the value of such Portfolio's net assets could be adversely affected. Ratings-(All Portfolios) The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to the quality of the obligations which they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Therefore, although these ratings may be an initial criterion for selection of portfolio investments, BSFM also will evaluate such obligations and the ability of their issuers to pay interest and principal. Each Portfolio will rely on BSFM's judgment, analysis and experience in evaluating the creditworthiness of an issuer. In this evaluation, BSFM will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, the quality of the issuer's management and regulatory matters. It also is possible that a rating agency might not timely change the rating on a particular issue to reflect subsequent events. Once the rating of a security held by a Portfolio has been changed, BSFM will consider all circumstances deemed relevant in determining whether such Portfolio should continue to hold the security. The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Distributor Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 Investment Adviser Bear Stearns Funds Management Inc. 245 Park Avenue New York, NY 10167 Custodian Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 Transfer & Dividend Disbursement Agent PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 Counsel Stroock & Stroock & Lavan 7 Hanover Square New York, NY 10004-2696 Independent Auditors Deloitte & Touche LLP Two World Financial Center New York, NY 10281-1434 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PORTFOLIOS' PROSPECTUS AND IN THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE PORTFOLIOS' SHARES, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THE PORTFOLIOS' PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. THE BEAR STEARNS FUNDS 245 PARK AVENUE NEW YORK, NY 10167 1-800-766-4111 PROSPECTUS S&P STARS Portfolio S&P STARS Portfolio (the "STARS Portfolio") is a separate non-diversified portfolio of The Bear Stearns Funds (the "Fund"), an open-end management investment company, known as a mutual fund. The STARS Portfolio's investment objective is to provide investment results that exceed the total return of publicly traded common stocks in the aggregate, as represented by the Standard & Poor's 500 Stock Index (the "S&P 500"). As its investment strategy, the investment adviser principally uses Standard & Poor's ("S&P") STock Appreciation Ranking System (or STARS) to identify a universe of securities in the highest category (which is five stars) to evaluate for purchase and in the lowest category (which is one star) to evaluate for short selling. The investment adviser believes that this approach will provide opportunities to achieve performance that exceeds the S&P 500's total return. The STARS Portfolio invests all of its assets in the S&P STARS Master Series (the "Master Series") of S&P STARS Fund (the "Master Fund"), an open-end management investment company, rather than in a portfolio of securities. This arrangement typically is known as a "master-feeder" structure. The Master Series has the same investment objective as the STARS Portfolio. Therefore, the STARS Portfolio's investment experience will correspond directly with the Master Series' investment experience. Master Series' shares may be purchased only by other investment companies or similar accredited investors. By this Prospectus, the STARS Portfolio is offering two Classes of shares. Class A shares are subject to a sales charge imposed at the time of purchase and Class C shares are subject to a 1% contingent deferred sales charge imposed on redemptions made within the first year of purchase. Other differences between the Classes include the services offered to and the expenses borne by each Class and certain voting rights, as described herein. These alternatives are offered so an investor may choose the method of purchasing shares that is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other circumstances. The STARS Portfolio issues another Class of shares which has different expenses which would affect performance. Investors desiring to obtain information about this Class of shares should call 1-800-766-4111 or ask their sales representative or the STARS Portfolio's distributor. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the Master Series' investment adviser. Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as the STARS Portfolio's distributor. ---------------- This Prospectus sets forth concisely information about the STARS Portfolio that you should know before investing. It should be read and retained for future reference. Part B (also known as the Statement of Additional Information), dated June 20, 1996, which may be revised from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, write to the address or call one of the telephone numbers listed under "General Information" in this Prospectus. ---------------- Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. The net asset value of funds of this type will fluctuate. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. June 20, 1996 Table of Contents PAGE Fee Table........................... 3 Condensed Financial Information..... 4 Alternative Purchase Methods........ 5 Description of the STARS Portfolio.. 5 Risk Factors........................ 10 Management of the STARS Portfolio... 11 How to Buy Shares................... 13 Shareholder Services................ 17 How to Redeem Shares................ 19 Dividends, Distributions and Taxes.. 21 Performance Information............. 22 General Information................. 23 Appendix............................ A-1 FEE TABLE* - ------------------------------------------------------------------------------- CLASS A CLASS C - ------------------------------------------------------------------------------ Shareholder Transaction Expenses Maximum Sales Load Imposed on Purchases (as a percentage of offering price)**............................................. 4.75% - Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of the amount subject to charge)................... *** 1.00% Annual STARS Portfolio Operating Expenses (as a percentage of average daily net assets) Master Series Management Fees (after fee waiver)****.......... 0.00% 0.00% 12b-1 Fees.................................................... 0.50% 1.00% Other Expenses (after expense reimbursement)****.............. 1.00% 1.00% Total STARS Portfolio Operating Expenses (after fee waiver and expense reimbursement)****.................................... 1.50% 2.00% Example: You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period: 1 Year....................................................... $ 62 $ 30 3 Years...................................................... $ 93 $ 63 5 Years...................................................... $125 $108 10 Years...................................................... $218 $233 You would pay the following expenses on the same investment, assuming no emption: 1 Year....................................................... $ 62 $ 20 3 Years...................................................... $ 93 $ 63 5 Years...................................................... $125 $108 10 Years...................................................... $218 $233 - ----- * This fee table summarizes the expenses of both the STARS Portfolio and the Master Series. The Board of Trustees believes that the aggregate per share expenses of the STARS Portfolio and the Master Series will be less than or equal to the expenses which the STARS Portfolio would incur if the STARS Portfolio retained the services of an investment adviser and the assets of the STARS Portfolio were invested directly in the type of securities being held by the Master Series. See the text following this table. ** Other mutual funds may invest in the Master Series and such other funds' expenses and, correspondingly, investment returns may differ from those of the STARS Portfolio. *** In certain situations, where no sales charge is assessed at the time of purchase, a contingent deferred sales charge of up to 1.00% may be imposed on redemptions within the first year after purchase. See "How to Buy Shares-Class A Shares." **** BSFM has undertaken to waive its investment advisory fee and assume certain expenses of the Master Series and the STARS Portfolio other than brokerage commissions, extraordinary items, interest and taxes to the extent Total STARS Portfolio Operating Expenses exceed 1.50% for Class A and 2.00% for Class C. Without such waiver and expense reimbursement, Master Series Management Fees stated above would be 0.75%, Other Expenses would be 1.14% for Class A and 1.17% for Class C and Total STARS Portfolio Operating Expenses would be 2.39% for Class A and 2.92% for Class C. The amounts listed in the example should not be considered as representative of past or future expenses and actual expenses may be greater or less than those indicated. Moreover, while the example assumes a 5% annual return, the STARS Portfolio's actual performance will vary and may result in an actual return greater or less than 5%. The purpose of the foregoing table is to assist you in understanding the costs and expenses borne by the STARS Portfolio and investors, the payment of which will reduce investors' annual return. In addition to the expenses noted above, the Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." Long-term investors could pay more in 12b-1 fees than the economic equivalent of paying a front-end sales charge. For a description of the expense reimbursement or waiver arrangements in effect, see "Management of the STARS Portfolio." Condensed Financial Information The information in the table below covering the STARS Portfolio's investment results for the period indicated has been audited by Deloitte & Touche. Further financial data and related notes appear in the STARS Portfolio's Annual Report for the fiscal year ended March 31, 1996 which is incorporated by reference into the STARS Portfolio's Statement of Additional Information which is available upon request. Financial Highlights Contained below is per share operating performance data, total investment return, ratios to average net assets and other supplemental data for a Class A and Class C share of the STARS Portfolio for the period April 5, 1995 (commencement of investment operations of the Master Series) to March 31, 1996. This information has been derived from information provided in the STARS Portfolio's financial statements.
- ----------------------------------------------------------------------------------------------- CLASS A CLASS C - ----------------------------------------------------------------------------------------------- Per Share Operating Performance* Net asset value, beginning of period....................................... $12.00 $12.00 --------- --------- Net investment income/(loss) (1)........................................... - (0.06) Net realized and unrealized gain on investment (2)......................... 3.31 3.28 --------- --------- Net increase in net assets resulting from operations....................... 3.31 3.22 --------- --------- Distributions to shareholders from: Net realized capital gains................................................. (0.39) (0.36) --------- --------- Net asset value, end of period............................................. $14.92 $14.86 ========= ========= Total investment return (3)................................................ 27.68% 26.91% ========= ========= Ratios/Supplemental Data Net assets, end of period (000's omitted).................................. $45,049 $28,081 Ratio of expenses to average net assets (1)(4)............................. 1.50% 2.00% Ratio of net investment income/(loss) to average net assets (1)(4)......... (0.01)% (0.45%) Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements (4)(5)................................... 0.89% 0.92% - ----- * Calculated based on shares outstanding on the first and last day of the period, except for dividends and distributions, if any, which are based on actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amount shown for a share outstanding throughout the period is not in accord with the change in the aggregate gains and losses in investments during the period because of the timing of sales and repurchases of STARS Portfolio shares in relation to fluctuating net asset value during the period. (3) Total return does not consider the effects of sales loads or contingent deferred sales charges. Total return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total returns are not annualized. (4) Annualized. (5) Includes the STARS Portfolio's share of Master Series' expenses.
Contained below are ratios to average net assets and other supplemental data for the Master Series for the period April 5, 1995 (commencement of investment operations) to March 31, 1996. This information has been derived from information provided in the Master Series' financial statements. Ratios/Supplemental Data Net assets, end of period (000's omitted)........................... $82,028 Ratio of expenses to average net assets (1)(2)...................... 0.19% Ratio of net investment income/(loss) to average net assets (1)(2).. 1.36% Decrease reflected in above expense ratios and net investment income due to waivers and reimbursements (2)........................ 0.91% Portfolio turnover rate (3)......................................... 295.97% Average commission rate per share................................... $0.06 - ----- (1) Reflects waivers and reimbursements. (2) Annualized. (3) Not annualized. Further information about performance is contained in the STARS Portfolio's Annual Report, which may be obtained without charge by writing to the address or calling one of the telephone numbers listed under "General Information." Alternative Purchase Methods By this Prospectus, the STARS Portfolio offers you two methods of purchasing its shares. By this Prospectus, the STARS Portfolio offers investors two methods of purchasing its shares; investors may choose the Class of shares that best suits their needs, given the amount of purchase, the length of time the investor expects to hold the shares and any other relevant circumstances. Each Portfolio share represents an identical pro rata interest in the STARS Portfolio's investment portfolio. Class A shares of the STARS Portfolio are sold at net asset value per share plus a maximum initial sales charge of 4.75% of the public offering price imposed at the time of purchase. The initial sales charge may be reduced or waived for certain purchases. See "How to Buy Shares-Class A Shares." The Class A shares of the STARS Portfolio are subject to an annual distribution and shareholder servicing fee at the rate of .50 of 1% of the value of the average daily net assets. See "Management of the Fund-Distribution and Shareholder Servicing Plan." Class C shares of the STARS Portfolio are subject to a 1% contingent deferred sales charge ("CDSC") which is assessed only if Class C shares are redeemed within one year of purchase. See "How to Redeem Shares-Class C Shares." These shares of the STARS Portfolio also are subject to an annual distribution and shareholder servicing fee at the rate of 1% of the value of the average daily net assets of Class C. See "Management of the Fund-Distribution and Shareholder Servicing Plan." The distribution and shareholder servicing fee paid by Class C will cause such Class to have a higher expense ratio and to pay lower dividends than Class A. The decision as to which Class of shares is more beneficial to each investor depends on the amount and the intended length of time of the investor's investment. Each investor should consider whether, during the anticipated life of the investor's investment in the Fund, the accumulated distribution and shareholder servicing fee and CDSC, if any, on Class C shares would be less than the initial sales charge on Class A shares purchased at the same time, and to what extent, if any, such differential would be offset by the return of Class A. Additionally, investors qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time might consider purchasing Class A shares because the accumulated continuing distribution and shareholder servicing fees on Class C shares may exceed the initial sales charge on Class A shares during the life of the investment. Finally, each investor should consider the effect of the CDSC period in the context of the investor's own investment time frame. Generally, Class A shares may be more appropriate for investors who invest $1,000,000 or more in STARS Portfolio's shares, but will not be appropriate for investors who invest less than $50,000 in STARS Portfolio's shares, unless they intend to hold those shares for more than ten years. Description of the STARS Portfolio General The Fund is a "series fund." It is part of a "master-feeder" arrangement. The Fund is a "series fund," which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the Investment Company Act of 1940, as amended (the "1940 Act"), and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As described below, for certain matters Fund shareholders vote together as a group; as to others they vote separately by portfolio. By this Prospectus, shares of the STARS Portfolio are being offered. From time to time, other portfolios may be established and sold pursuant to other offering documents. See "General Information." The STARS Portfolio is part of a so-called "master-feeder" structure. As such, it invests all of its assets in the Master Series, a separate series of the Master Fund, which has the same investment objective as the STARS Portfolio. See "Investment Objective" and "Management Policies" below. The Master Fund is organized as a trust under the laws of the State of Delaware. See "Management of the STARS Portfolio." In addition to selling its shares to the STARS Portfolio, the Master Series may sell its shares to certain other mutual funds or institutional investors. Information regarding additional options, if any, for investment in shares of the Master Series may be obtained by contacting PFPC International Ltd., Attention: S&P STARS Master Series, 80 Harcourt Street, Dublin 2, Ireland or by calling (353) 1 790 3500. The expenses and, correspondingly, the returns of other investment options in the Master Fund may differ from those of the STARS Portfolio. A master-feeder arrangement should provide benefits to shareholders; under certain circumstances, it can give rise to some additional risk. The Fund's Board of Trustees believes that, if other mutual funds or institutional investors invest their assets in the Master Series, certain economies of scale may be realized. For example, fixed expenses that otherwise would have been borne solely by the STARS Portfolio would be spread among a larger asset base provided by more than one fund investing in the Master Series. The STARS Portfolio and other entities investing in the Master Series will each be liable for all obligations of the Master Series. However, the risk of the STARS Portfolio incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance existed and the Master Fund itself was unable to meet its obligations. Accordingly, the Fund's Board of Trustees believes that neither the STARS Portfolio nor its shareholders will be adversely affected by reason of investing their assets in the Master Series. However, if a mutual fund or institutional investor with a large pro rata ownership of the Master Series' securities withdraws its investment from the Master Series, the economies of scale (e.g., spreading fixed expenses among a larger asset base) that the Fund's Board believes should be available through investment in the Master Series may not be fully achieved. The Master Series' investment objective and other fundamental policies, which are the same as those of the STARS Portfolio, cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Master Series' outstanding voting shares. Whenever the STARS Portfolio, as the Master Series' shareholder, is requested to vote on matters pertaining to the Master Series, the STARS Portfolio will hold a meeting of its shareholders to consider such matters and the STARS Portfolio will cast its votes in proportion to the votes received from STARS Portfolio shareholders. The STARS Portfolio will vote Master Series shares for which it receives no voting instructions in the same proportion as the votes received from STARS Portfolio shareholders. In addition, certain policies of the Master Series which are non-fundamental could be changed by vote of a majority of the Master Fund's Trustees without shareholder vote. If the Master Series' investment objective or fundamental or non-fundamental policies are changed, the STARS Portfolio could subsequently change its objective or policies to correspond to those of the Master Series or the STARS Portfolio could redeem its Master Series shares and either seek a new investment company with a matching objective in which to invest or retain its own investment adviser to manage its portfolio in accordance with its objective. In the latter case, the STARS Portfolio's inability to find a substitute investment company in which to invest or equivalent management services could adversely affect shareholders' investments in the STARS Portfolio. The STARS Portfolio will provide shareholders with 30 days' written notice prior to any change in the investment objective of the STARS Portfolio or Master Series, to the extent possible. Investment Objective The STARS Portfolio seeks to provide investment results that exceed the total return of publicly traded common stocks, in the aggregate, as represented by the S&P 500. The STARS Portfolio's investment objective is to provide investment results that exceed the total return of publicly traded common stocks, in the aggregate, as represented by the S&P 500. The STARS Portfolio's investment objective cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of its outstanding voting shares. The Master Series' investment objective, which is the same as the STARS Portfolio's, cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of its outstanding voting shares. Shareholders of the STARS Portfolio will be provided the opportunity to vote on any proposed change to the Master Series' investment objective, and the STARS Portfolio will vote on any such proposal in proportion to the votes received from STARS Portfolio shareholders. See "General" above. There can be no assurance that the investment objective of the STARS Portfolio or Master Series will be achieved. STARS STARS is S&P's proprietary stock ranking system. It is used by BSFM to identify a universe of securities in the highest category to evaluate for purchase and in the lowest category to evaluate for short selling. STARS ranks on a scale from five stars (highest) to one star (lowest) the stocks of approximately 1,100 issuers analyzed by S&P's research staff of securities analysts. STARS represents the evaluation of S&P's analysts of the short-term (up to 12 months) appreciation potential of the evaluated stocks. The rankings are as follows: *****Buy-Expected to be among the best performers over the next 12 months and to rise in price. ****Accumulate-Expected to be an above-average performer. ***Hold-Expected to be an average performer. **Avoid-Expected to be a below-average performer. *Sell-Expected to be a well-below-average performer and to fall in price. STARS was introduced by S&P in January 1987. Since 1993, on average, the five star category has consisted of approximately 95 stocks, the four star category has consisted of approximately 375 stocks, the three star category has consisted of approximately 525 stocks, the two star category has consisted of approximately 100 stocks, and the one star category has consisted of between approximately 14 and 23 stocks. Rankings may change frequently as developments affecting individual securities and the markets are considered by the S&P analysts. For purposes of evaluating the performance of stocks in the various categories-and thus of the performance of its analysts-S&P has created a model which initially equally weights by dollar amount the stocks in the various categories, does not rebalance the portfolio based on changes in values or rankings and does not take into account dividends or transaction costs. STARS is only a model; it does not reflect actual investment performance. While its performance cannot be used to predict actual results, S&P believes it is useful in evaluating the capability of its analysts. Investors should recognize that the pool of S&P analysts changes and their past performance is not necessarily predictive of future results either of the model or of the STARS Portfolio. From January 1, 1987 through March 31, 1996 The S&P 500 (measured on a total return basis, without dividend reinvestment)* increased by 166.55%. The ranked stocks, measured as described above, changed in value as follows*: Five stars-+353.64% Four stars-+220.18% Three stars-+146.37% Two stars-+116.87% One star- -36.83% - ----- * During this period, the average dividend yields on securities included in the S&P 500 and the securities ranked five stars were approximately 3.1% and 1.9%, respectively. The STARS Portfolio believes that this information should be used by investors only in their consideration that, historically, the five star stocks, measured as described above, have significantly outperformed lower ranked stocks and the one star stocks, similarly measured, have significantly underperformed the higher ranked stocks. This information should not be used to predict whether the results will occur in the future or the actual performance of a particular category. STARS performance has been more volatile than that of conventional indices such as the Dow Jones Industrial Average and the S&P 500. In addition, at times, lower ranked STARS categories have outperformed higher ranked STARS categories and higher ranked STARS categories have under-performed the S&P 500. Specifically, the performance of five star and one star stocks has not consistently exceeded or fallen below the performance of the S&P 500. In some years, one star stocks have outperformed the S&P 500 as well as five star stocks; in other years, both one and five star stocks have outperformed the S&P 500. In 1994, one star stocks outperformed the S&P 500, which in turn outperformed five star stocks. In 1995, the S&P 500 outperformed five star stocks, which in turn outperformed one star stocks. Investors also should consider that the Master Series is managed actively-and, thus, its performance will depend materially on BSFM's investment determinations and will incur transaction and other costs, including management and 12b-1 fees, which are not reflected in the foregoing information. STARS is available to the public through various S&P publications. BSFM has access to STARS through S&P's MarketScope, a computer-accessed subscription service available for an annual fee, currently with more than 72,000 subscribers. Management Policies General As part of a master-feeder arrangement, the STARS Portfolio invests all its assets in the Master Series, which has the same investment objective as the STARS Portfolio. The STARS Portfolio invests all of its assets in the Master Series, which has the same investment objective as the STARS Portfolio. The STARS Portfolio may withdraw its investment in the Master Series at any time, if the Fund's Board of Trustees determines that it is in the best interests of the STARS Portfolio to do so. Upon any such withdrawal, the Fund's Board of Trustees would consider what action should be taken, including investing all the STARS Portfolio's assets in another pooled investment entity having the same investment objective as the STARS Portfolio, or retaining an investment adviser to manage the STARS Portfolio's assets in accordance with the policies described below. Since the investment characteristics of the STARS Portfolio will correspond directly to those of the Master Series, the following is a discussion of the management policies used by the Master Series. The Master Series invests primarily in equity securities that, at the time of purchase were ranked as five stars in STARS or at their time of short sale were ranked as one star in STARS. As its investment strategy, BSFM uses STARS to identify a universe of securities in the five star category to evaluate for purchase and in the one star category to evaluate for short selling. BSFM anticipates that at least 85% of the value of the Master Series' total assets (except when maintaining a temporary defensive position) will be invested in common stocks that, at their time of purchase, were ranked as five stars in STARS or, at their time of short sale, were ranked as one star in STARS. The Master Series may invest up to 15% of its assets in common stocks without regard to STARS ranking, if BSFM believes that such securities offer opportunities for capital appreciation. BSFM will not seek to replicate STARS performance and will not necessarily sell a security once it has been downgraded from five stars or cover a short position once it has been upgraded from one star. From time to time, certain closed-end investment companies are ranked by STARS and will be eligible for purchase by the Master Series. The Master Series may invest, in anticipation of investing cash positions and, without limitation, for temporary defensive purposes, in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase agreements, as set forth in the Appendix. Investment Techniques The Master Series may engage in short selling, lending portfolio securities, and options transactions, each of which involves risk. The Master Series may engage in various investment techniques, such as short selling, lending portfolio securities, and options transactions, each of which involves risk. Options transactions involve "derivative securities." Short selling is discussed below. For a discussion of these other investment techniques and their related risks, see "Appendix-Investment Techniques" and "Risk Factors" below. Short sales are transactions in which the Master Series sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Master Series must borrow the security to make delivery to the buyer. The Master Series then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Master Series. Until the security is replaced, the Master Series is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Master Series also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Until the Master Series replaces a borrowed security in connection with a short sale, the Master Series will: (a) maintain daily a segregated account, containing cash, cash equivalents or U.S. Government securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position in accordance with positions taken by the Staff of the Securities and Exchange Commission. The Master Series will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Master Series replaces the borrowed security. The Master Series will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Master Series may be required to pay in connection with a short sale. The Master Series may purchase call options to provide a hedge against an increase in the price of a security sold short by the Master Series. See "Appendix-Investment Techniques-Options Transactions." The Master Series anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Master Series' net assets. The Master Series may not sell short the securities of any single issuer listed on a national securities exchange to the extent of more than 5% of the value of its net assets. The Master Series may not sell short the securities of any class of an issuer to the extent, at the time of the transaction, of more than 2% of the outstanding securities of that class. In addition to the short sales discussed above, the Master Series may make short sales "against the box," a transaction in which the Master Series enters into a short sale of a security which the Master Series owns. The proceeds of the short sale will be held by a broker until the settlement date at which time the Master Series delivers the security to close the short position. The Master Series receives the net proceeds from the short sale. The Master Series at no time will have more than 15% of the value of its net assets in deposits on short sales against the box. It currently is anticipated that the Master Series will make short sales against the box for purposes of protecting the value of the Master Series' net assets. Certain Fundamental Policies Certain of the STARS Portfolio's and Master Series' investment policies are fundamental policies that can be changed only by shareholder vote. The STARS Portfolio and the Master Series may (i) borrow money to the extent permitted under the 1940 Act; and (ii) invest up to 25% of the value of its total assets in the securities of issuers in a single industry, provided that there is no such limitation on investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. This paragraph describes fundamental policies that cannot be changed as to the STARS Portfolio or the Master Series without approval by the holders of a majority (as defined in the 1940 Act) of the outstanding voting securities of the STARS Portfolio or the Master Series, as the case may be. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Certain Additional Non-Fundamental Policies The STARS Portfolio and the Master Series may (i) purchase securities of any company having less than three years' continuous operation (including operations of any predecessors) if such purchase does not cause the value of its investments in all such companies to exceed 5% of the value of its total assets; (ii) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to secure permitted borrowings; and (iii) invest up to 15% of the value of its net assets in repurchase agreements providing for settlement in more than seven days after notice and in other illiquid securities. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Risk Factors No investment is free from risk. Investing in the STARS Portfolio will subject investors to certain risks which should be considered. General Since the investment characteristics and, therefore, investment risks associated with such characteristics of the STARS Portfolio will correspond directly to those of the Master Series, the following is a discussion of the risks associated with an investment in the Master Series. Net Asset Value Fluctuations The Master Series' net asset value is not fixed and should be expected to fluctuate. Investors should purchase STARS Portfolio shares only as a supplement to an overall investment program and only if investors are willing to undertake the risks involved, including the potential loss of a significant portion of their investment. Equity Securities Investors should be aware that equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and that fluctuations can be pronounced. Changes in the value of the common stocks in the Master Series' portfolio will result in changes in the value of its shares and thus its yield and total return to investors. STARS Performance STARS rankings are the subjective determination of S&P's analysts. The pool of these analysts changes. Past performance of securities and issuers included in STARS cannot be used to predict future results of the Master Series, which is managed actively by BSFM and the results of which should be expected to vary from the performance of STARS. None of the STARS Portfolio, Bear Stearns or BSFM have any ongoing relationship with S&P regarding the STARS Portfolio other than the right for a fee to use the S&P, Standard & Poor's and STARS trademarks in connection with the management of mutual funds and access to STARS through S&P's publicly available subscription service. Certain Investment Techniques The use of investment techniques, such as short selling, lending portfolio securities and engaging in options transactions, involves greater risk than that incurred by many other funds with a similar objective. See "Appendix-Investment Techniques." The Master Series' ability to engage in certain short-term transactions may be limited by the requirement that, for the STARS Portfolio to qualify as a regulated investment company, it must earn less than 30% of its gross income from the disposition of securities held for less than three months. This 30% test limits the extent to which the Master Series may sell securities held for less than three months, effect short sales of securities held for less than three months, and write options expiring in less than three months, among other strategies. Except for this requirement, the amount of portfolio activity will not be a limiting factor when making portfolio decisions. Under normal market conditions, the Master Series' portfolio turnover rate generally will not exceed 150%. However, the portfolio turnover rate may exceed this rate, when the BSFM believes the anticipated benefits of short-term investments outweigh any increase in transaction costs or increase in short-term gains. Higher portfolio turnover rates are likely to result in comparatively greater brokerage commissions or transaction costs. Short-term gains realized from portfolio transactions are taxable to shareholders as ordinary income. See "Portfolio Transactions" in the STARS Portfolio's Statement of Additional Information. Non-Diversified Status The Master Series', and thus the STARS Portfolio's, classification as a "non-diversified" investment company means that the proportion of its assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. A "diversified" investment company is required by the 1940 Act generally, with respect to 75% of its total assets, to invest not more than 5% of such assets in the securities of a single issuer and to hold not more than 10% of the outstanding voting securities of a single issuer. However, the Master Series intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which requires that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of the Master Series' total assets be invested in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Master Series' total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets be invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). Since a relatively high percentage of the Master Series' assets may be invested in the securities of a limited number of issuers, some of which may be within the same industry or economic sector, the Master Series' portfolio securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company. Simultaneous Investments Investment decisions for the Master Series are made independently from those of other investment companies or accounts advised by BSFM. However, if such other investment companies or accounts are prepared to invest in, or desire to dispose of, securities of the type in which the Master Series invests at the same time as the Master Series, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Master Series or the price paid or received by the Master Series. Management of the STARS Portfolio The STARS Portfolio has not retained the services of an investment adviser because all of its assets are invested in the Master Series. Board of Trustees The Trustees are responsible for the overall management and supervision of the STARS Portfolio's business. The STARS Portfolio's business affairs are managed under the general supervision of the Fund's Board of Trustees. The STARS Portfolio's Statement of Additional Information contains the name and general business experience of each Trustee. Master Series Investment Adviser The Master Series' investment adviser, BSFM, manages the STARS Portfolio's investments. The Master Series' investment adviser is BSFM, a wholly-owned subsidiary of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear Stearns, is a leading United States investment banking, securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. BSFM is a registered investment adviser and offers, either directly or through affiliates, investment advisory and administrative services to open-end and closed-end investment funds and other managed pooled investment vehicles with net assets at March 31, 1996 of over $1.9 billion. BSFM serves as investment adviser of the Master Series under an Investment Advisory Agreement between BSFM and the Master Fund, subject to the overall authority of the Master Fund's Board of Trustees in accordance with Delaware law. The Master Series' principal portfolio manager is Robert S. Reitzes. Mr. Reitzes joined Bear Stearns Asset Management in 1994 as Director of Mutual Funds-Bear Stearns Asset Management and Senior Managing Director of Bear Stearns. From 1991 until 1994, he was Co-Director of Research and Senior Chemical Analyst at C.J. Lawrence/Deutsche Bank Securities Corp. For six years prior thereto, Mr. Reitzes was employed by Mabon, Nugent & Co. as Chief Investment Officer and Chemical Analyst. The Master Fund pays BSFM an advisory fee at an annual rate equal to .75 of 1% of the Master Series' average daily net assets. Under the terms of the Investment Advisory Agreement, the Master Fund has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the Master Series' average daily net assets. From April 3, 1995 (commencement of operations) through March 31, 1996, no fees were paid by the Master Fund pursuant to an undertaking by BSFM. The STARS Portfolio's administrator is BSFM. The STARS Portfolio pays BSFM an administration fee at the annual rate of .15 of 1% of its average daily net assets. Under the terms of an Administration Agreement with the Fund, BSFM generally supervises all aspects of the operation of the STARS Portfolio, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. For providing administrative services to the STARS Portfolio, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of the STARS Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Fund, PFPC Inc. provides certain administrative services to the STARS Portfolio. For providing these services, the Fund has agreed to pay PFPC Inc. $5,500 per month. In addition, the Master Series will pay PFPC International Ltd. an annual fee, as set forth below: - ------------------------------------------------------------------------------- MASTER SERIES' ANNUAL FEE AS A PERCENTAGE OF AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS - ------------------------------------------------------------------------------- First $200 million.................... .12 of 1% Next $200 million up to $400 million.. .09 of 1% Next $200 million up to $600 million.. .075 of 1% Assets in excess of $600 million...... .05 of 1% The above-referenced fee is subject to a monthly minimum fee of $8,500. From April 3, 1995 (commencement of operations) through March 31, 1996, the Master Fund paid PFPC International Ltd. a monthly fee at the effective annual rate of .12 of 1% of the Master Series' average daily net assets. From time to time, BSFM may waive receipt of its fees and/or voluntarily assume certain Master Series or STARS Portfolio expenses, which would have the effect of lowering the Master Series' or STARS Portfolio's expense ratio, as the case may be, and increasing yield to investors at the time such amounts are waived or assumed, as the case may be. Neither the Master Fund nor the STARS Portfolio will pay BSFM at a later time for any amounts it may waive, nor will either reimburse BSFM for any amounts it may assume. Brokerage commissions may be paid to Bear Stearns for executing transactions if the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers. The allocation of brokerage transactions also may take into account a broker's sales of the STARS Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional Information. Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or derivatives thereof as part of the Fund name for as long as the Investment Advisory Agreement is in effect. Distributor Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as the STARS Portfolio's principal underwriter within the meaning of the 1940 Act and as distributor of the STARS Portfolio's shares pursuant to an agreement which is renewable annually. Bear Stearns is entitled to receive the sales load described under "How to Buy Shares" and payments under the STARS Portfolio's Di stribution and Shareholder Servicing Plan described below. STARS Portfolio's Custodian and Transfer Agent Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the STARS Portfolio's custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the STARS Portfolio's transfer agent, dividend disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also provides certain administrative services to the STARS Portfolio. Master Series' Custodian and Transfer Agent Custodial Trust Company also is the Master Series' custodian. PFPC International Ltd., 80 Harcourt Street, Dublin 2, Ireland, is the Master Series' transfer agent, dividend disbursing agent and registrar. PFPC International Ltd. also provides accounting services to the Master Series. Distribution and Shareholder Servicing Plan The STARS Portfolio has adopted a Rule 12b-1 Plan under which it pays Bear Stearns at the annual rate of .50% of Class A's average daily net assets and 1% of Class C's average daily net assets. Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the STARS Portfolio pays Bear Stearns for distributing STARS Portfolio shares and for providing personal services to, and/or maintaining accounts of, STARS Portfolio shareholders a fee at the annual rate of .50% and 1% of the average daily net assets of Class A and Class C, respectively. Under the Plan, Bear Stearns may pay third parties in respect of these services such amount as it may determine. The fees paid to Bear Stearns under the Plan are payable without regard to actual expenses incurred. The STARS Portfolio understands that these third parties also may charge fees to their clients who are beneficial owners of STARS Portfolio shares in connection with their client accounts. These fees would be in addition to any amounts which may be received by them from Bear Stearns under the Plan. Expense Limitation BSFM has undertaken until such time as it gives investors at least 60 days' notice to the contrary that, if in any fiscal year, certain expenses, including the investment advisory fee and fees under the Plan, exceed 1.5% of Class A's average daily net assets and 2% of Class C's average daily net assets for the fiscal year, BSFM may waive a portion of its investment advisory fee or bear other expenses to the extent of the excess expense. How to Buy Shares General An initial investment is $1,000, $500 for retirement plans; subsequent investments must be at least $250, $100 for retirement plans; specify the Class you wish to purchase. The minimum initial investment is $1,000, or $500 if the investment is for Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant. Subsequent investments ordinarily must be at least $250 or $100 for retirement plans. Share certificates are issued only upon written request. No certificates are issued for fractional shares. The STARS Portfolio reserves the right to reject any purchase order. The STARS Portfolio reserves the right to vary the initial and subsequent investment minimum requirements at any time. Investments by employees of Bear Stearns and its affiliates are not subject to minimum investment requirements. Purchases of the STARS Portfolio's shares may be made through a brokerage account maintained with Bear Stearns or through certain investment dealers who are members of the National Association of Securities Dealers, Inc. who have sales agreements with Bear Stearns (an "Authorized Dealer"). Purchases of the STARS Portfolio's shares also may be made directly through the Transfer Agent. When purchasing STARS Portfolio's shares, investors must specify which Class is being purchased. Purchases are effected at the public offering price next determined after a purchase order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent (the "trade date"). Payment for STARS Portfolio shares generally is due to Bear Stearns or the Authorized Dealer on the third business day (the "settlement date") after the trade date. Investors who make payment before the settlement date may permit the payment to be held in their brokerage accounts or may designate a temporary investment for payment until the settlement date. If a temporary investment is not designated, Bear Stearns or the Authorized Dealer will benefit from the temporary use of the funds if payment is made before the settlement date. Purchases can be made through Bear Stearns account executives, Authorized Dealers or the Transfer Agent. Purchases through Bear Stearns account executives or Authorized Dealers may be made by check (except that a check drawn on a foreign bank will not be accepted), Federal Reserve draft or by wiring Federal Funds with funds held in brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal Reserve drafts should be made payable as follows: (i) to Bear Stearns or an investor's Authorized Dealer or (ii) to "STARS Portfolio" if purchased directly from the STARS Portfolio, and should be directed to the Transfer Agent: PFPC Inc., Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960. Payment by check or Federal Reserve draft must be received within three business days of receipt of the purchase order by Bear Stearns or an Authorized Dealer. Orders placed directly with the Transfer Agent must be accompanied by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding payment promptly to the Fund. The Fund will charge $7.50 for each wire redemption. The payment proceeds of a redemption of shares recently purchased by check may be delayed as described under "How to Redeem Shares." Investors who are not Bear Stearns clients may purchase STARS Portfolio shares through the Transfer Agent. To make an initial investment in the STARS Portfolio, an investor must establish an account with the STARS Portfolio by furnishing necessary information to the Fund. An account with the STARS Portfolio may be established by completing and signing the Account Information Form indicating which Class of shares is being purchased, a copy of which is attached to this Prospectus, and mailing it, together with a check to cover the purchase, to PFPC Inc., Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960. Subsequent purchases of shares may be made by checks made payable to the Fund and directed to the address set forth in the preceding paragraph. The STARS Portfolio account number should appear on the check. Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer Agent before the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., New York time) on any day the STARS Portfolio calculates its net asset value are priced according to the net asset value determined on that date. Purchase orders received after the close of trading on the New York Stock Exchange are priced as of the time the net asset value is next determined. Net asset value is computed daily as of the close of regular trading on the New York Stock Exchange. Shares of the STARS Portfolio are sold on a continuous basis. Net asset value per share is determined as of the close of regular trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New York time) on each business day. The net asset value per share of each Class of the STARS Portfolio is computed by dividing the value of the STARS Portfolio's net assets represented by such Class (i.e., the value of its assets less liabilities) by the total number of shares of such Class outstanding. The STARS Portfolio's investments are valued based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by, or in accordance with procedures established by, the Master Fund's Board of Trustees. For further information regarding the methods employed in valuing the STARS Portfolio's investments, see "Determination of Net Asset Value" in the STARS Portfolio's Statement of Additional Information. Federal regulations require that investors provide a certified Taxpayer Identification Number (a "TIN") upon opening or reopening an account. See "Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the Fund could subject the investor to a $50 penalty imposed by the Internal Re venue Service (the "IRS"). Class A Shares The sales charge may vary depending on the dollar amount invested in the STARS Portfolio. The public offering price for Class A shares of the STARS Portfolio is the net asset value per share of that Class plus a sales load, which is imposed in accordance with the following schedule:
- ------------------------------------------------------------------------------------ TOTAL SALES LOAD ------------------------------ AS A % OF AS A % OF DEALER CONCESSIONS OFFERING PRICE NET ASSET VALUE AS A % AMOUNT OF TRANSACTION PER SHARE PER SHARE OF OFFERING PRICE* - ------------------------------------------------------------------------------------ Less than $50,000................. 4.75% 4.99% 4.25% $50,000 to less than $100,000..... 4.25 4.44 3.75 $100,000 to less than $250,000.... 3.75 3.90 3.25 $250,000 to less than $500,000.... 3.25 3.36 3.00 $500,000 to less than $750,000.... 2.75 2.83 2.50 $750,000 to less than $1,000,000.. 2.25 2.30 2.00 $1,000,000 and above.............. 0.00 0.00 0.00 - -----
* Until further notice to the contrary, the full amount of the sales load will be reallowed as a dealer concession. There is no initial sales charge on purchases of $1,000,000 or more of Class A shares. However, if an investor purchases Class A shares without an initial sales charge as part of an investment of at least $1,000,000 and redeems those shares within one year after purchase, a CDSC of 1.00% will be imposed at the time of redemption. The terms contained in the section of the Fund's Prospectus entitled "How to Redeem Shares-Contingent Deferred Sales Charge-Class C Shares" are applicable to the Class A shares subject to a CDSC. Letter of Intent and Right of Accumulation apply to such purchases of Class A shares. The dealer concession may be changed from time to time but will remain the same for all dealers. From time to time, Bear Stearns may make or allow additional payments or promotional incentives to dealers that sell Class A shares. In some instances, these incentives may be offered only to certain dealers who have sold or may sell significant amounts of Class A shares. Dealers may receive a larger percentage of the sales load from Bear Stearns than they receive for selling most other funds. Through September 30, 1996,Bear Stearns, at its expense, has agreed to pay Authorized Dealers a fee in respect of the aggregate of all shares of the STARS Portfolio and each other investment company sponsored by Bear Stearns sold to their customers through September 26, 1995. The fee paid is based on the aggregate net asset value of all shares of the STARS Portfolio and each other investment company sponsored by Bear Stearns purchased by customers of the Authorized Dealer during the period ended September 26, 1995, reduced for redemptions during the year ending September 30, 1996. For amounts greater than $1 million but less than $5 million, the fee is .05% of such amount; and for amounts greater than $5 million the fee is .10% of such amount. Any such amount is expected to be paid, on a pro-rata basis, quarterly. Class A shares may be sold at net asset value to (a) Bear Stearns, its affiliates or their respective officers, directors or employees (including retired employees), any partnership of which Bear Stearns is a general partner, any Trustee or officer of the Fund and designated family members of any of the above individuals; (b) qualified retirement plans of Bear Stearns; (c) any employee of McGraw-Hill, Inc. and its affiliates, or their respective spouses and minor children; (d) any employee or registered representative of any Authorized Dealer or their respective spouses and minor children; (e) trustees or directors of investment companies for which Bear Stearns or an affiliate acts as sponsor; (f) any state, county or city, or any instrumentality, department, authority or agency thereof, which is prohibited by applicable investment laws from paying a sales load or commission in connection with the purchase of STARS Portfolio shares; (g) any institutional investment clients including corporate sponsored pension and profit-sharing plans, other benefit plans and insurance companies; (h) any pension funds, state and municipal governments or funds, Taft-Hartley plans and qualified non-profit organizations, foundations and endowments; (i) trust institutions (including bank trust departments) investing on their own behalf or on behalf of their clients; and (j) accounts as to which an Authorized Dealer charges an asset management fee. To take advantage of these exemptions, a purchaser must indicate its eligibility for an exemption to Bear Stearns along with its Account Information Form. Such purchaser agrees to notify Bear Stearns if, at any time of any additional purchases, it is no longer eligible for an exemption. Bear Stearns reserves the right to request certification or additional information from a purchaser in order to verify that such purchaser is eligible for an exemption. Bear Stearns reserves the right to limit the participation of its employees in Class A shares of the STARS Portfolio. Dividends and distributions reinvested in Class A shares of the STARS Portfolio will be made at the net asset value per share on the reinvestment date. Class A shares of the STARS Portfolio also may be purchased at net asset value, with the proceeds from the redemption of shares of an investment company sold with a sales charge or commission and not distributed by Bear Stearns. However, if such investor redeems those shares within one year after purchase, a CDSC of 1.00% will be imposed at the time of redemption. This includes shares of a mutual fund which were subject to a contingent deferred sales charge upon redemption. The purchase must be made within 60 days of the redemption, and Bear Stearns must be notified by the investor in writing, or by the investor's investment professional, at the time the purchase is made. Bear Stearns will offer to pay Authorized Dealers an amount up to 1.00% of the net asset value of shares purchased by the dealers' clients or customers in this manner. In addition, Class A Shares of the STARS Portfolio may be purchased at net asset value by the following customers of a broker that operates a master account for purchasing and redeeming, and otherwise providing shareholder services in respect of Fund shares pursuant to agreements with the Fund or Bear Stearns: (i) investment advisers and financial planners who place trades for their own accounts or for the accounts of their clients and who charge a management, consulting or other fee, (ii) clients of such investment advisers and financial planners if such clients place trades through accounts linked to master accounts of such investment advisers or financial planners on the books and records of such broker and (iii) retirement and deferred compensation plans, and trusts used to fund such plans, including, but not limited to, plans or trusts defined in Section 401(a), 403(b) or 457 of the Code, and "rabbi trusts", provided, in each case, the purchase transaction is effected through such broker. The broker may charge a fee for transactions in STARS Portfolio shares. Class C Shares The public offering price for Class C shares is the next determined net asset value per share of that Class. No initial sales charge is imposed at the time of purchase. A CDSC is imposed, however, on redemptions of Class C shares made within the first year of purchase. See "How to Redeem Shares." Right of Accumulation Investors may qualify for a reduced sales charge. Pursuant to the Right of Accumulation, certain investors are permitted to purchase Class A shares of the STARS Portfolio at the sales charge applicable to the total of (a) the dollar amount then being purchased plus (b) the current public offering price of all Class A shares of the STARS Portfolio, shares of the Fund's other portfolios and shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, then held by the investor. The following purchases of Class A shares may be aggregated for the purposes of determining the amount of purchase and the corresponding sales load: (a) individual purchases on behalf of a single purchaser, the purchaser's spouse and their children under the age of 21 years including shares purchased in connection with a retirement account exclusively for the benefit of such individual(s), such as an IRA, and purchases made by a company controlled by such individual(s); (b) individual purchases by a trustee or other fiduciary account, including an employee benefit plan (such as employer-sponsored pension, profit-sharing and stock bonus plans, including plans under Section 401(k) of the Code, and medical, life and disability insurance trusts); or (c) individual purchases by a trustee or other fiduciary purchasing shares concurrently for two or more employee benefit plans of a single employer or of employers affiliated with each other. Subsequent purchases made under the conditions set forth above will be subject to the minimum subsequent investment of $250 and will be entitled to the Right of Accumulation. Letter of Intent-Class A Shares By checking the appropriate box in the Letter of Intent section of the Account Information Form, investors become eligible for the reduced sales load applicable to the total number of Class A shares of the STARS Portfolio, Class A shares of the Fund's other portfolios and shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, purchased in a 13-month period pursuant to the terms and under the conditions set forth herein. A minimum initial purchase of $1,000 is required. The Transfer Agent will hold in escrow 5% of the amount indicated in the Account Information Form for payment of a higher sales load if the investor does not purchase the full amount indicated in the Account Information Form. The escrow will be released when the investor fulfills the terms of the Letter of Intent by purchasing the specified amount. If an investor's purchases qualify for a further sales load reduction, the sales load will be adjusted to reflect the total purchase at the end of 13 months. If total purchases are less than the amount specified, the investor will be requested to remit an amount equal to the difference between the sales load actually paid and the sales load applicable to the aggregate purchases actually made. If such remittance is not received within 20 days, the Transfer Agent, as attorney-in-fact, will redeem an appropriate number of shares held in escrow to realize the difference. Checking a box in the Letter of Intent section of the Account Information Form does not bind an investor to purchase, or the STARS Portfolio to sell, the full amount indicated at the sales load in effect at the time of signing, but the investor must complete the intended purchase to obtain the reduced sales load. At the time an investor purchases shares of any of the above-listed funds, the investor must indicate its intention to do so under the Letter of Intent section of the Account Information Form. Systematic Investment Plan The STARS Portfolio offers shareholders convenient features and benefits, including the Systematic Investment Plan. The Systematic Investment Plan permits investors to purchase shares of the STARS Portfolio (minimum initial investment of $250 and minimum subsequent investments of $100 per transaction) at regular intervals selected by the investor. Provided the investor's bank or other financial institution allows automatic withdrawals, STARS Portfolio shares may be purchased by transferring funds from the account designated by the investor. At the investor's option, the account designated will be debited in the specified amount, and STARS Portfolio shares will be purchased once a month, on the twentieth day. Only an account maintained at a domestic financial institution which is an Automated Cl earing House member may be so designated. Investors desiring to participate in the Systematic Investment Plan should call the Transfer Agent at 1-800-447-1139 (in Delaware call collect 302-791-1031) to obtain the appropriate forms. The Systematic Investment Plan does not assure a profit and does not protect against loss in declining markets. Since the Systematic Investment Plan involves the continuous investment in the STARS Portfolio regardless of fluctuating price levels of the STARS Portfolio's shares, investors should consider their financial ability to continue to purchase through periods of low price levels. The Fund may modify or terminate the Systematic Investment Plan at any time or charge a service fee. No such fee currently is contemplated. Shareholder Services Exchange Privilege The Exchange Privilege permits easy purchases of other funds in the Bear Stearns family. The Exchange Privilege enables an investor to purchase, in exchange for shares of a Class of the STARS Portfolio, shares of the same Class of the Fund's other portfolios or shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale in the investor's state of residence. These funds have different investment objectives which may be of interest to investors. To use this Privilege, investors should consult their account executive at Bear Stearns, their account executive at an Authorized Dealer or the Transfer Agent to determine if it is available and whether any conditions are imposed on its use. To use this Privilege, exchange instructions must be given to the Transfer Agent in writing or by telephone. A shareholder wishing to make an exchange may do so by sending a written request to the Transfer Agent at the address given above in "How to Buy Shares-General." Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the account application that they do not wish to use this privilege. Shareholders holding share certificates are not eligible to exchange shares of the STARS Portfolio by phone because share certificates must accompany all exchange requests. To add this feature to an existing account that previously did not provide for this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 (in Delaware call collect 302-791-1031) to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing. If the exchanging shareholder does not currently own shares of the portfolio or fund whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and Authorized Dealer of record as the account from which shares are exchanged, unless otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as described below. To participate in the Systematic Investment Plan or establish automatic withdrawal for the new account, however, an exchanging shareholder must file a specific written request. The Exchange Privilege may be modified or terminated at any time, or from time to time, by the Fund on 60 days' notice to the affected portfolio or fund shareholders. The Fund, BSFM and Bear Stearns will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine. In attempting to confirm that telephone instructions are genuine, the Fund will use such procedures as are considered reasonable, including recording those instructions and requesting information as to account registration (such as the name in which an account is registered, the account number, recent transactions in the account, and the account holder's Social Security number, address and/or bank). Before any exchange, the investor must obtain and should review a copy of the current prospectus of the portfolio or fund into which the exchange is being made. Prospectuses may be obtained free of charge from Bear Stearns, any Authorized Dealer or the Transfer Agent. Except in the case of Personal Retirement Plans, the shares being exchanged must have a current value of at least $250; furthermore, when establishing a new account by exchange, the shares being exchanged must have a value of at least the minimum initial investment required for the portfolio or fund into which the exchange is being made; if making an exchange to an existing account, the dollar value must equal or exceed the applicable minimum for subsequent investments. If any amount remains in the investment portfolio from which the exchange is being made, such amount must not be below the minimum account value required by the Portfolio or Fund. Shares will be exchanged at the next determined net asset value; however, except in the instances described below, a sales load may be charged with respect to exchanges of Class A shares into portfolios or funds sold with a sales load. Generally, a sales load will be charged if the shares being exchanged were subject to a sales load which is lower than the sales load to which the shares being purchased are subject or were not subject to any sales load. No CDSC will be imposed on Class C shares at the time of an exchange. The CDSC applicable on redemption of the acquired Class C shares will be calculated from the date of the initial purchase of the Class C shares exchanged. If an investor is exchanging Class A into a portfolio or fund that charges a sales load, the investor may qualify for share prices which do not include the sales load or which reflect a reduced sales load, if the shares of the portfolio or fund from which the investor is exchanging were: (a) purchased with a sales load; (b) acquired by a previous exchange from shares purchased with a sales load; or (c) acquired through reinvestment of dividends or distributions paid with respect to the foregoing categories of shares. To qualify, at the time of the exchange the investor must notify Bear Stearns, the Authorized Dealer or the Transfer Agent. Any such qualification is subject to confirmation of the investor's holdings through a check of appropriate records. No fees currently are charged shareholders directly in connection with exchanges, although the Fund reserves the right, upon not less than 60 days' written notice, to charge shareholders a $5.00 fee in accordance with rules promulgated by the Securities and Exchange Commission. The Fund reserves the right to reject any exchange request in whole or in part. The Exchange Privilege may be modified or terminated at any time upon notice to shareholders. The exchange of shares of one portfolio or fund for shares of another is treated for Federal income tax purposes as a sale of the shares given in exchange by the shareholder and, therefore, an exchanging shareholder may realize a taxable gain or loss. Redirected Distribution Option The Redirected Distribution Option permits investment of investors' dividends and distributions in shares of other funds in the Bear Stearns family. The Redirected Distribution Option enables a shareholder to invest automatically dividends and/or capital gain distributions, if any, paid by the STARS Portfolio in shares of the same Class of another portfolio of the Fund or a fund advised or sponsored by Bear Stearns of which the shareholder is an investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be purchased at the then-current net asset value. If an investor is investing in a Class that charges a CDSC, the shares purchased will be subject on redemption to the CDSC, if any, applicable to the purchased shares. This privilege is available only for existing accounts and may not be used to open new accounts. Minimum subsequent investments do not apply. The Fund may modify or terminate this privilege at any time or charge a service fee. No such fee currently is contemplated. How to Redeem Shares General The redemption price will be based on the net asset value next computed after receipt of a redemption request; in certain instances a CDSC will be charged. Investors may request redemption of STARS Portfolio shares at any time. Redemption requests may be made as described below. When a request is received in proper form, the STARS Portfolio will redeem the shares at the next determined net asset value. If the investor holds STARS Portfolio shares of more than one Class, any request for redemption must specify the Class of shares being redeemed. If the investor fails to specify the Class of shares to be redeemed or if the investor owns fewer shares of the Class than specified to be redeemed, the redemption request may be delayed until the Transfer Agent receives further instructions from the investor, the investor's Bear Stearns account executive or the investor's Authorized Dealer. The Fund imposes no charges (other than any applicable CDSC) when shares are redeemed directly through Bear Stearns. The STARS Portfolio ordinarily will make payment for all shares redeemed within three days after receipt by the Transfer Agent of a redemption request in proper form, except as provided by the rules of the Securities and Exchange Commission. However, if an investor has purchased STARS Portfolio shares by check and subsequently submits a redemption request by mail, the redemption proceeds will not be transmitted until the check used for investment has cleared, which may take up to 15 days. The Fund will reject requests to redeem shares by telephone or wire for a period of 15 days after receipt by the Transfer Agent of the purchase check against which such redemption is requested. This procedure does not apply to shares purchased by wire payment. The Fund reserves the right to redeem investor accounts at its option upon not less than 60 days' written notice if the account's net asset value is $750 or less, for reasons other than market conditions, and remains so during the notice period. Shareholders who have redeemed Class A shares may reinstate their STARS Portfolio account without a sales charge up to the dollar amount redeemed by purchasing Class A shares of the STARS Portfolio within 60 days of the redemption. To take advantage of this reinstatement privilege, shareholders must notify their Bear Stearns account executive, Authorized Dealer or the Transfer Agent at the time the privilege is exercised. Contingent Deferred Sales Charge-Class C Shares Class C shares of the STARS Portfolio are subject to a CDSC of 1% upon redemption within one year of purchase. A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C shares within one year of the date of purchase. No CDSC will be imposed to the extent that the net asset value of the Class C shares redeemed does not exceed (i) the current net asset value of Class C shares acquired through reinvestment of dividends or capital gain distributions, plus (ii) increases in the net asset value of an investor's Class C shares above the dollar amount of all such investor's payments for the purchase of Class C shares held by the investor at the time of redemption. If the aggregate value of Class C shares redeemed has declined below their original cost as a result of the STARS Portfolio's performance, the applicable CDSC may be applied to the then-current net asset value rather than the purchase price. In determining whether a CDSC is applicable to a redemption, the calculation will be made in a manner that results in the lowest possible rate. It will be assumed that the redemption is made first of amounts representing shares acquired pursuant to the reinvestment of dividends and distributions; then of amounts representing the increase in net asset value of Class C shares above the total amount of payments for the purchase of Class C shares made during the preceding year; then of amounts representing shares purchased more than one year prior to the redemption; and, finally, of amounts representing the cost of shares purchased within one year prior to the redemption. For example, assume an investor purchased 100 shares of the STARS Portfolio at $10 per share for a cost of $1,000. Subsequently, the shareholder acquired 5 additional shares through dividend reinvestment. During the first year after the purchase the investor decided to redeem $500 of his or her investment. Assuming at the time of the redemption the net asset value had appreciated to $12 per share, the value of the investor's shares would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the value of the reinvested dividend shares and the amount which represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged at a rate of 1% for a total CDSC of $2.40. The CDSC applicable to Class C shares will be waived in connection with (a) redemptions made within one year after the death or disability, as defined in Section 72(m)(7) of the Code, of the shareholder, (b) redemptions by employees participating in Eligible Benefit Plans, (c) redemptions as a result of a combination of any investment company with the STARS Portfolio by merger, acquisition of assets or otherwise, and (d) a distribution following retirement under a tax-deferred retirement plan or upon attaining age 701/2 in the case of an IRA or Keogh plan or custodial account pursuant to Section 403(b) of the Code. If the Fund's Trustees determine to discontinue the waiver of the CDSC, the disclosure in the STARS Portfolio's prospectus will be revised appropriately. Any STARS Portfolio shares subject to a CDSC which were purchased prior to the termination of such waiver will have the CDSC waived as provided in the STARS Portfolio's prospectus at the time of the purchase of such shares. To qualify for a waiver of the CDSC, at the time of redemption an investor must notify the Transfer Agent or the investor's Bear Stearns account executive or the investor's Authorized Dealer must notify the Distributor. Any such qualification is subject to confirmation of the investor's entitlement. Procedures Shareholders may redeem shares in several ways. Redemption through Bear Stearns or Authorized Dealers Clients with a brokerage account may submit redemption requests to their account executives or Authorized Dealers in person or by telephone, mail or wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request by repurchasing Fund shares from a redeeming shareholder at the shares' net asset value next computed after receipt of the request by Bear Stearns or the Authorized Dealer. Under normal circumstances, within three days, redemption proceeds will be paid by check or credited to the shareholder's brokerage account at the election of the shareholder. Bear Stearns account executives or Authorized Dealers are responsible for promptly forwarding redemption requests to the Transfer Agent. If an investor authorizes telephone redemption, the Transfer Agent may act on telephone instructions from any person representing himself or herself to be a representative of Bear Stearns or the Authorized Dealer and reasonably believed by the Transfer Agent to be genuine. The Fund will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Transfer Agent or the Fund may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Fund nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Redemption through the Transfer Agent Shareholders who are not clients with a brokerage account who wish to redeem shares must redeem their shares through the Transfer Agent by mail; other shareholders also may redeem Fund shares through the Transfer Agent. Mail redemption requests should be sent to the Transfer Agent at: PFPC Inc., Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960. Additional Information about Redemptions A shareholder may have redemption proceeds of $500 or more wired to the shareholder's brokerage account or a commercial bank account designated by the shareholder. A transaction fee of $7.50 will be charged for payments by wire. Questions about this option, or redemption requirements generally, should be referred to the shareholder's Bear Stearns account executive, to any Authorized Dealer, or to the Transfer Agent if the shares are not held in a brokerage account. Written redemption instructions, indicating the portfolio from which shares are to be redeemed, and duly endorsed stock certificates, if previously issued, must be received by the Transfer Agent in proper form and signed exactly as the shares are registered. All signatures must be guaranteed. The Transfer Agent has adopted standards and procedures pursuant to which signature-guarantees in proper form generally will be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations, as well as from participants in the New York Stock Exchange Medallion Signature Program, the Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion Program ("STAMP"). Such guarantees must be signed by an authorized signatory thereof with "Signature Guaranteed" appearing with the shareholder's signature. If the signature is guaranteed by a broker or dealer, such broker or dealer must be a member of a clearing corporation and maintain net capital of at least $100,000. Signature-guarantees may not be provided by notaries public. Redemption requests by corporate and fiduciary shareholders must be accompanied by appropriate documentation establishing the authority of the person seeking to act on behalf of the account. Investors may obtain from the Fund or the Transfer Agent forms of resolutions and other documentation which have been prepared in advance to assist compliance with the Portfolio's procedures. Any questions with respect to signature-guarantees should be directed to the Transfer Agent by calling 1-800-447-1139 (in Delaware call collect 302-791-1031). During times of drastic economic or market conditions, investors may experience difficulty in contacting Bear Stearns or Authorized Dealers by telephone to request a redemption of STARS Portfolio shares. In such cases, investors should consider using the other redemption procedures described herein. Use of these other redemption procedures may result in the redemption request being processed at a later time than it would have been if telephone redemption had been used. During the delay, the STARS Portfolio's net asset value may fluctuate. Automatic Withdrawal Automatic Withdrawal permits investors to request withdrawal of a specified dollar amount (minimum of $25) on either a monthly or quarterly basis if the investor has a $5,000 minimum account. An application for Automatic Withdrawal can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal may be ended at any time by the investor, the Fund or the Transfer Agent. Shares for which certificates have been issued may not be redeemed through Automatic Withdrawal. Purchases of additional shares concurrent with withdrawals generally are undesirable. Class C shares withdrawn pursuant to the Automatic Withdrawal will be subject to any applicable CDSC. Purchases of additional Class A shares where the sales load is imposed concurrently with withdrawals of Class A shares generally are undesirable. Dividends, Distributions and Taxes Dividends will be automatically reinvested in additional STARS Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. The STARS Portfolio ordinarily pays dividends from net investment income and distributes net realized securities gains, if any, once a year, but it may make distributions on a more frequent basis to comply with the distribution requirements of the Code, in all events in a manner consistent with the provisions of the 1940 Act. The STARS Portfolio will not make distributions from net realized securities gains unless capital loss carryovers, if any, have been utilized or have expired. Dividends are automatically reinvested in additional STARS Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. All expenses are accrued daily and deducted before declaration of dividends to investors. Dividends paid by each Class of the STARS Portfolio will be calculated at the same time and in the same manner and will be of the same amount, except that the expenses attributable solely to a particular Class will be borne exclusively by such Class. Class C shares will receive lower per share dividends than Class A shares because of the higher expenses borne by Class C. See "Fee Table." Dividends derived from net investment income, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or disposition of certain market discount bonds, paid by the STARS Portfolio will be taxable to U.S. shareholders as ordinary income whether received in cash or reinvested in additional shares of the STARS Portfolio or redirected into another portfolio or fund. Distributions from net realized long-term securities gains of the STARS Portfolio will be taxable to U.S. shareholders as long-term capital gains for Federal income tax purposes, regardless of how long shareholders have held their STARS Portfolio's shares and whether such distributions are received in cash or reinvested in, or redirected into other, shares. The Code provides that the net capital gain of an individual generally will not be subject to Federal income tax at a rate in excess of 28%. Dividends and distributions may be subject to state and local taxes. Dividends, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or other disposition of certain market discount bonds, paid by the STARS Portfolio to a foreign investor generally are subject to U.S. nonresident withholding taxes at the rate of 30%, unless the foreign investor claims the benefit of a lower rate specified in a tax treaty. Distributions from net realized long-term securities gains paid by the STARS Portfolio to a foreign investor as well as the proceeds of any redemptions from a foreign investor's account, regardless of the extent to which gain or loss may be realized, generally will not be subject to U.S. nonresident withholding tax. However, such distributions may be subject to backup withholding, as described below, unless the foreign investor certifies his non-U.S. residency status. Notice as to the tax status of investors' dividends and distributions will be mailed to them annually. Investors also will receive periodic summaries of their accounts which will include information as to dividends and distributions from securities gains, if any, paid during the year. The Code provides for the "carryover" of some or all of the sales load imposed on the STARS Portfolio's Class A shares if an investor exchanges such shares for shares of another fund or portfolio advised or sponsored by BSFM or its affiliates within 91 days of purchase and such other fund reduces or eliminates its otherwise applicable sales load for the purpose of the exchange. In this case, the amount of the sales load charged the investor for such shares, up to the amount of the reduction of the sales load charge on the exchange, is not included in the basis of such shares for purposes of computing gain or loss on the exchange, and instead is added to the basis of the fund shares received on the exchange. Federal regulations generally require the Fund to withhold ("backup withholding") and remit to the U.S. Treasury 31% of dividends, distributions from net realized securities gains and the proceeds of any redemption, regardless of the extent to which gain or loss may be realized, paid to a shareholder if such shareholder fails to certify either that the TIN furnished in connection with opening an account is correct or that such shareholder has not received notice from the IRS of being subject to backup withholding as a result of a failure to properly report taxable dividend or interest income on a Federal income tax return. Furthermore, the IRS may notify the Fund to institute backup withholding if the IRS determines a shareholder's TIN is incorrect or if a shareholder has failed to properly report taxable dividend and interest income on a Federal income tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account, and may be claimed as a credit on the record owner's Federal income tax return. The STARS Portfolio is not expected to have any Federal tax liability; although investors should expect to be subject to Federal, state or local taxes in respect of their investment in STARS Portfolio shares. Management of the Fund believes that the STARS Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Code. The STARS Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Such qualification relieves the STARS Portfolio of any liability for Federal income tax to the extent its earnings are distributed in accordance with applicable provisions of the Code. In addition, the STARS Portfolio is subject to a non-deductible 4% excise tax, measured with respect to certain undistributed amounts of taxable investment income and capital gains. Each investor should consult its tax adviser regarding specific questions as to Federal, state or local taxes. Performance Information The STARS Portfolio may advertise its performance in a number of ways. For purposes of advertising, performance for each Class may be calculated on the basis of average annual total return and/or total return. These total return figures reflect changes in the price of the shares and assume that any income dividends and/or capital gains distributions made by the STARS Portfolio during the measuring period were reinvested in shares of the same Class. These figures also take into account any applicable distribution and shareholder servicing fees. As a result, at any given time, the performance of Class C should be expected to be lower than that of Class A. Performance for each Class will be calculated separately. Average annual total return is calculated pursuant to a standardized formula which assumes that an investment in the STARS Portfolio was purchased with an initial payment of $1,000 and that the investment was redeemed at the end of a stated period of time, after giving effect to the reinvestment of dividends and distributions during the period. The return is expressed as a percentage rate which, if applied on a compounded annual basis, would result in the redeemable value of the investment at the end of the period. Advertisements of the STARS Portfolio's performance will include its average annual total return for one, five and ten year periods, or for shorter periods depending upon the length of time during which the STARS Portfolio has operated. Computations of average annual total return for periods of less than one year represent an annualization of the STARS Portfolio's actual total return for the applicable period. Total return is computed on a per share basis and assumes the reinvestment of dividends and distributions. Total return generally is expressed as a percentage rate which is calculated by combining the income and principal changes for a specified period and dividing by the net asset value (or maximum public offering price in the case of Class A shares) per share at the beginning of the period. Class C total return will reflect the deduction of the CDSC. Advertisements may include the percentage rate of total return or may include the value of a hypothetical investment at the end of the period which assumes the application of the percentage rate of total return. Total return for the STARS Portfolio also may be calculated by using the net asset value per share at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class C shares. Calculations based on the net asset value per share do not reflect the deduction of the sales load on the STARS Portfolio's Class A shares, which, if reflected, would reduce the performance quoted. Performance will vary from time to time and past results are not necessarily representative of future results. Investors should remember that performance is a function of portfolio management in selecting the type and quality of portfolio securities and is affected by operating expenses. Performance information, such as that described above, may not provide a basis for comparison with other investments or other investment companies using a different method of calculating performance. Comparative performance information may be used from time to time in advertising or marketing the STARS Portfolio's shares, including data from Lipper Analytical Services, Inc. and other industry publications, and indices such as the S&P 500 and the Dow Jones Industrial Average. General Information The Fund was organized as an unincorporated business trust under the laws of the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994, and commenced operations on or about April 3, 1995. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. The STARS Portfolio's shares are classified into three Classes-Class A, Class C and Class Y. Each share has one vote and shareholders will vote in the aggregate and not by Class, except as otherwise required by law. Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the STARS Portfolio. However, the Trust Agreement disclaims shareholder liability for acts or obligations of the STARS Portfolio and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the STARS Portfolio or a Trustee. The Trust Agreement provides for indemnification from the STARS Portfolio's property for all losses and expenses of any shareholder held personally liable for the obligations of the STARS Portfolio. Thus, the risk of a shareholder incurring financial loss on account of a shareholder liability is limited to circumstances in which the STARS Portfolio itself would be unable to meet its obligations, a possibility which management believes is remote. Upon payment of any liability incurred by the STARS Portfolio, the shareholder paying such liability will be entitled to reimbursement from the general assets of the STARS Portfolio. The Fund's Trustees intend to conduct the operations of the STARS Portfolio in a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the STARS Portfolio. As discussed under "Management of the STARS Portfolio" in the STARS Portfolio's Statement of Additional Information, the STARS Portfolio ordinarily will not hold shareholder meetings; however, shareholders under certain circumstances may have the right to call a meeting of shareholders for the purpose of voting to remove Trustees. To date, the Fund's Board has authorized the creation of five portfolios of shares. All consideration received by the Fund for shares of one of the portfolios and all assets in which such consideration is invested will belong to that portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, one portfolio (and as to classes within a portfolio) are treated separately from those of the other portfolios (and classes). The Fund has the ability to create, from time to time, new portfolios of shares without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, the Rule exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of the Rule. The STARS Portfolio is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to shareholders of the STARS Portfolio or any member of the public regarding the advisability of investing in the STARS Portfolio. S&P's only ongoing relationship with Bear Stearns and its affiliates in connection with the STARS Portfolio is the licensing for a fee of certain S&P trademarks and trade names and the provision of access to the STARS ranking system through a publicly available subscription service of S&P. This license is terminable under circumstances generally described in the STARS Portfolio's Statement of Additional Information under "Information About the STARS Portfolio." BSFM will have no greater access to STARS than any other subscriber to MarketScope. S&P has no obligation to take the needs of Bear Stearns and its affiliates or shareholders of the STARS Portfolio into consideration in operating the STARS system. S&P is not responsible for and has not participated in the determination of the securities to be purchased by the STARS Portfolio. S&P has advised that its Equity Services Group which publishes STARS, operates independently of, and has no access to information obtained by, Standard & Poor's Ratings Services, which may in its regular operations obtain information of a confidential nature. The Transfer Agent maintains a record of share ownership and will send confirmations and statements of account. Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 (in Delaware call collect 302-791-1031) or by calling Bear Stearns at 1-800-766-4111. Appendix Since the investment characteristics of the STARS Portfolio will correspond directly to those of the Master Series, the following is a discussion of the investment techniques used, and certain securities purchased, by the Master Series. Investment Techniques In connection with its investment objective and policies, the Master Series may employ, among others, the following investment techniques which may involve certain risks. Options transactions involve "derivative securities." Options Transactions The Master Series may engage in options transactions. The Master Series may write and sell covered call option contracts to the extent of 20% of the value of its net assets at the time such option contracts are written and may purchase call options to close such positions. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at the exercise price at any time during the option period. The Master Series may purchase call and put options on stock indexes listed on U.S. securities exchanges. A stock index fluctuates with changes in the market values of the stocks included in the index. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Master Series will realize a gain or loss from purchasing options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. The Master Series is permitted to invest in put options in respect of specific securities (or groups or "baskets" of specific securities) in which the Master Series may invest. A put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at the exercise price at any time during the option period. The Master Series may not invest more than 5% of its assets, represented by the premium paid, in the purchase of options at any one time. Successful use by the Master Series of options will be subject to BSFM's ability to predict correctly movement in the direction of individual stocks or the stock market generally. To the extent BSFM's predictions are incorrect, the Master Series may incur losses which could adversely affect the value of a shareholder's investment. Lending Portfolio Securities The Master Series may earn additional income by lending its portfolio securities. From time to time, the Master Series may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. Such loans may not exceed 331/3% of the value of its total assets. In connection with such loans, the Master Series will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Master Series can increase its income through the investment of such collateral. The Master Series continues to be entitled to payments in amounts equal to the interest, dividends and other distributions payable on the loaned security and receives interest on the amount of the loan. Such loans will be terminable at any time upon specified notice. The Master Series might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with the Master Series. Borrowing Money The Master Series may borrow money. As a fundamental policy, the Master Series is permitted to borrow to th extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 331/3% of the value of such company's total assets. However, the Master Series currently intends to borrow money only for temporary or emergency (not leveraging) purposes, in an amount up to 15% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of its total assets, the Master Series will not make any additional investments. Certain Portfolio Securities American Depositary Receipts The Master Series may invest in securities of foreign issuers in the form of American Depositary Receipts. The Master Series' assets may be invested in the securities of foreign issuers in the form of American Depositary Receipts ("ADRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. The Master Series may invest in ADRs through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. Money Market Instruments The Master Series may invest in a variety of money market instruments. The Master Series may invest, in the circumstances described under "Description of the STARS Portfolio-Management Policies," in the following types of money market instruments, each of which at the time of purchase must have or be deemed to have under rules of the Securities and Exchange Commission remaining maturities of 13 months or less. U.S. Government Securities The Master Series may purchase securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, which include U.S. Treasury securities that differ in their interest rates, maturities and times of issuance. Treasury Bills have initial maturities of one year or less; Treasury Notes have initial maturities of one to ten years; and Treasury Bonds generally have initial maturities of greater than ten years. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the U.S. Treasury; others, such as those issued by the Federal National Mortgage Association, by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. Principal and interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so, because it is not so obligated by law. Bank Obligations The Master Series may purchase certificates of deposit, time deposits, bankers' acceptances and other short-term obligations of domestic banks, foreign subsidiaries of domestic banks, foreign branches of domestic banks, and domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, the Master Series may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, the possible imposition of foreign withholding taxes on interest income payable on the securities, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions wh ich might adversely affect the payment of principal and interest on these securities and the possible seizure or nationalization of foreign deposits. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by the Master Series will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. The Master Series will not invest more than 15% of the value of its net assets in time deposits maturing in more than seven days and in other securities that are illiquid. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Repurchase Agreements Repurchase agreements involve the acquisition by the Master Series of an underlying debt instrument, subject to an obligation of the seller to repurchase, and the Master Series to resell, the instrument at a fixed price usually not more than one week after its purchase. Certain costs may be incurred by the Master Series in connection with the sale of the securities if the seller does not repurchase them in accordance with the repurchase agreement. In addition, if bankruptcy proceedings are commenced with respect to the seller of the securities, realization on the securities by the Master Se ries may be delayed or limited. Commercial Paper and Other Short-Term Corporate Obligations Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by the Master Series will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's Investors Service Inc. ("Moody's"), A-1 by the S&P Ratings Group (which operates separately from and independently of S&P's Equity Services Group, which publishes STARS), F-1 by Fitch Investors Service L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), (b) issued by companies having an outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by BSFM to be of comparable quality to those rated obligations which may be purchased by the Master Series. The Master Series may purchase floating and variable rate demand notes and bonds, which are obligations ordinarily having stated maturities in excess of one year, but which permit the holder to demand payment of principal at any time or at specified intervals. Investment Company Securities The Master Series may invest in securities of other investment companies which are ranked by STARS. The Master Series may invest in securities issued by other investment companies which are ranked by STARS. Under the 1940 Act, the Master Series' investment in such securities currently is limited to, subject to certain exceptions, (i) 3% of the total voting stock of any one investment company, (ii) 5% of the Master Series' total assets with respect to any one investment company and (iii) 10% of the Master Series' total assets in the aggregate. Investments in the securities of other investment companies will involve duplication of advisory fees and certain other expenses. Illiquid Securities The Master Series may purchase illiquid securities. The Master Series may invest up to 15% of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with its investment objective. Such securities may include securities that are not readily marketable, such as certain securities that are subject to legal or contractual restrictions on resale and repurchase agreements providing for settlement in more than seven days after notice. As to these securities, the Master Series is subject to a risk that should it desire to sell them when a ready buyer is not available at a price it deems representative of their value, the value of its net assets could be adversely affected. The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Distributor Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 Investment Adviser Bear Stearns Funds Management Inc. 245 Park Avenue New York, NY 10167 Custodian Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 Transfer & Dividend Disbursement Agent PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 Counsel Stroock & Stroock & Lavan 7 Hanover Square New York, NY 10004-2696 Independent Auditors Deloitte & Touche Deloitte & Touche House Earlsfort Terrace Dublin 2, Ireland NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE STARS PORTFOLIO'S PROSPECTUS AND IN THE STARS PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE STARS PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THE STARS PORTFOLIO'S PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. BSF-P-001-04 THE BEAR STEARNS FUNDS 245 PARK AVENUE NEW YORK, NY 10167 1-800-766-4111 PROSPECTUS S&P STARS Portfolio Class Y Shares Only S&P STARS Portfolio (the "STARS Portfolio") is a separate non-diversified portfolio of The Bear Stearns Funds (the "Fund"), an open-end management investment company, known as a mutual fund. The STARS Portfolio's investment objective is to provide investment results that exceed the total return of publicly traded common stocks in the aggregate, as represented by the Standard & Poor's 500 Stock Index (the "S&P 500"). As its investment strategy, the investment adviser principally uses Standard & Poor's ("S&P") STock Appreciation Ranking System (or STARS) to identify a universe of securities in the highest category (which is five stars) to evaluate for purchase and in the lowest category (which is one star) to evaluate for short selling. The investment adviser believes that this approach will provide opportunities to achieve performance that exceeds the S&P 500's total return. The STARS Portfolio invests all of its assets in the S&P STARS Master Series (the "Master Series") of S&P STARS Fund (the "Master Fund"), an open-end management investment company, rather than in a portfolio of securities. This arrangement typically is known as a "master-feeder" structure. The Master Series has the same investment objective as the STARS Portfolio. Therefore, the STARS Portfolio's investment experience will correspond directly with the Master Series' investment experience. Master Series' shares may be purchased only by other investment companies or similar accredited investors. By this Prospectus, Class Y shares of the STARS Portfolio are being offered. Class Y shares are sold at net asset value without a sales charge to investors whose minimum investment is $2.5 million. The STARS Portfolio issues other Classes of shares which have sales charges and different expenses which would affect performance. Investors desiring to obtain information about these other Classes of shares should call 1-800-766-4111 or ask their sales representative or the STARS Portfolio's distributor. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the Master Series' investment adviser. Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as the STARS Portfolio's distributor. ---------------- This Prospectus sets forth concisely information about the STARS Portfolio that you should know before investing. It should be read and retained for future reference. Part B (also known as the Statement of Additional Information), dated June 20, 1996, which may be revised from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, write to the address or call one of the telephone numbers listed under "General Information" in this Prospectus. ---------------- Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. The net asset value of funds of this type will fluctuate. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AN D EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. June 20, 1996 Table of Contents PAGE Fee Table........................... 3 Condensed Financial Information..... 4 Description of the STARS Portfolio.. 5 Risk Factors........................ 9 Management of the STARS Portfolio... 10 How to Buy Shares................... 12 Shareholder Services................ 13 How to Redeem Shares................ 14 Dividends, Distributions and Taxes.. 16 Performance Information............. 17 General Information................. 17 Appendix............................ A-1 FEE TABLE* - ---------------------------------------------------------------------------- CLASS Y - ----------------------------------------------------------------------------- Shareholder Transaction Expenses Maximum Sales Load Imposed on Purchases (as a percentage of offering price)**................................ Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of the amount subject to charge)......................None Annual STARS Portfolio Operating Expenses (as a percentage of average daily net assets) Master Series Management Fees (after fee waiver)*** .................... 0.00% 12b-1 Fees.............................................................. None Other Expenses (after expense reimbursement)***........................ 1.00% Total STARS Portfolio Operating Expenses (after fee waiver and expense reimbursement)***.......................1.00% Example: You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period: 1 Year................................................................. $ 10 3 Years................................................................ $ 32 5 Years................................................................ $ 55 10 Years................................................................ $122 - ----- * This fee table summarizes the expenses of both the STARS Portfolio and the Master Series. The Board of Trustees believes that the aggregate per share expenses of the STARS Portfolio and the Master Series will be less than or equal to the expenses which the STARS Portfolio would incur if the STARS Portfolio retained the services of an investment adviser and the assets of the STARS Portfolio were invested directly in the type of securities being held by the Master Series. See the text following this table. ** Other mutual funds may invest in the Master Series and such other funds' expenses and, correspondingly, investment returns may differ from those of the STARS Portfolio. *** BSFM has undertaken to waive its investment advisory fee and assume certain expenses of the Master Series and the STARS Portfolio other than brokerage commissions, extraordinary items, interest and taxes to the extent Total STARS Portfolio Operating Expenses exceed 1.00% for Class Y. Without such waiver and expense reimbursement, Master Series Management Fees stated above would be 0.75%, Other Expenses would be 1.24% and Total STARS Portfolio Operating Expenses would be 1.99% for Class Y. The amounts listed in the example should not be considered as representative of past or future expenses and actual expenses may be greater or less than those indicated. Moreover, while the example assumes a 5% annual return, the STARS Portfolio's actual performance will vary and may result in an actual return greater or less than 5%. The purpose of the foregoing table is to assist you in understanding the costs and expenses borne by the STARS Portfolio and investors, the payment of which will reduce investors' annual return. In addition to the expenses noted above, the Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For a description of the expense reimbursement or waiver arrangements in effect, see "Management of the STARS Portfolio." Condensed Financial Information The information in the table below covering the STARS Portfolio's investment results for the period indicated has been audited by Deloitte & Touche. Further financial data and related notes appear in the STARS Portfolio's Annual Report for the fiscal year ended March 31, 1996 which is incorporated by reference into the STARS Portfolio's Statement of Additional Information which is available upon request. Financial Highlights Contained below is per share operating performance data, total investment return, ratios to average net assets and other supplemental data for a Class Y share of the STARS Portfolio for the period August 7, 1995 (commencement of initial public offering) to March 31,1996. This information has been derived from information in the STARS Portfolio's financial statements. - ------------------------------------------------------------------------------- CLASS Y - ------------------------------------------------------------------------------- Per Share Operating Performance* Net asset value, beginning of period....................................$14.13 ------- Net investment income (1)............................................... 0.07 Net realized and unrealized gain on investment (2)...................... 1.20 ------ Net increase in net assets resulting from operations.................... 1.27 ------ Dividends and distributions to shareholders from: Net investment income.................................................... (0.03) Net realized capital gains................................................(0.40) ------ (0.43) ----- Net asset value, end of period...........................................$14.97 ======= Total investment return (3).............................................. 9.09% ====== Ratios/Supplemental Data Net assets, end of period (000's omitted)................................$8,779 Ratio of expenses to average net assets (1)(4)........................... 1.00% Ratio of net investment income/(loss) to average net assets (1)(4)....... 0.82% Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements (4)(5)................. 0.99% - ----- * Calculated based on shares outstanding on the first and last day of the period, except for dividends and distributions, if any, which are based on actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amount shown for a share outstanding throughout the period is not in accord with the change in the aggregate gains and losses in investments during the period because of the timing of sales and repurchases of STARS Portfolio shares in relation to fluctuating net asset value during the period. (3) Total return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total return is not annualized. (4) Annualized. (5) Includes the STARS Portfolio's share of Master Series' expenses. Contained below are ratios to average net assets and other supplemental data for the Master Series for the period April 5, 1995 (commencement of investment operations) to March 31, 1996. This information has been derived from information provided in the Master Series' financial statements. Ratios/Supplemental Data Net assets, end of period (000's omitted)...............................$82,028 Ratio of expenses to average net assets (1)(2).......................... 0.19% Ratio of net investment income to average net assets (1)(2)............. 1.36% Decrease reflected in above expense ratios and net investment income due to waivers and reimbursements (2)........................... 0.91% Portfolio turnover rate (3)..............................................295.97% Average commission rate per share........................................ $0.06 - ----- (1) Reflects waivers and reimbursements. (2) Annualized. (3) Not annualized. Further information about performance is contained in the STARS Portfolio's Annual Report, which may be obtained without charge by writing to the address or calling one of the telephone numbers listed under "General Information." Description of the STARS Portfolio General The Fund is a "series fund." It is part of a "master-feeder" arrangement. The Fund is a "series fund," which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the Investment Company Act of 1940, as amended (the "1940 Act"), and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As described below, for certain matters Fund shareholders vote together as a group; as to others they vote separately by portfolio. By this Prospectus, shares of the STARS Portfolio are being offered. From time to time, other portfolios may be established and sold pursuant to other offering documents. See "General Information." The STARS Portfolio is part of a so-called "master-feeder" structure. As such, it invests all of its assets in the Master Series, a separate series of the Master Fund, which has the same investment objective as the STARS Portfolio. See "Investment Objective" and "Management Policies" below. The Master Fund is organized as a trust under the laws of the State of Delaware. See "Management of the STARS Portfolio." In addition to selling its shares to the STARS Portfolio, the Master Series may sell its shares to certain other mutual funds or institutional investors. Information regarding additional options, if any, for investment in shares of the Master Series may be obtained by contacting PFPC International Ltd., Attention: S&P STARS Master Series, 80 Harcourt Street, Dublin 2, Ireland or by calling (353) 1 790 3500. The expenses and, correspondingly, the returns of other investment options in the Master Fund may differ from those of the STARS Portfolio. A master-feeder arrangement should provide benefits to shareholders; under certain circumstances, it can give rise to some additional risk. The Fund's Board of Trustees believes that, if other mutual funds or institutional investors invest their assets in the Master Series, certain economies of scale may be realized. For example, fixed expenses that otherwise would have been borne solely by the STARS Portfolio would be spread among a larger asset base provided by more than one fund investing in the Master Series. The STARS Portfolio and other entities investing in the Master Series will each be liable for all obligations of the Master Series. However, the risk of the STARS Portfolio incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance existed and the Master Fund itself was unable to meet its obligations. Accordingly, the Fund's Board of Trustees believes that neither the STARS Portfolio nor its shareholders will be adversely affected by reason of investing their assets in the Master Series. However, if a mutual fund or institutional investor with a large pro rata ownership of the Master Series' securities withdraws its investment from the Master Series, the economies of scale (e.g., spreading fi xed expenses among a larger asset base) that the Fund's Board believes should be available through investment in the Master Series may not be fully achieved. The Master Series' investment objective and other fundamental policies, which are the same as those of the STARS Portfolio, cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Master Series' outstanding voting shares. Whenever the STARS Portfolio, as the Master Series' shareholder, is requested to vote on matters pertaining to the Master Series, the STARS Portfolio will hold a meeting of its shareholders to consider such matters and the STARS Portfolio will cast its votes in proportion to the votes received from STARS Portfolio shareholders. The STARS Portfolio will vote Master Series shares for which it receives no voting instructions in the same proportion as the votes received from STARS Portfolio shareholders. In addition, certain policies of the Master Series which are non-fundamental could be changed by vote of a majority of the Master Fund's Trustees without shareholder vote. If the Master Series' investment objective or fundamental or non-fundamental policies are changed, the STARS Portfolio could subsequently change its objective or policies to correspond to those of the Master Series or the STARS Portfolio could redeem its Master Series shares and either seek a new investment company with a matching objective in which to invest or retain its own investment adviser to manage its portfolio in accordance with its objective. In the latter case, the STARS Portfolio's inability to find a substitute investment company in which to invest or equivalent management services could adversely affect shareholders' investments in the STARS Portfolio. The STARS Portfolio will provide shareholders with 30 days' written notice prior to any change in the investment objective of the STARS Portfolio or Master Series, to the extent possible. Investment Objective The STARS Portfolio seeks to provide investment results that exceed the total return of publicly traded common stocks, in the aggregate, as represented by the S&P 500. The STARS Portfolio's investment objective is to provide investment results that exceed the total return of publicly traded common stocks, in the aggregate, as represented by the S&P 500. The STARS Portfolio's investment objective cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of its outstanding voting shares. The Master Series' investment objective, which is the same as the STARS Portfolio's, cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of its outstanding voting shares. Shareholders of the STARS Portfolio will be provided the opportunity to vote on any proposed change to the Master Series' investment objective, and the STARS Portfolio will vote on any such proposal in proportion to the votes received from STARS Portfolio shareholders. See "General" above. There can be no assurance that the investment objective of the STARS Portfolio or Master Series will be achieved. STARS STARS is S&P's proprietary stock ranking system. It is used by BSFM to identify a universe of securities in the highest category to evaluate for purchase and in the lowest category to evaluate for short selling. STARS ranks on a scale from five stars (highest) to one star (lowest) the stocks of approximately 1,100 issuers analyzed by S&P's research staff of securities analysts. STARS represents the evaluation of S&P's analysts of the short-term (up to 12 months) appreciation potential of the evaluated stocks. The rankings are as follows: ***** Buy-Expected to be among the best performers over the next 12 months and to rise in price. **** Accumulate-Expected to be an above-average performer. *** Hold-Expected to be an average performer. ** Avoid-Expected to be a below-average performer. * Sell-Expected to be a well-below-average performer and to fall in price. STARS was introduced by S&P in January 1987. Since 1993, on average, the five star category has consisted of approximately 95 stocks, the four star category has consisted of approximately 375 stocks, the three star category has consisted of approximately 525 stocks, the two star category has consisted of approximately 100 stocks, and the one star category has consisted of between approximately 14 and 23 stocks. Rankings may change frequently as developments affecting individual securities and the markets are considered by the S&P analysts. For purposes of evaluating the performance of stocks in the various categories-and thus of the performance of its analysts-S&P has created a model which initially equally weights by dollar amount the stocks in the various categories, does not rebalance the portfolio based on changes in values or rankings and does not take into account dividends or transaction costs. STARS is only a model; it does not reflect actual investment performance. While its performance cannot be used to predict actual results, S&P believes it is useful in evaluating the capability of its analysts. Investors should recognize that the pool of S&P analysts changes and their past performance is not necessarily predictive of future results either of the model or of the STARS Portfolio. From January 1, 1987 through March 31, 1996: The S&P 500 (measured on a total return basis, without dividend reinvestment)* increased by 166.55%. The ranked stocks, measured as described above, changed in value as follows*: Five stars -+353.64% Four stars -+220.18% Three stars -+146.37% Two stars -+116.87% One star - -36.83% - ----- * During this period, the average dividend yields on securities included in the S&P 500 and the securities ranked five stars were approximately 3.1% and 1.9%, respectively. The STARS Portfolio believes that this information should be used by investors only in their consideration that, historically, the five star stocks, measured as described above, have significantly outperformed lower ranked stocks and the one star stocks, similarly measured, have significantly underperformed the higher ranked stocks. This information should not be used to predict whether the results will occur in the future or the actual performance of a particular category. STARS performance has been more volatile than that of conventional indices such as the Dow Jones Industrial Average and the S&P 500. In addition, at times, lower ranked STARS categories have out-performed higher ranked STARS categories and higher ranked STARS categories have under-performed the S&P 500. Specifically, the performance of five star and one star stocks has not consistently exceeded or fallen below the performance of the S&P 500. In some years, one star stocks have outperformed the S&P 500 as well as five star stocks; in other years, both one and five star stocks have outperformed the S&P 500. In 1994, one star stocks outperformed the S&P 500, which in turn outperformed five star stocks. In 1995, the S&P 500 outperformed five star stocks, which in turn outperformed one star stocks. Investors also should consider that the Master Series is managed actively-and, thus, its performance will depend materially on BSFM's investment determinations-and will incur transaction and other costs, including management fees, which are not reflected in the foregoing information. STARS is available to the public through various S&P publications. BSFM has access to STARS through S&P's MarketScope, a computer-accessed subscription service available for an annual fee, currently with more than 72,000 subscribers. Management Policies General As part of a master-feeder arrangement, the STARS Portfolio invests all its assets in the Master Series, which has the same investment objective as the STARS Portfolio. The STARS Portfolio invests all of its assets in the Master Series, which has the same investment objective as the STARS Portfolio. The STARS Portfolio may withdraw its investment in the Master Series at any time, if the Fund's Board of Trustees determines that it is in the best interests of the STARS Portfolio to do so. Upon any such withdrawal, the Fund's Board of Trustees would consider what action should be taken, including investing all the STARS Portfolio's assets in another pooled investment entity having the same investment objective as the STARS Portfolio, or retaining an investment adviser to manage the STARS Portfolio's assets in accordance with the policies described below. Since the investment characteristics of the STARS Portfolio will correspond directly to those of the Master Series, the following is a discussion of the management policies used by the Master Series. The Master Series invests primarily in equity securities that, at the time of purchase were ranked as five stars in STARS or at their time of short sale were ranked as one star in STARS. As its investment strategy, BSFM uses STARS to identify a universe of securities in the five star category to evaluate for purchase and in the one star category to evaluate for short selling. BSFM anticipates that at least 85% of the value of the Master Series' total assets (except when maintaining a temporary defensive position) will be invested in common stocks that, at their time of purchase, were ranked as five stars in STARS or, at their time of short sale, were ranked as one star in STARS. The Master Series may invest up to 15% of its assets in common stocks without regard to STARS ranking, if BSFM believes that such securities offer opportunities for capital appreciation BSFM will not seek to replicate STARS performance and will not necessarily sell a security once it has been downgraded from five stars or cover a short position once it has been upgraded from one star. From time to time, certain closed-end investment companies are ranked by STARS and will be eligible for purchase by the Master Series. The Master Series may invest, in anticipation of investing cash positions and, without limitation, for termporary defensive purposes, in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase ag reements, as set forth in the Appendix. Investment Techniques The Master Series may engage in short selling, lending portfolio securities, and options transactions, each of which involves risk. The Master Series may engage in various investment techniques, such as short selling, lending portfolio securities, and options transactions, each of which involves risk. Options transactions involve "derivative securities." Short selling is discussed below. For a discussion of these other investment techniques and their related risks, see "Appendix-Investment Techniques" and "Risk Factors" below. Short sales are transactions in which the Master Series sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Master Series must borrow the security to make delivery to the buyer. The Master Series then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Master Series. Until the security is replaced, the Master Series is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Master Series also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Until the Master Series replaces a borrowed security in connection with a short sale, the Master Series will: (a) maintain daily a segregated account, containing cash, cash equivalents or U.S. Government securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position in accordance with positions taken by the Staff of the Securities and Exchange Commission. The Master Series will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Master Series replaces the borrowed security. The Master Series will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Master Series may be required to pay in connection with a short sale. The Master Series may purchase call options to provide a hedge against an increase in the price of a security sold short by the Master Series. See "Appendix-Investment Techniques-Options Transactions." The Master Series anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Master Series' net assets. The Master Series may not sell short the securities of any single issuer listed on a national securities exchange to the extent of more than 5% of the value of its net assets. The Master Series may not sell short the securities of any class of an issuer to the extent, at the time of the transaction, of more than 2% of the outstanding securities of that class. In addition to the short sales discussed above, the Master Series may make short sales "against the box," a transaction in which the Master Series enters into a short sale of a security which the Master Series owns. The proceeds of the short sale will be held by a broker until the settlement date at which time the Master Series delivers the security to close the short position. The Master Series receives the net proceeds from the short sale. The Master Series at no time will have more than 15% of the value of its net assets in deposits on short sales against the box. It currently is anticipated that the Master Series will make short sales against the box for purposes of protecting the value of the Master Series' net assets. Certain Fundamental Policies Certain of the STARS Portfolio's and Master Series' investment policies are fundamental policies that can be changed only by shareholder vote. The STARS Portfolio and the Master Series may (i) borrow money to the extent permitted under the 1940 Act; and (ii) invest up to 25% of the value of its total assets in the securities of issuers in a single industry, provided that there is no such limitation on investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. This paragraph describes fundamental policies that cannot be changed as to the STARS Portfolio or the Master Series without approval by the holders of a majority (as defined in the 1940 Act) of the outstanding voting securities of the STARS Portfolio or the Master Series, as the case may be. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Certain Additional Non-Fundamental Policies The STARS Portfolio and the Master Series may (i) purchase securities of any company having less than three years' continuous operation (including operations of any predecessors) if such purchase does not cause the value of its investments in all such companies to exceed 5% of the value of its total assets; (ii) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to secure permitted borrowings; and (iii) invest up to 15% of the value of its net assets in repurchase agreements providing for settlement in more than seven days after notice and in other illiquid securities. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Risk Factors No investment is free from risk. Investing in the STARS Portfolio will subject investors to certain risks which should be considered. General Since the investment characteristics and, therefore, investment risks associated with such characteristics of the STARS Portfolio will correspond directly to those of the Master Series, the following is a discussion of the risks associated with an investment in the Master Series. Net Asset Value Fluctuations The Master Series' net asset value is not fixed and should be expected to fluctuate. Investors should purchase STARS Portfolio shares only as a supplement to an overall investment program and only if investors are willing to undertake the risks involved, including the potential loss of a significant portion of their investment. Equity Securities Investors should be aware that equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and that fluctuations can be pronounced. Changes in the value of the common stocks in the Master Series' portfolio will result in changes in the value of its shares and thus its yield and total return to investors. STARS Performance STARS rankings are the subjective determination of S&P's analysts. The pool of these analysts changes. Past performance of securities and issuers included in STARS cannot be used to predict future results of the Master Series, which is managed actively by BSFM and the results of which should be expected to vary from the performance of STARS. None of the STARS Portfolio, Bear Stearns or BSFM have any ongoing relationship with S&P regarding the STARS Portfolio other than the right for a fee to use the S&P, Standard & Poor's and STARS trademarks in connection with the management of mutual funds and access to STARS through S&P's publicly available subscription service. Certain Investment Techniques The use of investment techniques, such as short selling, lending portfolio securities and engaging in options transactions, involves greater risk than that incurred by many other funds with a similar objective. See "Appendix-Investment Techniques." The Master Series' ability to engage in certain short-term transactions may be limited by the requirement that, for the STARS Portfolio to qualify as a regulated investment company, it must earn less than 30% of its gross income from the disposition of securities held for less than three months. This 30% test limits the extent to which the Master Series may sell securities held for less than three months, effect short sales of securities held for less than three months, and write options expiring in less than three months, among other strategies. Except for this requirement, the amount of portfolio activity will not be a limiting factor when making portfolio decisions. Under normal market conditions, the Master Series' portfolio turnover rate generally will not exceed 150%. However, the portfolio turnover rate may exceed this rate, when the BSFM believes the anticipated benefits of short-term investments outweigh any increase in transaction costs or increase in short-term gains. Higher portfolio turnover rates are likely to result in comparatively greater brokerage commissions or transaction costs. Short-term gains realized from portfolio transactions are taxable to shareholders as ordinary income. See "Portfolio Transactions" in the STARS Portfolio's Statement of Additional Information. Non-Diversified Status The Master Series', and thus the STARS Portfolio's, classification as a "non-diversified" investment company means that the proportion of its assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. A "diversified" investment company is required by the 1940 Act generally, with respect to 75% of its total assets, to invest not more than 5% of such assets in the securities of a single issuer and to hold not more than 10% of the outstanding voting securities of a single issuer. However, the Master Series intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which requires that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of the Master Series' total assets be invested in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Master Series' total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets be invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). Since a relatively high percentage of the Master Series' assets may be invested in the securities of a limited number of issuers, some of which may be within the same industry or economic sector, the Master Series' portfolio securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company. Simultaneous Investments Investment decisions for the Master Series are made independently from those of other investment companies or accounts advised by BSFM. However, if such other investment companies or accounts are prepared to invest in, or desire to dispose of, securities of the type in which the Master Series invests at the same time as the Master Series, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Master Series or the price paid or received by the Master Series. Management of the STARS Portfolio The STARS Portfolio has not retained the services of an investment adviser because all of its assets are invested in the Master Series. Board of Trustees The Trustees are responsible for the overall management and supervision of the STARS Portfolio's business. The STARS Portfolio's business affairs are managed under the general supervision of the Fund's Board of Trustees. The STARS Portfolio's Statement of Additional Information contains the name and general business experience of each Trustee. Master Series Investment Adviser The Master Series' investment adviser, BSFM, manages the STARS Portfolio's investments. The Master Series' investment adviser is BSFM, a wholly-owned subsidiary of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear Stearns, is a leading United States investment banking, securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. BSFM is a registered investment adviser and offers, either directly or through affiliates, investment advisory and administrative services to open-end and closed-end investment funds and other managed pooled investment vehicles with net assets at March 31, 1996 of over $1.9 billion. BSFM serves as investment adviser of the Master Series under an Investment Advisory Agreement between BSFM and the Master Fund, subject to the overall authority of the Master Fund's Board of Trustees in accordance with Delaware law. The Master Series' principal portfolio manager is Robert S. Reitzes. Mr. Reitzes joined Bear Stearns Asset Management in 1994 as Director of Mutual Funds-Bear Stearns Asset Management and Senior Managing Director of Bear Stearns. From 1991 until 1994, he was Co-Director of Research and Senior Chemical Analyst at C.J. Lawrence/Deutsche Bank Securities Corp. For six years prior thereto, Mr. Reitzes was employed by Mabon, Nugent & Co. as Chief Investment Officer and Chemical Analyst. The Master Fund pays BSFM an advisory fee at an annual rate equal to .75 of 1% of the Master Series' average daily net assets. Under the terms of the Investment Advisory Agreement, the Master Fund has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the Master Series' average daily net assets. From April 3, 1995 (commencement of operations) through March 31, 1996, no fees were paid by the Master Fund pursuant to an undertaking by BSFM. The STARS Portfolio's administrator is BSFM. The STARS Portfolio pays BSFM an administration fee at the annual rate of .15 of 1% of its average daily net assets. Under the terms of an Administration Agreement with the Fund, BSFM generally supervises all aspects of the operation of the STARS Portfolio, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. For providing administrative services to the STARS Portfolio, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of the STARS Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Fund, PFPC Inc. provides certain administrative services to the STARS Portfolio. For providing these services, the Fund has agreed to pay PFPC Inc. $5,500 per month. In addition, the Master Series will pay PFPC International Ltd. an annual fee, as set forth below: - ------------------------------------------------------------------------------- MASTER SERIES' ANNUAL FEE AS A PERCENTAGE OF AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS - ------------------------------------------------------------------------------- First $200 million..................... .12 of 1% Next $200 million up to $400 million... .09 of 1% Next $200 million up to $600 million... .075 of 1% Assets in excess of $600 million. ..... .05 of 1% The above-referenced fee is subject to a monthly minimum fee of $8,500. From April 3, 1995 (commencement of operations) through March 31, 1996, the Master Fund paid PFPC International Ltd. a monthly fee at the effective annual rate of .12 of 1% of the Master Series' average daily net assets. From time to time, BSFM may waive receipt of its fees and/or voluntarily assume certain Master Series or STARS Portfolio expenses, which would have the effect of lowering the Master Series' or STARS Portfolio's expense ratio, as the case may be, and increasing yield to investors at the time such amounts are waived or assumed, as the case may be. Neither the Master Fund nor the STARS Portfolio will pay BSFM at a later time for any amounts it may waive, nor will either reimburse BSFM for any amounts it may assume. Brokerage commissions may be paid to Bear Stearns for executing transactions if the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers. The allocation of brokerage transactions also may take into account a broker's sales of the STARS Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional Information. Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or derivatives thereof as part of the Fund name for as long as the Investment Advisory Agreement is in effect. Distributor Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as the STARS Portfolio's principal underwriter within the meaning of the 1940 Act and as distributor of the STARS Portfolio's shares pursuant to an agreement which is renewable annually. STARS Portfolio's Custodian and Transfer Agent Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the STARS Portfolio's custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the STARS Portfolio's transfer agent, dividend disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also provides certain administrative services to the STARS Portfolio. Master Series' Custodian and Transfer Agent Custodial Trust Company also is the Master Series' custodian. PFPC International Ltd., 80 Harcourt Street, Dublin 2, Ireland, is the Master Series' transfer agent, dividend disbursing agent and registrar. PFPC International Ltd. also provides accounting services to the Master Series. Expense Limitation BSFM has undertaken until such time as it gives investors at least 60 days' notice to the contrary that, if in any fiscal year, certain expenses, including the investment advisory fee, exceed 1% of Class Y's average daily net assets for the fiscal year, BSFM may waive a portion of its investment advisory fee or bear other expenses to the extent of the excess expense. How to Buy Shares General The minimum initial investment is $2.5 million. Subsequent investments may be made in any amount. Share certificates are issued only upon written request. The STARS Portfolio reserves the right to reject any purchase order. The STARS Portfolio reserves the right to vary the initial and subsequent investment minimum requirements at any time. Investments by employees of Bear Stearns and its affiliates are not subject to the minimum investment requirement. In addition, accounts under the discretionary management of Bear Stearns and its affiliates are not subject to the minimum investment requirement. Purchases of the STARS Portfolio's shares may be made through a brokerage account maintained with Bear Stearns or through certain investment dealers who are members of the National Association of Securities Dealers, Inc. who have sales agreements with Bear Stearns (an "Authorized Dealer"). Purchases of the STARS Portfolio's shares also may be made directly through the Transfer Agent. Investors must specify that Class Y is being purchased. Purchases are effected at Class Y's net asset value per share next determined after a purchase order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent (the "trade date"). Payment for STARS Portfolio shares generally is due to Bear Stearns or the Authorized Dealer on the third business day (the "settlement date") after the trade date. Investors who make payment before the settlement date may permit the payment to be held in their brokerage accounts or may designate a temporary investment for payment until the settlement date. If a temporary investment is not designated, Bear Stearns or the Authorized Dealer will benefit from the temporary use of the funds if payment is made before the settlement date. Purchases can be made through Bear Stearns account executives, Authorized Dealers or the Transfer Agent. Purchases through Bear Stearns account executives or Authorized Dealers may be made by check (except that a check drawn on a foreign bank will not be accepted), Federal Reserve draft or by wiring Federal Funds with funds held in brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal Reserve drafts should be made payable as follows: (i) to Bear Stearns or an investor's Authorized Dealer or (ii) to "STARS Portfolio-Class Y" if purchased directly from the STARS Portfolio, and should be directed to the Transfer Agent: PFPC Inc., Attention: STARS Portfolio-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Payment by check or Federal Reserve draft must be received within three business days of receipt of the purchase order by Bear Stearns or an Authorized Dealer. Orders placed directly with the Transfer Agent must be accompanied by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding payment promptly to the Fund. The Fund will charge $7.50 for each wire redemption. The payment proceeds of a redemption of shares recently purchased by check may be delayed as described under "How to Redeem Shares." Investors who are not Bear Stearns clients may purchase STARS Portfolio shares through the Transfer Agent. To make an initial investment in the STARS Portfolio, an investor must establish an account with the STARS Portfolio by furnishing necessary information to the Fund. An account with the STARS Portfolio may be established by completing and signing the Account Information Form indicating which Class of shares is being purchased, a copy of which is attached to this Prospectus, and mailing it, together with a check to cover the purchase, to PFPC Inc., Attention: STARS Portfolio-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Subsequent purchases of shares may be made by checks made payable to the Fund and directed to the address set forth in the preceding paragraph. The STARS Portfolio account number should appear on the check. Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer Agent before the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., New York time) on any day the STARS Portfolio calculates its net asset value are priced according to the net asset value determined on that date. Purchase orders received after the close of trading on the New York Stock Exchange are priced as of the time the net asset value is next determined. Net asset value is computed daily as of the close of regular trading on the New York Stock Exchange. Shares of the STARS Portfolio are sold on a continuous basis. Net asset value per share is determined as of the close of regular trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New York time) on each business day. The net asset value per share of Class Y of the STARS Portfolio is computed by dividing the value of the STARS Portfolio's net assets represented by Class Y (i.e., the value of its assets less liabilities) by the total number of shares of Class Y outstanding. The STARS Portfolio's investments are valued based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by, or in accordance with procedures established by, the Master Fund's Board of Trustees. For further information regarding the methods employed in valuing the STARS Portfolio's investments, see "Determination of Net Asset Value" in the STARS Portfolio's Statement of Additional Information. Federal regulations require that investors provide a certified Taxpayer Identification Number (a "TIN") upon opening or reopening an account. See "Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the Fund could subject the investor to a $50 penalty imposed by the Internal Re venue Service (the "IRS"). Shareholder Services Exchange Privilege The Exchange Privilege permits easy purchases of other funds in the Bear Stearns family. The Exchange Privilege enables an investor to purchase, in exchange for Class Y shares of the STARS Portfolio, Class Y shares of the Fund's other portfolios or shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale in the investor's state of residence. These funds have different investment objectives which may be of interest to investors. To use this Privilege, investors should consult their account executive at Bear Stearns, their account executive at an Authorized Dealer or the Transfer Agent to determine if it is available and whether any conditions are imposed on its use. To use this Privilege, exchange instructions must be given to the Transfer Agent in writing or by telephone. A shareholder wishing to make an exchange may do so by sending a written request to the Transfer Agent at the address given above in "How to Buy Shares-General." Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the account application that they do not wish to use this privilege. Shareholders holding share certificates are not eligible to exchange shares of the STARS Portfolio by phone because share certificates must accompany all exchange requests. To add this feature to an existing account that previously did not provide for this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 (in Delaware call collect 302-791-1031) to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing. If the exchanging shareholder does not currently own Class Y shares of the portfolio or fund whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and Authorized Dealer of record as the account from which shares are exchanged, un less otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as described below. The Exchange Privilege may be modified or terminated at any time, or from time to time, by the Fund on 60 days' notice to the affected portfolio or fund shareholders. The Fund, BSFM and Bear Stearns will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine. In attempting to confirm that telephone instructions are genuine, the Fund will use such procedures as are considered reasonable, including recording those instructions and requesting information as to account registration (such as the name in which an account is registered, the account number, recent transactions in the account, and the account holder's Social Security number, address and/or bank). Before any exchange, the investor must obtain and should review a copy of the current prospectus of the portfolio or fund into which the exchange is being made. Prospectuses may be obtained free of charge from Bear Stearns, any Authorized Dealer or the Transfer Agent. When establishing a new account by exchange, the Class Y shares being exchanged must have a value of at least the minimum initial investment required for the portfolio or fund into which the exchange is being made; if making an exchange to an existing account, the dollar value must equal or exceed the applicable minimum for subsequent investments. If any amount remains in the investment portfolio from which the exchange is being made, such amount must not be below the minimum account value required by the Portfolio or Fund. Class Y shares will be exchanged at the next determined net asset value. No fees currently are charged shareholders directly in connection with exchanges, although the Fund reserves the right, upon not less than 60 days' written notice, to charge shareholders a $5.00 fee in accordance with rules promulgated by the Securities and Exchange Commission. The Fund reserves the right to reject any exchange request in whole or in part. The Exchange Privilege may be modified or terminated at any time upon notice to shareholders. The exchange of Class Y shares of one portfolio or fund for Class Y shares of another is treated for Federal income tax purposes as a sale of the Class Y shares given in exchange by the shareholder and, therefore, an exchanging shareholder may realize a taxable gain or loss. Redirected Distribution Option The Redirected Distribution Option permits investment of investors' dividends and distributions in shares of other funds in the Bear Stearns family. The Redirected Distribution Option enables a shareholder to invest automatically dividends and/or capital gain distributions, if any, paid by the STARS Portfolio in Class Y shares of another portfolio of the Fund or a fund advised or sponsored by Bear Stearns of which the shareholder is an investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be purchased at the then-current net asset value. This privilege is available only for existing accounts and may not be used to open new accounts. Minimum subsequent investments do not apply. The Fund may modify or terminate this privilege at any time or charge a service fee. No such fee currently is contemplated. How to Redeem Shares General The redemption price will be based on the net asset value next computed after receipt of a redemption request. Investors may request redemption of STARS Portfolio shares at any time. Redemption requests may be made as described below. When a request is received in proper form, the STARS Portfolio will redeem the shares at the next determined net asset value. If the investor holds STARS Portfolio shares of more than one Class, any request for redemption must specify the Class of shares being redeemed. If the investor fails to specify the Class of shares to be redeemed or if the investor owns fewer shares of the Class than specified to be redeemed, the redemption request may be delayed until the Transfer Agent receives further instructions from the investor, the investor's Bear Stearns account executive or the investor's Authorized Dealer. The Fund imposes no charges when shares are redeemed directly through Bear Stearns. The STARS Portfolio ordinarily will make payment for all shares redeemed within three days after receipt by the Transfer Agent of a redemption request in proper form, except as provided by the rules of the Securities and Exchange Commission. However, if an investor has purchased STARS Portfolio shares by check and subsequently submits a redemption request by mail, the redemption proceeds will not be transmitted until the check used for investment has cleared, which may take up to 15 days. The Fund will reject requests to redeem shares by telephone or wire for a period of 15 days after receipt by the Transfer Agent of the purchase check against which such redemption is requested. This procedure does not apply to shares purchased by wire payment. The Fund reserves the right to redeem investor accounts at its option upon not less than 60 days' written notice if the account's net asset value is $750 or less, for reasons other than market conditions, and remains so during the notice period. Procedures Shareholders may redeem shares in several ways. Redemption through Bear Stearns or Authorized Dealers Clients with a brokerage account may submit redemption requests to their account executives or Authorized Dealers in person or by telephone, mail or wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request by repurchasing Fund shares from a redeeming shareholder at the shares' net asset value next computed after receipt of the request by Bear Stearns or the Authorized Dealer. Under normal circumstances, within three days, redemption proceeds will be paid by check or credited to the shareholder's brokerage account at the election of the shareholder. Bear Stearns account executives or Authorized Dealers are responsible for promptly forwarding redemption requests to the Transfer Agent. If an investor authorizes telephone redemption, the Transfer Agent may act on telephone instructions from any person representing himself or herself to be a representative of Bear Stearns or the Authorized Dealer and reasonably believed by the Transfer Agent to be genuine. The Fund will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Transfer Agent or the Fund may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Fund nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Redemption through the Transfer Agent Shareholders who are not clients with a brokerage account who wish to redeem shares must redeem their shares through the Transfer Agent by mail; other shareholders also may redeem Fund shares through the Transfer Agent. Mail redemption requests should be sent to the Transfer Agent at: PFPC Inc., Attention: STARS Portfolio-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Additional Information about Redemptions A shareholder may have redemption proceeds of $500 or more wired to the shareholder's brokerage account or a commercial bank account designated by the shareholder. A transaction fee of $7.50 will be charged for payments by wire. Questions about this option, or redemption requirements generally, should be referred to the shareholder's Bear Stearns account executive, to any Authorized Dealer, or to the Transfer Agent if the shares are not held in a brokerage account. Written redemption instructions, indicating the portfolio from which shares are to be redeemed, and duly endorsed stock certificates, if previously issued, must be received by the Transfer Agent in proper form and signed exactly as the shares are registered. All signatures must be guaranteed. The Transfer Agent has adopted standards and procedures pursuant to which signature-guarantees in proper form generally will be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations, as well as from participants in the New York Stock Exchange Medallion Signature Program, the Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion Program ("STAMP"). Such guarantees must be signed by an authorized signatory thereof with "Signature Guaranteed" appearing with the shareholder's signature. If the signature is guaranteed by a broker or dealer, such broker or dealer must be a member of a clearing corporation and maintain net capital of at least $100,000. Signature-guarantees may not be provided by notaries public. Redemption requests by corporate and fiduciary shareholders must be accompanied by appropriate documentation establishing the authority of the person seeking to act on behalf of the account. Investors may obtain from the Fund or the Transfer Agent forms of resolutions and other documentation which have been prepared in advance to assist compliance with the Portfolio's procedures. Any questions with respect to signature-guarantees should be directed to the Transfer Agent by calling 1-800-447-1139 (in Delaware call collect 302-791-1031). During times of drastic economic or market conditions, investors may experience difficulty in contacting Bear Stearns or Authorized Dealers by telephone to request a redemption of STARS Portfolio shares. In such cases, investors should consider using the other redemption procedures described herein. Use of these other redemption procedures may result in the redemption request being processed at a later time than it would have been if telephone redemption had been used. During the delay, the STARS Portfolio's net asset value may fluctuate. Dividends, Distributions and Taxes Dividends will be automatically reinvested in additional STARS Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. The STARS Portfolio ordinarily pays dividends from net investment income and distributes net realized securities gains, if any, once a year, but it may make distributions on a more frequent basis to comply with the distribution requirements of the Code, in all events in a manner consistent with the provisions of the 1940 Act. The STARS Portfolio will not make distributions from net realized securities gains unless capital loss carryovers, if any, have been utilized or have expired. Dividends are automatically reinvested in additional Class Y shares of the STARS Portfolio at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. All expenses are accrued daily and deducted before declaration of dividends to investors. Dividends derived from net investment income, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or disposition of certain market discount bonds, paid by the STARS Portfolio will be taxable to U.S. shareholders as ordinary income whether received in cash or reinvested in additional shares of the STARS Portfolio or redirected into another portfolio or fund. Distributions from net realized long-term securities gains of the STARS Portfolio will be taxable to U.S. shareholders as long-term capital gains for Federal income tax purposes, regardless of how long shareholders have held their STARS Portfolio's shares and whether such distributions are received in cash or reinvested in, or redirected into other, shares. The Code provides that the net capital gain of an individual generally will not be subject to Federal income tax at a rate in excess of 28%. Dividends and distributions may be subject to state and local taxes. Dividends, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or other disposition of certain market discount bonds, paid by the STARS Portfolio to a foreign investor generally are subject to U.S. nonresident withholding taxes at the rate of 30%, unless the foreign investor claims the benefit of a lower rate specified in a tax treaty. Distributions from net realized long-term securities gains paid by the STARS Portfolio to a foreign investor as well as the proceeds of any redemptions from a foreign investor's account, regardless of the extent to which gain or loss may be realized, generally will not be subject to U.S. nonresident withholding tax. However, such distributions may be subject to backup withholding, as described below, unless the foreign investor certifies his non-U.S. residency status. Notice as to the tax status of investors' dividends and distributions will be mailed to them annually. Investors also will receive periodic summaries of their accounts which will include information as to dividends and distributions from securities gains, if any, paid during the year. Federal regulations generally require the Fund to withhold ("backup withholding") and remit to the U.S. Treasury 31% of dividends, distributions from net realized securities gains and the proceeds of any redemption, regardless of the extent to which gain or loss may be realized, paid to a shareholder if such shareholder fails to certify either that the TIN furnished in connection with opening an account is correct or that such shareholder has not received notice from the IRS of being subject to backup withholding as a result of a failure to properly report taxable dividend or interest income on a Federal income tax return. Furthermore, the IRS may notify the Fund to institute backup withholding if the IRS determines a shareholder's TIN is incorrect or if a shareholder has failed to properly report taxable dividend and interest income on a Federal income tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account, and may be claimed as a credit on the record owner's Federal income tax return. The STARS Portfolio is not expected to have any Federal tax liability; although investors should expect to be subject to Federal, state or local taxes in respect of their investment in STARS Portfolio shares. Management of the Fund believes that the STARS Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Code. The STARS Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Such qualification relieves the STARS Portfolio of any liability for Federal income tax to the extent its earnings are distributed in accordance with applicable provisions of the Code. In addition, the STARS Portfolio is subject to a non-deductible 4% excise tax, measured with respect to certain undistributed amounts of taxable investment income and capital gains. Each investor should consult its tax adviser regarding specific questions as to Federal, state or local taxes. Performance Information The STARS Portfolio may advertise its performance in a number of ways. For purposes of advertising, performance for Class Y may be calculated on the basis of average annual total return and/or total return. These total return figures reflect changes in the price of the shares and assume that any income dividends and/or capital gains distributions made by the STARS Portfolio during the measuring period were reinvested in Class Y shares. Average annual total return is calculated pursuant to a standardized formula which assumes that an investment in the STARS Portfolio was purchased with an initial payment of $1,000 and that the investment was redeemed at the end of a stated period of time, after giving effect to the reinvestment of dividends and distributions during the period. The return is expressed as a percentage rate which, if applied on a compounded annual basis, would result in the redeemable value of the investment at the end of the period. Advertisements of the STARS Portfolio's performance will include its average annual total return for one, five and ten year periods, or for shorter periods depending upon the length of time during which the STARS Portfolio has operated. Computations of average annual total return for periods of less than one year represent an annualization of the STARS Portfolio's actual total return for the applicable period. Total return is computed on a per share basis and assumes the reinvestment of dividends and distributions. Total return generally is expressed as a percentage rate which is calculated by combining the income and principal changes for a specified period and dividing by the net asset value per share at the beginning of the period. Advertisements may include the percentage rate of total return or may include the value of a hypothetical investment at the end of the period which assumes the application of the percentage rate of total return. Performance will vary from time to time and past results are not necessarily representative of future results. Investors should remember that performance is a function of portfolio management in selecting the type and quality of portfolio securities and is affected by operating expenses. Performance information, such as that described above, may not provide a basis for comparison with other investments or other investment companies using a different method of calculating performance. Comparative performance information may be used from time to time in advertising or marketing the STARS Portfolio's shares, including data from Lipper Analytical Services, Inc. and other industry publications, and indices such as the S&P 500 and the Dow Jones Industrial Average. General Information The Fund was organized as an unincorporated business trust under the laws of the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994, and commenced operations on or about April 3, 1995. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. The STARS Portfolio's shares are classified into three Classes-Class A, Class C and Class Y. Each share has one vote and shareholders will vote in the aggregate and not by Class, except as otherwise required by law. Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the STARS Portfolio. However, the Trust Agreement disclaims shareholder liability for acts or obligations of the STARS Portfolio and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the STARS Portfolio or a Trustee. The Trust Agreement provides for indemnification from the STARS Portfolio's property for all losses and expenses of any shareholder held personally liable for the obligations of the STARS Portfolio. Thus, the risk of a shareholder incurring financial loss on account of a shareholder liability is limited to circumstances in which the STARS Portfolio itself would be unable to meet its obligations, a possibility which management believes is remote. Upon payment of any liability incurred by the STARS Portfolio, the shareholder paying such liability will be entitled to reimbursement from the general assets of the STARS Portfolio. The Fund's Trustees intend to conduct the operations of the STARS Portfolio in a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the STARS Portfolio. As discussed under "Management of the STARS Portfolio" in the STARS Portfolio's Statement of Additional Information, the STARS Portfolio ordinarily will not hold shareholder meetings; however, shareholders under certain circumstances may have the right to call a meeting of shareholders for the purpose of voting to remove Trustees. To date, the Fund's Board has authorized the creation of five portfolios of shares. All consideration received by the Fund for shares of one of the portfolios and all assets in which such consideration is invested will belong to that portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, one portfolio (and as to classes within a portfolio) are treated separately from those of the other portfolios (and classes). The Fund has the ability to create, from time to time, new portfolios of shares without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, the Rule exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of the Rule. The STARS Portfolio is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to shareholders of the STARS Portfolio or any member of the public regarding the advisability of investing in the STARS Portfolio. S&P's only ongoing relationship with Bear Stearns and its affiliates in connection with the STARS Portfolio is the licensing for a fee of certain S&P trademarks and trade names and the provision of access to the STARS ranking system through a publicly available subscription service of S&P. This license is terminable under circumstances generally described in the STARS Portfolio's Statement of Additional Information under "Information About the STARS Portfolio." BSFM will have no greater access to STARS than any other subscriber to MarketScope. S&P has no obligation to take the needs of Bear Stearns and its affiliates or shareholders of the STARS Portfolio into consideration in operating the STARS system. S&P is not responsible for and has not participated in the determination of the securities to be purchased by the STARS Portfolio. S&P has advised that its Equity Services Group, which publishes STARS, operates independently of, and has no access to information obtained by, Standard & Poor's Ratings Services, which may in its regular operations obtain information of a confidential nature. The Transfer Agent maintains a record of share ownership and will send confirmations and statements of account. Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 (in Delaware call collect 302-791-1031) or by calling Bear Stearns at 1-800-766-4111. Appendix Since the investment characteristics of the STARS Portfolio will correspond directly to those of the Master Series, the following is a discussion of the investment techniques used, and certain securities purchased, by the Master Series. Investment Techniques In connection with its investment objective and policies, the Master Series may employ, among others, the following investment techniques which may involve certain risks. Options transactions involve "derivative securities." Options Transactions The Master Series may engage in options transactions. The Master Series may write and sell covered call option contracts to the extent of 20% of the value of its net assets at the time such option contracts are written and may purchase call options to close such positions. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at the exercise price at any time during the option period. The Master Series may purchase call and put options on stock indexes listed on U.S. securities exchanges. A stock index fluctuates with changes in the market values of the stocks included in the index. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Master Series will realize a gain or loss from purchasing options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. The Master Series is permitted to invest in put options in respect of specific securities (or groups or "baskets" of specific securities) in which the Master Series may invest. A put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at the exercise price at any time during the option period. The Master Series may not invest more than 5% of its assets, represented by the premium paid, in the purchase of options at any one time. Successful use by the Master Series of options will be subject to BSFM's ability to predict correctly movement in the direction of individual stocks or the stock market generally. To the extent BSFM's predictions are incorrect, the Master Series may incur losses which could adversely affect the value of a shareholder's investment. Lending Portfolio Securities The Master Series may earn additional income by lending its portfolio securities. From time to time, the Master Series may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. Such loans may not exceed 331/3% of the value of its total assets. In connection with such loans, the Master Series will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Master Series can increase its income through the investment of such collateral. The Master Series continues to be entitled to payments in amounts equal to the interest, dividends and other distributions payable on the loaned security and receives interest on the amount of the loan. Such loans will be terminable at any time upon specified notice. The Master Series might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with the Master Series. Borrowing Money The Master Series may borrow money. As a fundamental policy, the Master Series is permitted to borrow to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 331/3% of the value of such company's total assets. However, the Master Series currently intends to borrow money only for temporary or emergency (not leveraging) purposes, in an amount up to 15% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of its total assets, the Master Series will not make any additional investments. Certain Portfolio Securities American Depositary Receipts The Master Series may invest in securities of foreign issuers in the form of American Depositary Receipts. The Master Series' assets may be invested in the securities of foreign issuers in the form of American Depositary Receipts ("ADRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. The Master Series may invest in ADRs through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. Money Market Instruments The Master Series may invest in a variety of money market instruments. The Master Series may invest, in the circumstances described under "Description of the STARS Portfolio-Management Policies," in the following types of money market instruments, each of which at the time of purchase must have or be deemed to have under rules of the Securities and Exchange Commission remaining maturities of 13 months or less. U.S. Government Securities The Master Series may purchase securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, which include U.S. Treasury securities that differ in their interest rates, maturities and times of issuance. Treasury Bills have initial maturities of one year or less; Treasury Notes have initial maturities of one to ten years; and Treasury Bonds generally have initial maturities of greater than ten years. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the U.S. Treasury; others, such as those issued by the Federal National Mortgage Association, by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. Principal and interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so, because it is not so obligated by law. Bank Obligations The Master Series may purchase certificates of deposit, time deposits, bankers' acceptances and other short-term obligations of domestic banks, foreign subsidiaries of domestic banks, foreign branches of domestic banks, and domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, the Master Series may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, the possible imposition of foreign withholding taxes on interest income payable on the securities, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions wh ich might adversely affect the payment of principal and interest on these securities and the possible seizure or nationalization of foreign deposits. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by the Master Series will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. The Master Series will not invest more than 15% of the value of its net assets in time deposits maturing in more than seven days and in other securities that are illiquid. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Repurchase Agreements Repurchase agreements involve the acquisition by the Master Series of an underlying debt instrument, subject to an obligation of the seller to repurchase, and the Master Series to resell, the instrument at a fixed price usually not more than one week after its purchase. Certain costs may be incurred by the Master Series in connection with the sale of the securities if the seller does not repurchase them in accordance with the repurchase agreement. In addition, if bankruptcy proceedings are commenced with respect to the seller of the securities, realization on the securities by the Master Series may be delayed or limited. Commercial Paper and Other Short-Term Corporate Obligations Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by the Master Series will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's Investors Service Inc. ("Moody's"), A-1 by the S&P Ratings Group (which operates separately from and independently of S&P's Equity Services Group, which publishes STARS), F-1 by Fitch Investors Service, L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Ratings Co. ("Duff"), (b) issued by companies having an outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by BSFM to be of comparable quality to those rated obligations which may be purchased by the Master Series. The Master Series may purchase floating and variable rate demand notes and bonds, which are obligations ordinarily having stated maturities in excess of one year, but which permit the holder to demand payment of principal at any time or at specified intervals. Investment Company Securities The Master Series may invest in securities of other investment companies which are ranked by STARS. The Master Series may invest in securities issued by other investment companies which are ranked by STARS. Under the 1940 Act, the Master Series' investment in such securities currently is limited to, subject to certain exceptions, (i) 3% of the total voting stock of any one investment company, (ii) 5% of the Master Series' total assets with respect to any one investment company and (iii) 10% of the Master Series' total assets in the aggregate. Investments in the securities of other investment companies will involve duplication of advisory fees and certain other expenses. Illiquid Securities The Master Series may purchase illiquid securities. The Master Series may invest up to 15% of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with its investment objective. Such securities may include securities that are not readily marketable, such as certain securities that are subject to legal or contractual restrictions on resale and repurchase agreements providing for settlement in more than seven days after notice. As to these securities, the Master Series is subject to a risk that should it desire to sell them when a ready buyer is not available at a price it deems representative of their value, the value of its net assets could be adversely affected. The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Distributor Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 Investment Adviser Bear Stearns Funds Management Inc. 245 Park Avenue New York, NY 10167 Custodian Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 Transfer & Dividend Disbursement Agent PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 Counsel Stroock & Stroock & Lavan 7 Hanover Square New York, NY 10004-2696 Independent Auditors Deloitte & Touche Deloitte & Touche House Earlsfort Terrace Dublin 2, Ireland NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE STARS PORTFOLIO'S PROSPECTUS AND IN THE STARS PORTFOLIO'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE STARS PORTFOLIO'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THE STARS PORTFOLIO'S PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. BSF-P-008-03 THE BEAR STEARNS FUNDS 245 PARK AVENUE NEW YORK, NY 10167 1-800-766-4111 PROSPECTUS The Insiders Select Fund The Bear Stearns Funds (the "Fund") is an open-end management investment company, known as a mutual fund. The Fund permits you to invest in separate portfolios. By this Prospectus, shares of The Insiders Select Fund, a non-diversified portfolio (the "Portfolio") are offered. The Portfolio's investment objective is capital appreciation. The Portfolio's sub-investment adviser uses its proprietary IntelliVest(TM) Model to analyze transactions by corporate insiders, the behavior of financial analysts and the corporate finance activities of the companies themselves to determine which securities to purchase or sell short. By this Prospectus, the Portfolio is offering two Classes of shares. Class A shares are subject to a sales charge imposed at the time of purchase and Class C shares are subject to a 1% contingent deferred sales charge imposed on redemptions made within the first year of purchase. Other differences between the Classes include the services offered to and the expenses borne by each Class and certain voting rights, as described herein. These alternatives are offered so an investor may choose the method of purchasing shares that is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other circumstances. The Portfolio issues another Class of shares which has different expenses which would affect performance. Investors desiring to obtain information about this Class of shares should call 1-800-766-4111 or ask their sales representative or the Portfolio's distributor. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the Portfolio's investment adviser. BSFM has engaged Symphony Asset Management ("Symphony"), a subsidiary of BARRA, Inc., as the Portfolio's sub-investment adviser to manage the Portfolio's day-to-day investment activities. BSFM and Symphony are referred to herein collectively as the "Advisers." Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as the Portfolio's distributor. ---------------- This Prospectus sets forth concisely information about the Portfolio that you should know before investing. It should be read and retained for future reference. Part B (also known as the Statement of Additional Information), dated June 20, 1996, which may be revised from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, write to the address or call one of the telephone numbers listed under "General Information" in this Prospectus. ---------------- Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. The net asset value of funds of this type will fluctuate. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. June 20, 1996 Table of Contents PAGE Fee Table........................... 3 Condensed Financial Information..... 4 Alternative Purchase Methods........ 4 Description of the Fund............. 5 Risk Factors........................ 9 Management of the Fund.............. 10 How to Buy Shares................... 15 Shareholder Services................ 19 How to Redeem Shares................ 20 Dividends, Distributions and Taxes.. 23 Performance Information............. 24 General Information................. 25 Appendix............................ A-1
Fee Table - --------------------------------------------------------------------------------------------- CLASS A CLASS C - --------------------------------------------------------------------------------------------- Shareholder Transaction Expenses Maximum Sales Load Imposed on Purchases (as a percentage of offering price).................................................... 4.75% - Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of the amount subject to charge)........................ * 1.00% Annual Portfolio Operating Expenses (as a percentage of average daily net assets) Management Fees (after fee waiver)**............................... 0.00%*** 0.00%*** 12b-1 Fees......................................................... 0.50% 1.00% Other Expenses (after expense reimbursement)**..................... 1.15% 1.15% Total Portfolio Operating Expenses (after fee waiver and expense reimbursement)**................................................... 1.65% 2.15% Example: You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period: 1 Year............................................................. $ 63 $ 32 3 Years............................................................ $ 97 $ 67 5 Years............................................................ $133 $115 10 Years........................................................... $234 $248 Example: You would pay the following expenses on the same investment, assuming no redemption: 1 Year............................................................. $ 63 $ 22 3 Years............................................................ $ 97 $ 67 5 Years............................................................ $133 $115 10 Years........................................................... $234 $248
- ----- * In certain situations, where no sales charge is assessed at the time of purchase, a contingent deferred sales charge of up to 1.00% may be imposed on redemptions within the first year after purchase. See "How to Buy Shares-Class A Shares." ** BSFM has undertaken to waive its investment advisory fee and assume certain expenses of the Portfolio other than brokerage commissions, extraordinary items, interest and taxes to the extent Total Portfolio Operating Expenses exceed 1.65% for Class A and 2.15% for Class C. Without such waiver and expense reimbursement, Management Fees stated above would be 1.00%, Other Expenses would be 2.02% for Class A and 2.07% for Class C, and Total Portfolio Operating Expenses would be 3.52% for Class A and 4.07% for Class C. *** The Management Fee is payable at an annual rate equal to 1% of the Portfolio's average daily net assets, subject to increase or decrease by up to 0.50% annually depending on the Portfolio's performance. See "Management of the Fund-Investment Adviser" and "-Sub-Investment Adviser." The amounts listed in the example should not be considered as representative of past or future expenses and actual expenses may be greater or less than those indicated. Moreover, while the example assumes a 5% annual return, the Portfolio's actual performance will vary and may result in an actual return greater or less than 5%. The purpose of the foregoing table is to assist you in understanding the costs and expenses borne by the Portfolio and investors, the payment of which will reduce investors' annual return. In addition to the expenses noted above, the Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." Long-term investors could pay more in 12b-1 fees than the economic equivalent of paying a front-end sales charge. For a description of the expense reimbursement or waiver arrangements in effect, see "Management of the Fund." Condensed Financial Information The information in the table below covering the Portfolio's investment results for the period indicated has been audited by Deloitte & Touche LLP. Further financial data and related notes appear in the Portfolio's Annual Report for the fiscal year ended March 31, 1996 which is incorporated by reference into the Portfolio's Statement of Additional Information which is available upon request. Financial Highlights Contained below is per share operating performance data, total investment return, ratios to average net assets and other supplemental data for a Class A and Class C share of the Portfolio for the period June 16, 1995 (commencement of investment operations) to March 31, 1996. This information has been derived from information provided in the Portfolio's financial statements.
- --------------------------------------------------------------------------------------- CLASS A CLASS C - --------------------------------------------------------------------------------------- Per Share Operating Performance* Net asset value, beginning of period................................ $12.00 $12.00 -------- --------- Net investment income/(loss) (1).................................... 0.03 (0.01) Net realized and unrealized gain on investments and securities sold short (2)........................................... 1.98 1.97 -------- --------- Net increase in net assets resulting from operations................ 2.01 1.96 -------- --------- Dividends to shareholders from: Net investment income............................................... (0.01) - -------- --------- Net asset value, end of period...................................... $14.00 $13.96 ======== ========= Total investment return (3)......................................... 16.75% 16.33% ======== ========= Ratios/Supplemental Data Net assets, end of period (000's omitted)........................... $12,132 $9,928 Ratio of expenses to average net assets (1)(4)...................... 1.65% 2.15% Ratio of net investment income/(loss) to average net assets (1)(4).. 0.38% (0.12)% Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements (4)................. 1.87% 1.92% Portfolio turnover rate (5)......................................... 93.45% 93.45% Average commission rate per share................................... $0.03 $0.03 - -----
* Calculated based on shares outstanding on the first and last day of the period, except for dividends and distributions, if any, which are based on the actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amount shown for a share outstanding throughout the period is not in accord with the change in the aggregate gains and losses in investments during the period because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset value during the period. (3) Total return does not consider the effects of sales loads or contingent deferred sales charges. Total return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total returns are not annualized. (4) Annualized. (5) Not annualized. Further information about performance is contained in the Portfolio's Annual Report, which may be obtained without charge by writing to the address or calling one of the telephone numbers listed under "General Information." Alternative Purchase Methods By this Prospectus, the Portfolio offers you two methods of purchasing its shares. By this Prospectus, the Portfolio offers investors two methods of purchasing its shares; investors may choose the Class of shares that best suits their needs, given the amount of purchase, the length of time the investor expects to hold the shares and any other relevant circumstances. Each Portfolio share represents an identical pro rata interest in the Portfolio's investment portfolio. Class A shares of the Portfolio are sold at net asset value per share plus a maximum initial sales charge of 4.75% of the public offering price imposed at the time of purchase. The initial sales charge may be reduced or waived for certain purchases. See "How to Buy Shares-Class A Shares." The Class A shares of the Portfolio are subject to an annual distribution and shareholder servicing fee at the rate of .50 of 1% of the value of the average daily net assets. See "Management of the Fund-Distribution and Shareholder Servicing Plan." Class C shares of the Portfolio are subject to a 1% contingent deferred sales charge ("CDSC") which is assessed only if Class C shares are redeemed within one year of purchase. See "How to Redeem Shares-Class C Shares." These shares also are subject to an annual distribution and shareholder servicing fee at the rate of 1% of the value of the average daily net assets of Class C. See "Management of the Fund-Distribution and Shareholder Servicing Plan." The distribution and shareholder servicing fee paid by Class C will cause such Class to have a higher expense ratio and to pay lower dividends than Class A. The decision as to which Class of shares is more beneficial to each investor depends on the amount and the intended length of time of the investor's investment. Each investor should consider whether, during the anticipated life of the investor's investment in the Fund, the accumulated distribution and shareholder servicing fee and CDSC, if any, on Class C shares would be less than the initial sales charge on Class A shares purchased at the same time, and to what extent, if any, such differential would be offset by the return of Class A. Additionally, investors qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time might consider purchasing Class A shares because the accumulated continuing distribution and shareholder servicing fees on Class C shares may exceed the initial sales charge on Class A shares during the life of the investment. Finally, each investor should consider the effect of the CDSC period in the context of the investor's own investment time frame. Generally, Class A shares may be more appropriate for investors who invest $1,000,000 or more in the Portfolio's shares, but will not be appropriate for investors who invest less than $50,000 in the Portfolio's shares, unless they intend to hold those shares for more than ten years. Description of the Fund General The Fund is a "series fund." The Fund is a "series fund," which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the Investment Company Act of 1940, as amended (the "1940 Act"), and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As described below, for certain matters Fund shareholders vote together as a group; as to others they vote separately by portfolio. By this Prospectus, shares of the Portfolio are being offered. From time to time, other portfolios may be established and sold pursuant to other offering documents. See "General Information." Investment Objective The Portfolio seeks to provide capital appreciation. The Portfolio's investment objective is capital appreciation. The Portfolio's investment objective cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting shares. There can be no assurance that the Portfolio's investment objective wi ll be achieved. IntelliVest(TM) Model The IntelliVest(TM) Model is Symphony's proprietary methodology for selecting a company's securities by analyzing the behavior of corporate insiders, financial analysts and the company itself. Symphony has developed a proprietary methodology (the "IntelliVest(TM) Model") for analyzing the behavior of (i) corporate insiders-officers, directors and significant stockholders-through an analysis of their publicly filed reports of their trading activities in the equity securities of the companies for which they are insiders, (ii) financial analysts, through an analysis of their published reports about covered companies, including predicted earnings and revisions to predicted earnings, and (iii) the company itself, through an analysis of its behavior as to corporate finance matters, such as stock repurchase programs, dividend policies and new securities issuance. Corporate insiders are believed by Symphony to be in the best position to understand the near term prospects of their companies. Symphony believes that insider behavior can be observed and analyzed since insiders are required to disclose transactions in their company's equity securities to the Securities and Exchange Commission generally no later than the tenth day of the month following the transaction. Each month many thousands of these disclosures are received. Symphony believes that the laborious process of collecting, classifying and analyzing these transactions using the IntelliVest(TM) Model provides valuable investment management information. These Insiders may have many reasons for transacting in company stock and stock options. Many of these are entirely incidental to the future of the company. For example, an insider may sell stock to buy a home or finance a college education for his or her child. Likewise a new management team may wish to signal confidence in the company by making token purchases of the company's equity. Many other transactions, however, are related directly to the insider's beliefs about the near-term price expectations for the company's stock. An insider who exercises long-term options early for small profits likely believes the stock soon will decline. Insiders who exercise options, hold the stock, and buy in the open market probably believe that the stock soon will rise. Clusters of insiders making substantial buys or sells indicate broad agreement within a firm as to the direction of the stock. Financial analysts use a variety of means to learn more about the companies they follow. Among these are visits to the company and in-depth discussions with management. Successful analysts learn to interpret the words and actions of management and the firm itself. Likewise, management uses its discussions with certain analysts as a means of signaling their views to the marketplace. Symphony has a computer model of analysts' predicted earnings and ratings. This model tracks the behavior of analysts as they have revised predicted earnings and the ratings of a company's prospects in the market. Symphony believes that analysts' revisions can be a valuable indicator of future returns for the company's stock. Part of the normal activity of every public company is its financing decisions. A company must routinely decide whether to maintain or change its dividend policy, whether to buy its own stock in the open market or whether to issue new securities. From time to time the firm may decide that its stock is undervalued. Many firms see undervaluation as an opportunity to purchase the company's stock in the open market. Symphony believes that by monitoring changes in shares outstanding (in the hands of the public), a useful signal can be extracted relating to the firm's beliefs about its prospects. Similarly, the company's decision to sell securities to the public or another firm can be an indication that the company believes that its stock has reached a near-term high, a potentially useful sell signal. Insiders, analysts and the company each send signals that can be analyzed using the IntelliVest(TM) Model to produce valuable information about the prospects for individual companies. Symphony believes that the most powerful analysis, however, comes from the interaction of all three sources. While no one signal alone determines whether a security will be purchased or sold, no security will be considered for purchase or sale using the IntelliVest(TM) Model unless a positive or negative signal, as the case may be, is received from insider behavior. In its analysis, the IntelliVest(TM) Model uses only data that is available to the public. Symphony obtains the data on insider trading activity from CDA/Investnet, which compiles this information from publicly available Securities and Exchange Commission filings. Symphony's research team has devoted four years of research to developing the framework necessary to analyze the behavior of each of these sources and the interaction among them. Management Policies The Portfolio seeks to invest primarily in equity securities that, at the time of purchase, are believed by Symphony, using data from the IntelliVest(TM) Model, to provide opportunities for capital appreciation or gains through short selling. Under normal market conditions, Symphony invests substantially all of the Portfolio's assets in the equity securities of U.S. issuers. Using data from the IntelliVest(TM) Model, Symphony selects equity securities believed by it to provide opportunities for capital appreciation or gains through short selling. Issuers are selected without regard to market capitalization, although Symphony anticipates that the issuers principally will be mid- to large capitalization companies; that is, those with market capitalizations exceeding $1 billion. Symphony seeks to use the IntelliVest(TM) Model to select all the Portfolio's securities. The IntelliVest(TM) Model, however, should not be expected to provide data sufficient to permit the Portfolio's entire portfolio to be invested in its selections. For its remaining assets invested in equity securities, Symphony will use an analytic valuation model created by the active strategies group of BARRA, Inc., Symphony's parent, to select from the universe of U.S. equity securities those securities it believes, in the aggregate, will approximate or exceed the total return performance of the Standard & Poor's 500 Stock Index* (the "S&P 500 Index"). The S&P 500 Index is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The composition of the S&P 500 Index is determined by Standard & Poor's based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representative of stocks in a particular industry group, and may be changed from time to time. The weightings of stocks in the S&P 500 Index are based on each stock's relative total market capitalization; that is, its market price per share times the number of shares outstanding. Because of this weighting, as of March 31, 1996, approximately 47% of the S&P 500 Index was composed of the 50 largest companies. The Portfolio will not invest in all or substantially all of the common stocks included in the S&P 500 Index and may invest in stocks that are not included in the S&P 500 index. The Portfolio expects ordinarily to invest in approximately 60 to 150 stocks. By investing in this manner-that is, using its IntelliVest(TM) Model and purchasing other equity securities in a manner intended to approximate or exceed the performance of the S&P 500 Index-Symphony seeks to exceed the total return of the S&P 500 Index. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which the Portfolio may invest will be rated at least investment grade by a nationally recognized statistical rating organization at the time of purchase. Convertible securities rated in the lowest investment grade rating may be considered to have speculative characteristics. Preferred stock generally receives dividends before distributions are paid on common stock and ordinarily has a priority claim over common stockholders if the issuer of the stock is liquidated. The Portfolio may invest, in anticipation of investing cash positions, in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase ag reements, as set forth in the Appendix. Under normal market conditions, the Portfolio expects to have less than 15% of its assets invested in money market instruments. However, when Symphony determines that adverse market conditions exist, the Portfolio may adopt a temporary defensive posture and invest all of its assets in money market instruments. Investment Techniques The Portfolio may engage in short selling, lending portfolio securities and options and futures transactions, each of which involves risk. The Portfolio may engage in various investment techniques, such as short selling, lending portfolio securities and options and futures transactions, each of which involves risk. Options and futures transactions involve "derivative securities." Short selling and futures transactions are discussed below. For a discussion of these other investment techniques and their related risks, see "Appendix-Investment Techniques" and "Risk Factors" below. Short Selling. Short sales are transactions in which the Portfolio sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio. Until the security is replaced, the Portfolio is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. - ----- * "Standard & Poor's," "S&P(R)" and "S&P 500(R)" are trademarks of The McGraw-Hill Companies, Inc. The Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's or The McGraw-Hill Companies, Inc.. Until the Portfolio replaces a borrowed security in connection with a short sale, the Portfolio will: (a) maintain daily a segregated account, containing cash, cash equivalents or U.S. Government securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position in accordance with positions taken by the Staff of the Securities and Exchange Commission. The Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. The Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Portfolio may be required to pay in connection with a short sale. The Portfolio may purchase call options to provide a hedge against an increase in the price of a security sold short by the Portfolio. See "Appendix-Investment Techniques-Options Transactions." The Portfolio anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net assets. The Portfolio may not sell short the securities of any single issuer listed on a national securities exchange to the extent of more than 5% of the value of its net assets. The Portfolio may not sell short the securities of any class of an issuer to the extent, at the time of the transaction, of more than 2% of the outstanding securities of that class. In addition to the short sales discussed above, the Portfolio may make short sales "against the box," a transaction in which the Portfolio enters into a short sale of a security which the Portfolio owns. The proceeds of the short sale will be held by a broker until the settlement date at which time the Portfolio delivers the security to close the short position. The Portfolio receives the net proceeds from the short sale. The Portfolio at no time will have more than 15% of the value of its net assets in deposits on short sales against the box. It currently is anticipated that the Portfolio will make short sales against the box for purposes of protecting the value of the Portfolio's net assets. Futures Contracts and Options on Futures Contracts. The Portfolio may enter into stock index futures contracts, and options with respect thereto, in U.S. domestic markets. See "Appendix-Investment Techniques-Options Transactions." These transactions will be entered into as a substitute for comparable market positions in the underlying securities or for hedging purposes. Although the Portfolio is not a commodity pool, it is subject to rules of the Commodity Futures Trading Commission (the "CFTC") limiting the extent to which it may engage in these transactions. The Portfolio's commodities transactions must constitute bona fide hedging or other permissible transactions pursuant to regulations promulgated by the CFTC. In addition, the Portfolio may not engage in such transactions if the sum of the amount of initial margin deposits and premiums paid for unexpired commodity options, other than for bona fide hedging transactions, would exceed 5% of the liquidation value of the Portfolio's assets, after taking into account unrealized profits and unrealized losses on such contracts it has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5%. To the extent the Portfolio engages in the use of futures and options on futures for other than bona fide hedging purposes, the Portfolio may be subject to additional risk. Engaging in these transactions involves risk of loss to the Portfolio which could adversely affect the value of a shareholder's investment. Although the Portfolio intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subject- ing the Portfolio to substantial losses. In addition, engaging in futures transactions in foreign markets may involve greater risks than trading on domestic exchanges. Successful use of futures by the Portfolio also is subject to Symphony's ability to predict correctly movements in the direction of the market or foreign currencies and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if the Portfolio has hedged against the possibility of a decline in the market adversely affecting the value of securities held in its portfolio and prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market. The Portfolio may have to sell securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Securities and Exchange Commission, the Portfolio may be required to segregate cash or high quality money market instruments in connection with its commodities transactions in an amount generally equal to the value of the underlying commodity. The segregation of such assets will have the effect of limiting the Portfolio's ability otherwise to invest those assets. Future Developments. The Portfolio may take advantage of opportunities in the area of options and futures contracts, options on futures contracts and any other derivative investments which are not presently contemplated for use by the Portfolio or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Portfolio's investment objective and legally permissible for the Portfolio. Before entering into such transactions or making any such investment, the Portfolio will provide appropriate disclosure in its prospectus. Certain Fundamental Policies Certain of the Portfolio's investment policies are fundamental policies that can be changed only by shareholder vote. The Portfolio may (i) borrow money to the extent permitted under the 1940 Act; and (ii) invest up to 25% of the value of its total assets in the securities of issuers in a single industry, provided that there is no such limitation on investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. This paragraph describes fundamental policies that cannot be changed as to the Portfolio without approval by the holders of a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting shares. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Certain Additional Non-Fundamental Policies The Portfolio may (i) purchase securities of any company having less than three years' continuous operation (including operations of any predecessors) if such purchase does not cause the value of the Portfolio's investments in all such companies to exceed 5% of the value of its total assets; (ii) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to secure permitted borrowings; and (iii) invest up to 15% of the value of its net assets in repurchase agreements providing for settlement in more than seven days after notice and in other illiquid securities. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Risk Factors No investment is free from risk. Investing in the Portfolio will subject investors to certain risks which should be considered. Net Asset Value Fluctuations The Portfolio's net asset value per share is not fixed and should be expected to fluctuate. Investors should purchase Portfolio shares only as a supplement to an overall investment program and only if investors are willing to undertake the risks involved. Equity Securities Investors should be aware that equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and that fluctuations can be pronounced. Changes in the value of the equity securities in the Portfolio's portfolio will result in changes in the value of the Portfolio's shares and thus the Portfolio's yield and total return to investors. Certain Investment Techniques The use of investment techniques such as short selling, lending portfolio securities and engaging in options and futures transactions, involves greater risk than that incurred by many other funds with a similar objective. Using these techniques may produce higher than normal portfolio turnover and may affect the degree to which the Portfolio's net asset value fluctuates. See "Appendix-Investment Techniques." The Portfolio's ability to engage in certain short-term transactions may be limited by the requirement that, to qualify as a regulated investment company, it must earn less than 30% of its gross income from the disposition of securities held for less than three months. This 30% test limits the extent to which the Portfolio may sell securities held for less than three months, effect short sales of securities held for less than three months, write options expiring in less than three months and invest in certain futures contracts, among other strategies. With the exception of the above requirement, the amount of portfolio activity will not be a limiting factor when making portfolio decisions. Under normal market conditions, the Portfolio's portfolio turnover rate generally will not exceed 150%. Higher portfolio turnover rates are likely to result in comparatively greater brokerage commissions or transaction costs. Short-term gains realized from portfolio transactions are taxable to shareholders as ordinary income. See "Portfolio Transactions" in the Portfolio's Statement of Additional Information. Non-Diversified Status The Portfolio's classification as a "non-diversified" investment company means that the proportion of its assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. A "diversified" investment company is required by the 1940 Act generally, with respect to 75% of its total assets, to invest not more than 5% of such assets in the securities of a single issuer and to hold not more than 10% of the outstanding voting securities of a single issuer. However, the Portfolio intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which requires that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of the Portfolio's total assets be invested in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Portfolio's total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets be invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). Since a relatively high percentage of the Portfolio's assets may be invested in the securities of a limited number of issuers, some of which may be within the same industry or economic sector, the Portfolio's portfolio securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company. Simultaneous Investments Investment decisions for the Portfolio are made independently from those of other investment companies or accounts advised by the Advisers. However, if such other investment companies or accounts are prepared to invest in, or desire to dispose of, securities of the type in which the Portfolio invests at the same time as the Portfolio, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Portfolio or the price paid or received by the Portfolio. Management of the Fund Board of Trustees The Trustees are responsible for the overall management and supervision of the Portfolio's business. The Fund's business affairs are managed under the general supervision of its Board of Trustees. The Portfolio's Statement of Additional Information contains the name and general business experience of each Trustee. Investment Adviser The Portfolio's investment adviser is BSFM; Symphony provides day-to-day management of the Portfolio's investments. The Portfolio's investment adviser is BSFM, a wholly-owned subsidiary of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear Stearns, is a leading United States investment banking, securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. BSFM is a registered investment adviser and offers, either directly or through affiliates, investment advisory and administrative services to open-end and closed-end investment funds and other managed pooled investment vehicles with net assets at March 31, 1996 of over $1.9 billion. BSFM supervises and assists in the overall management of the Portfolio's affairs under an Investment Advisory Agreement between BSFM and the Fund, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. The Portfolio pays BSFM an advisory fee at an annual rate equal to 1% of the Portfolio's average daily net assets which will be adjusted monthly depending on the extent to which the investment performance of Portfolio shares exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. Under the terms of the Investment Advisory Agreement, the Portfolio has agreed to pay BSFM a monthly fee at the annual rate of 1% of the Portfolio's average daily net assets (the "Basic Fee") which will be adjusted monthly (the "Monthly Performance Adjustment") depending on the extent to which the investment performance of the Class of shares (currently, Class C) expected to bear the highest total Portfolio operating expenses, after expenses, exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. The Monthly Performance Adjustment may increase or decrease the total advisory fee payable to BSFM (the "Total Advisory Fee") by up to .50% per year of the value of the Portfolio's average daily net assets. The monthly Total Advisory Fee is calculated as follows: (a) one-twelfth of the 1.0% annual Basic Fee rate (0.083%) is applied to the Portfolio's average daily net assets over the most recent calendar month, giving a dollar amount which is the Basic Fee for that month; (b) one-twelfth of the applicable performance adjustment rate from the table below is applied to the Portfolio's average daily net assets over the most recent calendar month, giving a dollar amount which is the Monthly Performance Adjustment (for the first twelve-month period, no performance adjustment will be made); and (c) the Monthly Performance Adjustment is then added to or subtracted from the Basic Fee and the result is the amount payable by the Portfolio to BSFM as the Total Advisory Fee for that month. The full range of Total Advisory Fees on an annualized basis is as follows:
- ------------------------------------------------------------------------------------------- PERCENTAGE POINT DIFFERENCE BETWEEN DESIGNATED CLASS' PERFORMANCE (NET OF EXPENSES INCLUDING ADVISORY FEES) PERFORMANCE AND PERCENTAGE CHANGE IN THE ADJUSTMENT S&P 500 INDEX BASIC FEE (%) RATE (%) TOTAL FEE (%) - ------------------------------------------------------------------------------------------- +3.00 percentage points or more.................... 1% .50% 1.50% +2.75 percentage points or more but less than +3.00 percentage points.................................. 1% .40% 1.40% +2.50 percentage points or more but less than +2.75 percentage points.................................. 1% .30% 1.30% +2.25 percentage points or more but less than +2.50 percentage points.................................. 1% .20% 1.20% +2.00 percentage points or more but less than +2.25 percentage points.................................. 1% .10% 1.10% Less than +2.00 percentage points but more than - -2.00 percentage points............................ 1% 0% 1.00% - -2.00 percentage points or less but more than -2.25 percentage points.................................. 1% -.10% .90% - -2.25 percentage points or less but more than -2.50 percentage points.................................. 1% -.20% .80% - -2.50 percentage points or less but more than -2.75 percentage points.................................. 1% -.30% .70% - -2.75 percentage points or less but more than -3.00 percentage points.................................. 1% -.40% .60% - -3.00 percentage points or less.................... 1% -.50% .50%
The period over which performance is measured is a rolling twelve-month period and the performance of the S&P 500 Index is calculated as the sum of the change in the level of the S&P 500 Index during the period, plus the value of any dividends or distributions made by the companies whose securities comprise the S&P 500 Index. From June 16, 1995 (commencement of operations) through March 31, 1996, no fees were paid by the Portfolio pursuant to an undertaking by BSFM. The Portfolio's administrator is BSFM. The Portfolio pays BSFM an administration fee at the annual rate of .15 of 1% of its average daily net assets. Under the terms of an Administration Agreement with the Fund, BSFM generally supervises all aspects of the operation of the Portfolio, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. For providing administrative services to the Portfolio, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of the Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Fund, PFPC Inc. provides certain administrative services to the Portfolio. For providing these services, the Fund has agreed to pay PFPC Inc. an annual fee, as set forth below: - -------------------------------------------------------------------- PORTFOLIO'S ANNUAL FEE AS A PERCENTAGE OF AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS - -------------------------------------------------------------------- First $200 million.................... .10 of 1% Next $200 million up to $400 million.. .075 of 1% Next $200 million up to $600 million.. .05 of 1% Assets in excess of $600 million...... .03 of 1% The above-referenced fee is subject to a monthly minimum fee of $11,000. From June 16, 1995 (commencement of operations) through March 31, 1996, the Portfolio paid PFPC Inc. a monthly fee at the effective annual rate of .30 of 1% of the Portfolio's average daily net assets. From time to time, BSFM may waive receipt of its fees and/or voluntarily assume certain Portfolio expenses, which would have the effect of lowering the Portfolio's expense ratio and increasing yield to investors at the time such amounts are waived or assumed, as the case may be. The Portfolio will not pay BSFM at a later time for any amounts it may waive, nor will the Portfolio reimburse BSFM for any amounts it may assume. From time to time, PFPC Inc. may waive or a portion of its fee. Effective May 1, 1996, and until further notice, PFPC Inc. will reduce its monthly minimum to $7,500 for net assets of less than $25 million; $9,167 for net assets of $25 million to $50 million; $11,000 for net assets in excess of $50 million. PFPC Inc. reserves the right to revoke this voluntary fee waiver at any time. Brokerage commissions may be paid to Bear Stearns for executing transactions if the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers. The allocation of brokerage transactions also may take into account a broker's sales of the Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional Information. Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or derivatives thereof as part of the Fund name for as long as the Investment Advisory Agreement is in effect. Sub-Investment Adviser The Portfolio's sub-investment adviser, Symphony, provides investment advisory assistance and the day-to-day management of the Portfolio's investments. BSFM has engaged Symphony, located at 555 California Street, San Francisco, California 94104, to serve as the Fund's sub-investment adviser. Symphony, a registered investment adviser, was formed in 1994. Symphony is a wholly-owned subsidiary of BARRA, Inc., a leading supplier of analytical financial software. Symphony's principals are Jeffrey Skelton, Praveen Gottipalli, Michael Henman and Neil Rudolph. Messrs. Skelton, Henman and Rudolph joined Symphony in 1994 from Wells Fargo Nikko Investment Advisors where they were Managing Directors. Mr. Gottipalli joined Symphony in 1994 from BARRA, Inc. Symphony, subject to the supervision and approval of BSFM, provides investment advisory assistance and the day-to-day management of the Portfolio's investments, as well as investment research and statistical information, under a Sub-Investment Advisory Agreement with BSFM, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. BSFM pays Symphony a sub-advisory fee at an annual rate equal to .45 of 1% of the Portfolio's average daily net assets which will be adjusted monthly depending on the extent to which the investment performance of Portfolio shares exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. Under the Sub-Investment Advisory Agreement, BSFM has agreed to pay Symphony a monthly fee at the annual rate of .45 of 1% of the Portfolio's average daily net assets (the "Symphony Basic Fee") which will be adjusted by a Monthly Performance Adjustment calculated as described above. The Monthly Performance Adjustment applicable to Symphony may increase or decrease the total advisory fee payable to Symphony (the "Total Sub-Advisory Fee") by up to .25% per year of the value of the Portfolio's average daily net assets. The monthly Total Sub-Advisory fee is calculated in the same manner as the Total Advisory Fee. The full range of Total Sub-Advisory Fees on an annualized basis is as follows: - ------------------------------------------------------------------------------- PERCENTAGE POINT DIFFERENCE BETWEEN DESIGNATED CLASS' PERFORMANCE PERFORMANCE (NET OF EXPENSES INCLUDING ADVISORY FEES) BASIC ADJUSTMENT TOTAL AND PERCENTAGE CHANGE IN THE S&P 500 INDEX FEE (%) RATE (%) FEE (%) - -------------------------------------------------------------------------------- +3.00 percentage points or more...................... .45% .25% .70% +2.75 percentage points or more but less than +3.00 percentage points.................................... .45% .20% .65% +2.50 percentage points or more but less than +2.75 percentage points.................................... .45% .15% .60% +2.25 percentage points or more but less than +2.50 percentage points.................................... .45% .10% .55% +2.00 percentage points or more but less than +2.25 percentage points.................................... .45% .05% .50% Less than +2.00 percentage points but more than -2.00 percentage points.................................... .45% 0% .45% - -2.00 percentage points or less but more than -2.25 percentage points.................................... .45% -.05% .40% - -2.25 percentage points or less but more than -2.50 percentage points.................................... .45% -.10% .35% - -2.50 percentage points or less but more than -2.75 percentage points.................................... .45% -.15% .30% - -2.75 percentage points or less but more than -3.00 percentage points.................................... .45% -.20% .25% - -3.00 percentage points or less...................... .45% -.25% .20% If for the 12-month period ended February 22, 1997, the Total Sub-Advisory Fee exceeds .45%, without giving effect to any fee waivers by BSFM, then thereafter BSFM has agreed to pay Symphony a Basic Fee equal to .50 of 1% on an annualized basis. From June 16, 1995 (commencement of operations) through March 31, 1996, no fees were paid to Symphony by BSFM pursuant to an undertaking by Symphony. The Fund's primary investment officer is Praveen Gottipalli. Since May 1994, he has been Symphony's Director of Investments. For more than five years prior thereto, he was Director of the Active Strategies Group of BARRA, Inc. Distributor Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as the Portfolio's principal underwriter and distributor of the Portfolio's shares pursuant to an agreement which is renewable annually. Bear Stearns is entitled to receive the sales load described under "How to Buy Shares" and payments under the Portfolio's Distribution and Shareholder Servicing Plan described below. Custodian and Transfer Agent Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the Portfolio's custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the Portfolio's transfer agent, dividend disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also provides certain administrative services to the Portfolio. Distribution and Shareholder Servicing Plan The Portfolio has adopted a Rule 12b-1 Plan under which the Portfolio pays Bear Stearns at the annual rate of .50% of Class A's average daily net assets and 1% of Class C's average daily net assets. Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Portfolio pays Bear Stearns for distributing Portfolio shares and for providing personal services to, and/or maintaining accounts of, Portfolio shareholders a fee at the annual rate of .50% and 1% of the average daily net assets of Class A and Class C, respectively. Under the Plan, Bear Stearns may pay third parties in respect of these services such amount as it may determine. The fees paid to Bear Stearns under the Plan are payable without regard to actual expenses incurred. The Fund understands that these third parties also may charge fees to their clients who are beneficial owners of Portfolio shares in connection with their client accounts. These fees would be in addition to any amounts which may be received by them from Bear Stearns under the Plan. Expense Limitation BSFM has undertaken until such time as it gives investors at least 60 days' notice to the contrary that, if in any fiscal year, certain expenses, including the investment advisory fee and fees under the Plan, exceed 1.65% of Class A's average daily net assets and 2.15% of Class C's average daily net assets for the fiscal year, BSFM may waive a portion of its investment advisory fee or bear other expenses to the extent of the excess expense. How to Buy Shares General An initial investment is $1,000, $500 for retirement plans; subsequent investments must be at least $250, $100 for retirement plans; specify the Class you wish to purchase. The minimum initial investment is $1,000, or $500 if the investment is for Keogh Plans, IRAs, SEP-IRAs and 403(b)(7) Plans with only one participant. Subsequent investments ordinarily must be at least $250 or $100 for retirement plans. Share certificates are issued only upon written request. No certificates are issued for fractional shares. The Fund reserves the right to reject any purchase order. The Fund reserves the right to vary the initial and subsequent investment minimum requirements at any time. Investments by employees of Bear Stearns and its affiliates are not subject to minimum investment requirements. Purchases of the Portfolio's shares may be made through a brokerage account maintained with Bear Stearns or through certain investment dealers who are members of the National Association of Securities Dealers, Inc. who have sales agreements with Bear Stearns (an "Authorized Dealer"). Purchases of the Portfolio's shares also may be made directly through the Transfer Agent. When purchasing Portfolio shares, investors must specify which Class is being purchased. Purchases are effected at the public offering price next determined after a purchase order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent (the "trade date"). Payment for Portfolio shares generally is due to Bear Stearns or the Authorized Dealer on the third business day (the "settlement date") after the trade date. Investors who make payment before the settlement date may permit the payment to be held in their brokerage accounts or may designate a temporary investment for payment until the settlement date. If a temporary investment is not designated, Bear Stearns or the Authorized Dealer will benefit from the temporary use of the funds if payment is made before the settlement date. Purchases can be made through Bear Stearns account executives, Authorized Dealers or the Transfer Agent. Purchases through Bear Stearns account executives or Authorized Dealers may be made by check (except that a check drawn on a foreign bank will not be accepted), Federal Reserve draft or by wiring Federal Funds with funds held in brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal Reserve drafts should be made payable as follows: (i) to Bear Stearns or an investor's Authorized Dealer or (ii) to "The Bear Stearns Funds-The Insiders Select Fund" if purchased directly from the Portfolio, and should be directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds-The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960. Payment by check or Federal Reserve draft must be received within three business days of receipt of the purchase order by Bear Stearns or an Authorized Dealer. Orders placed directly with the Transfer Agent must be accompanied by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding payment promptly to the Fund. The Fund will charge $7.50 for each wire redemption. The payment proceeds of a redemption of shares recently purchased by check may be delayed as described under "How to Redeem Shares." Investors who are not Bear Stearns clients may purchase Portfolio shares through the Transfer Agent. To make an initial investment in the Portfolio, an investor must establish an account with the Portfolio by furnishing necessary information to the Fund. An account with the Portfolio may be established by completing and signing the Account Information Form indicating which Class of shares is being purchased, a copy of which is attached to this Prospectus, and mailing it, together with a check to cover the purchase, to PFPC Inc., Attention: The Bear Stearns Funds-The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960. Subsequent purchases of shares may be made by checks made payable to the Fund and directed to the address set forth in the preceding paragraph. The Portfolio account number should appear on the check. Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer Agent before the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., New York time) on any day the Portfolio calculates its net asset value are priced according to the net asset value determined on that date. Purchase orders received after the close of trading on the New York Stock Exchange are priced as of the time the net asset value is next determined. Net asset value is computed daily as of the close of regular trading on the New York Stock Exchange. Shares of the Portfolio are sold on a continuous basis. Net asset value per share is determined as of the close of regular trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New York time) on each business day. The net asset value per share of each Class of the Portfolio is computed by dividing the value of the Portfolio's net assets represented by such Class (i.e., the value of its assets less liabilities) by the total number of shares of such Class outstanding. The Portfolio's investments are valued based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by, or in accordance with procedures established by, the Fund's Board of Trustees. For further information regarding the methods employed in valuing the Portfolio's investments, see "Determination of Net Asset Value" in the Portfolio's Statement of Additional Information. Federal regulations require that investors provide a certified Taxpayer Identification Number (a "TIN") upon opening or reopening an account. See "Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the Fund could subject the investor to a $50 penalty imposed by the Internal Re venue Service (the "IRS"). Class A Shares The sales charge may vary depending on the dollar amount invested in the Portfolio. The public offering price for Class A shares of the Portfolio is the net asset value per share of that Class plus a sales load, which is imposed in accordance with the following schedule:
- ------------------------------------------------------------------------------------------ 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* - ------------------------------------------------------------------------------------------ Less than $50,000................. 4.75% 4.99% 4.25% $50,000 to less than $100,000..... 4.25 4.44 3.75 $100,000 to less than $250,000.... 3.75 3.90 3.25 $250,000 to less than $500,000.... 3.25 3.36 3.00 $500,000 to less than $750,000.... 2.75 2.83 2.50 $750,000 to less than $1,000,000.. 2.25 2.30 2.00 $1,000,000 and above.............. 0.00 0.00 0.00 - ------------------- * Until further notice to the contrary, the full amount of the sales load will be reallowed as a dealer concession.
There is no initial sales charge on purchases of $1,000,000 or more of Class A shares. However, if an investor purchases Class A shares without an initial sales charge as part of an investment of at least $1,000,000 and redeems those shares within one year after purchase, a CDSC of 1.00% will be imposed at the time of redemption. The terms contained in the section of the Fund's Prospectus entitled "How to Redeem Shares-Contingent Deferred Sales Charge-Class C Shares" are applicable to the Class A shares subject to a CDSC. Letter of Intent and Right of Accumulation apply to such purchases of Class A shares. The dealer concession may be changed from time to time but will remain the same for all dealers. From time to time, Bear Stearns may make or allow additional payments or promotional incentives to dealers that sell Class A shares. In some instances, these incentives may be offered only to certain dealers who have sold or may sell significant amounts of Class A shares. Dealers may receive a larger percentage of the sales load from Bear Stearns than they receive for selling most other funds. Through September 30, 1996, Bear Stearns, at its expense, has agreed to pay Authorized Dealers a fee in respect of the aggregate of all shares of the Portfolio and each other investment company sponsored by Bear Stearns sold to their customers through September 26, 1995. The fee paid is based on the aggregate net asset value of all shares of the Portfolio and each other investment company sponsored by Bear Stearns purchased by customers of the Authorized Dealer during the period ended September 26, 1995, reduced for redemptions during the year ending September 30, 1996. For amounts greater than $1 million but less than $5 million, the fee is .05% of such amount; and for amounts greater than $5 million, the fee is .10% of such amount. Any such amount is expected to be paid, on a pro rata basis, quarterly. Class A shares may be sold at net asset value to (a) each Adviser, its affiliates or their respective officers, directors or employees (including retired employees), any partnership of which an Adviser is a general partner, any Trustee or officer of the Fund and designated family members of any of the above individuals; (b) qualified retirement plans of each Adviser; (c) any employee or registered representative of any Authorized Dealer or their respective spouses and minor children; (d) trustees or directors of investment companies for which an Adviser or an affiliate acts as sponsor; (e) any state, county or city, or any instrumentality, department, authority or agency thereof, which is prohibited by applicable investment laws from paying a sales load or commission in connection with the purchase of Portfolio shares; (f) any institutional investment clients including corporate sponsored pension and profit-sharing plans and other benefit plans (excluding Keogh Plans, IRAs and SEP-IRAs), and insurance companies; (g) any pension funds (excluding Keogh Plans, IRAs and SEP-IRAs), state and municipal governments or funds, Taft-Hartley plans and qualified non-profit organizations, foundations and endowments; (h) trust institutions (including bank trust departments) investing on their own behalf or on behalf of their clients; and (i) accounts as to which an Authorized Dealer charges an asset management fee. To take advantage of these exemptions, a purchaser must indicate its eligibility for an exemption to Bear Stearns along with its Account Information Form. Such purchaser agrees to notify Bear Stearns if, at any time of any additional purchases, it is no longer eligible for an exemption. Bear Stearns reserves the right to request certification or additional information from a purchaser in order to verify that such purchaser is eligible for an exemption. Bear Stearns reserves the right to limit the participation in Class A shares of the Portfolio of its employees. Dividends and distributions reinvested in Class A shares of the Portfolio will be made at the net asset value per share on the reinvestment date. Class A shares of the Portfolio also may be purchased at net asset value, with the proceeds from the redemption of shares of an investment company sold with a sales charge or commission and not distributed by Bear Stearns. However, if such investor redeems those shares within one year after purchase, a CDSC of 1.00% will be imposed at the time of redemption. This includes shares of a mutual fund which were subject to a contingent deferred sales charge upon redemption. The purchase must be made within 60 days of the redemption, and Bear Stearns must be notified by the investor in writing, or by the investor's investment professional, at the time the purchase is made. Bear Stearns will offer to pay Authorized Dealers an amount up to 1.00% of the net asset value of shares purchased by the dealers' clients or customers in this manner. In addition, Class A shares of the Portfolio may be purchased at net asset value by the following customers of a broker that operates a master account for purchasing and redeeming, and otherwise providing shareholder services in respect of, Fund shares pursuant to agreements with the Fund or Bear Stearns: (i) investment advisers and financial planners who place trades for their own accounts or for the accounts of their clients and who charge a management, consulting or other fee, (ii) clients of such investment advisers and financial planners if such clients place trades through accounts linked to master accounts of such investment advisers or financial planners on the books and records of such broker and (iii) retirement and deferred compensation plans, and trusts used to fund such plans, including, but not limited to, plans or trusts defined in Section 401(a), 403(b) or 457 of the Code and "rabbi trusts", provided, in each case, the purchase transaction is effected through such broker. The broker may charge a fee for transactions in Portfolio shares. Class C Shares The public offering price for Class C shares is the next determined net asset value per share of that Class. No initial sales charge is imposed at the time of purchase. A CDSC is imposed, however, on redemptions of Class C shares made within the first year of purchase. See "How to Redeem Shares." Right of Accumulation-Class A Shares Investors in Class A shares may qualify for a reduced sales charge. Pursuant to the Right of Accumulation, certain investors are permitted to purchase Class A shares of the Portfolio at the sales charge applicable to the total of (a) the dollar amount then being purchased plus (b) the current public offering price of all Class A shares of the Portfolio, shares of the Fund's other portfolios and shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, then held by the investor. The following purchases of Class A shares may be aggregated for the purposes of determining the amount of purchase and the corresponding sales load: (a) individual purchases on behalf of a single purchaser, the purchaser's spouse and their children under the age of 21 years including shares purchased in connection with a retirement account exclusively for the benefit of such individual(s), such as an IRA, and purchases made by a company controlled by such individual(s); (b) individual purchases by a trustee or other fiduciary account, including an employee benefit plan (such as employer-sponsored pension, profit-sharing and stock bonus plans, including plans under Section 401(k) of the Code, and medical, life and disability insurance trusts); or (c) individual purchases by a trustee or other fiduciary purchasing shares concurrently for two or more employee benefit plans of a single employer or of employers affiliated with each other. Letter of Intent-Class A Shares By checking the appropriate box in the Letter of Intent section of the Account Information Form, investors become eligible for the reduced sales load applicable to the total number of Class A shares of the Portfolio, Class A shares of the Fund's other portfolios and shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, purchased in a 13-month period pursuant to the terms and under the conditions set forth herein. A minimum initial purchase of $1,000 is required. The Transfer Agent will hold in escrow 5% of the amount indicated in the Account Information Form for payment of a higher sales load if the investor does not purchase the full amount indicated in the Account Information Form. The escrow will be released when the investor fulfills the terms of the Letter of Intent by purchasing the specified amount. If an investor's purchases qualify for a further sales load reduction, the sales load will be adjusted to reflect the total purchase at the end of 13 months. If total purchases are less than the amount specified, the investor will be requested to remit an amount equal to the difference between the sales load actually paid and the sales load applicable to the aggregate purchases actually made. If such remittance is not received within 20 days, the Transfer Agent, as attorney-in-fact, will redeem an appropriate number of shares held in escrow to realize the difference. Checking a box in the Letter of Intent section of the Account Information Form does not bind an investor to purchase, or the Portfolio to sell, the full amount indicated at the sales load in effect at the time of signing, but the investor must complete the intended purchase to obtain the reduced sales load. At the time an investor purchases shares of any of the above-listed funds, the investor must indicate its intention to do so under the Letter of Intent section of the Account Information Form. Systematic Investment Plan The Portfolio offers shareholders convenient features and benefits, including the Systematic Investment Plan. The Systematic Investment Plan permits investors to purchase shares of the Portfolio (minimum initial investment of $250 and minimum subsequent investments of $100 per transaction) at regular intervals selected by the investor. Provided the investor's bank or other financial institution allows automatic withdrawals, Portfolio shares may be purchased by transferring funds from the account designated by the investor. At the investor's option, the account designated will be debited in the specified amount, and Portfolio shares will be purchased once a month, on the twentieth day. Only an account maintained at a domestic financial institution which is an Automated Clearing House member may be so designated. Investors desiring to participate in the Systematic Investment Plan should call the Transfer Agent at 1-800-447-1139 (in Delaware call collect 302-791-1031) to obtain the appropriate forms. The Systematic Investment Plan does not assure a profit and does not protect against loss in declining markets. Since the Systematic Investment Plan involves the continuous investment in the Portfolio regardless of fluctuating price levels of the Portfolio's shares, investors should consider their financial ability to continue to purchase through periods of low price levels. The Fund may modify or terminate the Systematic Investment Plan at any time or charge a service fee. No such fee currently is contemplated. Shareholder Services Exchange Privilege The Exchange Privilege permits easy purchases of other funds in the Bear Stearns family. The Exchange Privilege enables an investor to purchase, in exchange for shares of a Class of the Portfolio, shares of the same Class of the Fund's other portfolios or shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale in the investor's state of residence. These funds have different investment objectives which may be of interest to investors. To use this Privilege, investors should consult their account executive at Bear Stearns, their account executive at an Authorized Dealer or the Transfer Agent to determine if it is available and whether any conditions are imposed on its use. To use this Privilege, exchange instructions must be given to the Transfer Agent in writing or by telephone. A shareholder wishing to make an exchange may do so by sending a written request to the Transfer Agent at the address given above in "How to Buy Shares-General." Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the account application that they do not wish to use this privilege. Shareholders holding share certificates are not eligible to exchange shares of the Portfolio by phone because share certificates must accompany all exchange requests. To add this feature to an existing account that previously di d not provide for this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 (in Delaware call collect 302-791-1031) to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing. If the exchanging shareholder does not currently own shares of the portfolio or fund whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and Authorized Dealer of record as the account from which shares are exchanged, unless otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as described below. To participate in the Systematic Investment Plan or establish automatic withdrawal for the new account, however, an exchanging shareholder must file a specific written request. The Exchange Privilege may be modified or terminated at any time, or from time to time, by the Fund on 60 days' notice to the affected portfolio or fund shareholders. The Fund, BSFM and Bear Stearns will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine. In attempting to confirm that telephone instructions are genuine, the Fund will use such procedures as are considered reasonable, including recording those instructions and requesting information as to account registration (such as the name in which an account is registered, the account number, recent transactions in the account, and the account holder's Social Security number, address and/or bank). Before any exchange, the investor must obtain and should review a copy of the current prospectus of the portfolio or fund into which the exchange is being made. Prospectuses may be obtained free of charge from Bear Stearns, any Authorized Dealer or the Transfer Agent. Except in the case of Personal Retirement Plans, the shares being exchanged must have a current value of at least $250; furthermore, when establishing a new account by exchange, the shares being exchanged must have a value of at least the minimum initial investment required for the portfolio or fund into which the exchange is being made; if making an exchange to an existing account, the dollar value must equal or exceed the applicable minimum for subsequent investments. If any amount remains in the investment portfolio from which the exchange is being made, such amount must not be below the minimum account value required by the Portfolio or Fund. Shares will be exchanged at the next determined net asset value; however, except in the instances described below, a sales load may be charged with respect to exchanges of Class A shares into portfolios or funds sold with a sales load. Generally, a sales load will be charged if the shares being exchanged were subject to a sales load which is lower than the sales load to which the shares being purchased are subject or were not subject to any sales load. No CDSC will be imposed on Class C shares at the time of an exchange. The CDSC applicable on redemption of the acquired Class C shares will be calculated from the date of the initial purchase of the Class C shares exchanged. If an investor is exchanging Class A into a portfolio or fund that charges a sales load, the investor may qualify for share prices which do not include the sales load or which reflect a reduced sales load, if the shares of the portfolio or fund from which the investor is exchanging were: (a) purchased with a sales load; (b) acquired by a previous exchange from shares purchased with a sales load; or (c) acquired through reinvestment of dividends or distributions paid with respect to the foregoing categories of shares. To qualify, at the time of the exchange the investor must notify Bear Stearns, the Authorized Dealer or the Transfer Agent. Any such qualification is subject to confirmation of the investor's holdings through a check of appropriate records. No fees currently are charged shareholders directly in connection with exchanges, although the Fund reserves the right, upon not less than 60 days' written notice, to charge shareholders a $5.00 fee in accordance with rules promulgated by the Securities and Exchange Commission. The Fund reserves the right to reject any exchange request in whole or in part. The Exchange Privilege may be modified or terminated at any time upon notice to shareholders. The exchange of shares of one portfolio or fund for shares of another is treated for Federal income tax purposes as a sale of the shares given in exchange by the shareholder and, therefore, an exchanging shareholder may realize a taxable gain or loss. Redirected Distribution Option The Redirected Distribution Option permits investment of investors' dividends and distributions in shares of other funds in the Bear Stearns family. The Redirected Distribution Option enables a shareholder to invest automatically dividends and/or capital gain distributions, if any, paid by the Portfolio in shares of the same Class of another portfolio of the Fund or a fund advised or sponsored by Bear Stearns of which the shareholder is an investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be purchased at the then-current net asset value. If an investor is investing in a Class that charges a CDSC, the shares purchased will be subject on redemption to the CDSC, if any, applicable to the purchased shares. This privilege is available only for existing accounts and may not be used to open new accounts. Minimum subsequent investments do not apply. The Fund may modify or terminate this privilege at any time or charge a service fee. No such fee currently is contemplated. How to Redeem Shares General The redemption price will be based on the net asset value next computed after receipt of a redemption request; in certain instances a CDSC will be charged. Investors may request redemption of Portfolio shares at any time. Redemption requests may be made as described below. When a request is received in proper form, the Portfolio will redeem the shares at the next determined net asset value. If the investor holds Portfolio shares of more than one Class, any request for redemption must specify the Class of shares being redeemed. If the investor fails to specify the Class of shares to be redeemed or if the investor owns fewer shares of the Class than specified to be redeemed, the redemption request may be delayed until the Transfer Agent receives further instructions from the investor, the investor's Bear Stearns account executive or the investor's Authorized Dealer. The Fund imposes no charges (other than any applicable CDSC) when shares are redeemed directly through Bear Stearns. The Portfolio ordinarily will make payment for all shares redeemed within three days after receipt by the Transfer Agent of a redemption request in proper form, except as provided by the rules of the Securities and Exchange Commission. However, if an investor has purchased Portfolio shares by check and subsequently submits a redemption request by mail, the redemption proceeds will not be transmitted until the check used for investment has cleared, which may take up to 15 days. The Fund will reject requests to redeem shares by telephone or wire for a period of 15 days after receipt by the Transfer Agent of the purchase check against which such redemption is requested. This procedure does not apply to shares purchased by wire payment. The Fund reserves the right to redeem investor accounts at its option upon not less than 60 days' written notice if the account's net asset value is $750 or less, for reasons other than market conditions, and remains so during the notice period. Shareholders who have redeemed Class A shares may reinstate their Portfolio account without a sales charge up to the dollar amount redeemed by purchasing Class A shares of the same Portfolio within 60 days of the redemption. To take advantage of this reinstatement privilege, shareholders must notify their Bear Stearns account executive, Authorized Dealer or the Transfer Agent at the time the privilege is exercised. Contingent Deferred Sales Charge-Class C Shares Class C shares of the Portfolio are subject to a CDSC of 1% upon redemption within one year of purchase. A CDSC of 1% payable to Bear Stearns is imposed on any redemption of Class C shares within one year of the date of purchase. No CDSC will be imposed to the extent that the net asset value of the Class C shares redeemed does not exceed (i) the current net asset value of Class C shares acquired through reinvestment of dividends or capital gain distributions, plus (ii) increases in the net asset value of an investor's Class C shares above the dollar amount of all such investor's payments for the purchase of Class C shares held by the investor at the time of redemption. If the aggregate value of Class C shares redeemed has declined below their original cost as a result of the Portfolio's performance, the applicable CDSC may be applied to the then-current net asset value rather than the purchase price. In determining whether a CDSC is applicable to a redemption, the calculation will be made in a manner that results in the lowest possible rate. It will be assumed that the redemption is made first of amounts representing shares acquired pursuant to the reinvestment of dividends and distributions; then of amounts representing the increase in net asset value of Class C shares above the total amount of payments for the purchase of Class C shares made during the preceding year; then of amounts representing shares purchased more than one year prior to the redemption; and finally, of amounts representing the cost of shares purchased within one year prior to the redemption. For example, assume an investor purchased 100 shares of the Portfolio at $10 per share for a cost of $1,000. Subsequently, the shareholder acquired 5 additional shares through dividend reinvestment. During the first year after the purchase the investor decided to redeem $500 of his or her investment. Assuming at the time of the redemption the net asset value had appreciated to $12 per share, the value of the investor's shares would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the value of the reinvested dividend shares and the amount which represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged at a rate of 1% for a total CDSC of $2.40. The CDSC applicable to Class C shares will be waived in connection with (a) redemptions made within one year after the death or disability, as defined in Section 72(m)(7) of the Code, of the shareholder, (b) redemptions by employees participating in Eligible Benefit Plans, (c) redemptions as a result of a combination of any investment company with the Portfolio by merger, acquisition of assets or otherwise, and (d) a distribution following retirement under a tax-deferred retirement plan or upon attaining age 701/2 in the case of an IRA or Keogh plan or custodial account pursuant to Section 403(b) of the Code. If the Fund's Trustees determine to discontinue the waiver of the CDSC, the disclosure in the Portfolio's prospectus will be revised appropriately. Any Portfolio shares subject to a CDSC which were purchased prior to the termination of such waiver will have the CDSC waived as provided in the Portfolio's prospectus at the time of the purchase of such shares. To qualify for a waiver of the CDSC, at the time of redemption an investor must notify the Transfer Agent or the investor's Bear Stearns account executive or the investor's Authorized Dealer must notify the Distributor. Any such qualification is subject to confirmation of the investor's entitlement. Procedures Shareholders may redeem shares in several ways. Redemption through Bear Stearns or Authorized Dealers Clients with a brokerage account may submit redemption requests to their account executives or Authorized Dealers in person or by telephone, mail or wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request by repurchasing Fund shares from a redeeming shareholder at the shares' net asset value next computed after receipt of the request by Bear Stearns or the Authorized Dealer. Under normal circumstances, within three days, redemption proceeds will be paid by check or credited to the shareholder's brokerage account at the election of the shareholder. Bear Stearns account executives or Authorized Dealers are responsible for promptly forwarding redemption requests to the Transfer Agent. If an investor authorizes telephone redemption, the Transfer Agent may act on telephone instructions from any person representing himself or herself to be a representative of Bear Stearns or the Authorized Dealer and reasonably believed by the Transfer Agent to be genuine. The Fund will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Transfer Agent or the Fund may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Fund nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Redemption through the Transfer Agent Shareholders who are not clients with a brokerage account who wish to redeem shares must redeem their shares through the Transfer Agent by mail; other shareholders also may redeem Fund shares through the Transfer Agent. Mail redemption requests should be sent to the Transfer Agent at: PFPC Inc., Attention: The Bear Stearns Funds-The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960. Additional Information about Redemptions A shareholder may have redemption proceeds of $500 or more wired to the shareholder's brokerage account or a commercial bank account designated by the shareholder. A transaction fee of $7.50 will be charged for payments by wire. Questions about this option, or redemption requirements generally, should be referred to the shareholder's Bear Stearns account executive, to any Authorized Dealer, or to the Transfer Agent if the shares are not held in a brokerage account. Written redemption instructions, indicating the Portfolio from which shares are to be redeemed, and duly endorsed stock certificates, if previously issued, must be received by the Transfer Agent in proper form and signed exactly as the shares are registered. All signatures must be guaranteed. The Transfer Agent has adopted standards and procedures pursuant to which signature-guarantees in proper form generally will be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations, as well as from participants in the New York Stock Exchange Medallion Signature Program, the Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion Program ("STAMP"). Such guarantees must be signed by an authorized signatory thereof with "Signature Guaranteed" appearing with the shareholder's signature. If the signature is guaranteed by a broker or dealer, such broker or dealer must be a member of a clearing corporation and maintain net capital of at least $100,000. Signature-guarantees may not be provided by notaries public. Redemption requests by corporate and fiduciary shareholders must be accompanied by appropriate documentation establishing the authority of the person seeking to act on behalf of the account. Investors may obtain from the Fund or the Transfer Agent forms of resolutions and other documentation which have been prepared in advance to assist compliance with the Portfolio's procedures. Any questions with respect to signature-guarantees should be directed to the Transfer Agent by calling 1-800-447-1139 (in Delaware call collect 302-791-1031). During times of drastic economic or market conditions, investors may experience difficulty in contacting Bear Stearns or Authorized Dealers by telephone to request a redemption of Portfolio shares. In such cases, investors should consider using the other redemption procedures described herein. Use of these other redemption procedures may result in the redemption request being processed at a later time than it would have been if telephone redemption had been used. During the delay, the Portfolio's net asset value may fluctuate. Automatic Withdrawal Automatic Withdrawal permits investors to request withdrawal of a specified dollar amount (minimum of $25) on either a monthly or quarterly basis if the investor has a $5,000 minimum account. An application for Automatic Withdrawal can be obtained from Bear Stearns or the Transfer Agent. Automatic Withdrawal may be ended at any time by the investor, the Fund or the Transfer Agent. Shares for which certificates have been issued may not be redeemed through Automatic Withdrawal. Purchases of additional shares concurrent with withdrawals generally are undesirable. Class C shares withdrawn pursuant to the Automatic Withdrawal will be subject to any applicable CDSC. Purchases of additional Class A shares where the sales load is imposed concurrently with withdrawals of Class A shares generally are undesirable. Dividends, Distributions and Taxes Dividends will be automatically reinvested in additional Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. The Portfolio ordinarily pays dividends from its net investment income and distributes net realized securities gains, if any, once a year, but it may make distributions on a more frequent basis to comply with the distribution requirements of the Code, in all events in a manner consistent with the provisions of the 1940 Act. The Portfolio will not make distributions from net realized securities gains unless capital loss carryovers, if any, have been utilized or have expired. Dividends are automatically reinvested in additional Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. All expenses are accrued daily and deducted before declaration of dividends to investors. Dividends paid by each Class of each Portfolio will be calculated at the same time and in the same manner and will be of the same amount, except that the expenses attributable solely to a particular Class will be borne exclusively by such Class. Class C shares will receive lower per share dividends than Class A shares because of the higher expenses borne by Class C. See "Fee Table." Dividends derived from net investment income, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or disposition of certain market discount bonds, paid by the Portfolio will be taxable to U.S. shareholders as ordinary income, whether received in cash or reinvested in additional shares of the Portfolio or redirected into another portfolio or fund. Distributions from net realized long-term securities gains of the Portfolio will be taxable to U.S. shareholders as long-term capital gains for Federal income tax purposes, regardless of how long shareholders have held their Portfolio shares and whether such distributions are received in cash or reinvested in, or redirected into other, shares. The Code provides that the net capital gain of an individual generally will not be subject to Federal income tax at a rate in excess of 28%. Dividends and distributions may be subject to state and local taxes. Dividends, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or other disposition of market discount bonds, paid by the Portfolio to a foreign investor generally are subject to U.S. nonresident withholding taxes at the rate of 30%, unless the foreign investor claims the benefit of a lower rate specified in a tax treaty. Distributions from net realized long-term securities gains paid by the Portfolio to a foreign investor as well as the proceeds of any redemptions from a foreign investor's account, regardless of the extent to which gain or loss may be realized, generally will not be subject to U.S. nonresident withholding tax. However, such distributions may be subject to backup withholding, as described below, unless the foreign investor certifies his non-U.S. residency status. Notice as to the tax status of investors' dividends and distributions will be mailed to them annually. Investors also will receive periodic summaries of their accounts which will include information as to dividends and distributions from securities gains, if any, paid during the year. The Code provides for the "carryover" of some or all of the sales load imposed on the Portfolio's Class A shares if an investor exchanges such shares for shares of another fund or portfolio advised or sponsored by BSFM or its affiliates within 91 days of purchase and such other fund reduces or eliminates its otherwise applicable sales load for the purpose of the exchange. In this case, the amount of the sales load charged the investor for such shares, up to the amount of the reduction of the sales load charged on the exchange, is not included in the basis of such shares for purposes of computing gain or loss on the exchange, and instead is added to the basis of the fund shares received on the exchange. Federal regulations generally require the Fund to withhold ("backup withholding") and remit to the U.S. Treasury 31% of dividends, distributions from net realized securities gains and the proceeds of any redemption, regardless of the extent to which gain or loss may be realized, paid to a shareholder if such shareholder fails to certify either that the TIN furnished in connection with opening an account is correct or that such shareholder has not received notice from the IRS of being subject to backup withholding as a result of a failure to properly report taxable dividend or interest income on a Federal income tax return. Furthermore, the IRS may notify the Fund to institute backup withholding if the IRS determines a shareholder's TIN is incorrect or if a shareholder has failed to properly report taxable dividend and interest income on a Federal income tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account, and may be claimed as a credit on the record owner's Federal income tax return. The Portfolio is not expected to have any Federal tax liability; although investors should expect to be subject to Federal, state or local taxes in respect of their investment in Portfolio shares. Management of the Fund believes that the Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Code. The Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Such qualification relieves the Portfolio of any liability for Federal income tax to the extent its earnings are distributed in accordance with applicable provisions of the Code. In addition, the Portfolio is subject to a non-deductible 4% excise tax, measured with respect to certain undistributed amounts of taxable investment income and capital gains. Each investor should consult its tax adviser regarding specific questions as to Federal, state or local taxes. Performance Information The Portfolio may advertise its performance in a number of ways. For purposes of advertising, performance for each Class may be calculated on the basis of average annual total return and/or total return. These total return figures reflect changes in the price of the shares and assume that any income dividends and/or capital gains distributions made by the Portfolio du ring the measuring period were reinvested in shares of the same Class. These figures also take into account any applicable distribution and shareholder servicing fees. As a result, at any given time, the performance of Class C should be expected to be lower than that of Class A. Performance for each Class will be calculated separately. Average annual total return is calculated pursuant to a standardized formula which assumes that an investment in the Portfolio was purchased with an initial payment of $1,000 and that the investment was redeemed at the end of a stated period of time, after giving effect to the reinvestment of dividends and distributions during the period. The return is expressed as a percentage rate which, if applied on a compounded annual basis, would result in the redeemable value of the investment at the end of the period. Advertisements of the Portfolio's performance will include the Portfolio's average annual total return for one, five and ten year periods, or for shorter periods depending upon the length of time during which the Portfolio has operated. Computations of average annual total return for periods of less than one year represent an annualization of the Portfolio's actual total return for the applicable period. Total return is computed on a per share basis and assumes the reinvestment of dividends and distributions. Total return generally is expressed as a percentage rate which is calculated by combining the income and principal changes for a specified period and dividing by the net asset value (or maximum public offering price in the case of Class A shares) per share at the beginning of the period. Class C total return will reflect the deduction of the CDSC. Advertisements may include the percentage rate of total return or may include the value of a hypothetical investment at the end of the period which assumes the application of the percentage rate of total return. Total return for the Portfolio also may be calculated by using the net asset value per share at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class C shares. Calculations based on the net asset value per share do not reflect the deduction of the sales load on the Portfolio's Class A shares, which, if reflected, would reduce the performance quoted. Performance will vary from time to time and past results are not necessarily representative of future results. Investors should remember that performance is a function of portfolio management in selecting the type and quality of portfolio securities and is affected by operating expenses. Performance information, such as that described above, may not provide a basis for comparison with other investments or other investment companies using a different method of calculating performance. Comparative performance information may be used from time to time in advertising or marketing the Portfolio's shares, including data from Lipper Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index, Wilshire 4500 Stock Index, Russell Small Cap Index, the Dow Jones Industrial Average and other industry publications. General Information The Fund was organized as an unincorporated business trust under the laws of the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994. The Fund commenced operations on or about April 3, 1995 in connection with the offer of shares of certain of its other portfolios. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. The Portfolio's shares are classified into three Classes-Class A, Class C and Class Y. Each share has one vote and shareholders will vote in the aggregate and not by Class, except as otherwise required by law. Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Portfolio. However, the Trust Agreement disclaims shareholder liability for acts or obligations of the Portfolio and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or a Trustee. The Trust Agreement provides for indemnification from the Portfolio's property for all losses and expenses of any shareholder held personally liable for the obligations of the Portfolio. Thus, the risk of a shareholder incurring financial loss on account of a shareholder liability is limited to circumstances in which the Portfolio itself would be unable to meet its obligations, a possibility which management believes is remote. Upon payment of any liability incurred by the Portfolio, the shareholder paying such liability will be entitled to reimbursement from the general assets of the Portfolio. The Fund's Trustees intend to conduct the operations of the Portfolio in a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Portfolio. As discussed under "Management of the Fund" in the Portfolio's Statement of Additional Information, the Portfolio ordinarily will not hold shareholder meetings; however, shareholders under certain circumstances may have the right to call a meeting of shareholders for the purpose of voting to remove Trustees. To date, the Fund's Board has authorized the creation of five portfolios of shares. All consideration received by the Fund for shares of one of the portfolios and all assets in which such consideration is invested will belong to that portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, one portfolio (and as to classes within a portfolio) are treated separately from those of the other portfolios (and classes). The Fund has the ability to create, from time to time, new portfolios of shares without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, the Rule exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of the Rule. The Transfer Agent maintains a record of share ownership and will send confirmations and statements of account. Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 (in Delaware call collect 302-791-1031) or by calling Bear Stearns at 1-800-766-4111. Appendix Investment Techniques In connection with its investment objective and policies, the Portfolio may employ, among others, the following investment techniques which may involve certain risks. Options transactions involve "derivative securities." Options Transactions The Portfolio may engage in options transactions. The Portfolio is permitted to invest up to 5% of its assets, represented by the premium paid, in the purchase of call and put options in respect of specific securities (or groups or "baskets" of specific securities) in which the Portfolio may invest. The Portfolio may write and sell covered call option contracts on securities owned by the Portfolio not exceeding 20% of the value of its net assets at the time such option contracts are written. The Portfolio also may purchase call options to enter into closing purchase transactions. The Portfolio also may write covered put option contracts to the extent of 20% of the value of its net assets at the time such option contracts are written. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at the exercise price at any time during the option period. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at the exercise price at any time during the option period. A covered put option sold by the Portfolio exposes the Portfolio during the term of the option to a decline in price of the underlying security or securities. A put option sold by the Portfolio is covered when, among other things, cash or liquid securities are placed in a segregated account with the Fund's custodian to fulfill the obligation undertaken. The Portfolio may purchase and sell call and put options on stock indexes listed on U.S. securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Portfolio will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Successful use by the Portfolio of options will be subject to Symphony's ability to predict correctly movements in the direction of individual stocks, the stock market generally, foreign currencies or interest rates. To the extent Symphony's predictions are incorrect, the Portfolio may incur losses which could adversely affect the value of a shareholder's investment. Lending Portfolio Securities The Portfolio may earn additional income by lending its portfolio securities. From time to time, the Portfolio may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. Such loans may not exceed 331/3% of the value of the Portfolio's total assets. In connection with such loans, the Portfolio will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Portfolio can increase its income through the investment of such collateral. The Portfolio continues to be entitled to payments in amounts equal to the interest, dividends and other distributions payable on the loaned security and receives interest on the amount of the loan. Such loans will be terminable at any time upon specified notice. The Portfolio might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with the Portfolio. Borrowing Money The Portfolio may borrow money. As a fundamental policy, the Portfolio is permitted to borrow to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 331/3% of the value of such company's total assets. However, the Portfolio currently intends to borrow money only for temporary or emergency (not leveraging) purposes, in an amount up to 15% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of the Portfolio's total assets, the Portfolio will not make any additional investments. Certain Portfolio Securities Convertible Securities The Portfolio may invest in convertible securities. Convertible securities are fixed-income securities that may be converted at either a stated price or stated rate into underlying shares of common stock. Convertible securities have general characteristics similar to both fixed-income and equity securities. Although to a lesser extent than with fixed-income securities generally, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock, and, therefore, also will react to variations in the general market for equity securities. A unique feature of convertible securities is that as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. As fixed-income securities, convertible securities are investments that provide for a stable stream of income with generally higher yields than common stocks. Of course, like all fixed-income securities, there can be no assurance of current income because the issuers of the convertible securities may default on their obligations. Convertible securities, however, generally offer lower interest or dividend yields than non-convertible securities of similar quality because of the potential for capital appreciation. A convertible security, in addition to providing fixed income, offers the potential for capital ap preciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. There can be no assurance of capital appreciation, however, because securities prices fluctuate. Convertible securities generally are subordinated to other similar but non-convertible securities of the same issuer, although convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. Because of the subordination feature, however, convertible securities typically have lower ratings than similar non-convertible securities. Money Market Instruments The Portfolio may invest in a variety of money market instruments. The Portfolio may invest, in the circumstances described under "Description of the Fund-Management Policies," in the following types of money market instruments, each of which at the time of purchase must have or be deemed to have under rules of the Securities and Exchange Commission remaining maturities of 13 months or less. U.S. Government Securities The Portfolio may purchase securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, which include U.S. Treasury securities that differ in their interest rates, maturities and times of issuance. Treasury Bills have initial maturities of one year or less; Treasury Notes have initial maturities of one to ten years; and Treasury Bonds generally have initial maturities of greater than ten years. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the U.S. Treasury; others, such as those issued by the Federal National Mortgage Association, by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. Principal and interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law. Bank Obligations The Portfolio may invest in bank obligations, including certificates of deposit, time deposits, bankers' acceptances and other short-term obligations of domestic banks, foreign subsidiaries of domestic banks, foreign branches of domestic banks, and domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, the Portfolio may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, the possible imposition of foreign withholding taxes on interest income payable on the securities, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on these securities and the possible seizure or nationalization of foreign deposits. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by the Portfolio will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. The Portfolio will not invest more than 15% of the value of its net assets in time deposits maturing in more than seven days and in other securities that are illiquid. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Repurchase Agreements Repurchase agreements involve the acquisition by the Portfolio of an underlying debt instrument, subject to an obligation of the seller to repurchase, and the Portfolio to resell, the instrument at a fixed price usually not more than one week after its purchase. Certain costs may be incurred by the Portfolio in connection with the sale of the securities if the seller does not repurchase them in accordance with the repurchase agreement. In addition, if bankruptcy proceedings are commenced with respect to the seller of the securities, realization on the securities by the Portfolio may be delayed or limited. Commercial Paper and Other Short-Term Corporate Obligations Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by the Portfolio will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's Investors Service In c. ("Moody's"), A-1 by Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), F-1 by Fitch Investors Service, L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), (b) issued by companies having an outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by the Advisers to be of comparable quality to those rated obligations which may be purchased by the Portfolio. The Portfolio may purchase floating and variable rate demand notes and bonds, which are obligations ordinarily having stated maturities in excess of one year, but which permit the holder to demand payment of principal at any time or at specified intervals. Warrants The Portfolio may invest up to 5% of its net assets in warrants. The Portfolio may invest up to 5% of its net assets in warrants, except that this limitation does not apply to warrants acquired in units or attached to securities. Included in such amount, but not to exceed 2% of the value of the Portfolio's net assets, may be warrants which are not listed on the New York or American Stock Exchange. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specified amount of the corporation's capital stock at a set price for a specified period of time. Investment Company Securities The Portfolio may invest in securities of other investment companies. The Portfolio may invest in securities issued by other investment companies. Under the 1940 Act, the Portfolio's investment in such securities currently is limited to, subject to certain exceptions, (i) 3% of the total voting stock of any one investment company, (ii) 5% of the Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Investments in the securities of other investment companies will involve duplication of advisory fees and certain other expenses. Illiquid Securities The Portfolio may purchase illiquid securities. The Portfolio may invest up to 15% of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. Such securities may include securities that are not readily marketable, such as certain securities that are subject to legal or contractual restrictions on resale, repurchase agreements providing for settlement in more than seven days after notice, and options traded in the over-the-counter market and securities used to cover such options. As to these securities, the Portfolio is subject to a risk that should the Portfolio desire to sell them when a ready buyer is not available at a price the Portfolio deems representative of their value, the value of the Portfolio's net assets could be adversely affected. The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Distributor Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 Investment Adviser Bear Stearns Funds Management Inc. 245 Park Avenue New York, NY 10167 Sub-Investment Adviser Symphony Asset Management 555 California Street, Suite 2975 San Francisco, CA 94104 Custodian Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 Transfer & Dividend Disbursement Agent PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 Counsel Stroock & Stroock & Lavan 7 Hanover Square New York, NY 10004-2696 Independent Auditors Deloitte & Touche LLP Two World Financial Center New York, NY 10281-1434 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE INSIDERS SELECT FUND'S PROSPECTUS AND IN THE INSIDERS SELECT FUND'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE INSIDERS SELECT FUND'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THE INSIDERS SELECT FUND'S PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. BSF-P-005-03 THE BEAR STEARNS FUNDS 245 PARK AVENUE NEW YORK, NY 10167 1-800-766-4111 PROSPECTUS The Insiders Select Fund Class Y Shares Only The Bear Stearns Funds (the "Fund") is an open-end management investment company, known as a mutual fund. The Fund permits you to invest in separate portfolios. By this Prospectus, Class Y shares of The Insiders Select Fund, a non-diversified portfolio (the "Portfolio"), are offered. The Portfolio's in vestment objective is capital appreciation. The Portfolio's sub-investment adviser uses its proprietary IntelliVest(TM) Model to analyze transactions by corporate insiders, the behavior of financial analysts and the corporate finance activities of the companies themselves to determine which securities to purchase or sell short. Class Y shares are sold at net asset value without a sales charge to investors whose minimum investment is $2.5 million. The Portfolio issues other Classes of shares which have sales charges and different expenses which would affect performance. Investors desiring to obtain information about these other Classes of shares should call 1-800-766-4111 or ask their sales representative or the Portfolio's distributor. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the Portfolio's investment adviser. BSFM has engaged Symphony Asset Management ("Symphony"), a subsidiary of BARRA, Inc., as the Portfolio's sub-investment adviser to manage the Portfolio's day-to-day investment activities. BSFM and Symphony are referred to herein collectively as the "Advisers." Bear, Stearns & Co. Inc. ("Bear Stearns"), an affiliate of BSFM, serves as the Portfolio's distributor. ---------------- This Prospectus sets forth concisely information about the Portfolio that you should know before investing. It should be read and retained for future reference. Part B (also known as the Statement of Additional Information), dated June 20, 1996, which may be revised from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, write to the address or call one of the telephone numbers listed under "General Information" in this Prospectus. ---------------- Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. The net asset value of funds of this type will fluctuate. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AN D EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. June 20, 1996 Table of Contents PAGE Fee Table........................... 3 Condensed Financial Information..... 4 Description of the Fund............. 4 Risk Factors........................ 9 Management of the Fund.............. 10 How to Buy Shares................... 14 Shareholder Services................ 15 How to Redeem Shares................ 16 Dividends, Distributions and Taxes.. 18 Performance Information............. 19 General Information................. 19 Appendix............................ A-1
Fee Table - ---------------------------------------------------------------------------------------- CLASS Y - ---------------------------------------------------------------------------------------- Shareholder Transaction Expenses Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....... None Maximum Deferred Sales Charge Imposed on Redemptions (as a percentage of the amount subject to charge)......................................................... None Annual Portfolio Operating Expenses (as a percentage of average daily net assets) Management Fees (after fee waiver)*............................................... 0.00%** 12b-1 Fees........................................................................ None Other Expenses (after expense reimbursement)*..................................... 1.15% Total Portfolio Operating Expenses (after fee waiver and expense reimbursement)*.. 1.15% Example: You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period: 1 Year........................................................................... $ 12 3 Years.......................................................................... $ 37 5 Years.......................................................................... $ 63 10 Years.......................................................................... $140 - ----- * BSFM has undertaken to waive its investment advisory fee and assume certain expenses of the Portfolio other than brokerage commissions, extraordinary items, interest and taxes to the extent Total Portfolio Operating Expenses exceed 1.15% for Class Y. Without such waiver and expense reimbursement, Management Fees stated above would be 1.00%, Other Expenses would be 2.19% and Total Portfolio Operating Expenses would be 3.19% for Class Y. ** The Management Fee is payable at an annual rate equal to 1% of the Portfolio's average daily net assets, subject to increase or decrease by up to 0.50% annually depending on the Portfolio's performance. See "Management of the FundInvestment Adviser" and "-Sub-Investment Adviser."
The amounts listed in the example should not be considered as representative of past or future expenses and actual expenses may be greater or less than those indicated. Moreover, while the example assumes a 5% annual return, the Portfolio's actual performance will vary and may result in an actual return greater or less than 5%. The purpose of the foregoing table is to assist you in understanding the costs and expenses borne by the Portfolio and investors, the payment of which will reduce investors' annual return. In addition to the expenses noted above, the Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." For a description of the expense reimbursement or waiver arrangements in effect, see "Management of the Fund." Condensed Financial Information The information in the table below covering the Portfolio's investment results for the period indicated has been audited by Deloitte & Touche LLP. Further financial data and related notes appear in the Portfolio's Annual Report for the fiscal year ended March 31, 1996 which is incorporated by reference into the Portfolio's Statement of Additional Information which is available upon request. Financial Highlights Contained below is per share operating performance data, total investment return, ratios to average net assets and other supplemental data for a Class Y share of the Portfolio for the period June 20, 1995 (commencement of initial public offering) to March 31, 1996. This information has been derived from information provided in the Portfolio's financial statements.
- ------------------------------------------------------------------------------------------ CLASS Y - ------------------------------------------------------------------------------------------ Per Share Operating Performance* Net asset value, beginning of period............................................... $12.12 ------- Net investment income (1).......................................................... 0.07 Net realized and unrealized gain on investments and securities sold short (2)...... 1.87 ------- Net increase in net assets resulting from operations............................... 1.94 ------- Dividends to shareholders from: Net investment income.............................................................. (0.04) ------- Net asset value, end of period..................................................... $14.02 ======= Total investment return (3)........................................................ 15.98% ======= Ratios/Supplemental Data Net assets, end of period (000's omitted).......................................... $1,293 Ratio of expenses to average net assets (1)(4)..................................... 1.15% Ratio of net investment income to average net assets (1)(4)........................ 0.97% Decrease reflected in above expense ratios and net investment income due to waivers and reimbursements (4)............................................................. 2.04% Portfolio turnover rate (5)........................................................ 93.45% Average commission rate per share.................................................. $0.03 - ----- * Calculated based on shares outstanding on the first and last day of the period, except for dividends and distribution, if any, which are based on the actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amount shown for a share outstanding throughout the period is not in accord with the change in the aggregate gains and losses in investments during the period because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset value during the period. (3) Total return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total return is not annualized. (4) Annualized. (5) Not annualized.
Further information about performance is contained in the Portfolio's Annual Report, which may be obtained without charge by writing to the address or calling one of the telephone numbers listed under "General Information." Description of the Fund General The Fund is a "series fund." The Fund is a "series fund," which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the Investment Company Act of 1940, as amended (the "1940 Act"), and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As described below, for certain matters Fund shareholders vote together as a group; as to others they vote separately by portfolio. By this Prospectus, shares of the Portfolio are being offered. From time to time, other portfolios may be established and sold pursuant to other offering documents. See "General Information." Investment Objective The Portfolio seeks to provide capital appreciation. The Portfolio's investment objective is capital appreciation. The Portfolio's investment objective cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting shares. There can be no assurance that the Portfolio's investment objective will be achieved. IntelliVest(TM) Model The IntelliVest(TM) Model is Symphony's proprietary methodology for selecting a company's securities by analyzing the behavior of corporate insiders, financial analysts and the company itself. Symphony has developed a proprietary methodology (the "IntelliVest(TM) Model") for analyzing the behavior of (i) corporate insiders-officers, directors and significant stockholders-through an analysis of their publicly filed reports of their trading activities in the equity securities of the companies for which they are insiders, (ii) financial analysts, through an analysis of their published reports about covered companies, including predicted earnings and revisions to predicted earnings, and (iii) the company itself, through an analysis of its behavior as to corporate finance matters, such as stock repurchase programs, dividend policies and new securities issuance. Corporate insiders are believed by Symphony to be in the best position to understand the near term prospects of their companies. Symphony believes that insider behavior can be observed and analyzed since insiders are required to disclose transactions in their company's equity securities to the Securities and Exchange Commission generally no later than the tenth day of the month following the transaction. Each month many thousands of these disclosures are received. Symphony believes that the laborious process of collecting, classifying and analyzing these transactions using the IntelliVest(TM) Model provides valuable investment management information. These Insiders may have many reasons for transacting in company stock and stock options. Many of these are entirely incidental to the future of the company. For example, an insider may sell stock to buy a home or finance a college education for his or her child. Likewise a new management team may wish to signal confidence in the company by making token purchases of the company's equity. Many other transactions, however, are related directly to the insider's beliefs about the near-term price expectations for the company's stock. An insider who exercises long-term options early for small profits likely believes the stock soon will decline. Insiders who exercise options, hold the stock, and buy in the open market probably believe that the stock soon will rise. Clusters of insiders making substantial buys or sells indicate broad agreement within a firm as to the direction of the stock. Financial analysts use a variety of means to learn more about the companies they follow. Among these are visits to the company and in-depth discussions with management. Successful analysts learn to interpret the words and actions of management and the firm itself. Likewise, management uses its discussions with certain analysts as a means of signaling their views to the marketplace. Symphony has a computer model of analysts' predicted earnings and ratings. This model tracks the behavior of analysts as they have revised predicted earnings and the ratings of a company's prospects in the market. Symphony believes that analysts' revisions can be a valuable indicator of future returns for the company's stock. Part of the normal activity of every public company is its financing decisions. A company must routinely decide whether to maintain or change its dividend policy, whether to buy its own stock in the open market or whether to issue new securities. From time to time the firm may decide that its stock is undervalued. Many firms see undervaluation as an opportunity to purchase the company's stock in the open market. Symphony believes that by monitoring changes in shares outstanding (in the hands of the public), a useful signal can be extracted relating to the firm's beliefs about its prospects. Similarly, the company's decision to sell securities to the public or another firm can be an indication that the company believes that its stock has reached a near-term high, a potentially useful sell signal. Insiders, analysts and the company each send signals that can be analyzed using the IntelliVest(TM) Model to produce valuable information about the prospects for individual companies. Symphony believes that the most powerful analysis, however, comes from the interaction of all three sources. While no one signal alone determines whether a security will be purchased or sold, no security will be considered for purchase or sale using the IntelliVest(TM) Model unless a positive or negative signal, as the case may be, is received from insider behavior. In its analysis, the IntelliVest(TM) Model uses only data that is available to the public. Symphony obtains the data on insider trading activity from CDA/Investnet, which compiles this information from publicly available Securities and Exchange Commission filings. Symphony's research team has devoted four years of research to developing the framework necessary to analyze the behavior of each of these sources and the interaction among them. Management Policies The Portfolio seeks to invest primarily in equity securities that, at the time of purchase, are believed by Symphony, using data from the IntelliVest(TM) Model, to provide opportunities for capital appreciation or gains through short selling. Under normal market conditions, Symphony invests substantially all of the Portfolio's assets in the equity securities of U.S. issuers. Using data from the IntelliVest(TM) Model, Symphony selects equity securities believed by it to provide opportunities for capital appreciation or gains through short selling. Issuers are selected without regard to market capitalization, although Symphony anticipates that the issuers principally will be mid- to large capitalization companies; that is, those with market capitalizations exceeding $1 billion. Symphony seeks to use the IntelliVest(TM) Model to select all the Portfolio's securities. The IntelliVest(TM) Model, however, should not be expected to provide data sufficient to permit the Portfolio's entire portfolio to be invested in its selections. For its remaining assets invested in equity securities, Symphony will use an analytic valuation model created by the active strategies group of BARRA, Inc., Symphony's parent, to select from the universe of U.S. equity securities those securities it believes, in the aggregate, will approximate or exceed the total return performance of the Standard & Poor's 500 Stock Index* (the "S&P 500 Index"). The S&P 500 Index is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The composition of the S&P 500 Index is determined by Standard & Poor's based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representative of stocks in a particular industry group, and may be changed from time to time. The weightings of stocks in the S&P 500 Index are based on each stock's relative total market capitalization; that is, its market price per share times the number of shares outstanding. Because of this weighting, as of March 31, 1996, approximately 47% of the S&P 500 Index was composed of the 50 largest companies. The Portfolio will not invest in all or substantially all of the common stocks included in the S&P 500 Index and may invest in stocks that are not included in the S&P 500 index. The Portfolio expects ordinarily to invest in approximately 60 to 150 stocks. By investing in this manner-that is, using its IntelliVest(TM) Model and purchasing other equity securities in a manner intended to approximate or exceed the performance of the S&P 500 Index-Symphony seeks to exceed the total return of the S&P 500 Index. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which the Portfolio may invest will be rated at least investment grade by a nationally recognized statistical rating organization at the time of purchase. Convertible securities rated in the lowest investment grade rating may be considered to have speculative characteristics. Preferred stock generally receives dividends before distributions are paid on common stock and ordinarily has a priority claim over common stockholders if the issuer of the stock is liquidated. The Portfolio may invest, in anticipation of investing cash positions, in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase ag reements, as set forth in the Appendix. Under normal market conditions, the Portfolio expects to have less than 15% of its assets invested in money market instruments. However, when Symphony determines that adverse market conditions exist, the Portfolio may adopt a temporary defensive posture and invest all of its assets in money market instruments. Investment Techniques The Portfolio may engage in short selling, lending portfolio securities and options and futures transactions, each of which involves risk. The Portfolio may engage in various investment techniques, such as short selling, lending portfolio securities and options and futures transactions, each of which involves risk. Options and futures transactions involve "derivative securities." Short selling and futures transactions are discussed below. For a discussion of these other investment techniques and their related risks, see "Appendix-Investment Techniques" and "Risk Factors" below. - ----- * "Standard & Poor's," "S&P(R)" and "S&P 500(R)" are trademarks of The McGraw-Hill Companies, Inc. The Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's or The McGraw-Hill Companies, Inc. Short Selling. Short sales are transactions in which the Portfolio sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio. Until the security is replaced, the Portfolio is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Until the Portfolio replaces a borrowed security in connection with a short sale, the Portfolio will: (a) maintain daily a segregated account, containing cash, cash equivalents or U.S. Government securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position in accordance with positions taken by the Staff of the Securities and Exchange Commission. The Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. The Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Portfolio may be required to pay in connection with a short sale. The Portfolio may purchase call options to provide a hedge against an increase in the price of a security sold short by the Portfolio. See "Appendix-Investment Techniques-Options Transactions." The Portfolio anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net assets. The Portfolio may not sell short the securities of any single issuer listed on a national securities exchange to the extent of more than 5% of the value of its net assets. The Portfolio may not sell short the securities of any class of an issuer to the extent, at the time of the transaction, of more than 2% of the outstanding securities of that class. In addition to the short sales discussed above, the Portfolio may make short sales "against the box," a transaction in which the Portfolio enters into a short sale of a security which the Portfolio owns. The proceeds of the short sale will be held by a broker until the settlement date at which time the Portfolio delivers the security to close the short position. The Portfolio receives the net proceeds from the short sale. The Portfolio at no time will have more than 15% of the value of its net assets in deposits on short sales against the box. It currently is anticipated that the Portfolio will make short sales against the box for purposes of protecting the value of the Portfolio's net assets. Futures Contracts and Options on Futures Contracts. The Portfolio may enter into stock index futures contracts, and options with respect thereto, in U.S. domestic markets. See "Appendix-Investment Techniques-Options Transactions." These transactions will be entered into as a substitute for comparable market positions in the underlying securities or for hedging purposes. Although the Portfolio is not a commodity pool, it is subject to rules of the Commodity Futures Trading Commission (the "CFTC") limiting the extent to which it may engage in these transactions. The Portfolio's commodities transactions must constitute bona fide hedging or other permissible transactions pursuant to regulations promulgated by the CFTC. In addition, the Portfolio may not engage in such transactions if the sum of the amount of initial margin deposits and premiums paid for unexpired commodity options, other than for bona fide hedging transactions, would exceed 5% of the liquidation value of the Portfolio's assets, after taking into account unrealized profits and unrealized losses on such contracts it has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in calculating the 5%. To the extent the Portfolio engages in the use of futures and options on futures for other than bona fide hedging purposes, the Portfolio may be subject to additional risk. Engaging in these transactions involves risk of loss to the Portfolio which could adversely affect the value of a shareholder's investment. Although the Portfolio intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Portfolio to substantial losses. In addition, engaging in futures transactions in foreign markets may involve greater risks than trading on domestic exchanges. Successful use of futures by the Portfolio also is subject to Symphony's ability to predict correctly movements in the direction of the market or foreign currencies and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if the Portfolio has hedged against the possibility of a decline in the market adversely affecting the value of securities held in its portfolio and prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market. The Portfolio may have to sell securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Securities and Exchange Commission, the Portfolio may be required to segregate cash or high quality money market instruments in connection with its commodities transactions in an amount generally equal to the value of the underlying commodity. The segregation of such assets will have the effect of limiting the Portfolio's ability otherwise to invest those assets. Future Developments. The Portfolio may take advantage of opportunities in the area of options and futures contracts, options on futures contracts and any other derivative investments which are not presently contemplated for use by the Portfolio or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Portfolio's investment objective and legally permissible for the Portfolio. Before entering into such transactions or making any such investment, the Portfolio will provide appropriate disclosure in its prospectus. Certain Fundamental Policies Certain of the Portfolio's investment policies are fundamental policies that can be changed only by shareholder vote. The Portfolio may (i) borrow money to the extent permitted under the 1940 Act; and (ii) invest up to 25% of the value of its total assets in the securities of issuers in a single industry, provided that there is no such limitation on investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. This paragraph describes fundamental policies that cannot be changed as to the Portfolio without approval by the holders of a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting shares. See "Investment Objective and Management Policies-Investment Re strictions" in the Statement of Additional Information. Certain Additional Non-Fundamental Policies The Portfolio may (i) purchase securities of any company having less than three years' continuous operation (including operations of any predecessors) if such purchase does not cause the value of the Portfolio's investments in all such companies to exceed 5% of the value of its total assets; (ii) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to secure permitted borrowings; and (iii) invest up to 15% of the value of its net assets in repurchase agreements providing for settlement in more than seven days after notice and in other illiquid securities. See "Investment Objective and Management Policies-Investment Restrictions" in the Statement of Additional Information. Risk Factors No investment is free from risk. Investing in the Portfolio will subject investors to certain risks which should be considered. Net Asset Value Fluctuations The Portfolio's net asset value per share is not fixed and should be expected to fluctuate. Investors should purchase Portfolio shares only as a supplement to an overall investment program and only if investors are willing to undertake the risks involved. Equity Securities Investors should be aware that equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and that fluctuations can be pronounced. Changes in the value of the equity securities in the Portfolio's portfolio will result in changes in the value of the Portfolio's shares and thus the Portfolio's yield and total return to investors. Certain Investment Techniques The use of investment techniques such as short selling, lending portfolio securities and engaging in options and futures transactions, involves greater risk than that incurred by many other funds with a similar objective. Using these techniques may produce higher than normal portfolio turnover and may affect the degree to which the Portfolio's net asset value fluctuates. See "Appendix-Investment Techniques." The Portfolio's ability to engage in certain short-term transactions may be limited by the requirement that, to qualify as a regulated investment company, it must earn less than 30% of its gross income from the disposition of securities held for less than three months. This 30% test limits the extent to which the Portfolio may sell securities held for less than three months, effect short sales of securities held for less than three months, write options expiring in less than three months and invest in certain futures contracts, among other strategies. With the exception of the above requirement, the amount of portfolio activity will not be a limiting factor when making portfolio decisions. Under normal market conditions, the Portfolio's portfolio turnover rate generally will not exceed 150%. Higher portfolio turnover rates are likely to result in comparatively greater brokerage commissions or transaction costs. Short-term gains realized from portfolio transactions are taxable to shareholders as ordinary income. See "Portfolio Transactions" in the Portfolio's Statement of Additional Information. Non-Diversified Status The Portfolio's classification as a "non-diversified" investment company means that the proportion of its assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. A "diversified" investment company is required by the 1940 Act generally, with respect to 75% of its total assets, to invest not more than 5% of such assets in the securities of a single issuer and to hold not more than 10% of the outstanding voting securities of a single issuer. However, the Portfolio intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which requires that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of the Portfolio's total assets be invested in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Portfolio's total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets be invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). Since a relatively high percentage of the Portfolio's assets may be invested in the securities of a limited number of issuers, some of which may be within the same industry or economic sector, the Portfolio's portfolio securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company. Simultaneous Investments Investment decisions for the Portfolio are made independently from those of other investment companies or accounts advised by the Advisers. However, if such other investment companies or accounts are prepared to invest in, or desire to dispose of, securities of the type in which the Portfolio invests at the same time as the Portfolio, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Portfolio or the price paid or received by the Portfolio. Management of the Fund Board of Trustees The Trustees are responsible for the overall management and supervision of the Portfolio's business. The Fund's business affairs are managed under the general supervision of its Board of Trustees. The Portfolio's Statement of Additional Information contains the name and general business experience of each Trustee. Investment Adviser The Portfolio's investment adviser is BSFM; Symphony provides day-to-day management of the Portfolio's investments. The Portfolio's investment adviser is BSFM, a wholly-owned subsidiary of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear Stearns, is a leading United States investment banking, securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. BSFM is a registered investment adviser and offers, either directly or through affiliates, investment advisory and administrative services to open-end and closed-end investment funds and other managed pooled investment vehicles with net assets at March 31, 1996 of over $1.9 billion. BSFM supervises and assists in the overall management of the Portfolio's affairs under an Investment Advisory Agreement between BSFM and the Fund, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. The Portfolio pays BSFM an advisory fee at an annual rate equal to 1% of the Portfolio's average daily net assets which will be adjusted monthly depending on the extent to which the investment performance of Portfolio shares exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. Under the terms of the Investment Advisory Agreement, the Portfolio has agreed to pay BSFM a monthly fee at the annual rate of 1% of the Portfolio's average daily net assets (the "Basic Fee") which will be adjusted monthly (the "Monthly Performance Adjustment") depending on the extent to which the investment performance of the Class of shares (currently, Class C) expected to bear the highest total Portfolio operating expenses, after expenses, exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. The Monthly Performance Adjustment may increase or decrease the total advisory fee payable to BSFM (the "Total Advisory Fee") by up to .50% per year of the value of the Portfolio's average daily net assets. The monthly Total Advisory Fee is calculated as follows: (a) one-twelfth of the 1.0% annual Basic Fee rate (0.083%) is applied to the Portfolio's average daily net assets over the most recent calendar month, giving a dollar amount which is the Basic Fee for that month; (b) one-twelfth of the applicable performance adjustment rate from the table below is applied to the Portfolio's average daily net assets over the most recent calendar month, giving a dollar amount which is the Monthly Performance Adjustment (for the first twelve-month period, no performance adjustment will be made); and (c) the Monthly Performance Adjustment is then added to or subtracted from the Basic Fee and the result is the amount payable by the Portfolio to BSFM as the Total Advisory Fee for that month. The full range of Total Advisory Fees on an annualized basis is as follows: - ------------------------------------------------------------------------------- PERCENTAGE POINT DIFFERENCE BETWEEN DESIGNATED CLASS' PERFORMANCE (NET OF EXPENSES INCLUDING ADVISORY FEES) PERFORMANCE AND PERCENTAGE CHANGE IN THE BASIC ADJUSTMENT TOTAL S&P 500 INDEX FEE (%) RATE (%) FEE (%) - ------------------------------------------------------------------------------- +3.00 percentage points or more.................... 1% .50% 1.50% +2.75 percentage points or more but less than +3.00 percentage points.................................. 1% .40% 1.40% +2.50 percentage points or more but less than +2.75 percentage points.................................. 1% .30% 1.30% +2.25 percentage points or more but less than +2.50 percentage points.................................. 1% .20% 1.20% +2.00 percentage points or more but less than +2.25 percentage points.................................. 1% .10% 1.10% Less than +2.00 percentage points but more than - -2.00 percentage points............................ 1% 0% 1.00% - -2.00 percentage points or less but more than -2.25 percentage points.................................. 1% -.10% .90% - -2.25 percentage points or less but more than -2.50 percentage points.................................. 1% -.20% .80% - -2.50 percentage points or less but more than -2.75 percentage points.................................. 1% -.30% .70% - -2.75 percentage points or less but more than -3.00 percentage points.................................. 1% -.40% .60% - -3.00 percentage points or less.................... 1% -.50% .50% The period over which performance is measured is a rolling twelve-month period and the performance of the S&P 500 Index is calculated as the sum of the change in the level of the S&P 500 Index during the period, plus the value of any dividends or distributions made by the companies whose securities comprise the S&P 500 Index. From June 16, 1995 (commencement of operations) through March 31, 1996, no fees were paid by the Portfolio pursuant to an undertaking by BSFM. The Portfolio's administrator is BSFM. The Portfolio pays BSFM an administration fee at the annual rate of .15 of 1% of its average daily net assets. Under the terms of an Administration Agreement with the Fund, BSFM generally supervises all aspects of the operation of the Portfolio, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. For providing administrative services to the Portfolio, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of the Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Fund, PFPC Inc. provides certain administrative services to the Portfolio. For providing these services, the Fund has agreed to pay PFPC Inc. an annual fee, as set forth below: - ------------------------------------------------------------------------------- PORTFOLIO'S ANNUAL FEE AS A PERCENTAGE OF AVERAGE NET ASSETS AVERAGE DAILY NET ASSETS - ------------------------------------------------------------------------------- First $200 million.................... .10 of 1% Next $200 million up to $400 million.. .075 of 1% Next $200 million up to $600 million.. .05 of 1% Assets in excess of $600 million...... .03 of 1% The above-referenced fee is subject to a monthly minimum fee of $11,000. From June 16, 1995 (commencement of operations) through March 31, 1996, the Portfolio paid PFPC Inc. a monthly fee at the effective annual rate of .30 of 1% of the Portfolio's average daily net assets. From time to time, BSFM may waive receipt of its fees and/or voluntarily assume certain Portfolio expenses, which would have the effect of lowering the Portfolio's expense ratio and increasing yield to investors at the time such amounts are waived or assumed, as the case may be. The Portfolio will not pay BSFM at a later time for any amounts it may waive, nor will the Portfolio reimburse BSFM for any amounts it may assume. From time to time, PFPC Inc. may waive a portion of its fee. Effective May 1, 1996, and until further notice, PFPC Inc. will reduce its monthly minimum to $7,500 for net assets of less than $25 million; $9,167 for net assets of $25 million to $50 million; $11,000 for net assets in excess of $50 million. PFPC Inc. reserves the right to revoke this voluntary fee waiver at any time. Brokerage commissions may be paid to Bear Stearns for executing transactions if the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers. The allocation of brokerage transactions also may take into account a broker's sales of the Portfolio's shares. See "Portfolio Transactions" in the Statement of Additional Information. Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or derivatives thereof as part of the Fund name for as long as the Investment Advisory Agreement is in effect. Sub-Investment Adviser The Portfolio's sub-investment adviser, Symphony, provides investment advisory assistance and the day-to-day management of the Portfolio's investments. BSFM has engaged Symphony, located at 555 California Street, San Francisco, California 94104, to serve as the Fund's sub-investment adviser. Symphony, a registered investment adviser, was formed in 1994. Symphony is a wholly-owned subsidiary of BARRA, Inc., a leading supplier of analytical financial software. Symphony's principals are Jeffrey Skelton, Praveen Gottipalli, Michael Henman and Neil Rudolph. Messrs. Skelton, Henman and Rudolph joined Symphony in 1994 from Wells Fargo Nikko Investment Advisors where they were Managing Directors. Mr. Gottipalli joined Symphony in 1994 from BARRA, Inc. Symphony, subject to the supervision and approval of BSFM, provides investment advisory assistance and the day-to-day management of the Portfolio's investments, as well as investment research and statistical information, under a Sub-Investment Advisory Agreement with BSFM, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. BSFM pays Symphony a sub-advisory fee at an annual rate equal to .45 of 1% of the Portfolio's average daily net assets which will be adjusted monthly depending on the extent to which the investment performance of Portfolio shares exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. Under the Sub-Investment Advisory Agreement, BSFM has agreed to pay Symphony a monthly fee at the annual rate of .45 of 1% of the Portfolio's average daily net assets (the "Symphony Basic Fee") which will be adjusted by a Monthly Performance Adjustment calculated as described above. The Monthly Performance Adjustment applicable to Symphony may increase or decrease the total advisory fee payable to Symphony (the "Total Sub-Advisory Fee") by up to .25% per year of the value of the Portfolio's average daily net assets. The monthly Total Sub-Advisory fee is calculated in the same manner as the Total Advisory Fee.
The full range of Total Sub-Advisory Fees on an annualized basis is as follows: - ------------------------------------------------------------------------------------------------------- PERCENTAGE POINT DIFFERENCE BETWEEN DESIGNATED CLASS' PERFORMANCE (NET OF EXPENSES INCLUDING ADVISORY FEES) PERFORMANCE AND PERCENTAGE CHANGE IN THE ADJUSTMENT S&P 500 INDEX BASIC FEE (%) RATE (%) TOTAL FEE (%) - ------------------------------------------------------------------------------------------------------- +3.00 percentage points or more...................... .45% .25% .70% +2.75 percentage points or more but less than +3.00 percentage points.................................... .45% .20% .65% +2.50 percentage points or more but less than +2.75 percentage points.................................... .45% .15% .60% +2.25 percentage points or more but less than +2.50 percentage points.................................... .45% .10% .55% +2.00 percentage points or more but less than +2.25 percentage points.................................... .45% .05% .50% Less than +2.00 percentage points but more than -2.00 percentage points.................................... .45% 0% .45% - -2.00 percentage points or less but more than -2.25 percentage points.................................... .45% -.05% .40% - -2.25 percentage points or less but more than -2.50 percentage points.................................... .45% -.10% .35% - -2.50 percentage points or less but more than -2.75 percentage points.................................... .45% -.15% .30% - -2.75 percentage points or less but more than -3.00 percentage points.................................... .45% -.20% .25% - -3.00 percentage points or less...................... .45% -.25% .20%
If for the 12-month period ended February 22, 1997, the Total Sub-Advisory Fee exceeds .45%, without giving effect to any fee waivers by BSFM, then thereafter BSFM has agreed to pay Symphony a Basic Fee equal to .50 of 1% on an annualized basis. From June 16, 1995 (commencement of operations) through March 31, 1996, no fees were paid to Symphony by BSFM pursuant to an undertaking by Symphony. The Fund's primary investment officer is Praveen Gottipalli. Since May 1994, he has been Symphony's Director of Investments. For more than five years prior thereto, he was Director of the Active Strategies Group of BARRA, Inc. Distributor Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as the Portfolio's principal underwriter and distributor of the Portfolio's shares pursuant to an agreement which is renewable annually. Custodian and Transfer Agent Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the Portfolio's custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the Portfolio's transfer agent, dividend disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also provides certain administrative services to the Portfolio. Expense Limitation BSFM has undertaken until such time as it gives investors at least 60 days' notice to the contrary that, if in any fiscal year, certain expenses, including the investment advisory fee, exceed 1.15% of Class Y's average daily net assets for the fiscal year, BSFM may waive a portion of its investment advisory fee or bear other expenses to the extent of the excess expense. How to Buy Shares General The minimum initial investment is $2.5 million. Subsequent investments may be made in any amount. Share certificates are issued only upon written request. The Fund reserves the right to re-ject any purchase order. The Fund reserves the right to vary the initial and subsequent investment minimum requirements at any time. Investments by employees of Bear Stearns and its affiliates are not subject to the minimum investment requirement. In addition, accounts under the discretionary management of Bear Stearns and its affiliates or Symphony and its affiliates are not subject to the minimum investment requirement. Purchases of the Portfolio's shares may be made through a brokerage account maintained with Bear Stearns or through certain investment dealers who are members of the National Association of Securities Dealers, Inc. who have sales agreements with Bear Stearns (an "Authorized Dealer"). Purchases of the Portfolio's shares also may be made directly through the Transfer Agent. Investors must specify that Class Y is being purchased. Purchases are effected at Class Y's net asset value next determined after a purchase order is received by Bear Stearns, an Authorized Dealer or the Transfer Agent (the "trade date"). Payment for Portfolio shares generally is due to Bear Stearns or the Authorized Dealer on the third business day (the "settlement date") after the trade date. Investors who make payment before the settlement date may permit the payment to be held in their brokerage accounts or may designate a temporary investment for payment until the settlement date. If a temporary investment is not designated, Bear Stearns or the Authorized Dealer will benefit from the temporary use of the funds if payment is made before the settlement date. Purchases can be made through Bear Stearns account executives, Authorized Dealers or the Transfer Agent. Purchases through Bear Stearns account executives or Authorized Dealers may be made by check (except that a check drawn on a foreign bank will not be accepted), Federal Reserve draft or by wiring Federal Funds with funds held in brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal Reserve drafts should be made payable as follows: (i) to Bear Stearns or an investor's Authorized Dealer or (ii) to "The Bear Stearns Funds-The Insiders Select Fund-Class Y" if purchased directly from the Portfolio, and should be directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds-The Insiders Select Fund-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Payment by check or Federal Reserve draft must be received within three business days of receipt of the purchase order by Bear Stearns or an Authorized Dealer. Orders placed directly with the Transfer Agent must be accompanied by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding payment promptly to the Fund. The Fund will charge $7.50 for each wire redemption. The payment proceeds of a redemption of shares recently purchased by check may be delayed as described under "How to Redeem Shares." Investors who are not Bear Stearns clients may purchase Portfolio shares through the Transfer Agent. To make an initial investment in the Portfolio, an investor must establish an account with the Portfolio by furnishing necessary information to the Fund. An account with the Portfolio may be established by completing and signing the Account Information Form indicating which Class of shares is being purchased, a copy of which is attached to this Prospectus, and mailing it, together with a check to cover the purchase, to PFPC Inc., Attention: The Bear Stearns Funds-The Insiders Select Fund-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Subsequent purchases of shares may be made by checks made payable to the Fund and directed to the address set forth in the preceding paragraph. The Portfolio account number should appear on the check. Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer Agent before the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., New York time) on any day the Portfolio calculates its net asset value are priced according to the net asset value determined on that date. Purchase orders received after the close of trading on the New York Stock Exchange are priced as of the time the net asset value is next determined. Net asset value is computed daily as of the close of regular trading on the New York Stock Exchange. Shares of the Portfolio are sold on a continuous basis. Net asset value per share is determined as of the close of regular trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New York time) on each business day. The net asset value per share of Class Y of the Portfolio is computed by dividing the value of the Portfolio's net assets represented by Class Y (i.e., the value of its assets less liabilities) by the total number of shares of Class Y outstanding. The Portfolio's investments are valued based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by, or in accordance with procedures established by, the Fund's Board of Trustees. For further information regarding the methods employed in valuing the Portfolio's investments, see "Determination of Net Asset Value" in the Portfolio's Statement of Additional Information. Federal regulations require that investors provide a certified Taxpayer Identification Number (a "TIN") upon opening or reopening an account. See "Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the Fund could subject the investor to a $50 penalty imposed by the Internal Re venue Service (the "IRS"). Shareholder Services Exchange Privilege The Exchange Privilege permits easy purchases of other funds in the Bear Stearns family. The Exchange Privilege enables an investor to purchase, in exchange for Class Y shares of the Portfolio, Class Y shares of the Fund's other portfolios or shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale in the investor's state of residence. These funds have different investment objectives which may be of interest to investors. To use this Privilege, investors should consult their account executive at Bear Stearns, their account executive at an Authorized Dealer or the Transfer Agent to determine if it is available and whether any conditions are imposed on its use. To use this Privilege, exchange instructions must be given to the Transfer Agent in writing or by telephone. A shareholder wishing to make an exchange may do so by sending a written request to the Transfer Agent at the address given above in "How to Buy Shares-General." Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the account application that they do not wish to use this privilege. Shareholders holding share certificates are not eligible to exchange shares of the Portfolio by phone because share certificates must accompany all exchange requests. To add this feature to an existing account that previously di d not provide for this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 (in Delaware call collect 302-791-1031) to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing. If the exchanging shareholder does not currently own Class Y shares of the portfolio or fund whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and Authorized Dealer of record as the account from which shares are exchanged, un less otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as described below. The Exchange Privilege may be modified or terminated at any time, or from time to time, by the Fund on 60 days' notice to the affected portfolio or fund shareholders. The Fund, BSFM and Bear Stearns will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine. In attempting to confirm that telephone instructions are genuine, the Fund will use such procedures as are considered reasonable, including recording those instructions and requesting information as to account registration (such as the name in which an account is registered, the account number, recent transactions in the account, and the account holder's Social Security number, address and/or bank). Before any exchange, the investor must obtain and should review a copy of the current prospectus of the portfolio or fund into which the exchange is being made. Prospectuses may be obtained free of charge from Bear Stearns, any Authorized Dealer or the Transfer Agent. When establishing a new account by exchange, the Class Y shares being exchanged must have a value of at least the minimum initial investment required for the portfolio or fund into which the exchange is being made; if making an exchange to an existing account, the dollar value must equal or exceed the applicable minimum for subsequent investments. If any amount remains in the investment portfolio from which the exchange is being made, such amount must not be below the minimum account value required by the Portfolio or Fund. Class Y Shares will be exchanged at the next determined net asset value. No fees currently are charged shareholders directly in connection with exchanges, although the Fund reserves the right, upon not less than 60 days' written notice, to charge shareholders a $5.00 fee in accordance with rules promulgated by the Securities and Exchange Commission. The Fund reserves the right to reject any exchange request in whole or in part. The Exchange Privilege may be modified or terminated at any time upon notice to shareholders. The exchange of Class Y shares of one portfolio or fund for Class Y shares of another is treated for Federal income tax purposes as a sale of the Class Y shares given in exchange by the shareholder and, therefore, an exchanging shareholder may realize a taxable gain or loss. Redirected Distribution Option The Redirected Distribution Option permits investment of investors' dividends and distributions in shares of other funds in the Bear Stearns family. The Redirected Distribution Option enables a shareholder to invest automatically dividends and/or capital gain distributions, if any, paid by the Portfolio in Class Y shares of another portfolio of the Fund or a fund advised or sponsored by Bear Stearns of which the shareholder is an investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be purchased at the then-current net asset value. This privilege is available only for existing accounts and may not be used to open new accounts. Minimum subsequent investments do not apply. The Fund may modify or terminate this privilege at any time or charge a service fee. No such fee currently is contemplated. How to Redeem Shares General The redemption price will be based on the net asset value next computed after receipt of a redemption request. Investors may request redemption of Portfolio shares at any time. Redemption requests may be made as described below. When a request is received in proper form, the Portfolio will redeem the shares at the next determined net asset value. If the investor holds Portfolio shares of more than one Class, any request for redemption must specify the Class of shares being redeemed. If the investor fails to specify the Class of shares to be redeemed or if the investor owns fewer shares of the Class than specified to be redeemed, the redemption request may be delayed until the Transfer Agent receives further instructions from the investor, the investor's Bear Stearns account executive or the investor's Authorized Dealer. The Fund imposes no charges when shares are redeemed directly through Bear Stearns. The Portfolio ordinarily will make payment for all shares redeemed within three days after receipt by the Transfer Agent of a redemption request in proper form, except as provided by the rules of the Securities and Exchange Commission. However, if an investor has purchased Portfolio shares by check and subsequently submits a redemption request by mail, the redemption proceeds will not be transmitted until the check used for investment has cleared, which may take up to 15 days. The Fund will reject requests to redeem shares by telephone or wire for a period of 15 days after receipt by the Transfer Agent of the purchase check against which such redemption is requested. This procedure does not apply to shares purchased by wire payment. The Fund reserves the right to redeem investor accounts at its option upon not less than 60 days' written notice if the account's net asset value is $750 or less, for reasons other than market conditions, and remains so during the notice period. Procedures Shareholders may redeem shares in several ways. Redemption through Bear Stearns or Authorized Dealers Clients with a brokerage account may submit redemption requests to their account executives or Authorized Dealers in person or by telephone, mail or wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request by repurchasing Fund shares from a redeeming shareholder at the shares' net asset value next computed after receipt of the request by Bear Stearns or the Authorized Dealer. Under normal circumstances, within three days, redemption proceeds will be paid by check or credited to the shareholder's brokerage account at the election of the shareholder. Bear Stearns account executives or Authorized Dealers are responsible for promptly forwarding redemption requests to the Transfer Agent. If an investor authorizes telephone redemption, the Transfer Agent may act on telephone instructions from any person representing himself or herself to be a representative of Bear Stearns or the Authorized Dealer and reasonably believed by the Transfer Agent to be genuine. The Fund will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Transfer Agent or the Fund may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Fund nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Redemption through the Transfer Agent Shareholders who are not clients with a brokerage account who wish to redeem shares must redeem their shares through the Transfer Agent by mail; other shareholders also may redeem Fund shares through the Transfer Agent. Mail redemption requests should be sent to the Transfer Agent at: PFPC Inc., Attention: The Bear Stearns Funds-The Insiders Select Fund-Class Y, P.O. Box 8960, Wilmington, Delaware 19899-8960. Additional Information about Redemptions A shareholder may have redemption proceeds of $500 or more wired to the shareholder's brokerage account or a commercial bank account designated by the shareholder. A transaction fee of $7.50 will be charged for payments by wire. Questions about this option, or redemption requirements generally, should be referred to the shareholder's Bear Stearns account executive, to any Authorized Dealer, or to the Transfer Agent if the shares are not held in a brokerage account. Written redemption instructions, indicating the Portfolio from which shares are to be redeemed, and duly endorsed stock certificates, if previously issued, must be received by the Transfer Agent in proper form and signed exactly as the shares are registered. All signatures must be guaranteed. The Transfer Agent has adopted standards and procedures pursuant to which signature-guarantees in proper form generally will be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations, as well as from participants in the New York Stock Exchange Medallion Signature Program, the Stock Exchanges Medallion Program and the Securities Transfer Agents Medallion Program ("STAMP"). Such guarantees must be signed by an authorized signatory thereof with "Signature Guaranteed" appearing with the shareholder's signature. If the signature is guaranteed by a broker or dealer, such broker or dealer must be a member of a clearing corporation and maintain net capital of at least $100,000. Signature-guarantees may not be provided by notaries public. Redemption requests by corporate and fiduciary shareholders must be accompanied by appropriate documentation establishing the authority of the person seeking to act on behalf of the account. Investors may obtain from the Fund or the Transfer Agent forms of resolutions and other documentation which have been prepared in advance to assist compliance with the Portfolio's procedures. Any questions with respect to signature-guarantees should be directed to the Transfer Agent by calling 1-800-447-1139 (in Delaware call collect 302-791-1031). During times of drastic economic or market conditions, investors may experience difficulty in contacting Bear Stearns or Authorized Dealers by telephone to request a redemption of Portfolio shares. In such cases, investors should consider using the other redemption procedures described herein. Use of these other redemption procedures may result in the redemption request being processed at a later time than it would have been if telephone redemption had been used. During the delay, the Portfolio's net asset value may fluctuate. Dividends, Distributions and Taxes Dividends will be automatically reinvested in additional Portfolio shares at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. The Portfolio ordinarily pays dividends from its net investment income and distributes net realized securities gains, if any, once a year, but it may make distributions on a more frequent basis to comply with the distribution requirements of the Code, in all events in a manner consistent with the provisions of the 1940 Act. The Portfolio will not make distributions from net realized securities gains unless capital loss carryovers, if any, have been utilized or have expired. Dividends are automatically reinvested in additional Class Y shares of the Portfolio at net asset value, unless payment in cash is requested or dividends are redirected into another fund pursuant to the Redirected Distribution Option. All expenses are accrued daily and deducted before declaration of dividends to investors. Dividends derived from net investment income, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or disposition of certain market discount bonds, paid by the Portfolio will be taxable to U.S. shareholders as ordinary income, whether received in cash or reinvested in additional shares of the Portfolio or redirected into another portfolio or fund. Distributions from net realized long-term securities gains of the Portfolio will be taxable to U.S. shareholders as long-term capital gains for Federal income tax purposes, regardless of how long shareholders have held their Portfolio shares and whether such distributions are received in cash or reinvested in, or redirected into other, shares. The Code provides that the net capital gain of an individual generally will not be subject to Federal income tax at a rate in excess of 28%. Dividends and distributions may be subject to state and local taxes. Dividends, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or other disposition of market discount bonds, paid by the Portfolio to a foreign investor generally are subject to U.S. nonresident withholding taxes at the rate of 30%, unless the foreign investor claims the benefit of a lower rate specified in a tax treaty. Distributions from net realized long-term securities gains paid by the Portfolio to a foreign investor as well as the proceeds of any redemptions from a foreign investor's account, regardless of the extent to which gain or loss may be realized, generally will not be subject to U.S. nonresident withholding tax. However, such distributions may be subject to backup withholding, as described below, unless the foreign investor certifies his non-U.S. residency status. Notice as to the tax status of investors' dividends and distributions will be mailed to them annually. Investors also will receive periodic summaries of their accounts which will include information as to dividends and distributions from securities gains, if any, paid during the year. Federal regulations generally require the Fund to withhold ("backup withholding") and remit to the U.S. Treasury 31% of dividends, distributions from net realized securities gains and the proceeds of any redemption, regardless of the extent to which gain or loss may be realized, paid to a shareholder if such shareholder fails to certify either that the TIN furnished in connection with opening an account is correct or that such shareholder has not received notice from the IRS of being subject to backup withholding as a result of a failure to properly report taxable dividend or interest income on a Federal income tax return. Furthermore, the IRS may notify the Fund to institute backup withholding if the IRS determines a shareholder's TIN is incorrect or if a shareholder has failed to properly report taxable dividend and interest income on a Federal income tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account, and may be claimed as a credit on the record owner's Federal income tax return. The Portfolio is not expected to have any Federal tax liability; although investors should expect to be subject to Federal, state or local taxes in respect of their investment in Portfolio shares. Management of the Fund believes that the Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Code. The Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Such qualification relieves the Portfolio of any liability for Federal income tax to the extent its earnings are distributed in accordance with applicable provisions of the Code. In addition, the Portfolio is subject to a non-deductible 4% excise tax, measured with respect to certain undistributed amounts of taxable investment income and capital gains. Each investor should consult its tax adviser regarding specific questions as to Federal, state or local taxes. Performance Information The Portfolio may advertise its performance in a number of ways. For purposes of advertising, performance for Class Y may be calculated on the basis of average annual total return and/or total return. These total return figures reflect changes in the price of the shares and assume that any income dividends and/or capital gains distributions made by the Portfolio during the measuring period were reinvested in Class Y shares. Average annual total return is calculated pursuant to a standardized formula which assumes that an investment in the Portfolio was purchased with an initial payment of $1,000 and that the investment was redeemed at the end of a stated period of time, after giving effect to the reinvestment of dividends and distributions during the period. The return is expressed as a percentage rate which, if applied on a compounded annual basis, would result in the redeemable value of the investment at the end of the period. Advertisements of the Portfolio's performance will include the Portfolio's average annual total return for one, five and ten year periods, or for shorter periods depending upon the length of time during which the Portfolio has operated. Computations of average annual total return for periods of less than one year represent an annualization of the Portfolio's actual total return for the applicable period. Total return is computed on a per share basis and assumes the reinvestment of dividends and distributions. Total return generally is expressed as a percentage rate which is calculated by combining the income and principal changes for a specified period and dividing by the net asset value per share at the beginning of the period. Advertisements may include the percentage rate of total return or may include the value of a hypothetical investment at the end of the period which assumes the application of the percentage rate of total return. Performance will vary from time to time and past results are not necessarily representative of future results. Investors should remember that performance is a function of portfolio management in selecting the type and quality of portfolio securities and is affected by operating expenses. Performance information, such as that described above, may not provide a basis for comparison with other investments or other investment companies using a different method of calculating performance. Comparative performance information may be used from time to time in advertising or marketing the Portfolio's shares, including data from Lipper Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index, Wilshire 4500 Stock Index, Russell Small Cap Index, the Dow Jones Industrial Average and other industry publications. General Information The Fund was organized as an unincorporated business trust under the laws of the Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994. The Fund commenced operations on or about April 3, 1995 in connection with the offer of shares of certain of its other portfolios. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. The Portfolio's shares are classified into three Classes-Class A, Class C and Class Y. Each share has one vote and shareholders will vote in the aggregate and not by Class, except as otherwise required by law. Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Portfolio. However, the Trust Agreement disclaims shareholder liability for acts or obligations of the Portfolio and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or a Trustee. The Trust Agreement provides for indemnification from the Portfolio's property for all losses and expenses of any shareholder held personally liable for the obligations of the Portfolio. Thus, the risk of a shareholder incurring financial loss on account of a shareholder liability is limited to circumstances in which the Portfolio itself would be unable to meet its obligations, a possibility which management believes is remote. Upon payment of any liability incurred by the Portfolio, the shareholder paying such liability will be entitled to reimbursement from the general assets of the Portfolio. The Fund's Trustees intend to conduct the operations of the Portfolio in a way so as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the Portfolio. As discussed under "Management of the Fund" in the Portfolio's Statement of Additional Information, the Portfolio ordinarily will not hold shareholder meetings; however, shareholders under certain circumstances may have the right to call a meeting of shareholders for the purpose of voting to remove Trustees. To date, the Fund's Board has authorized the creation of five portfolios of shares. All consideration received by the Fund for shares of one of the portfolios and all assets in which such consideration is invested will belong to that portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, one portfolio (and as to classes within a portfolio) are treated separately from those of the other portfolios (and classes). The Fund has the ability to create, from time to time, new portfolios of shares without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, the Rule exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of the Rule. The Transfer Agent maintains a record of share ownership and will send confirmations and statements of account. Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 (in Delaware call collect 302-791-1031) or by calling Bear Stearns at 1-800-766-4111. Appendix Investment Techniques In connection with its investment objective and policies, the Portfolio may employ, among others, the following investment techniques which may involve certain risks. Options transactions involve "derivative securities." Options Transactions The Portfolio may engage in options transactions. The Portfolio is permitted to invest up to 5% of its assets, represented by the premium paid, in the purchase of call and put options in respect of specific securities (or groups or "baskets" of specific securities) in which the Portfolio may invest. The Portfolio may write and sell covered call option contracts on securities owned by the Portfolio not exceeding 20% of the value of its net assets at the time such option contracts are written. The Portfolio also may purchase call options to enter into closing purchase transactions. The Portfolio also may write covered put option contracts to the extent of 20% of the value of its net assets at the time such option contracts are written. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at the exercise price at any time during the option period. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at the exercise price at any time during the option period. A covered put option sold by the Portfolio exposes the Portfolio during the term of the option to a decline in price of the underlying security or securities. A put option sold by the Portfolio is covered when, among other things, cash or liquid securities are placed in a segregated account with the Fund's custodian to fulfill the obligation undertaken. The Portfolio may purchase and sell call and put options on stock indexes listed on U.S. securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Portfolio will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Successful use by the Portfolio of options will be subject to Symphony's ability to predict correctly movements in the direction of individual stocks or the stock market generally, foreign currencies or interest rates. To the extent Symphony's predictions are incorrect, the Portfolio may incur losses which could adversely affect the value of a shareholder's investment. Lending Portfolio Securities The Portfolio may earn additional income by lending its portfolio securities. From time to time, the Portfolio may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. Such loans may not exceed 331/3% of the value of the Portfolio's total assets. In connection with such loans, the Portfolio will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Portfolio can increase its income through the investment of such collateral. The Portfolio continues to be entitled to payments in amounts equal to the interest, dividends and other distributions payable on the loaned security and receives interest on the amount of the loan. Such loans will be terminable at any time upon specified notice. The Portfolio might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with the Portfolio. Borrowing Money The Portfolio may borrow money. As a fundamental policy, the Portfolio is permitted to borrow to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 331/3% of the value of such company's total assets. However, the Portfolio currently intends to borrow money only for temporary or emergency (not leveraging) purposes, in an amount up to 15% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of the Portfolio's total assets, the Portfolio will not make any additional investments. Certain Portfolio Securities Convertible Securities The Portfolio may invest in convertible securities. Convertible securities are fixed-income securities that may be converted at either a stated price or stated rate into underlying shares of common stock. Convertible securities have general characteristics similar to both fixed-income and equity securities. Although to a lesser extent than with fixed-income securities generally, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock, and, therefore, also will react to variations in the general market for equity securities. A unique feature of convertible securities is that as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. As fixed-income securities, convertible securities are investments that provide for a stable stream of income with generally higher yields than common stocks. Of course, like all fixed-income securities, there can be no assurance of current income because the issuers of the convertible securities may default on their obligations. Convertible securities, however, generally offer lower interest or dividend yields than non-convertible securities of similar quality because of the potential for capital appreciation. A convertible security, in addition to providing fixed income, offers the potential for capital ap preciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. There can be no assurance of capital appreciation, however, because securities prices fluctuate. Convertible securities generally are subordinated to other similar but non-convertible securities of the same issuer, although convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. Because of the subordination feature, however, convertible securities typically have lower ratings than similar non-convertible securities. Money Market Instruments The Portfolio may invest in a variety of money market instruments. The Portfolio may invest, in the circumstances described under "Description of the Fund-Management Policies," in the following types of money market instruments, each of which at the time of purchase must have or be deemed to have under rules of the Securities and Exchange Commission remaining maturities of 13 months or less. U.S. Government Securities The Portfolio may purchase securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, which include U.S. Treasury securities that differ in their interest rates, maturities and times of issuance. Treasury Bills have initial maturities of one year or less; Treasury Notes have initial maturities of one to ten years; and Treasury Bonds generally have initial maturities of greater than ten years. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the U.S. Treasury; others, such as those issued by the Federal National Mortgage Association, by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. These securities bear fixed, floating or variable rates of interest. Principal and interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law. Bank Obligations The Portfolio may invest in bank obligations, including certificates of deposit, time deposits, bankers' acceptances and other short-term obligations of domestic banks, foreign subsidiaries of domestic banks, foreign branches of domestic banks, and domestic and foreign branches of foreign banks, domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, the Portfolio may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, the possible imposition of foreign withholding taxes on interest income payable on the securities, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on these securities and the possible seizure or nationalization of foreign deposits. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by the Portfolio will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. The Portfolio will not invest more than 15% of the value of its net assets in time deposits maturing in more than seven days and in other securities that are illiquid. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. Repurchase Agreements Repurchase agreements involve the acquisition by the Portfolio of an underlying debt instrument, subject to an obligation of the seller to repurchase, and the Portfolio to resell, the instrument at a fixed price usually not more than one week after its purchase. Certain costs may be incurred by the Portfolio in connection with the sale of the securities if the seller does not repurchase them in accordance with the repurchase agreement. In addition, if bankruptcy proceedings are commenced with respect to the seller of the securities, realization on the securities by the Portfolio may be delayed or limited. Commercial Paper and Other Short-Term Corporate Obligations Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by the Portfolio will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's Investors Service In c. ("Moody's"), A-1 by Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), F-1 by Fitch Investors Service, L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), (b) issued by companies having an outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by the Advisers to be of comparable quality to those rated obligations which may be purchased by the Portfolio. The Portfolio may purchase floating and variable rate demand notes and bonds, which are obligations ordinarily having stated maturities in excess of one year, but which permit the holder to demand payment of principal at any time or at specified intervals. Warrants The Portfolio may invest up to 5% of its net assets in warrants. The Portfolio may invest up to 5% of its net assets in warrants, except that this limitation does not apply to warrants acquired in units or attached to securities. Included in such amount, but not to exceed 2% of the value of the Portfolio's net assets, may be warrants which are not listed on the New York or American Stock Exchange. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specified amount of the corporation's capital stock at a set price for a specified period of time. Investment Company Securities The Portfolio may invest in securities of other investment companies. The Portfolio may invest in securities issued by other investment companies. Under the 1940 Act, the Portfolio's investment in such securities currently is limited to, subject to certain exceptions, (i) 3% of the total voting stock of any one investment company, (ii) 5% of the Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Investments in the securities of other investment companies will involve duplication of advisory fees and certain other expenses. Illiquid Securities The Portfolio may purchase illiquid securities. The Portfolio may invest up to 15% of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. Such securities may include securities that are not readily marketable, such as certain securities that are subject to legal or contractual restrictions on resale, repurchase agreements providing for settlement in more than seven days after notice, and options traded in the over-the-counter market and securities used to cover such options. As to these securities, the Portfolio is subject to a risk that should the Portfolio desire to sell them when a ready buyer is not available at a price the Portfolio deems representative of their value, the value of the Portfolio's net assets could be adversely affected. The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1.800.766.4111 Distributor Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 Investment Adviser Bear Stearns Funds Management Inc. 245 Park Avenue New York, NY 10167 Sub-Investment Adviser Symphony Asset Management 555 California Street, Suite 2975 San Francisco, CA 94104 Custodian Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 Transfer & Dividend Disbursement Agent PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 Counsel Stroock & Stroock & Lavan 7 Hanover Square New York, NY 10004-2696 Independent Auditors Deloitte & Touche LLP Two World Financial Center New York, NY 10281-1434 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE INSIDERS SELECT FUND'S PROSPECTUS AND IN THE INSIDERS SELECT FUND'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFER OF THE INSIDERS SELECT FUND'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THE INSIDERS SELECT FUND'S PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. BSF-P-007-03 THE BEAR STEARNS FUNDS LARGE CAP VALUE PORTFOLIO SMALL CAP VALUE PORTFOLIO TOTAL RETURN BOND PORTFOLIO CLASS A, CLASS C AND CLASS Y PART B (STATEMENT OF ADDITIONAL INFORMATION) JUNE 20, 1996 This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the current relevant Prospectus dated June 20, 1996 of The Bear Stearns Funds (the "Fund"), as each may be revised from time to time, offering shares of three diversified portfolios (each, a "Portfolio"): the Large Cap Value Portfolio and the Small Cap Value Portfolio (together, the "Equity Portfolios") and the Total Return Bond Portfolio (the "Bond Portfolio"). To obtain a free copy of such Prospectus, please write to the Fund at PFPC Inc. ("PFPC"), Attention: [Name of Portfolio], P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1-800-447-1139 (in Delaware call collect 302-791-1031) or call Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766-4111. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as each Portfolio's investment adviser. Bear Stearns, an affiliate of BSFM, serves as distributor of each Portfolio's shares. TABLE OF CONTENTS Page Investment Objective and Management Policies.............. B-2 Management of the Fund.................................... B-14 Management Arrangements................................... B-18 Purchase and Redemption of Shares......................... B-22 Determination of Net Asset Value.......................... B-24 Dividends, Distributions and Taxes........................ B-26 Portfolio Transactions.................................... B-28 Performance Information................................... B-30 Information About the Fund................................ B-32 Custodian, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors.......................... B-35 Financial Statements...................................... B-36 Appendix.................................................. B-37 INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES The following information supplements and should be read in conjunction with the section in the Portfolios' Prospectus entitled "Description of the Fund." Portfolio Securities Bank Obligations. (All Portfolios) Domestic commercial banks organized under Federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System and to have their deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state law are supervised and examined by state banking authorities but are members of the Federal Reserve System only if they elect to join. In addition, state banks whose certificates of deposit ("CDs") may be purchased by each Portfolio are insured by the FDIC (although such insurance may not be of material benefit to a Portfolio, depending on the principal amount of the CDs of each bank held by such Portfolio) and are subject to Federal examination and to a substantial body of Federal law and regulation. As a result of Federal or state laws and regulations, domestic branches of domestic banks whose CDs may be purchased by each Portfolio generally are required, among other things, to maintain specified levels of reserves, are limited in the amounts which they can loan to a single borrower and are subject to other regulation designed to promote financial soundness. However, not all of such laws and regulations apply to the foreign branches of domestic banks. Obligations of foreign branches of domestic banks, foreign subsidiaries of domestic banks and domestic and foreign branches of foreign banks, such as CDs and time deposits ("TDs"), may be general obligations of the parent banks in addition to the issuing branch, or may be limited by the terms of a specific obligation and governmental regulation. Such obligations are subject to different risks than are those of domestic banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. These foreign branches and subsidiaries are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, auditing and financial record keeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank or about a foreign bank than about a domestic bank. Obligations of United States branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation or by Federal or state regulation as well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may be subject to reserve requirements imposed by the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, Federal branches licensed by the Comptroller of the Currency and branches licensed by certain states ("State Branches") may be required to: (1) pledge to the regulator, by depositing assets with a designated bank within the state, a certain percentage of their assets as fixed from time to time by the appropriate regulatory authority; and (2) maintain assets within the state in an amount equal to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of Federal and State Branches generally must be insured by the FDIC if such branches take deposits of less than $100,000. In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of domestic banks, by foreign branches of foreign banks or by domestic branches of foreign banks, BSFM carefully evaluates such investments on a case-by-case basis. Mortgage-Related Securities Government Agency Securities. (Bond Portfolio) Mortgage-related securities issued by the Government National Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as to the timely payment of principal and interest by GNMA and such guarantee is backed by the full faith and credit of the United States. GNMA is a wholly-owned U.S. Government corporation within the department of Housing and Urban Development. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. Government Related Securities. (Bond Portfolio) Mortgage-related securities issued by the Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are solely the obligations of the FNMA and are not backed by or entitled to the full faith and credit of the United States. The FNMA is a government-sponsored organization owned entirely by private stockholders. Fannie Maes are guaranteed as to timely payment of principal and interest by FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United States created pursuant to an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or by any Federal Home Loan Bank and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When the FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. Repurchase Agreements. (All Portfolios) Each Portfolio's custodian or sub-custodian will have custody of, and will hold in a segregated account, securities acquired by the Portfolio under a repurchase agreement. Repurchase agreements are considered by the staff of the Securities and Exchange Commission to be loans by the Portfolio. In an attempt to reduce the risk of incurring a loss on a repurchase agreement, each Portfolio will enter into repurchase agreements only with domestic banks with total assets in excess of one billion dollars, or primary government securities dealers reporting to the Federal Reserve Bank of New York, with respect to securities of the type in which each Portfolio may invest, and will require that additional securities be deposited with it if the value of the securities purchased should decrease below the resale price. BSFM will monitor on an ongoing basis the value of the collateral to assure that it always equals or exceeds the repurchase price. Each Portfolio will consider on an ongoing basis the creditworthiness of the institutions with which it enters into repurchase agreements. Municipal Obligations. (Bond Portfolio) Municipal obligations are classified as general obligation bonds, revenue bonds and notes. General obligation bonds are secured by the issuer's pledge of its faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable from the revenue derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source, but not from the general taxing power. Industrial development bonds, in most cases, are revenue bonds and generally do not carry the pledge of the credit of the issuing municipality, but generally are guaranteed by the corporate entity on whose behalf they are issued. Notes are short-term instruments which are obligations of the issuing municipalities or agencies and are sold in anticipation of a bond sale, collection of taxes or receipt of other revenues. Municipal obligations include municipal lease/purchase agreements which are similar to installment purchase contracts for property or equipment issued by municipalities. Certain municipal obligations are subject to redemption at a date earlier than their stated maturity pursuant to call options, which may be separated from the related municipal obligation and purchased and sold separately. The Bond Portfolio will invest in municipal obligations, the ratings of which correspond with the ratings of other permissible Bond Portfolio investments. Commercial Paper and Other Short-Term Corporate Obligations. (All Portfolios) Variable rate demand notes include variable amount master demand notes, which are obligations that permit each Portfolio to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between a Portfolio, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. As mutually agreed between the parties, a Portfolio may increase the amount under the notes at any time up to the full amount provided by the note agreement, or decrease the amount, and the borrower may repay up to the full amount of the note without penalty. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded, and there generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, a Portfolio's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. In connection with floating and variable rate demand obligations, BSFM will consider, on an ongoing basis, earning power, cash flow and other liquidity ratios of the borrower, and the borrower's ability to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and an Equity Portfolio may invest in them only if at the time of an investment the borrower meets the criteria set forth in the Equity Portfolios' Prospectus for other commercial paper issuers. Illiquid Securities. (All Portfolios) When purchasing securities that have not been registered under the Securities Act of 1933, as amended, and are not readily marketable, each Portfolio will endeavor to obtain the right to registration at the expense of the issuer. Generally, there will be a lapse of time between a Portfolio's decision to sell any such security and the registration of the security permitting sale. During any such period, the price of the securities will be subject to market fluctuations. However, if a substantial market of qualified institutional buyers develops for certain unregistered securities purchased by a Portfolio pursuant to Rule 144A under the Securities Act of 1933, as amended, such Portfolio intends to treat them as liquid securities in accordance with procedures approved by the Fund's Board of Trustees. Because it is not possible to predict with assurance how the market for restricted securities pursuant to Rule 144A will develop, the Fund's Board of Trustees has directed BSFM to monitor carefully each Portfolio's investments in such securities with particular regard to trading activity, availability of reliable price information and other relevant information. To the extent that, for a period of time, qualified institutional buyers cease purchasing restricted securities pursuant to Rule 144A, a Portfolio's investing in such securities may have the effect of increasing the level of illiquidity in such Portfolio during such period. Ratings of Debt. (Bond Portfolio) Subsequent to its purchase by the Bond Portfolio, a debt issue may cease to be rated or its rating may be reduced below the minimum required for purchase by the Bond Portfolio. Neither event will require the sale of such securities by the Bond Portfolio, but BSFM will consider such event in determining whether the Bond Portfolio should continue to hold the securities. To the extent that the ratings given by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), Fitch Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff") may change as a result of changes in such organizations or their rating systems, the Bond Portfolio will attempt to use comparable ratings as standards for its investments in accordance with the investment policies contained in the Portfolio's Prospectus and this Statement of Additional Information. Management Policies Each Portfolio engages in the following practices in furtherance of its objective. Options Transactions. (All Portfolios) Each Portfolio may engage in options transactions, such as purchasing or writing covered call or put options. The principal reason for writing covered call options, which are call options with respect to which a Portfolio owns the underlying security or securities, is to realize, through the receipt of premiums, a greater return than would be realized on a Portfolio's securities alone. In return for a premium, the writer of a covered call option forfeits the right to any appreciation in the value of the underlying security above the strike price for the life of the option (or until a closing purchase transaction can be effected). Nevertheless, the call writer retains the risk of a decline in the price of the underlying security. Similarly, the principal reason for writing covered put options is to realize income in the form of premiums. The writer of a covered put option accepts the risk of a decline in the price of the underlying security. The size of the premiums that a Portfolio may receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option-writing activities. Options written ordinarily will have expiration dates between one and nine months from the date written. The exercise price of the options may be below, equal to or above the market values of the underlying securities at the time the options are written. In the case of call options, these exercise prices are referred to as "in-the-money," "at-the-money" and "out-of-the- money," respectively. Each Portfolio may write (a) in-the-money call options when BSFM expects that the price of the underlying security will remain stable or decline moderately during the option period, (b) at-the-money call options when BSFM expects that the price of the underlying security will remain stable or advance moderately during the option period and (c) out-of-the- money call options when BSFM expects that the premiums received from writing the call option plus the appreciation in market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. In these circumstances, if the market price of the underlying security declines and the security is sold at this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Out-of-the-money, at- the-money and in-the-money put options (the reverse of call options as to the relation of exercise price to market price) may be utilized in the same market environments that such call options are used in equivalent transactions. So long as a Portfolio's obligation as the writer of an option continues, such Portfolio may be assigned an exercise notice by the broker-dealer through which the option was sold, requiring the Portfolio to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates when the option expires or a Portfolio effects a closing purchase transaction. A Portfolio can no longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice. While it may choose to do otherwise, each Portfolio generally will purchase or write only those options for which BSFM believes there is an active secondary market so as to facilitate closing transactions. There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times have rendered certain clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that otherwise may interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If as a covered call option writer a Portfolio is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. Stock Index Options. (Equity Portfolios) Each Equity Portfolio may purchase and write put and call options on stock indexes listed on U.S. or foreign securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indexes are similar to options on stock except that (a) the expiration cycles of stock index options are generally monthly, while those of stock options are currently quarterly, and (b) the delivery requirements are different. Instead of giving the right to take or make delivery of a stock at a specified price, an option on a stock index gives the holder the right to receive a cash "exercise settlement amount" equal to (i) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised. Futures Contracts and Options on Futures Contracts. (All Portfolios) Each Portfolio may trade futures contracts and options on futures contracts in U.S. domestic markets, such as the Chicago Board of Trade and the International Monetary Market of the Chicago Mercantile Exchange, or, to the extent permitted under applicable law, on exchanges located outside the United States, such as the London International Financial Futures Exchange and the Sydney Futures Exchange Limited. Foreign markets may offer advantages such as trading in commodities that are not currently traded in the United States or arbitrage possibilities not available in the United States. Initially, when purchasing or selling futures contracts a Portfolio will be required to deposit with the Fund's custodian in the broker's name an amount of cash or cash equivalents up to approximately 10% of the contract amount. This amount is subject to change by the exchange or board of trade on which the contract is traded and members of such exchange or board of trade may impose their own higher requirements. This amount is known as "initial margin" and is in the nature of a performance bond or good faith deposit on the contract which is returned to the Portfolio upon termination of the futures position, assuming all contractual obligations have been satisfied. Subsequent payments, known as "variation margin," to and from the broker will be made daily as the price of the index or securities underlying the futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as "marking-to-market." At any time prior to the expiration of a futures contract, the Portfolio may elect to close the position by taking an opposite position, at the then prevailing price, which will operate to terminate the Portfolio's existing position in the contract. Although each Portfolio intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting a Portfolio to substantial losses. If it is not possible, or the Portfolio determines not, to close a futures position in anticipation of adverse price movements, the Portfolio will be required to make daily cash payments of variation margin. In such circumstances, an increase in the value of the portion of the portfolio being hedged, if any, may offset partially or completely losses on the futures contract. However, no assurance can be given that the price of the securities being hedged will correlate with the price movements in a futures contract and thus provide an offset to losses on the futures contract. In addition, to the extent a Portfolio is engaging in a futures transaction as a hedging device, due to the risk of an imperfect correlation between securities owned by the Portfolio that are the subject of a hedging transaction and the futures contract used as a hedging device, it is possible that the hedge will not be fully effective in that, for example, losses on the portfolio securities may be in excess of gains on the futures contract or losses on the futures contract may be in excess of gains on the portfolio securities that were the subject of the hedge. In futures contracts based on indexes, the risk of imperfect correlation increases as the composition of an Equity Portfolio's investments varies from the composition of the index. In an effort to compensate for the imperfect correlation of movements in the price of the securities being hedged and movements in the price of futures contracts, the Portfolio may buy or sell futures contracts in a greater or lesser dollar amount than the dollar amount of the securities being hedged if the historical volatility of the futures contract has been less or greater than that of the securities. Such "over hedging" or "under hedging" may adversely affect a Portfolio's net investment results if market movements are not as anticipated when the hedge is established. Upon exercise of an option, the writer of the option will deliver to the holder of the option the futures position and the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. The potential loss related to the purchase of options on futures contracts is limited to the premium paid for the option (plus transaction costs). Because the value of the option is fixed at the time of sale, there are no daily cash payments to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change would be reflected in the net asset value of each Portfolio. Foreign Currency Transactions. (Equity Portfolios) If an Equity Portfolio enters into a currency transaction, it will deposit, if so required by applicable regulations, with its custodian cash, U.S. government securities or other high grade debt obligations, in a segregated account of the Equity Portfolio in an amount at least equal to the value of the Equity Portfolio's total assets committed to the consummation of the forward contract. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account so that the value of the account will equal the amount of the Equity Portfolio's commitment with respect to the contract. At or before the maturity of a forward contract, the Equity Portfolio either may sell a security and make delivery of the currency, or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Equity Portfolio will obtain, on the same maturity date, the same amount of the currency which it is obligated to deliver. If the Equity Portfolio retains the portfolio security and engages in an offsetting transaction, such Equity Portfolio, at the time of execution of the offsetting transaction, will incur a gain or loss to the extent movement has occurred in forward contract prices. Should forward prices decline during the period between the Equity Portfolio's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Equity Portfolio will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Equity Portfolio will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. The cost to each Equity Portfolio of engaging in currency transactions varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because transactions in currency exchange usually are conducted on a principal basis, no fees or commissions are involved. The use of forward currency exchange contracts does not eliminate fluctuations in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. If a devaluation generally is anticipated, an Equity Portfolio may not be able to contract to sell the currency at a price above the devaluation level it anticipates. The requirements for qualification as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), may cause the Fund to restrict the degree to which each Equity Portfolio engages in currency transactions. See "Dividends, Distributions and Taxes." Lending Portfolio Securities. (All Portfolios) To a limited extent, each Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions, provided it receives cash collateral which at all times is maintained in an amount equal to at least 100% of the current market value of the securities loaned. By lending its portfolio securities, a Portfolio can increase its income through the investment of the cash collateral. For purposes of this policy, a Portfolio considers collateral consisting of U.S. Government securities or irrevocable letters of credit issued by banks whose securities meet the standards for investment by such Portfolio to be the equivalent of cash. From time to time, a Portfolio may return to the borrower or a third party which is unaffiliated with such Portfolio, and which is acting as a "placing broker," a part of the interest earned from the investment of collateral received for securities loaned. The Securities and Exchange Commission currently requires that the following conditions must be met whenever portfolio securities are loaned: (1) each Portfolio must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) each Portfolio must be able to terminate the loan at any time; (4) each Portfolio must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) each Portfolio may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Fund's Board of Trustees must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. These conditions may be subject to future modification. Investment Restrictions. Each Portfolio has adopted investment restrictions numbered 1 through 10 as fundamental policies. These restrictions cannot be changed, as to a Portfolio, without approval by the holders of a majority (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")) of such Portfolio's outstanding voting shares. Investment restrictions numbered 11 through 16 are not fundamental policies and may be changed by vote of a majority of the Trustees at any time. No Portfolio may: 1. Invest more than 25% of the value of its total assets in the securities of issuers in any single industry, provided that there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. 2. Invest more than 5% of its assets in the obligations of any single issuer, except that up to 25% of the value of the Portfolio's total assets may be invested, and securities issued or guaranteed by the U.S. Government, or its agencies or instrumentalities may be purchased, without regard to any such limitation. 3. Hold more than 10% of the outstanding voting securities of any single issuer. This Investment Restriction applies only with respect to 75% of the Portfolio's total assets. 4. Invest in commodities, except that each Portfolio may purchase and sell options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 5. Purchase, hold or deal in real estate, real estate limited partnership interests, or oil, gas or other mineral leases or exploration or development programs, but each Portfolio may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. 6. Borrow money, except to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 33-1/3% of the value of such company's total assets. For purposes of this Investment Restriction, the entry into options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes shall not constitute borrowing. 7. Make loans to others, except through the purchase of debt obligations and the entry into repurchase agreements. However, each Portfolio may lend its portfolio securities in an amount not to exceed 33-1/3% of the value of its total assets. Any loans of portfolio securities will be made according to guidelines established by the Securities and Exchange Commission and the Fund's Board of Trustees. 8. Act as an underwriter of securities of other issuers, except to the extent each Portfolio may be deemed an underwriter under the Securities Act of 1933, as amended, by virtue of disposing of portfolio securities. 9. Issue any senior security (as such term is defined in Section 18(f) of the 1940 Act). 10. Purchase securities on margin, but each Portfolio may make margin deposits in connection with transactions in options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 11. Pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings and to the extent related to the purchase of securities on a when-issued or forward commitment basis and the deposit of assets in escrow in connection with writing covered put and call options and collateral and initial or variation margin arrangements with respect to options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 12. Purchase, sell or write puts, calls or combinations thereof, except as described in the Portfolio's Prospectus and Statement of Additional Information. 13. Enter into repurchase agreements providing for settlement in more than seven days after notice or purchase securities which are illiquid, if, in the aggregate, more than 15% of the value of its net assets would be so invested. 14. Purchase securities of other investment companies, except to the extent permitted under the 1940 Act. The following investment restrictions numbered 15 and 16, which are not a fundamental policy, apply only to the Equity Portfolios. Neither of these Portfolios may: 15. Purchase securities of any company having less than three years' continuous operations (including operations of any predecessor) if such purchase would cause the value of the Equity Portfolio's investments in all such companies to exceed 5% of the value of its total assets. 16. Invest in the securities of a company for the purpose of exercising management or control, but each Equity Portfolio will vote the securities it owns in its portfolio as a shareholder in accordance with its views. If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such restriction. The Fund may make commitments more restrictive than the restrictions listed above so as to permit the sale of a Portfolio's shares in certain states. Should the Fund determine that a commitment is no longer in the best interest of the Portfolio and its shareholders, the Fund reserves the right to revoke the commitment by terminating the sale of Fund shares in the state involved. MANAGEMENT OF THE FUND Trustees and officers of the Fund, together with information as to their principal business occupations during at least the last five years, are shown below. Each Trustee who is an "interested person" of the Fund, as defined in the 1940 Act, is indicated by an asterisk.
Name and Address Position Principal Occupation (and age) with Fund During Past Five Years Peter M. Bren (62) Trustee President of The Bren Co.; 2 East 70th Street President of Cole, Bren New York, NY 10021 Realty Advisors and Senior Partner for Lincoln Properties prior thereto. Alan J. Dixon* (68) Trustee Partner of Bryan Cave, a law 7535 Claymont Court firm in St. Louis since Apt. #2 January 1993; United Belleville, IL 62223 States Senator of Illinois from 1981 to 1993. John R. McKernan, Jr. (48) Trustee Chairman and Chief Executive 114 Nottingham Road Officer of McKernan Auburn, ME 04210 Enterprises since January 1995; Governor of Maine prior thereto. M.B. Oglesby, Jr. (53) Trustee Vice Chairman of Cassidy & 5300 Albemarle Street Associates since February Bethesda, MD 20816 1996; Senior Vice President of RJR Nabisco, Inc. from April 1989 to February 1996; Former Deputy Chief of Staff-White House from 1988 to January 1989. Robert S. Reitzes* (51) Chairman Director of Mutual Funds- 245 Park Avenue of the Board Bear Stearns Asset New York, NY 10167 Management and Senior Managing Director of Bear Stearns since March 1994; Co-Director of Research and Senior Chemical Analyst of C.J. Lawrence/ Deutsche Bank Securities Corp. from January 1991 to March 1994. Neil T. Eigen (53) President Chief Investment Officer 245 Park Avenue and Director of Equity New York, NY 10167 Investments--Bear Stearns Asset Management since 1992 and Senior Managing Director of Bear Stearns since 1990. Peter B. Fox (44) Executive Vice Senior Managing Director, Three First National President Bear Stearns, Public Plaza Finance. Chicago, IL 60602 William J. Montgoris (49) Executive Vice Chief Financial Officer and 245 Park Avenue President Chief Operating Officer, New York, NY 10167 Bear Stearns. Stephen A. Bornstein (52) Vice President Managing Director, Legal 245 Park Avenue Department, Bear Stearns. New York, NY 10167 Frank J. Maresca (37) Vice President Managing Director of Bear 245 Park Avenue and Treasurer Stearns since September New York, NY 10167 1994; Associate Director of Bear Stearns from September 1993 to September 1994; Executive Vice President of BSFM since March 1992; Vice President of Bear Stearns from March 1992 to September 1993; First Vice President of Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") from June 1988 to March 1992; and Director of Funds Administration Division of Mitchell Hutchins from November 1991 to March 1992. Raymond D. DeAngelo (35) Vice President Associate Director of Bear 245 Park Avenue Stearns since November 1994; New York, NY 10167 Vice President and Manager-- Mutual Fund Sales Support Group of Kidder, Peabody & Co. Incorporated ("Kidder Peabody") from August 1994 to November 1994; Vice President and Manager--Unit Investment Trust Department of Kidder Peabody from August 1992 to August 1994; Vice President and Wholesaler of Nike Securities, L.P. (formerly Clayton Brown & Associates) from September 1991 to August 1992; Assistant Vice President and Wholesaler of Clayton Brown & Associates prior thereto. Ellen T. Arthur (43) Secretary Associate Director of Bear 245 Park Avenue Stearns since January 1996; New York, NY 10167 Senior Counsel and Corporate Vice President of PaineWebber Incorporated from April 1989 to September 1995. Vincent L. Pereira (30) Assistant Associate Director of 245 Park Avenue Treasurer Bear Stearns since September New York, NY 10167 1995 and Vice President of BSFM since May 1993; Vice President of Bear Stearns from May 1993 to September 1995; Assistant Vice President of Mitchell Hutchins from October 1992 to May 1993; Senior Relationship Manager of Mitchell Hutchins from June 1988 to October 1992. Eileen M. Coyle (30) Assistant Vice President of Bear Stearns 245 Park Avenue Secretary since September 1995; New York, NY 10167 Accounting Supervisor and Senior Accountant for Bear Stearns since 1990.
The Fund pays its non-affiliated Board members an annual retainer of $5,000 and a per meeting fee of $500 and reimburses them for their expenses. The Fund does not compensate its officers. The aggregate amount of compensation paid to each Board member by the Fund and by all other funds in the Bear Stearns Family of Funds for which such person is a Board member (the number of which is set forth in parenthesis next to each Board member's total compensation) for the fiscal year ended March 31, 1996 is as follows:
(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 Peter M. Bren $7,000 None None $12,000 (2) Alan J. Dixon $7,000 None None $ 7,000 (1) John R. McKernan, Jr. $7,000 None None $12,000 (2) M.B. Oglesby, Jr. $7,000 None None $12,000 (2) Robert S. Reitzes None None None None (2) - --------------------- * Amount does not include reimbursed expenses for attending Board meetings, which amounted to $10,100 for Board members of the Fund, as a group.
Board members and officers of the Fund, as a group, owned less than 1% of each Portfolio's shares outstanding on May 31, 1996. For so long as the Plan described in the section captioned "Management Arrangements--Distribution and Shareholder Servicing Plan" remains in effect, the Fund's Trustees who are not "interested persons" of the Fund, as defined in the 1940 Act, will be selected and nominated by the Trustees who are not "interested persons" of the Fund. No meetings of shareholders of the Fund will be held for the purpose of electing Trustees unless and until such time as less than a majority of the Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Under the 1940 Act, shareholders of record of not less than two-thirds of the outstanding shares of the Fund may remove a Trustee through a declaration in writing or by vote cast in person or by proxy at a meeting called for that purpose. Under the Fund's Agreement and Declaration of Trust, the Trustees are required to call a meeting of shareholders for the purpose of voting upon the question of removal of any such Trustee when requested in writing to do so by the shareholders of record of not less than 10% of the Fund's outstanding shares. MANAGEMENT ARRANGEMENTS The following information supplements and should be read in conjunction with the section in the Portfolios' Prospectus entitled "Management of the Fund." Investment Advisory Agreement. BSFM provides investment advisory services to each Portfolio pursuant to the Investment Advisory Agreement (the "Agreement") dated February 22, 1995, with the Fund. As to each Portfolio, the Agreement is subject to annual approval by (i) the Fund's Board of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Portfolio, provided that in either event the continuance also is approved by a majority of the Board of Trustees who are not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Board of Trustees, including a majority of the Trustees who are not "interested persons" of any party to the Agreement, last approved the Agreement at a meeting held on February 22, 1995. The Agreement is terminable, as to each Portfolio, without penalty, on 60 days' notice, by the Fund's Board of Trustees or by vote of the holders of a majority of the Portfolio's shares, or, on not less than 90 days' notice, by BSFM. As to the relevant Portfolio, the Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). BSFM is a wholly owned subsidiary of The Bear Stearns Companies Inc. The following persons are directors and/or senior officers of BSFM: Mark A. Kurland, Chief Executive Officer, President, Chairman of the Board and Director; Robert S. Reitzes, Executive Vice President and Director; Milton B. Rubin, Vice Chairman of the Board; Frank J. Maresca, Executive Vice President; Neil T. Eigen, Executive Vice President; Vincent L. Pereira, Treasurer and Secretary; and Michael Minikes, Warren J. Spector and Robert M. Steinberg, Directors. BSFM provides investment advisory services to each Portfolio in accordance with its stated policies, subject to the approval of the Fund's Board of Trustees. BSFM provides each Portfolio with portfolio managers who are authorized by the Board of Trustees to execute purchases and sales of securities. The portfolio managers of the Equity Portfolios are Neil T. Eigen and Richard S. Rosen. The portfolio managers of the Bond Portfolio are Peter E. Mahoney and Mark R. Valkenburgh. All purchases and sales are reported for the Board's review at the meeting subsequent to such transactions. As compensation for BSFM's advisory services, each Equity Portfolio has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the value of such Equity Portfolio's average daily net assets. The Bond Portfolio has agreed to pay BSFM a monthly fee at the annual rate of .45 of 1% of the value of the Bond Portfolio's average daily net assets. For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the investment advisory fees payable by the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio amounted to $45,531, $88,955 and $51,869, respectively. These amounts were waived pursuant to an undertaking by BSFM, resulting in no fees being paid by the Large Cap Value Portfolio, the Small Cap Value Portfolio and the Bond Portfolio. Administration Agreement. BSFM provides certain administrative services to the Fund pursuant to the Administration Agreement dated February 22, 1995, with the Fund. As to each Portfolio, the Administration Agreement will continue until February 22, 1998 and thereafter will be subject to annual approval by (i) the Fund's Board or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Portfolio, provided that in either event its continuance also is approved by a majority of the Fund's Board members who are not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Administration Agreement is terminable, as to each Portfolio, without penalty, on 60 days' notice, by the Fund's Board or by vote of the holders of a majority of the Portfolio's shares or, upon not less than 90 days' notice, by BSFM. As to the relevant Portfolio, the Administration Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). As compensation for BSFM's administrative services, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of each Portfolio's average daily net assets. For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the administration fees accrued, but not paid, by the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio amounted to $9,106, $17,782 and $17,290, respectively. Administrative Services Agreement. PFPC provides certain administrative services to the Fund pursuant to the Administrative Services Agreement dated February 22, 1995, with the Fund. The Administrative Services Agreement is terminable upon 60 days' notice by either the Fund or PFPC. PFPC may assign its rights or delegate its duties under the Administrative Services Agreement to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund 30 days' notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee) promptly provide information requested by the Fund in connection with such delegation. As compensation for PFPC's administrative services, the Fund has agreed to pay PFPC a monthly fee at the rate set forth in the Portfolios' Prospectus. For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the administrative fees payable by the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio amounted to $126,000 $127,500 and $124,500, respectively. These amounts were reduced to $62,405, $62,532 and $63,913, respectively, as a result of a waiver of fees by PFPC. Distribution and Shareholder Servicing Plan. Rule 12b-1 (the "Rule") adopted by the Securities and Exchange Commission under the 1940 Act provides, among other things, that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Fund's Trustees have adopted such a plan with respect to Class A and Class C shares (the "Plan"). The Fund's Trustees believe that there is a reasonable likelihood that the Plan will benefit each Portfolio and the holders of its Class A and Class C shares. A quarterly report of the amounts expended under the Plan, and the purposes for which such expenditures were incurred, must be made to the Trustees for their review. In addition, the Plan provides that it may not be amended to increase materially the costs which holders of a Class of shares may bear pursuant to the Plan without approval of such shareholders and that other material amendments of the Plan must be approved by the Board of Trustees, and by the Trustees who are neither "interested persons" (as defined in the 1940 Act) of the Fund nor have any direct or indirect financial interest in the operation of the Plan or in the related Plan agreements, by vote cast in person at a meeting called for the purpose of considering such amendments. The Plan and related agreements are subject to annual approval by such vote cast in person at a meeting called for the purpose of voting on the Plan. The Plan was so approved on January 23, 1996. The Plan is terminable at any time, as to each Class of each Portfolio, by vote of a majority of the Trustees who are not "interested persons" and who have no direct or indirect financial interest in the operation of the Plan or in the Plan agreements or by vote of holders of a majority of the relevant Class' shares. A Plan agreement is terminable, as to each Class of each Portfolio, without penalty, at any time, by such vote of the Trustees, upon not more than 60 days' written notice to the parties to such agreement or by vote of the holders of a majority of the relevant Class' shares. A Plan agreement will terminate automatically, as to the relevant Class of a Portfolio, in the event of its assignment (as defined in the 1940 Act). For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio paid Bear Stearns $13,300, $22,762 and $14,093, respectively, with respect to Class A shares and $23,333, $37,577 and $11,638, respectively, with respect to Class C shares under the Plan. Of such amounts, the following amounts were paid as indicated for Class A and Class C shares of each Portfolio:
Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio ------------------------- ------------------------ --------------------------- Class A Class C Class A Class C Class A Class C ------- ------- ------- ------- ------- -------- Payments to Brokers or Dealers $7,620 $10,955 $17,815 $26,976 $11,713 $4,734 Payments for 5,680 12,378 4,947 10,601 2,380 6,904 Advertising
Expenses. All expenses incurred in the operation of the Fund are borne by the Fund, except to the extent specifically assumed by BSFM. The expenses borne by the Fund include: organizational costs, taxes, interest, loan commitment fees, interest and distributions paid on securities sold short, brokerage fees and commissions, if any, fees of Board members who are not officers, directors, employees or holders of 5% or more of the outstanding voting securities of BSFM or its affiliates, Securities and Exchange Commission fees, state Blue Sky qualification fees, advisory, administrative and fund accounting fees, charges of custodians, transfer and dividend disbursing agents' fees, certain insurance premiums, industry association fees, outside auditing and legal expenses, costs of maintaining the Fund's existence, costs of independent pricing services, costs attributable to investor services (including, without limitation, telephone and personnel expenses), costs of shareholders' reports and meetings, costs of preparing and printing certain prospectuses and statements of additional information, and any extraordinary expenses. Expenses attributable to a particular portfolio are charged against the assets of that portfolio; other expenses of the Fund are allocated among the portfolios on the basis determined by the Board, including, but not limited to, proportionately in relation to the net assets of each portfolio. Expense Limitation. BSFM agreed that if, in any fiscal year, the aggregate expenses of a Portfolio, exclusive of taxes, brokerage, interest on borrowings and (with the prior written consent of the necessary state securities commissions) extraordinary expenses, exceed the expense limitation of any state having jurisdiction over the Portfolio, the Fund may deduct from the payment to be made to BSFM, such excess expense to the extent required by state law. Such deduction or payment, if any, will be estimated daily, and reconciled and effected or paid, as the case may be, on a monthly basis. PURCHASE AND REDEMPTION OF SHARES The following information supplements and should be read in conjunction with the sections in the Portfolios' Prospectus entitled "How to Buy Shares" and "How to Redeem Shares." The Distributor. Bear Stearns serves as the Portfolios' distributor on a best efforts basis pursuant to an agreement dated February 22, 1995 which is renewable annually. For the period April 3, 1995 (commencement of operations) through March 31, 1996, Bear Stearns retained $72, $388 and $10,549 from the sales loads on Class A shares of the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively, and $110, $583 and $185 from contingent deferred sales charges ("CDSC") on Class C shares of the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio, respectively. In some states, banks or other institutions effecting transactions in Portfolio shares may be required to register as dealers pursuant to state law. Purchase Order Delays. The effective date of a purchase order may be delayed if PFPC, the Portfolios' transfer agent, is unable to process the purchase order because of an interruption of services at its processing facilities. In such event, the purchase order would become effective at the purchase price next determined after such services are restored. Sales Loads--Class A. Set forth below is an example of the method of computing the offering price of the Class A shares of each Portfolio. The example assumes a purchase of Class A shares aggregating less than $50,000 subject to the schedule of sales charges set forth in the Prospectus at a price based upon the net asset value of the Class A shares on March 31, 1996. EQUITY PORTFOLIOS: Large Cap Value Small Cap Value ------------------ --------------- --------------- Net Asset Value per Share $15.13 $15.87 Per Share Sales Charge - 4.75% of offering price (4.99% of net asset value per share) $ 0.75 $ 0.79 Per Share Offering Price to the Public $15.88 $16.66 BOND PORTFOLIO: Net Asset Value per Share $12.26 Per Share Sales Charge - 3.75% of offering price (3.90% of net asset value per share) $ 0.48 Per Share Offering Price to the Public $12.74 Redemption Commitment. Each Portfolio has committed itself to pay in cash all redemption requests by any shareholder of record, limited in amount during any 90-day period to the lesser of $250,000 or 1% of the value of the Portfolio's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the Securities and Exchange Commission. In the case of requests for redemption in excess of such amount, the Board of Trustees reserves the right to make payments in whole or in part in securities or other assets in case of an emergency or any time a cash distribution would impair the liquidity of the Portfolio to the detriment of the existing shareholders. In this event, the securities would be valued in the same manner as the Portfolio is valued. If the recipient sold such securities, brokerage charges would be incurred. Suspension of Redemptions. The right of redemption may be suspended or the date of payment postponed (a) during any period when the New York Stock Exchange is closed (other than customary weekend and holiday closings), (b) when trading in the markets each Portfolio ordinarily utilizes is restricted, or when an emergency exists as determined by the Securities and Exchange Commission so that disposal of a Portfolio's investments or determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit to protect Portfolio shareholders. DETERMINATION OF NET ASSET VALUE The following information supplements and should be read in conjunction with the section in the Portfolios' Prospectus entitled "How to Buy Shares." Valuation of Portfolio Securities. Equity Portfolio securities, including covered call options written by an Equity Portfolio, are valued at the last sale price on the securities exchange or national securities market on which such securities primarily are traded. Securities not listed on an exchange or national securities market, or securities in which there were no transactions, are valued at the average of the most recent bid and asked prices, except in the case of open short positions where the asked price is used for valuation purposes. Bid price is used when no asked price is available. Any assets or liabilities initially expressed in terms of foreign currency will be converted into U.S. dollars at the prevailing market rates for purposes of calculating net asset value. Because of the need to obtain prices as of the close of trading on various exchanges throughout the world for such foreign securities, the calculation of net asset value does not take place contemporaneously with the determination of prices of such securities. Forward currency contracts will be valued at the current cost of offsetting the contract. Short-term investments are carried at amortized cost, which approximates value. Any securities or other assets for which recent market quotations are not readily available are valued at fair value as determined in good faith by the Fund's Board of Trustees. Expenses and fees, including the management fee and distribution and service fees, are accrued daily and taken into account for the purpose of determining the net asset value of an Equity Portfolio's shares. Because of the differences in operating expenses incurred by each Class, the per share net asset value of each Class will differ. Substantially all of the Bond Portfolio's investments (including short-term investments) are valued each business day by one or more independent pricing services (the "Service") approved by the Fund's Board of Trustees. Securities valued by the Service for which quoted bid prices in the judgment of the Service are readily available and are representative of the bid side of the market are valued at the mean between the quoted bid prices (as obtained by the Service from dealers in such securities) and asked prices (as calculated by the Service based upon its evaluation of the market for such securities). Any assets or liabilities initially expressed in terms of foreign currency will be converted into U.S. dollars at the prevailing market rates for purposes of calculating net asset value. Because of the need to obtain prices as of the close of trading on various exchanges throughout the world for such foreign securities, the calculation of net asset value does not take place contemporaneously with the determination of prices of such securities. Other investments valued by the Service are carried at fair value as determined by the Service, based on methods which include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. Short- term investments are not valued by the Service and are carried at amortized cost, which approximate value. Other investments that are not valued by the Service are valued at the average of the most recent bid and asked prices in the market in which such investments are primarily traded, or at the last sales price for securities traded primarily on an exchange or the national securities market. In the absence of reported sales of investments traded primarily on an exchange or the national securities market, the average of the most recent bid and asked prices is used. Bid price is used when no asked price is available. Expenses and fees are accrued daily and taken into account for the purpose of determining the net asset value of the Bond Portfolio's shares. Because of the differences in operating expenses incurred by each Class, the per share net asset value of each Class will differ. Each Portfolio's restricted securities, as well as securities or other assets for which market quotations are not readily available, or are not valued by a pricing service approved by the Board of Trustees, are valued at fair value as determined in good faith by the Board of Trustees. The Board of Trustees will review the method of valuation on a current basis. In making their good faith valuation of restricted securities, the Trustees generally will take the following factors into consideration: restricted securities which are, or are convertible into, securities of the same class of securities for which a public market exists usually will be valued at market value less the same percentage discount at which purchased. This discount will be revised periodically by the Board of Trustees if the Trustees believe that it no longer reflects the value of the restricted securities. Restricted securities not of the same class as securities for which a public market exists usually will be valued initially at cost. Any subsequent adjustment from cost will be based upon considerations deemed relevant by the Board of Trustees. New York Stock Exchange Closings. The holidays (as observed) on which the New York Stock Exchange is closed currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. DIVIDENDS, DISTRIBUTIONS AND TAXES The following information supplements and should be read in conjunction with the section in the Portfolios' Prospectus entitled "Dividends, Distributions and Taxes." Management of the Fund believes that each Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Code. Each Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Qualification as a regulated investment company relieves the Portfolio from any liability for Federal income taxes on net investment income and net realized securities gains to the extent that such income and gains are distributed to shareholders in accordance with applicable provisions of the Code. The term "regulated investment company" does not imply the supervision of management or investment practices or policies by any government agency. Any dividend or distribution paid shortly after an investor's purchase may have the effect of reducing the net asset value of the shares below the cost of the investment. Such a dividend or distribution would be a return of investment in an economic sense, although taxable as stated above. In addition, the Code provides that if a shareholder holds shares of a regulated investment company for six months or less and has received a capital gain distribution with respect to such shares, any loss incurred on the sale of such shares will be treated as long-term capital loss to the extent of the capital gain distribution received. Depending on the composition of a regulated investment company's income, dividends paid by the regulated investment company from net investment income may qualify for the dividends received deduction allowable to certain U.S. corporate shareholders ("dividends received deduction"). In general, dividend income of the regulated investment company distributed to qualifying corporate shareholders will be eligible for the dividends received deduction only to the extent that (i) the regulated investment company's income consists of dividends paid by U.S. corporations and (ii) the regulated investment company would have been entitled to the dividends received deduction with respect to such dividend income if the regulated investment company were not a regulated investment company under the Code. The dividends received deduction for qualifying corporate shareholders may be further reduced if the shares of the regulated investment company held by such shareholders with respect to which dividends are received are treated as debt-financed or deemed to have been held for less than 46 days. In addition, the Code provides other limitations with respect to the ability of a qualifying corporate shareholder to claim the dividends received deduction in connection with holding shares of a regulated investment company. Ordinarily, gains and losses realized from portfolio transactions will be treated as capital gain and loss. However, a portion of the gain or loss from the disposition of non-U.S. dollar denominated securities (including debt instruments, certain financial forward futures and option contracts and certain preferred stock) may be treated as ordinary income or loss under Section 988 of the Code. In addition, all or a portion of any gain realized from the sale or other disposition of certain market discount bonds will be treated as ordinary income under Section 1276. Finally, all or a portion of the gain realized from engaging in "conversion transactions" may be treated as ordinary income under Section 1258. "Conversion transactions" are defined to include certain forward, futures, option and straddle transactions, transactions marketed or sold to produce capital gains, or transactions described in Treasury regulations to be issued in the future. Under Section 1256 of the Code, any gain or loss realized by a regulated investment company from certain futures and forward contracts and options transactions will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. Gain or loss will arise upon exercise or lapse of such contracts and options as well as from closing transactions. In addition, any such contracts or options remaining unexercised at the end of a regulated investment company's taxable year will be treated as sold for their then fair market value, resulting in additional gain or loss to such regulated investment company characterized in the manner described above. Offsetting positions held by a regulated investment company involving certain contracts or options may constitute "straddles." "Straddles" are defined to include "offsetting positions" in actively traded personal property. The tax treatment of "straddles" is governed by Sections 1092 and 1258 of the Code, which, in certain circumstances, overrides or modifies the provisions of Section 1256 and 988. If a regulated investment company were treated as entering into "straddles" by reason of its engaging in certain contracts or options transactions, such "straddles" would be characterized as "mixed straddles" if the contracts or options transactions comprising a part of such "straddles" were governed by Section 1256 of the Code. A regulated investment company may make one or more elections with respect to "mixed straddles." Depending on which election is made, if any, the results to a regulated investment company may differ. If no election is made to the extent the "straddle" and conversion transactions rules apply to positions established by a regulated investment company, losses realized by the regulated investment company will be deferred to the extent of unrealized gain in the offsetting position. Moreover, as a result of the "straddle" rules, short-term capital loss on "straddle" positions may be recharacterized as long-term capital loss, and long-term capital gains may be treated as short-term capital gains or ordinary income. Investment by a regulated investment company in securities issued or acquired at a discount, or providing for deferred interest or for payment of interest in the form of additional obligations could under special tax rules affect the amount, timing and character of distributions to shareholders by causing a regulated investment company to recognize income prior to the receipt of cash payments. For example, a regulated investment company could be required to accrue a portion of the discount (or deemed discount) at which the securities were issued and to distribute such income in order to maintain its qualification as a regulated investment company. In such case, a regulated investment company may have to dispose of securities which it might otherwise have continued to hold in order to generate cash to satisfy these distribution requirements. If a regulated investment company invests in an entity that is classified as a "passive foreign investment company" ("PFIC") for federal income tax purposes, the operation of certain provisions of the Code applying to PFICs could result in the imposition of certain federal income taxes on the regulated investment company. Under Proposed Treasury Regulation Section 1.1291-8(a), the Fund can elect to mark-to-market gains (but not losses) from PFIC securities in lieu of paying taxes on gain or distributions therefrom. Such gains will be treated as ordinary income under Proposed Treasury Regulation Section 1.1291-8(b)(2). PORTFOLIO TRANSACTIONS BSFM assumes general supervision over placing orders on behalf of each Equity Portfolio for the purchase or sale of investment securities. Allocation of brokerage transactions, including their frequency, is made in BSFM's best judgment and in a manner deemed fair and reasonable to shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected will include those that supplement BSFM's research facilities with statistical data, investment information, economic facts and opinions. Information so received is in addition to and not in lieu of services required to be performed by BSFM and BSFM's fees are not reduced as a consequence of the receipt of such supplemental information. BSFM assumes general supervision over placing orders on behalf of the Bond Portfolio for the purchase or sale of investment securities. Purchases and sales of portfolio securities usually are principal transactions. Bond Portfolio securities ordinarily are purchased directly from the issuer or from an underwriter or a market maker for the securities. Usually no brokerage commissions are paid by the Fund for such purchases. Purchases of portfolio securities from underwriters include a commission or concession paid by the issuer to the underwriter and the purchase price paid to market makers for the securities may include the spread between the bid and asked price. Bond Portfolio transactions are allocated to various dealers by the Fund's portfolio managers in their best judgment. Such information may be useful to BSFM in serving each Portfolio and other funds which it advises and, conversely, supplemental information obtained by the placement of business of other clients may be useful to BSFM in carrying out its obligations to the Portfolios. Sales of Portfolio shares by a broker may be taken into consideration, and brokers also will be selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. Large block trades may, in certain cases, result from two or more funds advised or administered by BSFM being engaged simultaneously in the purchase or sale of the same security. Certain of BSFM's transactions in securities of foreign issuers may not benefit from the negotiated commission rates available to an Equity Portfolio for transactions in securities of domestic issuers. When transactions are executed in the over-the-counter market, each Portfolio will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Foreign exchange transactions of each Equity Portfolio are made with banks or institutions in the interbank market at prices reflecting a mark-up or mark-down and/or commission. Portfolio turnover may vary from year to year as well as within a year. The turnover rate for the Large Cap Value Portfolio, Small Cap Value Portfolio and Bond Portfolio for the period April 3, 1995 (commencement of operations) through March 31, 1996 was 45%, 41% and 107%, respectively. In periods in which extraordinary market conditions prevail, BSFM will not be deterred from changing investment strategy as rapidly as needed, in which case higher turnover rates can be anticipated which would result in greater brokerage expenses. The overall reasonableness of brokerage commissions paid is evaluated by BSFM based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. To the extent consistent with applicable provisions of the 1940 Act and the rules and exemptions adopted by the Securities and Exchange Commission thereunder, the Board of Trustees has determined that transactions for each Portfolio may be executed through Bear Stearns if, in the judgment of BSFM, the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers, and if, in the transaction, Bear Stearns charges the Portfolio a rate consistent with that charged to comparable unaffiliated customers in similar transactions. In addition, under rules recently adopted by the Securities and Exchange Commission, Bear Stearns may directly execute such transactions for each Portfolio on the floor of any national securities exchange, provided (i) the Board of Trustees has expressly authorized Bear Stearns to effect such transactions, and (ii) Bear Stearns annually advises the Board of Trustees of the aggregate compensation it earned on such transactions. Over-the-counter purchases and sales are transacted directly with principal market makers except in those cases in which better prices and executions may be obtained elsewhere. For the period April 3, 1995 (commencement of operations) through March 31, 1996, the Large Cap Value Portfolio and Small Cap Value Portfolio paid total brokerage commissions of $26,576 and $64,825, respectively, of which approximately $1,200 and $1,700 was paid to Bear Stearns. The Large Cap Value Portfolio and Small Cap Value Portfolio paid 4.52% and 2.62%, respectively, of its commissions to Bear Stearns, and, with respect to all the securities transactions for each Equity Portfolio, 1.95% and 0.72% of the transactions, respectively, involved commissions being paid to Bear Stearns. No brokerage commissions were paid by the Bond Portfolio. PERFORMANCE INFORMATION The following information supplements and should be read in conjunction with the section in the Portfolios' Prospectus entitled "Performance Information." Current yield for the 30-day period ended March 31, 1996 for Class A, Class C and Class Y of the Bond Portfolio was 5.12%, 4.94% and 5.68%, respectively. The current yield for each Class reflects the waiver or reimbursement of certain fees and expenses by the investment adviser, without which the Portfolio's current yield for such period would have been 2.65% for Class A, 2.37% for Class C and 3.11% for Class Y. Current yield of the Bond Portfolio is computed pursuant to a formula which operates as follows: The amount of the Bond Portfolio's expenses accrued for the 30-day period (net of reimbursements) is subtracted from the amount of the dividends and interest earned by the Bond Portfolio during the period. That result is then divided by the product of: (a) the average daily number of shares outstanding during the period that were entitled to receive dividends, and (b) the maximum offering price per share on the last day of the period less any undistributed earned income per share reasonably expected to be declared as a dividend shortly thereafter. The quotient is then added to 1, and that sum is raised to the 6th power, after which 1 is subtracted. The current yield is then arrived at by multiplying the result by 2. Average annual total return of each Portfolio is calculated by determining the ending redeemable value of an investment purchased at net asset value (maximum offering price in the case of Class A) per share with a hypothetical $1,000 payment made at the beginning of the period (assuming the reinvestment of dividends and distributions), dividing by the amount of the initial investment, taking the "n"th root of the quotient (where "n" is the number of years in the period) and subtracting 1 from the result. A Class' average annual total return figures calculated in accordance with such formula assume that in the case of Class A the maximum sales load has been deducted from the hypothetical initial investment at the time of purchase or in the case of Class C the maximum applicable CDSC has been paid upon redemption at the end of the period. Total return of each Portfolio is calculated by subtracting the amount of the Portfolio's net asset value (maximum offering price in the case of Class A) per share at the beginning of a stated period from the net asset value per share at the end of the period (after giving effect to the reinvestment of dividends and distributions during the period and any applicable CDSC), and dividing the result by the net asset value (maximum offering price in the case of Class A) per share at the beginning of the period. Total return also may be calculated based on the net asset value per share at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class C shares. In such cases, the calculation would not reflect the deduction of the sales load with respect to Class A shares or any applicable CDSC with respect to Class C shares, which, if reflected would reduce the performance quoted. The total return for each Portfolio for the period from commencement of investment operations of the Portfolio or Class thereof through March 31, 1996 for the indicated Class was as follows:
Class A Class C Class Y -------------------------------- ------------------------------- -------- Based on Maximum Based on Net Based on Net Based on Name of Portfolio Offering Price Asset Value Asset Value Maximum CDSC Large Cap Value Portfolio(1) 20.34% 26.35% 25.71% 24.71% 8.75% Small Cap Value Portfolio(2) 27.97% 34.36% 33.59% 32.59% 23.52% Total Return Bond Portfolio(3) 4.47% 8.54% 8.13% 7.13% 2.92% - ------------------------ (1) From April 4, 1995 for Class A and Class C, and from August 11, 1995 for Class Y, to March 31, 1996. (2) From April 3, 1995 for Class A and Class C, and from June 22, 1995 for Class Y, to March 31, 1996. (3) From April 5, 1995 for Class A and Class C, and from September 8, 1995 for Class Y, to March 31, 1996.
INFORMATION ABOUT THE FUND The following information supplements and should be read in conjunction with the section in the Portfolios' Prospectus entitled "General Information." Each Portfolio share has one vote and, when issued and paid for in accordance with the terms of the offering, is fully paid and non-assessable. Portfolio shares have no preemptive, subscription or conversion rights and are freely transferable. The Fund will send annual and semi-annual financial statements to all its shareholders. As of May 31, 1996, the following shareholders owned, directly or indirectly, 5% or more of the indicated Class of the Portfolio's shares. Percent of Large Cap Value Portfolio Name and Address Class A Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 19.6% FBO 001-00269-20 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 5.1% FBO 086-15297-17 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 19.8% FBO 200-40406-10 1 Metrotech Center North Brooklyn, NY 11201-3859 Percent of Large Cap Value Portfolio Name and Address Class C Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 26.4% FBO 001-00269-20 1 Metrotech Center North Brooklyn, NY 11201-3859 Percent of Large Cap Value Portfolio Name and Address Class Y Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 5.8% FBO 220-43167-11 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 67.1% FBO 049-41108-10 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 10.8% FBO 049-41109-19 1 Metrotech Center North Brooklyn, NY 11201-3859 Percent of Small Cap Value Portfolio Name and Address Class A Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 12.9% FBO 001-00269-20 1 Metrotech Center North Brooklyn, NY 11201-3859 Percent of Small Cap Value Portfolio Name and Address Class C Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 14.4% FBO 001-00269-20 1 Metrotech Center North Brooklyn, NY 01201-3859 Percent of Small Cap Value Portfolio Name and Address Class Y Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 8.4% FBO 049-41065-11 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 5.0% FBO 049-40625-16 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 13.4% FBO 049-41108-10 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 12.9% FBO 049-41109-19 1 Metrotech Center North Brooklyn, NY 11201-3859 Custodial Trust Company 13.3% 101 Carnegie Center Princeton, NJ 08540 Percent of Total Return Bond Portfolio Name and Address Class A Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 16.5% FBO 001-00269-20 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 17.1% FBO 051-29339-12 1 Metrotech Center North Brooklyn, NY 11201-3859 Percent of Total Return Bond Portfolio Name and Address Class C Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 40.5% FBO 001-00269-20 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 15.0% FBO 498-00001-13 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 7.2% FBO 220-43677-14 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 7.2% FBO 220-43671-10 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 5.7% FBO 027-43204-23 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 5.3% FBO 050-34543-16 1 Metrotech Center North Brooklyn, NY 11201-3859 Percent of Total Return Bond Portfolio Name and Address Class Y Shares Outstanding - ----------------- -------------------------- Bear Stearns Securities Corp. 54.4% FBO 049-41095-15 1 Metrotech Center North Brooklyn, NY 11201-3859 Bear Stearns Securities Corp. 35.7% FBO 049-41110-16 1 Metrotech Center North Brooklyn, NY 11201-3859 A shareholder who beneficially owns, directly or indirectly, more than 25% of a Portfolio's voting Securities may be deemed a "control person" (as defined in the 1940 Act) of a Portfolio. CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL AND INDEPENDENT AUDITORS Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is each Portfolio's custodian. Under a custody agreement with each Portfolio, CTC holds each Portfolio's securities and keeps all necessary accounts and records. For its services, CTC receives from each Portfolio an annual fee of the greater of .015% of the value of the domestic assets held in custody or $5,000, such fee to be payable monthly based upon the total market value of such assets, as determined on the last business day of the month. In addition, CTC receives certain securities transactions charges which are payable monthly. PFPC, Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is each Portfolio's transfer agent, dividend disbursing agent and registrar. Neither CTC nor PFPC has any part in determining the investment policies of any Portfolio or which securities are to be purchased or sold by any Portfolio. Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, as counsel for the Fund, has rendered its opinion as to certain legal matters regarding the due authorization and valid issuance of the shares of beneficial interest being sold pursuant to the Portfolios' Prospectus. Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281-1434, independent auditors, have been selected as auditors of the Fund. FINANCIAL STATEMENTS The Portfolios' Annual Report to Shareholders for the fiscal year ended March 31, 1996 is a separate document supplied with this Statement of Additional Information, and the financial statements, accompanying notes and report of independent auditors appearing therein are incorporated by reference into this Statement of Additional Information. APPENDIX Description of certain ratings assigned by S&P, Moody's, Fitch and Duff: S&P Bond Ratings AAA Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. A Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. BBB Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. S&P's letter ratings may be modified by the addition of a plus (+) or minus (-) sign designation, which is used to show relative standing within the major rating categories, except in the AAA (Prime Grade) category. Commercial Paper Rating The designation A-1 by S&P indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus sign (+) designation. Capacity for timely payment on issues with an A-2 designation is strong. However, the relative degree of safety is not as high as for issues designated A-1. Moody's Bond Ratings Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what generally are known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long- term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Moody's applies the numerical modifiers 1, 2 and 3 to show relative standing within the major rating categories, except in the Aaa category. The modifier 1 indicates a ranking for the security in the higher end of a rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of a rating category. Commercial Paper Rating The rating Prime-1 (P-1) is the highest commercial paper rating assigned by Moody's. Issuers of P-1 paper must have a superior capacity for repayment of short-term promissory obligations, and ordinarily will be evidenced by leading market positions in well established industries, high rates of return on funds employed, conservative capitalization structures with moderate reliance on debt and ample asset protection, broad margins in earnings coverage of fixed financial charges and high internal cash generation, and well established access to a range of financial markets and assured sources of alternate liquidity. Issuers (or relating supporting institutions) rated Prime-2 (P-2) have a strong capacity for repayment of short-term promissory obligations. This ordinarily will be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Fitch Bond Ratings The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt. The ratings take into consideration special features of the issue, its relationship to other obligations of the issuer, the current financial condition and operative performance of the issuer and of any guarantor, as well as the political and economic environment that might affect the issuer's future financial strength and credit quality. AAA Bonds rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA Bonds rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have an adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Plus (+) and minus (-) signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Short-Term Ratings Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. Although the credit analysis is similar to Fitch's bond rating analysis, the short-term rating places greater emphasis than bond ratings on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2 Good Credit Quality. Issues carrying this rating have a satisfactory degree of assurance for timely payments, but the margin of safety is not as great as the F-1+ and F-1 categories. Duff Bond Ratings AAA Bonds rated AAA are considered highest credit quality. The risk factors are negligible, being only slightly more than for risk- free U.S. Treasury debt. AA Bonds rated AA are considered high credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A Bonds rated A have protection factors which are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB Bonds rated BBB are considered to have below average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles. Plus (+) and minus (-) signs are used with a rating symbol (except AAA) to indicate the relative position of a credit within the rating category. Commercial Paper Rating The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty of timely payment with excellent liquidity factors which are supported by ample asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty of timely payment, good access to capital markets and sound liquidity factors and company fundamentals. Risk factors are small. BSF-S-002-06 THE BEAR STEARNS FUNDS S&P STARS PORTFOLIO CLASS A, CLASS C AND CLASS Y PART B (STATEMENT OF ADDITIONAL INFORMATION) JUNE 20, 1996 This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the current relevant Prospectus dated June 20, 1996 of S&P STARS Portfolio (the "STARS Portfolio"), a portfolio of The Bear Stearns Funds (the "Fund"), as each may be revised from time to time. To obtain a free copy of such Prospectus, please write to the Fund at PFPC Inc. ("PFPC"), Attention: STARS Portfolio, P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1-800-447- 1139 (in Delaware call collect 302-791-1031) or call Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766-4111. As described in the Prospectus, the STARS Portfolio invests all of its assets in the S&P STARS Master Series (the "Master Series") of S&P STARS Fund (the "Master Fund"). Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the Master Series' investment adviser. Bear Stearns, an affiliate of BSFM, serves as distributor of the STARS Portfolio's shares. TABLE OF CONTENTS Page Investment Objective and Management Policies.................. B-2 Management of the STARS Portfolio............................. B-10 Management Arrangements....................................... B-15 Purchase and Redemption of Shares............................. B-19 Determination of Net Asset Value.............................. B-20 Dividends, Distributions and Taxes............................ B-21 Portfolio Transactions........................................ B-23 Performance Information....................................... B-25 Information About the STARS Portfolio......................... B-26 Custodian, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors............................ B-27 Financial Statements.......................................... B-28 INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES The following information supplements and should be read in conjunction with the section in the STARS Portfolio's Prospectus entitled "Description of STARS Portfolio." General The STARS Portfolio seeks to achieve its investment objective by investing all of its assets in the Master Series. The STARS Portfolio may withdraw its investment from the Master Series at any time if the Fund's Board of Trustees determines that it is in the best interests of the STARS Portfolio to do so. Since the investment characteristics of the STARS Portfolio will correspond directly to those of the Master Series, the following is a discussion of the various investment policies and techniques employed by the Master Series. Portfolio Securities Bank Obligations. Domestic commercial banks organized under Federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System and to have their deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state law are supervised and examined by state banking authorities but are members of the Federal Reserve System only if they elect to join. In addition, state banks whose certificates of deposit ("CDs") may be purchased by the Master Series are insured by the FDIC (although such insurance may not be of material benefit to the Master Series, depending on the principal amount of the CDs of each bank held by the Master Series) and are subject to Federal examination and to a substantial body of Federal law and regulation. As a result of Federal or state laws and regulations, domestic branches of domestic banks whose CDs may be purchased by the Master Series generally are required, among other things, to maintain specified levels of reserves, are limited in the amounts which they can loan to a single borrower and are subject to other regulation designed to promote financial soundness. However, not all of such laws and regulations apply to the foreign branches of domestic banks. Obligations of foreign branches of domestic banks, foreign subsidiaries of domestic banks and domestic and foreign branches of foreign banks, such as CDs and time deposits ("TDs"), may be general obligations of the parent banks in addition to the issuing branch, or may be limited by the terms of a specific obligation and governmental regulation. Such obligations are subject to different risks than are those of domestic banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. These foreign branches and subsidiaries are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, auditing and financial record keeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank or about a foreign bank than about a domestic bank. Obligations of United States branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation or by Federal or state regulation as well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may be subject to reserve requirements imposed by the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, Federal branches licensed by the Comptroller of the Currency and branches licensed by certain states ("State Branches") may be required to: (1) pledge to the regulator, by depositing assets with a designated bank within the state, a certain percentage of their assets as fixed from time to time by the appropriate regulatory authority; and (2) maintain assets within the state in an amount equal to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of Federal and State Branches generally must be insured by the FDIC if such branches take deposits of less than $100,000. In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of domestic banks, by foreign branches of foreign banks or by domestic branches of foreign banks, BSFM carefully evaluates such investments on a case-by-case basis. Repurchase Agreements. The Master Series' custodian or sub-custodian will have custody of, and will hold in a segregated account, securities acquired by the Master Series under a repurchase agreement. Repurchase agreements are considered by the staff of the Securities and Exchange Commission to be loans by the Master Series. In an attempt to reduce the risk of incurring a loss on a repurchase agreement, the Master Series will enter into repurchase agreements only with domestic banks with total assets in excess of one billion dollars, or primary government securities dealers reporting to the Federal Reserve Bank of New York, with respect to securities of the type in which the Master Series may invest, and will require that additional securities be deposited with it if the value of the securities purchased should decrease below the resale price. BSFM will monitor on an ongoing basis the value of the collateral to assure that it always equals or exceeds the repurchase price. The Master Series will consider on an ongoing basis the creditworthiness of the institutions with which it enters into repurchase agreements. Commercial Paper and Other Short-Term Corporate Obligations. Variable rate demand notes include variable amount master demand notes, which are obligations that permit the Master Series to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Master Series, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. As mutually agreed between the parties, the Master Series may increase the amount under the notes at any time up to the full amount provided by the note agreement, or decrease the amount, and the borrower may repay up to the full amount of the note without penalty. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded, and there generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Master Series' right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. In connection with floating and variable rate demand obligations, BSFM will consider, on an ongoing basis, earning power, cash flow and other liquidity ratios of the borrower, and the borrower's ability to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and the Master Series may invest in them only if at the time of an investment the borrower meets the criteria set forth in the STARS Portfolio's Prospectus for other commercial paper issuers. Illiquid Securities. When purchasing securities that have not been registered under the Securities Act of 1933, as amended, and are not readily marketable, the Master Series will endeavor to obtain the right to registration at the expense of the issuer. Generally, there will be a lapse of time between the Master Series' decision to sell any such security and the registration of the security permitting sale. During any such period, the price of the securities will be subject to market fluctuations. However, if a substantial market of qualified institutional buyers develops for certain unregistered securities purchased by the Master Series pursuant to Rule 144A under the Securities Act of 1933, as amended, it intends to treat them as liquid securities in accordance with procedures approved by the Master Fund's Board of Trustees. Because it is not possible to predict with assurance how the market for restricted securities pursuant to Rule 144A will develop, the Master Fund's Board of Trustees has directed BSFM to monitor carefully the Master Series' investments in such securities with particular regard to trading activity, availability of reliable price information and other relevant information. To the extent that, for a period of time, qualified institutional buyers cease purchasing restricted securities pursuant to Rule 144A, the Master Series' investing in such securities may have the effect of increasing the level of illiquidity in the Master Series during such period. Management Policies Options Transactions. The Master Series may engage in options transactions of the type described in the STARS Portfolio's Prospectus. The principal reason for writing covered call options, which are call options with respect to which the Master Series owns the underlying security or securities, is to realize, through the receipt of premiums, a greater return than would be realized on the Master Series' securities alone. Similarly, the principal reason for writing covered put options is to realize income in the form of premiums. In return for a premium, the writer of a covered call option forfeits the right to any appreciation in the value of the underlying security above the strike price for the life of the option (or until a closing purchase transaction can be effected). Nevertheless, the call writer retains the risk of a decline in the price of the underlying security. The size of the premiums that the Master Series may receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option-writing activities. Options written ordinarily will have expiration dates between one and nine months from the date written. The exercise price of the options may be below, equal to or above the market values of the underlying securities at the time the options are written. In the case of call options, these exercise prices are referred to as "in-the-money," "at-the-money" and "out-of-the- money," respectively. The Master Series may write (a) in-the-money call options when BSFM expects that the price of the underlying security will remain stable or decline moderately during the option period, (b) at-the-money call options when BSFM expects that the price of the underlying security will remain stable or advance moderately during the option period and (c) out-of-the-money call options when BSFM expects that the premiums received from writing the call option plus the appreciation in market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. In these circumstances, if the market price of the underlying security declines and the security is sold at this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Out-of-the money, at-the-money and in-the-money put options (the reverse of call options as to the relation of exercise price to market price) may be utilized in the same market environments that such call options are used in equivalent transactions. So long as the Master Series' obligation as the writer of an option continues, it may be assigned an exercise notice by the broker-dealer through which the option was sold, requiring the Master Series to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates when the option expires or the Master Series effects a closing purchase transaction. The Master Series can no longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice. While it may choose to do otherwise, the Master Series generally will purchase or write only those options for which BSFM believes there is an active secondary market so as to facilitate closing transactions. There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times have rendered certain clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that otherwise may interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If as a covered call option writer the Master Series is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. Stock Index Options. The Master Series may engage in stock index option transactions of the type described in the STARS Portfolio's Prospectus. A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indexes are similar to options on stock except that (a) the expiration cycles of stock index options are generally monthly, while those of stock options are currently quarterly, and (b) the delivery requirements are different. Instead of giving the right to take or make delivery of a stock at a specified price, an option on a stock index gives the holder the right to receive a cash "exercise settlement amount" equal to (i) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised. Lending Portfolio Securities. To a limited extent, the Master Series may lend its portfolio securities to brokers, dealers and other financial institutions, provided it receives cash collateral which at all times is maintained in an amount equal to at least 100% of the current market value of the securities loaned. By lending its portfolio securities, the Master Series can increase its income through the investment of the cash collateral. For purposes of this policy, the Master Series considers collateral consisting of U.S. Government securities or irrevocable letters of credit issued by banks whose securities meet the standards for investment by the Master Series to be the equivalent of cash. From time to time, the Master Series may return to the borrower or a third party which is unaffiliated with the Master Series, and which is acting as a "placing broker," a part of the interest earned from the investment of collateral received for securities loaned. The Securities and Exchange Commission currently requires that the following conditions must be met whenever portfolio securities are loaned: (1) the Master Series must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the Master Series must be able to terminate the loan at any time; (4) the Master Series must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) the Master Series may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Master Fund's Board of Trustees must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. These conditions may be subject to future modification. Investments in Warrants. The Master Series does not presently intend to invest in warrants. However, any future investment in warrants will be limited to 5% of its net assets, except that this limitation does not apply to warrants acquired in units or attached to securities. Included in such amount, but not to exceed 2% of the value of its net assets, may be warrants which are not listed on the New York or American Stock Exchange. Investment Restrictions. The STARS Portfolio and the Master Series have adopted investment restrictions numbered 1 through 10 as fundamental policies. These restrictions cannot be changed, as to the STARS Portfolio or Master Series, without approval by the holders of a majority (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")) of the outstanding voting securities of the STARS Portfolio or Master Series, as the case may be. Investment restrictions numbered 11 through 14 are not fundamental policies and may be changed by vote of a majority of the Trustees of the Fund or Master Fund at any time. Neither the STARS Portfolio nor the Master Series may: 1. Invest more than 25% of the value of its total assets in the securities of issuers in any single industry, provided that there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. 2. Invest in commodities, except that each may purchase and sell options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 3. Purchase, hold or deal in real estate, real estate limited partnership interests, or oil, gas or other mineral leases or exploration or development programs, but each may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. 4. Borrow money, except to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 33-1/3% of the value of such company's total assets. For purposes of this Investment Restriction, the entry into options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes shall not constitute borrowing. 5. Make loans to others, except through the purchase of debt obligations and the entry into repurchase agreements. However, each may lend its portfolio securities in an amount not to exceed 33-1/3% of the value of its total assets. Any loans of portfolio securities will be made according to guidelines established by the Securities and Exchange Commission and the Board of Trustees of the Fund and Master Fund, as the case may be. 6. Act as an underwriter of securities of other issuers, except to the extent each may be deemed an underwriter under the Securities Act of 1933, as amended, by virtue of disposing of portfolio securities. 7. Issue any senior security (as such term is defined in Section 18(f) of the 1940 Act). 8. Purchase securities on margin, but each may make margin deposits in connection with transactions in options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 9. Purchase securities of any company having less than three years' continuous operations (including operations of any predecessor) if such purchase would cause the value of the STARS Portfolio's or the Master Series' investments, as the case may be, in all such companies to exceed 5% of the value of its total assets. 10. Invest in the securities of a company for the purpose of exercising management or control, but each will vote the securities it owns in its portfolio as a shareholder in accordance with its views. 11. Pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings and to the extent related to the purchase of securities on a when-issued or forward commitment basis and the deposit of assets in escrow in connection with writing covered put and call options and collateral and initial or variation margin arrangements with respect to options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 12. Purchase, sell or write puts, calls or combinations thereof, except as described in the STARS Portfolio's Prospectus and Statement of Additional Information. 13. Enter into repurchase agreements providing for settlement in more than seven days after notice or purchase securities which are illiquid, if, in the aggregate, more than 15% of the value of its net assets would be so invested. 14. Purchase securities of other investment companies, except to the extent permitted under the 1940 Act. If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such restriction. The Fund may make commitments more restrictive than the restrictions listed above so as to permit the sale of STARS Portfolio's shares in certain states. Should the Fund determine that a commitment is no longer in the best interest of the STARS Portfolio and its shareholders, the Fund reserves the right to revoke the commitment by terminating the sale of STARS Portfolio shares in the state involved. MANAGEMENT OF THE STARS PORTFOLIO Trustees and officers of the Fund, together with information as to their principal business occupations during at least the last five years, are shown below. Each Trustee who is an "interested person" of the Fund, as defined in the 1940 Act, is indicated by an asterisk.
Name and Address Position Principal Occupation (and age) with Fund During Past Five Years - ---------------- --------- ---------------------- Peter M. Bren (62) Trustee President of The Bren Co.; 2 East 70th Street President of Cole, Bren New York, NY 10021 Realty Advisors and Senior Partner for Lincoln Properties prior thereto. Alan J. Dixon* (68) Trustee Partner of Bryan Cave, a law 7535 Claymont Court firm in St. Louis since Apt. #2 January 1993; United Belleville, IL 62223 States Senator of Illinois from 1981 to 1993. John R. McKernan, Jr. (48) Trustee Chairman and Chief Executive 114 Nottingham Road Officer of McKernan Auburn, ME 04210 Enterprises since January 1995; Governor of Maine prior thereto. M.B. Oglesby, Jr. (53) Trustee Vice Chairman of Cassidy & 5300 Albemarle Street Associates since February Bethesda, MD 20816 1996; Senior Vice President of RJR Nabisco, Inc. from April 1989 to February 1996; Former Deputy Chief of Staff-White House from 1988 to January 1989. Robert S. Reitzes* (51) Chairman Director of Mutual Funds- 245 Park Avenue of the Board Bear Stearns Asset New York, NY 10167 Management and Senior Managing Director of Bear Stearns since March 1994; Co- Director of Research and Senior Chemical Analyst of C.J. Lawrence/Deutsche Bank Securities Corp. from January 1991 to March 1994. Neil T. Eigen (53) President Chief Investment Officer and 245 Park Avenue Director of Equity New York, NY 10167 Investments--Bear Stearns Asset Management since 1992 and Senior Managing Director of Bear Stearns since 1990. Peter B. Fox (44) Executive Vice Senior Managing Director, Three First National President Bear Stearns, Public Plaza Finance. Chicago, IL 60602 William J. Montgoris (49) Executive Vice Chief Financial Officer and 245 Park Avenue President Chief Operating Officer, New York, NY 10167 Bear Stearns. Stephen A. Bornstein (52) Vice President Managing Director, Legal 245 Park Avenue Department, Bear Stearns. New York, NY 10167 Frank J. Maresca (37) Vice President Managing Director of Bear 245 Park Avenue and Treasurer Stearns since September New York, NY 10167 1994; Associate Director of Bear Stearns from September 1993 to September 1994; Executive Vice Presidentof BSFM since March 1992; Vice President of Bear Stearns from March 1992 to September 1993; First Vice President of Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") from June 1988 to March 1992; and Director of Funds Administration Division of Mitchell Hutchins from November 1991 to March 1992. Raymond D. DeAngelo (35) Vice President Associate Director of Bear 245 Park Avenue Stearns since November 1994; New York, NY 10167 Vice President and Manager-- Mutual Fund Sales Support Group of Kidder, Peabody & Co. Incorporated ("Kidder Peabody") from August 1994 to November 1994; Vice President and Manager--Unit Investment Trust Department of Kidder Peabody from August 1992 to August 1994; Vice President and Wholesaler of Nike Securities, L.P. formerly Clayton Brown & Associates) from September 1991 to August 1992; Assistant Vice President and Wholesaler of Clayton Brown & Associates prior thereto. Ellen T. Arthur (43) Secretary Associate Director of Bear 245 Park Avenue Stearns since January New York, NY 10167 1996; Senior Counsel and Corporate Vice President of PaineWebber Incorporated from April 1989 to September 1995. Vincent L. Pereira (30) Assistant Associate Director of Bear 245 Park Avenue Treasurer Stearns since September 1995 New York, NY 10167 and Vice President of BSFM since May 1993; Vice President of Bear Stearns from May 1993 to September 1995; Assistant Vice President of Mitchell Hutchins from October 1992 to May 1993; Senior Relationship Manager of Mitchell Hutchins from June 1988 to October 1992. Eileen M. Coyle (30) Assistant Vice President of Bear Stearns 245 Park Avenue Secretary since September 1995; New York, NY 10167 Accounting Supervisor and Senior Accountant for Bear Stearns since 1990.
Information pertaining to the Trustees and officers of the Master Fund is set forth below together with their respective positions and a brief statement of their principal occupations during the past five years. Trustees deemed to be "interested persons" of the Master Fund for purposes of the 1940 Act are indicated by an asterisk.
Name and Address Position with Principal Occupation (and age) Master Fund During Past Five Years John J. Danilovich (45) Trustee Chairman and Principal of 32 Blomfield Road Danilovich & Company, London, W9 1AA merchants bankers. England Robert S. Reitzes* (51) Chairman of Described above. 245 Park Avenue the Board New York, NY 10167 Vincent Anthony Walsh (69) Trustee Consultant of Arthur Cox, 41-45 St. Stephen's a law firm in Dublin, Green since 1993, Senior Partner Dublin 2 of Arthur Cox prior thereto. Ireland Barry Nix (36) President Senior Managing Director of 1 Canada Square Fixed Income Sales of London E14 58D Bear, Stearns England International Limited since 1991; Managing Director of Bear, Stearns International Limited prior thereto. James Fergus McKeon (36) Treasurer General Manager of PFPC Jordanstown and Secretary International Ltd. since Oldtown September 1993; Chief Dublin Accountant of Swiss Ireland Bank Corporation Ireland from 1990 to 1993.
The Fund pays its non-affiliated Board members an annual retainer of $5,000 and a per meeting fee of $500 and reimburses them for their expenses. The Fund does not compensate its officers. The aggregate amount of compensation paid to each Board member by the Fund and by all other funds in the Bear Stearns Family of Funds for which such person is a Board member (the number of which is set forth in parenthesis next to each Board member's total compensation) for the fiscal year ended March 31, 1996 is as follows:
(3) (5) (2) (4) Total Pension or Compensation from (1) Aggregate Retirement Benefits Estimated Annual Fund and Fund Name of Board Compensation Accrued as Part of Benefits Upon Complex Paid to Member from Fund * Fund's Expenses Retirement Board Members Peter M. Bren $7,000 None None $12,000(2) Alan J. Dixon $7,000 None None $ 7,000(1) John R. McKernan, Jr. $7,000 None None $12,000(2) M.B. Oglesby, Jr. $7,000 None None $12,000(2) Robert S. Reitzes None None None None(2)
The Master Fund pays its non-affiliated Board members an annual retainer of $5,000 and a per meeting fee of $500 and reimburses them for their expenses. The Master Fund does not compensate its officers. The aggregate amount of compensation paid to each Board member by the Master Fund and by all other funds in the Bear Stearns Family of Funds for which such person is a Board member (the number of which is set forth in parenthesis next to each Board member's total compensation) for the fiscal year ended March 31, 1996 is as follows:
(2) (3) (5) Total Aggregate Pension or (4) Compensation from (1) Compensation Retirement Benefits Estimated Annual Master Fund and Fund Name of Board from Master Accrued as Part of Benefits Upon Complex Paid to Member Fund* Master Fund's Expenses Retirement Board Members John J. Danilovich $7,000 None None $7,000(1) Vincent Anthony Walsh $7,000 None None $7,000(1) Robert S. Reitzes None None None None(2) - -------- * Amount does not include reimbursed expenses for attending Board meetings, which amounted to $10,100 for Board members of the Fund and $2,113 for Board members of the Master Fund, as a group.
Board members and officers of the Fund, as a group, owned less than 1% of the STARS Portfolio's shares outstanding on May 31, 1996. No Board member or officer of the Master Fund owned any of the Master Series' shares outstanding on May 31, 1996. For so long as the Plan described in the section captioned "Management Arrangements--Distribution and Shareholder Servicing Plan" remains in effect, the Fund's Trustees who are not "interested persons" of the Fund, as defined in the 1940 Act, will be selected and nominated by the Trustees who are not "interested persons" of the Fund. No meetings of shareholders of the STARS Portfolio will be held for the purpose of electing Trustees unless and until such time as less than a majority of the Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Under the 1940 Act, shareholders of record of not less than two-thirds of the outstanding shares of the Fund may remove a Trustee through a declaration in writing or by vote cast in person or by proxy at a meeting called for that purpose. Under the Fund's Agreement and Declaration of Trust, the Trustees are required to call a meeting of shareholders for the purpose of voting upon the question of removal of any such Trustee when requested in writing to do so by the shareholders of record of not less than 10% of the Fund's outstanding shares. MANAGEMENT ARRANGEMENTS The following information supplements and should be read in conjunction with the section in the STARS Portfolios' Prospectus entitled "Management of STARS Portfolio." Investment Advisory Agreement. BSFM provides investment advisory services to the Master Series pursuant to the Investment Advisory Agreement (the "Agreement") dated February 23, 1995, with the Fund. The Agreement is subject to annual approval by (i) the Master Fund's Board of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Master Series, provided that in either event the continuance also is approved by a majority of the Master Fund's Board of Trustees who are not "interested persons" (as defined in the 1940 Act) of the Master Fund or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Master Fund's Board of Trustees, including a majority of the Trustees who are not "interested persons" of any party to the Agreement, last approved the Agreement at a meeting held on February 23, 1995. The Agreement is terminable, on 60 days' notice, by the Master Fund's Board of Trustees or by vote of the holders of a majority of the Master Series' shares, or, on not less than 90 days' notice, by BSFM. The Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). BSFM is a wholly owned subsidiary of The Bear Stearns Companies Inc. The following persons are directors and/or senior officers of BSFM: Mark A. Kurland, Chief Executive Officer, President, Chairman of the Board and Director; Robert S. Reitzes, Executive Vice President and Director; Milton B. Rubin, Vice Chairman of the Board; Frank J. Maresca, Executive Vice President; Neil T. Eigen, Executive Vice President; Vincent L. Pereira, Treasurer and Secretary; and Michael Minikes, Warren J. Spector and Robert M. Steinberg, Directors. BSFM provides investment advisory services to the Master Series in accordance with its stated policies, subject to the approval of the Master Fund's Board of Trustees. BSFM provides the Master Series with portfolio managers who are authorized by the Master Fund's Board of Trustees to execute purchases and sales of securities. The portfolio managers are Robert S. Reitzes and Gayle M. Sprute. All purchases and sales are reported for the Board's review at the meeting subsequent to such transactions. As compensation for BSFM's advisory services, the Master Fund has agreed to pay BSFM a monthly fee at the annual rate of .75 of 1% of the value of the Master Series' average daily net assets. For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the investment advisory fees payable amounted to $384,779. This amount was waived pursuant to an undertaking by BSFM, resulting in no fees being paid by the Master Fund. Administration Agreement. BSFM provides certain administrative services to the Fund pursuant to the Administration Agreement dated February 22, 1995, with the Fund. The Administration Agreement will continue until February 22, 1998 and thereafter will be subject to annual approval by (i) the Fund's Board or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the STARS Portfolio, provided that in either event its continuance also is approved by a majority of the Fund's Board members who are not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Administration Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board or by vote of the holders of a majority of the STARS Portfolio's shares or upon not less than 90 days' notice by BSFM. The Administration Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). As compensation for BSFM's administrative services, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of the STARS Portfolio's average daily net assets. For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the administration fee accrued amounted to $78,090 and the amount paid was $74,227. Administrative Services Agreements. PFPC provides certain administrative services to the Fund pursuant to the Administrative Services Agreement dated February 22, 1995, with the Fund. The Administrative Services Agreement is terminable upon 60 days' notice by either the Fund or PFPC. PFPC may assign its rights or delegate its duties under the Administrative Services Agreement to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund 30 days' notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee) promptly provide information requested by the Fund in connection with such delegation. As compensation for PFPC's administrative services, the Fund has agreed to pay PFPC $5,500 per month. For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the administrative fee payable by the STARS Portfolio amounted to $60,000. This amount was reduced to $58,660 as a result of a waiver of fees by PFPC. PFPC International Ltd. provides certain administrative services to the Master Fund pursuant to the Administrative Services Agreement dated February 23, 1995, with the Fund. PFPC International Ltd. may delegate any of its functions and duties under the Administrative Services Agreement to any person, provided that such appointment shall first be approved in writing by the Master Fund. As compensation for PFPC International Ltd.'s administrative services, the Master Fund has agreed to pay PFPC International Ltd. a monthly fee at the rate set forth in the STARS Portfolio's Prospectus. For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the administrative fee payable by the Master Series amounted to $102,000. This amount was reduced to $61,620 as a result of a waiver of fees by PFPC International Ltd. Distribution and Shareholder Servicing Plan. Rule 12b-1 (the "Rule") adopted by the Securities and Exchange Commission under the 1940 Act provides, among other things, that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Fund's Trustees have adopted such a plan with respect to Class A and Class C Shares (the "Plan"). The Fund's Trustees believe that there is a reasonable likelihood that the Plan will benefit the STARS Portfolio and the holders of its Class A and Class C shares. A quarterly report of the amounts expended under the Plan, and the purposes for which such expenditures were incurred, must be made to the Trustees for their review. In addition, the Plan provides that it may not be amended to increase materially the costs which holders of a Class of shares may bear pursuant to the Plan without approval of such shareholders and that other material amendments of the Plan must be approved by the Board of Trustees, and by the Trustees who are neither "interested persons" (as defined in the 1940 Act) of the Fund nor have any direct or indirect financial interest in the operation of the Plan or in the related Plan agreements, by vote cast in person at a meeting called for the purpose of considering such amendments. The Plan and related agreements are subject to annual approval by such vote cast in person at a meeting called for the purpose of voting on the Plan. The Plan was so approved on January 23, 1995. The Plan is terminable at any time, as to the STARS Portfolio, without penalty, by vote of a majority of the Trustees who are not "interested persons" and who have no direct or indirect financial interest in the operation of the Plan or in the Plan agreements or by vote of holders of a majority of the STARS Portfolio's relevant Class of shares. A Plan agreement is terminable without penalty, at any time, by such vote of the Trustees, upon not more than 60 days' written notice to the parties to such agreement or by vote of the holders of a majority of the STARS Portfolio's shares. A Plan agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). For the period from April 3, 1995 (commencement of operations) through March 31, 1996, the STARS Portfolio paid Bear Stearns $152,980 with respect to Class A shares and $176,445 with respect to Class C shares under the Plan. All such amounts were paid to brokers or dealers. Expenses. The Fund and the Master Fund each bear their respective operating expenses. Operating expenses include: organizational costs, taxes, interest, loan commitment fees, interest and distributions paid on securities sold short, brokerage fees and commissions, if any, fees of Board members who are not officers, directors, employees or holders of 5% or more of the outstanding voting securities of BSFM or its affiliates, Securities and Exchange Commission fees, state Blue Sky qualification fees, administrative and fund accounting fees, charges of custodians, transfer and dividend disbursing agents' fees, certain insurance premiums, industry association fees, outside auditing and legal expenses, costs of maintaining the existence of the Fund and the Master Fund, costs attributable to investor services (including, without limitation, telephone and personnel expenses), costs of shareholders' reports and meetings, costs of preparing and printing certain prospectuses and statements of additional information, and any extraordinary expenses. Expenses attributable to a particular portfolio of the Fund are charged against the assets of that portfolio; other expenses of the Fund are allocated among the portfolios on the basis determined by the Board, including, but not limited to, proportionately in relation to the net assets of each portfolio. The Master Series also bears the following expenses: advisory and administrative fees and costs of independent pricing services. The STARS Portfolio also bears administration fees, fees under the Plan and transfer and dividend disbursing agents' fees. Expense Limitation. BSFM agreed that if, in any fiscal year, the aggregate expenses of the STARS Portfolio, exclusive of taxes, brokerage, interest on borrowings and (with the prior written consent of the necessary state securities commissions) extraordinary expenses, exceed the expense limitation of any state having jurisdiction over the STARS Portfolio, the Fund may deduct from the payment to be made to BSFM, such excess expense to the extent required by state law. Such deduction or payment, if any, will be estimated daily, and reconciled and effected or paid, as the case may be, on a monthly basis. PURCHASE AND REDEMPTION OF SHARES The following information supplements and should be read in conjunction with the sections in the STARS Portfolio's Prospectus entitled "How to Buy Shares" and "How to Redeem Shares." The Distributor. Bear Stearns serves as the STARS Portfolio's distributor on a best efforts basis pursuant to an agreement dated February 22, 1995 which is renewable annually. For the period from April 3, 1995 (commencement of operations) through March 31, 1996, Bear Stearns retained $32,434 from the sales loads on Class A shares and $25,670 from contingent deferred sales charges ("CDSC") on Class C shares. In some states, banks or other institutions effecting transactions in STARS Portfolio shares may be required to register as dealers pursuant to state law. Purchase Order Delays. The effective date of a purchase order may be delayed if PFPC, the STARS Portfolio's transfer agent, is unable to process the purchase order because of an interruption of services at its processing facilities. In such event, the purchase order would become effective at the purchase price next determined after such services are restored. Sales Loads--Class A. Set forth below is an example of the method of computing the offering price of the Class A shares of the STARS Portfolio. The example assumes a purchase of Class A shares aggregating less than $50,000 subject to the schedule of sales charges set forth in the Prospectus at a price based upon the net asset value of the Class A shares on March 31, 1996. Net Asset Value per Share $14.92 Per Share Sales Charge - 4.75% of offering price (4.99% of net asset value per share) $ 0.74 Per Share Offering Price to the Public $15.66 Suspension of Redemptions. The right of redemption may be suspended or the date of payment postponed (a) during any period when the New York Stock Exchange is closed (other than customary weekend and holiday closings), (b) when trading in the markets the Master Series ordinarily utilizes is restricted, or when an emergency exists as determined by the Securities and Exchange Commission so that disposal of the Master Series' investments or determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit to protect the STARS Portfolio's shareholders. DETERMINATION OF NET ASSET VALUE The following information supplements and should be read in conjunction with the section in the STARS Portfolio's Prospectus entitled "How to Buy Shares." Valuation of Portfolio Securities. Portfolio securities, including covered call options written by the Master Series, are valued at the last sale price on the securities exchange or national securities market on which such securities primarily are traded. Securities not listed on an exchange or national securities market, or securities in which there were no transactions, are valued at the average of the most recent bid and asked prices, except in the case of open short positions where the asked price is used for valuation purposes. Bid price is used when no asked price is available. Short-term investments are carried at amortized cost, which approximates value. Any securities or other assets for which recent market quotations are not readily available are valued at fair value as determined in good faith by the Fund's Board of Trustees. Expenses and fees, including the management fee and distribution and service fees, are accrued daily and taken into account for the purpose of determining the net asset value of STARS Portfolio's and Master Series' shares. Because of the differences in operating expenses incurred by each Class, the per share net asset value of each Class will differ. DIVIDENDS, DISTRIBUTIONS AND TAXES The following information supplements and should be read in conjunction with the section in the STARS Portfolio's Prospectus entitled "Dividends, Distributions and Taxes." Management of the Fund believes that the STARS Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"). The STARS Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Qualification as a regulated investment company relieves the STARS Portfolio from any liability for Federal income taxes on net investment income and net realized securities gains to the extent that such income and gains are distributed to shareholders in accordance with applicable provisions of the Code. The term "regulated investment company" does not imply the supervision of management or investment practices or policies by any government agency. Any dividend or distribution paid shortly after an investor's purchase of shares in a regulated investment company may have the effect of reducing the aggregate net asset value of his shares below the cost of his investment. Such a distribution would be a return on investment in an economic sense although taxable as stated in "Dividends, Distributions and Taxes" in the Prospectus. In addition, the Code provides that if a shareholder holds shares of a regulated investment company for six months or less and has received a capital gain dividend with respect to such shares, any loss incurred on the sale of such shares will be treated as a long-term capital loss to the extent of the capital gain dividend received. Depending on the composition of a regulated investment company's income, dividends paid by the regulated investment company from net investment income may qualify for the dividends received deduction allowable to certain U.S. corporate shareholders ("dividends received deduction"). In general, dividend income of the regulated investment company distributed to qualifying corporate shareholders will be eligible for the dividends received deduction only to the extent that (i) the regulated investment company's income consists of dividends paid by U.S. corporations and (ii) the regulated investment company would have been entitled to the dividends received deduction with respect to such dividend income if the regulated investment company were not a regulated investment company under the Code. The dividends received deduction for qualifying corporate shareholders may be further reduced if the shares of the regulated investment company held by such shareholders with respect to which dividends are received are treated as debt-financed or deemed to have been held for less than 46 days. In addition, the Code provides other limitations with respect to the ability of a qualifying corporate shareholder to claim the dividends received deduction in connection with holding shares of a regulated investment company. Ordinarily, gains and losses realized from portfolio transactions will be treated as capital gain or loss. However, all or a portion of the gain or loss from the disposition of non- U.S. dollar denominated securities (including debt instruments, certain financial forward, futures and option contracts, and certain preferred stock) may be treated as ordinary income or loss under Section 988 of the Code (relating to the taxation of foreign currency transactions). In addition, all or a portion of the gain realized from the disposition of certain market discount bonds will be treated as ordinary income under Section 1276. Finally, all or a portion of the gain realized from engaging in "conversion transactions" may be treated as ordinary income under Section 1258. "Conversion transactions" are defined to include certain forward, futures, option and straddle transactions, transactions marketed or sold to produce capital gains, or transactions described in Treasury regulations to be issued in the future. Under Section 1256 of the Code, gain or loss realized by the regulated investment company from certain financial forward, futures and options transactions (other than those taxed under Section 988 of the Code) will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. Gain or loss will arise upon the exercise or lapse of such forward contracts, futures and options as well as from closing transactions. In addition, any such forward contracts, futures or options remaining unexercised at the end of the regulated investment company's taxable year will be treated as sold for their then fair market value, resulting in additional gain or loss to the regulated investment company characterized in the manner described above. Offsetting positions held by a regulated investment company involving certain financial forward, futures or option contracts may be considered, for tax purposes to constitute "straddles." "Straddles" are defined to include "offsetting positions" in actively traded personal property. The tax treatment of "straddles" is governed by Sections 1092 and 1258 of the Code which, in certain circumstances, overrides or modifies the provisions of Sections 988 or 1256. If a regulated investment company were treated as entering into "straddles" by reason of its engaging in certain financial forward, futures or option contracts, such straddles will be characterized as "mixed straddles" if the futures, forwards, or options comprising a part of such straddles were governed by Section 1256 of the Code. The regulated investment company may make one or more elections with respect to "mixed straddles." Depending upon which election is made, if any, results with respect to the regulated investment company may differ. If no election is made, to the extent the straddle rules apply to positions established by the regulated investment company, losses realized by the regulated investment company will be deferred to the extent of unrealized gain in any offsetting positions. Moreover, as a result of the straddle and the conversion transaction rules, short-term capital loss on straddle positions may be recharacterized as long-term capital loss and long-term capital gain may be characterized as short-term capital gain or ordinary income. Investment by a regulated investment company in securities issued or acquired at a discount, or providing for deferred interest or for payment of interest in the form of additional obligations could under special tax rules affect the amount, timing and character of distributions to shareholders by causing the regulated investment company to recognize income prior to the receipt of cash payments. For example, the regulated investment company could be required to accrue a portion of the discount (or deemed discount) at which the securities were issued each year and to distribute such income in order to maintain its qualification as a regulated investment company. In such case, the regulated investment company may have to dispose of securities which it might otherwise have continued to hold in order to generate cash to satisfy these distribution requirements. PORTFOLIO TRANSACTIONS BSFM assumes general supervision over placing orders on behalf of the Master Series for the purchase or sale of investment securities. Allocation of brokerage transactions, including their frequency, is made in BSFM's best judgment and in a manner deemed fair and reasonable to shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected will include those that supplement BSFM's research facilities with statistical data, investment information, economic facts and opinions. Information so received is in addition to and not in lieu of services required to be performed by BSFM and BSFM's fees are not reduced as a consequence of the receipt of such supplemental information. Such information may be useful to BSFM in serving both the Master Series and other funds which it advises and, conversely, supplemental information obtained by the placement of business of other clients may be useful to BSFM in carrying out their obligations to the Master Series. Sales of STARS Portfolio shares by a broker may be taken into consideration, and brokers also will be selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. Large block trades may, in certain cases, result from two or more funds advised or administered by BSFM being engaged simultaneously in the purchase or sale of the same security. When transactions are executed in the over-the-counter market, the Master Series will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Portfolio turnover may vary from year to year as well as within a year. The turnover rate for the Master Series for the period April 3, 1995 (commencement of operations) through March 31, 1996 was 296%. The portfolio turnover rate differed from the anticipated portfolio turnover rate because of market volatility in the last quarter of 1995 and first month of 1996. BSFM repositioned the Master Series' portfolio by selling some of its technology stocks and purchasing stocks that were believed to be more defensive in nature, such as healthcare, consumer non- durables, and growth stocks. In periods in which extraordinary market conditions prevail, BSFM will not be deterred from changing investment strategy as rapidly as needed, in which case higher turnover rates can be anticipated which would result in greater brokerage expenses. The overall reasonableness of brokerage commissions paid is evaluated by BSFM based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. To the extent consistent with applicable provisions of the 1940 Act and the rules and exemptions adopted by the Securities and Exchange Commission thereunder, the Board of Trustees has determined that transactions for the Master Series may be executed through Bear Stearns if, in the judgment of BSFM, the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers, and if, in the transaction, Bear Stearns charges the Master Series a rate consistent with that charged to comparable unaffiliated customers in similar transactions. In addition, under rules recently adopted by the Securities and Exchange Commission, Bear Stearns may directly execute such transactions for the Master Series on the floor of any national securities exchange, provided (i) the Board of Trustees has expressly authorized Bear Stearns to effect such transactions, and (ii) Bear Stearns annually advises the Board of Trustees of the aggregate compensation it earned on such transactions. Over- the-counter purchases and sales are transacted directly with principal market makers except in those cases in which better prices and executions may be obtained elsewhere. For the period April 3, 1995 (commencement of operations) through March 31, 1996, the Master Series paid total brokerage commissions of $415,246 of which $378,353 was paid to Bear Stearns. The Master Series paid 91.10% of its commissions to Bear Stearns, and, with respect to all the securities transactions for the Master Series, 90.60% of the transactions involved commissions being paid to Bear Stearns. PERFORMANCE INFORMATION The following information supplements and should be read in conjunction with the section in the STARS Portfolio's Prospectus entitled "Performance Information." Average annual total return is calculated by determining the ending redeemable value of an investment purchased at net asset value (maximum offering price in the case of Class A) per share with a hypothetical $1,000 payment made at the beginning of the period (assuming the reinvestment of dividends and distributions), dividing by the amount of the initial investment, taking the "n"th root of the quotient (where "n" is the number of years in the period) and subtracting 1 from the result. A Class' average annual total return figures calculated in accordance with such formula assume that in the case of Class A the maximum sales load has been deducted from the hypothetical initial investment at the time of purchase or in the case of Class C the maximum applicable CDSC has been paid upon redemption at the end of the period. The total return for Class A for the period April 5, 1995 (commencement of investment operations of the Master Series) to March 31, 1996 was 21.62%. Based on net asset value per share, the total return for Class A was 27.68% for this period. The total return for Class C for the same period was 25.91%. Without giving effect to the applicable CDSC, the total return for Class C was 26.91% for this period. The total return for Class Y for the period August 7, 1995 (commencement of initial public offering) to March 31, 1996 was 9.09%. Total return is calculated by subtracting the amount of the STARS Portfolio's net asset value (maximum offering price in the case of Class A) per share at the beginning of a stated period from the net asset value per share at the end of the period (after giving effect to the reinvestment of dividends and distributions during the period and any applicable CDSC), and dividing the result by the net asset value (maximum offering price in the case of Class A) per share at the beginning of the period. Total return also may be calculated based on the net asset value per share at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class C shares. In such cases, the calculation would not reflect the deduction of the sales load with respect to Class A shares or any applicable CDSC with respect to Class C shares, which, if reflected would reduce the performance quoted. INFORMATION ABOUT THE STARS PORTFOLIO The following information supplements and should be read in conjunction with the section in the STARS Portfolio's Prospectus entitled "General Information." Bear Stearns and S&P entered into a License Agreement dated October 1, 1994 that provides for, among other matters: (i) the grant by S&P to Bear Stearns of the exclusive right until March 31, 2001, and the non-exclusive right thereafter, to use certain of S&P's proprietary trade names and trademarks for investment companies based, in whole or in part, on the STARS System, (ii) such right to become non-exclusive at an earlier date, if the STARS Portfolio and certain other investment companies which, in the future, may be sponsored by Bear Stearns fail to reach certain aggregate asset sizes, measured annually commencing on April 1, 1996, (iii) such right to terminate at S&P's option upon certain events, such as breach by Bear Stearns of the material terms of the License Agreement, S&P ceasing to publish STARS, the adoption of adverse legislation or regulation (none of which currently is foreseen) affecting S&P's ability to license its trade names or trademarks as contemplated by the License Agreement, or the existence of certain litigation (none of which is known to exist or to be threatened), (iv) the payment by Bear Stearns of annual license fees in amounts equal to a range of .30% to .375% of the net assets of the STARS Portfolio and other investment companies subject to the License Agreement and (v) a partial reduction of the license fees to offset certain marketing expenses incurred by Bear Stearns in connection with the STARS Portfolio. STARS is the centerpiece of the OUTLOOK, S&P's flagship investment newsletter that has a high net worth readership of 25,000 weekly subscribers. STARS reaches more than 72,000 brokers and investment professionals on their desktop computers through MarketScope, S&P's on-line, real-time equity evaluation service, which is accessed more than one million times daily. S&P has more than 130 years' experience in providing financial information and analysis, offers more than 60 products and employs more than 50 experienced equity analysts. These analysts consider fundamental factors that are expected to impact growth. These factors include company operations and industry and macroeconomic conditions. Among the fundamental factors are the company's balance sheet, ability to finance growth, competitive market advantages, earnings per share growth and strength of management. Each STARS Portfolio share has one vote and, when issued and paid for in accordance with the terms of the offering, is fully paid and non-assessable. STARS Portfolio shares have no preemptive, subscription or conversion rights and are freely transferable. The Fund will send annual and semi-annual financial statements to all its shareholders. As of May 31, 1996, the following shareholders owned, directly or indirectly, 5% or more of the indicated Class of the STARS Portfolio's outstanding shares. Percent of Class Y Name and Address Shares Outstanding Bear Stearns Securities Corp. 11.4% FBO 048-93405-13 1 Metrotech Center North Brooklyn, NY 11201-3859 Custodial Trust Company 40.1% 101 Carnegie Center Princeton, NJ 08540 A shareholder who beneficially owns, directly or indirectly, more than 25% of the STARS Portfolio's voting securities may be deemed a "control person" (as defined in the 1940 Act) of the STARS Portfolio. CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL AND INDEPENDENT AUDITORS Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the STARS Portfolio's custodian. Under the custody agreement with the STARS Portfolio, CTC holds the STARS Portfolio's securities and keeps all necessary accounts and records. For its services, CTC receives an annual fee of the greater of .01% of the value of the domestic assets held in custody or $5,000, such fee to be payable monthly based upon the total market value of such assets, as determined on the last business day of the month. In addition, CTC receives certain securities transactions charges which are payable monthly. PFPC, Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the STARS Portfolio's transfer agent, dividend disbursing agent and registrar. Neither CTC nor PFPC has any part in determining the investment policies of the Master Series or which securities are to be purchased or sold by the Master Series. Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, as counsel for the Fund, has rendered its opinion as to certain legal matters regarding the due authorization and valid issuance of the shares of beneficial interest being sold pursuant to the STARS Portfolio's Prospectus. Deloitte & Touche, Deloitte & Touche House, Earlsfort Terrace, Dublin 2, Ireland, independent auditors, have been selected as auditors of the Fund. FINANCIAL STATEMENTS The STARS Portfolio's Annual Report to Shareholders for the fiscal year ended March 31, 1996 is a separate document supplied with this Statement of Additional Information, and the financial statements, accompanying notes and reports of independent auditors appearing therein are incorporated by reference into this Statement of Additional Information. BSF-S-001-07 THE BEAR STEARNS FUNDS THE INSIDERS SELECT FUND CLASS A, CLASS C AND CLASS Y PART B (STATEMENT OF ADDITIONAL INFORMATION) JUNE 20, 1996 This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the current relevant Prospectus dated June 20, 1996 of The Insiders Select Fund (the "Portfolio") of The Bear Stearns Funds (the "Fund"), as each may be revised from time to time. To obtain a free copy of such Prospectus, please write to the Fund at PFPC Inc. ("PFPC"), Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1-800-447-1139 (in Delaware call collect 302-791-1031) or call Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766-4111. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the Portfolio's investment adviser. BSFM has engaged Symphony Asset Management ("Symphony"), a subsidiary of BARRA, Inc., as the Portfolio's sub-investment adviser to manage the Portfolio's day-to-day investment activities. BSFM and Symphony are referred to herein collectively as the "Advisers." Bear Stearns, an affiliate of BSFM, serves as distributor of the Portfolio's shares. TABLE OF CONTENTS Page Investment Objective and Management Policies........... B-2 Management of the Fund................................. B-12 Management Arrangements................................ B-16 Purchase and Redemption of Shares...................... B-20 Determination of Net Asset Value....................... B-21 Dividends, Distributions and Taxes..................... B-22 Portfolio Transactions................................. B-25 Performance Information................................ B-26 Information About the Fund............................. B-27 Custodian, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors..................... B-28 Financial Statements................................... B-29 INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "Description of the Fund." Portfolio Securities Bank Obligations. Domestic commercial banks organized under Federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System and to have their deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state law are supervised and examined by state banking authorities but are members of the Federal Reserve System only if they elect to join. In addition, state banks whose certificates of deposit ("CDs") may be purchased by the Portfolio are insured by the FDIC (although such insurance may not be of material benefit to the Portfolio, depending on the principal amount of the CDs of each bank held by the Portfolio) and are subject to Federal examination and to a substantial body of Federal law and regulation. As a result of Federal or state laws and regulations, domestic branches of domestic banks whose CDs may be purchased by the Portfolio generally are required, among other things, to maintain specified levels of reserves, are limited in the amounts which they can loan to a single borrower and are subject to other regulation designed to promote financial soundness. However, not all of such laws and regulations apply to the foreign branches of domestic banks. Obligations of foreign branches of domestic banks, foreign subsidiaries of domestic banks and domestic and foreign branches of foreign banks, such as CDs and time deposits ("TDs"), may be general obligations of the parent banks in addition to the issuing branch, or may be limited by the terms of a specific obligation and governmental regulation. Such obligations are subject to different risks than are those of domestic banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. These foreign branches and subsidiaries are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, auditing and financial record keeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank or about a foreign bank than about a domestic bank. Obligations of United States branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation or by Federal or state regulation as well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may be subject to reserve requirements imposed by the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, Federal branches licensed by the Comptroller of the Currency and branches licensed by certain states ("State Branches") may be required to: (1) pledge to the regulator, by depositing assets with a designated bank within the state, a certain percentage of their assets as fixed from time to time by the appropriate regulatory authority; and (2) maintain assets within the state in an amount equal to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The deposits of Federal and State Branches generally must be insured by the FDIC if such branches take deposits of less than $100,000. In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of domestic banks, by foreign branches of foreign banks or by domestic branches of foreign banks, BSFM carefully evaluates such investments on a case-by-case basis. Repurchase Agreements. The Portfolio's custodian or sub-custodian will have custody of, and will hold in a segregated account, securities acquired by the Portfolio under a repurchase agreement. Repurchase agreements are considered by the staff of the Securities and Exchange Commission to be loans by the Portfolio. In an attempt to reduce the risk of incurring a loss on a repurchase agreement, the Portfolio will enter into repurchase agreements only with domestic banks with total assets in excess of one billion dollars, or primary government securities dealers reporting to the Federal Reserve Bank of New York, with respect to securities of the type in which the Portfolio may invest, and will require that additional securities be deposited with it if the value of the securities purchased should decrease below the resale price. The Advisers will monitor on an ongoing basis the value of the collateral to assure that it always equals or exceeds the repurchase price. The Portfolio will consider on an ongoing basis the credit worthiness of the institutions with which it enters into repurchase agreements. Commercial Paper and Other Short-Term Corporate Obligations. Variable rate demand notes include variable amount master demand notes, which are obligations that permit the Portfolio to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Portfolio, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. As mutually agreed between the parties, the Portfolio may increase the amount under the notes at any time up to the full amount provided by the note agreement, or decrease the amount, and the borrower may repay up to the full amount of the note without penalty. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded, and there generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Portfolio's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. In connection with floating and variable rate demand obligations, the Advisers will consider, on an ongoing basis, earning power, cash flow and other liquidity ratios of the borrower, and the borrower's ability to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and the Portfolio may invest in them only if at the time of an investment the borrower meets the criteria set forth in the Portfolio's Prospectus for other commercial paper issuers. Illiquid Securities. When purchasing securities that have not been registered under the Securities Act of 1933, as amended, and are not readily marketable, the Portfolio will endeavor to obtain the right to registration at the expense of the issuer. Generally, there will be a lapse of time between the Portfolio's decision to sell any such security and the registration of the security permitting sale. During any such period, the price of the securities will be subject to market fluctuations. However, if a substantial market of qualified institutional buyers develops for certain unregistered securities purchased by the Portfolio pursuant to Rule 144A under the Securities Act of 1933, as amended, the Portfolio intends to treat them as liquid securities in accordance with procedures approved by the Fund's Board of Trustees. Because it is not possible to predict with assurance how the market for restricted securities pursuant to Rule 144A will develop, the Fund's Board of Trustees has directed the Advisers to monitor carefully the Portfolio's investments in such securities with particular regard to trading activity, availability of reliable price information and other relevant information. To the extent that, for a period of time, qualified institutional buyers cease purchasing restricted securities pursuant to Rule 144A, the Portfolio's investing in such securities may have the effect of increasing the level of illiquidity in the Portfolio during such period. Management Policies The Portfolio engages in the following practices in furtherance of its objective. Options Transactions. The Portfolio may engage in options transactions, such as purchasing or writing covered call or put options. The principal reason for writing covered call options, which are call options with respect to which the Portfolio owns the underlying security or securities, is to realize, through the receipt of premiums, a greater return than would be realized on the Portfolio's securities alone. In return for a premium, the writer of a covered call option forfeits the right to any appreciation in the value of the underlying security above the strike price for the life of the option (or until a closing purchase transaction can be effected). Nevertheless, the call writer retains the risk of a decline in the price of the underlying security. Similarly, the principal reason for writing covered put options is to realize income in the form of premiums. The writer of a covered put option accepts the risk of a decline in the price of the underlying security. The size of the premiums that the Portfolio may receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option-writing activities. Options written ordinarily will have expiration dates between one and nine months from the date written. The exercise price of the options may be below, equal to or above the market values of the underlying securities at the time the options are written. In the case of call options, these exercise prices are referred to as "in-the-money," "at-the-money" and "out-of-the- money," respectively. The Portfolio may write (a) in-the-money call options when Symphony expects that the price of the underlying security will remain stable or decline moderately during the option period, (b) at-the-money call options when Symphony expects that the price of the underlying security will remain stable or advance moderately during the option period and (c) out-of-the-money call options when Symphony expects that the premiums received from writing the call option plus the appreciation in market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. In these circumstances, if the market price of the underlying security declines and the security is sold at this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Out-of-the-money, at-the-money and in-the-money put options (the reverse of call options as to the relation of exercise price to market price) may be utilized in the same market environments that such call options are used in equivalent transactions. So long as the Portfolio's obligation as the writer of an option continues, the Portfolio may be assigned an exercise notice by the broker-dealer through which the option was sold, requiring the Portfolio to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates when the option expires or the Portfolio effects a closing purchase transaction. The Portfolio can no longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice. While it may choose to do otherwise, the Portfolio generally will purchase or write only those options for which Symphony believes there is an active secondary market so as to facilitate closing transactions. There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times have rendered certain clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that otherwise may interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If as a covered call option writer the Portfolio is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. Stock Index Options. The Portfolio may purchase and write put and call options on stock indexes listed on U.S. or foreign securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indexes are similar to options on stock except that (a) the expiration cycles of stock index options are generally monthly, while those of stock options are currently quarterly, and (b) the delivery requirements are different. Instead of giving the right to take or make delivery of a stock at a specified price, an option on a stock index gives the holder the right to receive a cash "exercise settlement amount" equal to (i) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised. Futures Contracts and Options on Futures Contracts. The Portfolio may trade futures contracts and options on futures contracts in U.S. domestic markets, such as the Chicago Board of Trade and the International Monetary Market of the Chicago Mercantile Exchange. Initially, when purchasing or selling futures contracts the Portfolio will be required to deposit with the Fund's custodian in the broker's name an amount of cash or cash equivalents up to approximately 10% of the contract amount. This amount is subject to change by the exchange or board of trade on which the contract is traded and members of such exchange or board of trade may impose their own higher requirements. This amount is known as "initial margin" and is in the nature of a performance bond or good faith deposit on the contract which is returned to the Portfolio upon termination of the futures position, assuming all contractual obligations have been satisfied. Subsequent payments, known as "variation margin," to and from the broker will be made daily as the price of the index or securities underlying the futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as "marking-to-market." At any time prior to the expiration of a futures contract, the Portfolio may elect to close the position by taking an opposite position, at the then prevailing price, which will operate to terminate the Portfolio's existing position in the contract. Although the Portfolio intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Portfolio to substantial losses. If it is not possible, or the Portfolio determines not, to close a futures position in anticipation of adverse price movements, the Portfolio will be required to make daily cash payments of variation margin. In such circumstances, an increase in the value of the portion of the portfolio being hedged, if any, may offset partially or completely losses on the futures contract. However, no assurance can be given that the price of the securities being hedged will correlate with the price movements in a futures contract and thus provide an offset to losses on the futures contract. In addition, to the extent the Portfolio is engaging in a futures transaction as a hedging device, due to the risk of an imperfect correlation between securities owned by the Portfolio that are the subject of a hedging transaction and the futures contract used as a hedging device, it is possible that the hedge will not be fully effective in that, for example, losses on the portfolio securities may be in excess of gains on the futures contract or losses on the futures contract may be in excess of gains on the portfolio securities that were the subject of the hedge. In futures contracts based on indexes, the risk of imperfect correlation increases as the composition of the Portfolio's investments varies from the composition of the index. In an effort to compensate for the imperfect correlation of movements in the price of the securities being hedged and movements in the price of futures contracts, the Portfolio may buy or sell futures contracts in a greater or lesser dollar amount than the dollar amount of the securities being hedged if the historical volatility of the futures contract has been less or greater than that of the securities. Such "over hedging" or "under hedging" may adversely affect the Portfolio's net investment results if market movements are not as anticipated when the hedge is established. Upon exercise of an option, the writer of the option will deliver to the holder of the option the futures position and the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. The potential loss related to the purchase of options on futures contracts is limited to the premium paid for the option (plus transaction costs). Because the value of the option is fixed at the time of sale, there are no daily cash payments to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change would be reflected in the net asset value of each Portfolio. Lending Portfolio Securities. To a limited extent, the Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions, provided it receives cash collateral which at all times is maintained in an amount equal to at least 100% of the current market value of the securities loaned. By lending its portfolio securities, the Portfolio can increase its income through the investment of the cash collateral. For purposes of this policy, the Portfolio considers collateral consisting of U.S. Government securities or irrevocable letters of credit issued by banks whose securities meet the standards for investment by the Portfolio to be the equivalent of cash. From time to time, the Portfolio may return to the borrower or a third party which is unaffiliated with the Portfolio, and which is acting as a "placing broker," a part of the interest earned from the investment of collateral received for securities loaned. The Securities and Exchange Commission currently requires that the following conditions must be met whenever portfolio securities are loaned: (1) the Portfolio must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the Portfolio must be able to terminate the loan at any time; (4) the Portfolio must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) the Portfolio may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Fund's Board of Trustees must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. These conditions may be subject to future modification. Investment Restrictions. The Portfolio has adopted investment restrictions numbered 1 through 8 as fundamental policies. These restrictions cannot be changed, as to a Portfolio, without approval by the holders of a majority (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")) of the Portfolio's outstanding voting shares. Investment restrictions numbered 9 through 14 are not fundamental policies and may be changed by vote of a majority of the Trustees at any time. The Portfolio may not: 1. Invest more than 25% of the value of its total assets in the securities of issuers in any single industry, provided that there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. 2. Invest in commodities, except that the Portfolio may purchase and sell options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 3. Purchase, hold or deal in real estate, real estate limited partnership interests, or oil, gas or other mineral leases or exploration or development programs, but the Portfolio may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. 4. Borrow money, except to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 33-1/3% of the value of such company's total assets. For purposes of this Investment Restriction, the entry into options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes shall not constitute borrowing. 5. Make loans to others, except through the purchase of debt obligations and the entry into repurchase agreements. However, the Portfolio may lend its portfolio securities in an amount not to exceed 33-1/3% of the value of its total assets. Any loans of portfolio securities will be made according to guidelines established by the Securities and Exchange Commission and the Fund's Board of Trustees. 6. Act as an underwriter of securities of other issuers, except to the extent the Portfolio may be deemed an underwriter under the Securities Act of 1933, as amended, by virtue of disposing of portfolio securities. 7. Issue any senior security (as such term is defined in Section 18(f) of the 1940 Act). 8. Purchase securities on margin, but the Portfolio may make margin deposits in connection with transactions in options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 9. Purchase securities of any company having less than three years' continuous operations (including operations of any predecessor) if such purchase would cause the value of the Portfolio's investments in all such companies to exceed 5% of the value of its total assets. 10. Invest in the securities of a company for the purpose of exercising management or control, but the Portfolio will vote the securities it owns in its portfolio as a shareholder in accordance with its views. 11. Pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings and to the extent related to the purchase of securities on a when-issued or forward commitment basis and the deposit of assets in escrow in connection with writing covered put and call options and collateral and initial or variation margin arrangements with respect to options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 12. Purchase, sell or write puts, calls or combinations thereof, except as described in the Portfolio's Prospectus and Statement of Additional Information. 13. Enter into repurchase agreements providing for settlement in more than seven days after notice or purchase securities which are illiquid, if, in the aggregate, more than 15% of the value of its net assets would be so invested. 14. Purchase securities of other investment compan- ies, except to the extent permitted under the 1940 Act. If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such restriction. The Fund may make commitments more restrictive than the restrictions listed above so as to permit the sale of the Portfolio's shares in certain states. Should the Fund determine that a commitment is no longer in the best interest of the Portfolio and its shareholders, the Fund reserves the right to revoke the commitment by terminating the sale of Fund shares in the state involved. MANAGEMENT OF THE FUND Trustees and officers of the Fund, together with information as to their principal business occupations during at least the last five years, are shown below. Each Trustee who is an "interested person" of the Fund, as defined in the 1940 Act, is indicated by an asterisk.
Name and Address Position Principal Occupation (and age) with Fund During Past Five Years - ---------------- --------- ----------------------- Peter M. Bren (62) Trustee President of The Bren Co.; 2 East 70th Street President of Cole, Bren New York, NY 10021 Realty Advisors and Senior Partner for Lincoln Properties prior thereto. Alan J. Dixon* (68) Trustee Partner of Bryan Cave, a law 7535 Claymont Court firm in St. Louis since Apt. #2 January 1993; United Belleville, IL 62223 States Senator of Illinois from 1981 to 1993. John R. McKernan, Jr. (48) Trustee Chairman and Chief Executive 114 Nottingham Road Officer of McKernan Auburn, ME 04210 Enterprises since January 1995; Governor of Maine prior thereto. M.B. Oglesby, Jr. (53) Trustee Vice Chairman of Cassidy & 5300 Albemarle Street Associates since February Bethesda, MD 20816 1996; Senior Vice President of RJR Nabisco, Inc. from April 1989 to February 1996; Former Deputy Chief of Staff-White House from 1988 to January 1989. Robert S. Reitzes* (51) Chairman Director of Mutual Funds- 245 Park Avenue of the Board Bear Stearns Asset New York, NY 10167 Management and Senior Managing Director of Bear Stearns since March 1994; Co-Director of Research and Senior Chemical Analyst of C.J. Lawrence/Deutsche Bank Securities Corp. from January 1991 to March 1994. Neil T. Eigen (53) President Chief Investment Officer and 245 Park Avenue Director of Equity Investments- New York, NY 10167 Bear Stearns Asset Management since 1992 and Senior Managing Director of Bear Stearns since 1990. Peter B. Fox (44) Executive Senior Managing Director, Three First National Vice President Bear Stearns, Public Plaza Finance. Chicago, IL 60602 William J. Montgoris (49) Executive Chief Financial Officer and 245 Park Avenue Vice President Chief Operating Officer, New York, NY 10167 Bear Stearns. Stephen A. Bornstein (52) Vice President Managing Director, Legal 245 Park Avenue Department, Bear Stearns. New York, NY 10167 Frank J. Maresca (37) Vice President Managing Director of Bear 245 Park Avenue and Treasurer Stearns since September New York, NY 10167 1994; Associate Director of Bear Stearns from September 1993 to September 1994; Executive Vice President of BSFM since March 1992; Vice President of Bear Stearns from March 1992 to September 1993; First Vice President of Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") from June 1988 to March 1992; and Director of Funds Administration Division of Mitchell Hutchins from November 1991 to March 1992. Raymond D. DeAngelo (35) Vice President Associate Director of Bear 245 Park Avenue Stearns since November 1994; New York, NY 10167 Vice President and Manager--Mutual Fund Sales Support Group of Kidder, Peabody & Co. Incorporated ("Kidder Peabody") from August 1994 to November 1994; Vice President and Manager--Unit Investment Trust Department of Kidder Peabody from August 1992 to August 1994; Vice President and Wholesaler of Nike Securities, L.P.(formerly Clayton Brown & Associates) from September 1991 to August 1992; Assistant Vice President and Wholesaler of Clayton Brown & Associates prior thereto. Ellen T. Arthur (43) Secretary Associate Director of Bear 245 Park Avenue Stearns since January 1996; New York, NY 10167 Senior Counsel and Corporate Vice President of PaineWebber Incorporated from April 1989 to September 1995. Vincent L. Pereira (30) Assistant Associate Director of Bear 245 Park Avenue Treasurer Stearns since September 1995 New York, NY 10167 and Vice President of BSFM since May 1993; Vice President to September 1995; Assistant Vice President of Mitchell Hutchins from October 1992 to May 1993; Senior Relationship Manager of Mitchell Hutchins from June 1988 to October 1992. Eileen M. Coyle (30) Assistant Vice President of Bear Stearns 245 Park Avenue Secretary since September 1995; New York, NY 10167 Accounting Supervisor and Senior Accountant for Bear Stearns since 1990.
The Fund pays its non-affiliated Board members an annual retainer of $5,000 and a per meeting fee of $500 and reimburses them for their expenses. The Fund does not compensate its officers. The aggregate amount of compensation paid to each Board member by the Fund and by all other funds in the Bear Stearns Family of Funds for which such person is a Board member (the number of which is set forth in parenthesis next to each Board member's total compensation) for the fiscal year ended March 31, 1996 is as follows:
(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 Peter M. Bren $7,000 None None $12,000(2) Alan J. Dixon $7,000 None None $7,000(1) John R. McKernan, Jr. $7,000 None None $12,000(2) M.B. Oglesby, Jr. $7,000 None None $12,000(2) Robert S. Reitzes None None None None(2) - --------------------- * Amount does not include reimbursed expenses for attending Board meetings, which amounted to $10,100 for Board members of the Fund, as a group.
Board members and officers of the Fund, as a group, owned less than 1% of the Portfolio's shares outstanding on May 31, 1996. For so long as the Plan described in the section captioned "Management Arrangements- Servicing Plan" remains in effect, the Fund's Trustees who are not "interested persons" of the Fund, as defined in the 1940 Act, will be selected and nominated by the Trustees who are not "interested persons" of the Fund. No meetings of shareholders of the Fund will be held for the purpose of electing Trustees unless and until such time as less than a majority of the Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Under the 1940 Act, shareholders of record of not less than two-thirds of the outstanding shares of the Fund may remove a Trustee through a declaration in writing or by vote cast in person or by proxy at a meeting called for that purpose. Under the Fund's Agreement and Declaration of Trust, the Trustees are required to call a meeting of shareholders for the purpose of voting upon the question of removal of any such Trustee when requested in writing to do so by the shareholders of record of not less than 10% of the Fund's outstanding shares. MANAGEMENT ARRANGEMENTS The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "Management of the Fund." Investment Advisory Agreement. BSFM provides investment advisory services to the Portfolio pursuant to the Investment Advisory Agreement (the "Agreement") dated February 22, 1995, with the Fund. The Agreement is subject to annual approval by (i) the Fund's Board of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Portfolio, provided that in either event the continuance also is approved by a majority of the Board of Trustees who are not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Board of Trustees, including a majority of the Trustees who are not "interested persons" of any party to the Agreement, last approved the Agreement at a meeting as to the Portfolio, held on February 22, 1995. The Agreement is terminable, as to the Portfolio, without penalty, on 60 days' notice, by the Fund's Board of Trustees or by vote of the holders of a majority of the Portfolio's shares, or, on not less than 90 days' notice, by BSFM. As to the Portfolio, the Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). BSFM is a wholly owned subsidiary of The Bear Stearns Companies Inc. The following persons are directors and/or senior officers of BSFM: Mark A. Kurland, Chief Executive Officer, President, Chairman of the Board and Director; Robert S. Reitzes, Executive Vice President and Director; Milton B. Rubin, Vice Chairman of the Board; Frank J. Maresca, Executive Vice President; Neil T. Eigen, Executive Vice President; Vincent L. Pereira, Treasurer and Secretary; and Michael Minikes, Warren J. Spector and Robert M. Steinberg, Directors. As compensation for BSFM's advisory services, the Fund has agreed to pay BSFM a monthly fee at the annual rate of 1% of value of the Portfolio's average daily net assets which will be adjusted monthly ("Monthly Performance Adjustment") depending on the extent to which the Portfolio's investment performance exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. The Monthly Performance Adjustment may increase or decrease the total advisory fee payable to BSFM by up to .50% per year of the value of the Portfolio's average daily net assets. For the period from June 16, 1995 (commencement of operations) through March 31, 1996, the investment advisory fees payable amounted to $116,606. This amount was waived pursuant to an undertaking by BSFM, resulting in no fees being paid by the Portfolio. Sub-Investment Advisory Agreement. Symphony provides investment advisory assistance and day-to-day management of the Fund's portfolio pursuant to the Sub-Investment Advisory Agreement (the "Sub-Advisory Agreement") dated February 22, 1995 between Symphony and BSFM. The Sub-Advisory Agreement is subject to annual approval by (i) the Fund's Board of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Portfolio, provided that in either event the continuance also is approved by a majority of the Board of Trustees who are not "interested persons" (as defined in the 1940 Act) of the Fund or Symphony, by vote cast in person at a meeting called for the purpose of voting on such approval. The Board of Trustees, including a majority of the Trustees who are not "interested persons" of any party to the Sub-Advisory Agreement, last approved the Sub-Advisory Agreement at a meeting held on February 22, 1995. The Sub-Advisory Agreement is terminable without penalty (i) by BSFM on 60 days' notice, (ii) by the Fund's Board of Trustees, on 60 days' notice, or by vote of the holders of a majority of the Fund's shares or (iii) on not less than 90 days' notice, by Symphony. The Sub- Advisory Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act) or upon termination of the Agreement for any reason. Symphony provides day-to-day management of the Portfolio's portfolio of investments in accordance with the stated policies of the Fund, subject to the supervision of BSFM and the approval of the Fund's Board of Trustees. BSFM and Symphony provide the Fund with Investment Officers who are authorized by the Board of Trustees to execute purchases and sales of securities. All purchases and sales are reported for the Board of Trustees' review at the meeting subsequent to such transactions. Under the terms of the Sub-Advisory Agreement, BSFM has agreed to pay Symphony a monthly fee at the annual rate of .45 of 1% of the value of the Portfolio's average daily net assets, which will be adjusted by a Monthly Performance Adjustment. The Monthly Performance Adjustment applicable to Symphony may increase or decrease the total advisory fee payable to Symphony by up to .25% per year of the value of the Portfolio's average daily net assets. For the period June 16, 1995 (commencement of operations) through March 31, 1996, no fees were paid by BSFM to Symphony pursuant to an undertaking by Symphony. Administration Agreement. BSFM provides certain administrative services to the Fund pursuant to the Administration Agreement dated February 22, 1995, with the Fund. The Administration Agreement will continue until February 22, 1998 and thereafter will be subject to annual approval by (i) the Fund's Board or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Portfolio, provided that in either event its continuance also is approved by a majority of the Fund's Board members who are not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Administration Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board or by vote of the holders of a majority of the Portfolio's shares or upon not less than 90 days' notice by BSFM. The Administration Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). As compensation for BSFM's administrative services, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of the Portfolio's average daily net assets. For the period from June 16, 1995 (commencement of operations) through March 31, 1996, the administration fee accrued amounted to $21,806 and the amount paid was $18,824. Administrative Services Agreement. PFPC provides certain administrative services to the Fund pursuant to the Administrative Services Agreement dated February 22, 1995, with the Fund. The Administrative Services Agreement is terminable upon 60 days' notice by either the Fund or PFPC. PFPC may assign its rights or delegate its duties under the Administrative Services Agreement to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund 30 days' notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee) promptly provide information requested by the Fund in connection with such delegation. As compensation for PFPC's administrative services, the Fund has agreed to pay PFPC a monthly fee at the rate set forth in the Portfolio's Prospectus. For the period from June 16, 1995 (commencement of operations) through March 31, 1996, the administrative fee payable by the Portfolio amounted to $104,500. This amount was reduced to $44,282 as a result of a waiver of fees by PFPC. Distribution and Shareholder Servicing Plan. Rule 12b-1 (the "Rule") adopted by the Securities and Exchange Commission under the 1940 Act provides, among other things, that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Fund's Trustees have adopted such a plan with respect to Class A and Class C shares (the "Plan"). The Fund's Trustees believe that there is a reasonable likelihood that the Plan will benefit the Portfolio and the holders of its Class A and Class C shares. A quarterly report of the amounts expended under the Plan, and the purposes for which such expenditures were incurred, must be made to the Trustees for their review. In addition, the Plan provides that it may not be amended to increase materially the costs which holders of a Class of shares may bear pursuant to the Plan without approval of such shareholders and that other material amendments of the Plan must be approved by the Board of Trustees, and by the Trustees who are neither "interested persons" (as defined in the 1940 Act) of the Fund nor have any direct or indirect financial interest in the operation of the Plan or in the related Plan agreements, by vote cast in person at a meeting called for the purpose of considering such amendments. The Plan and related agreements are subject to annual approval by such vote cast in person at a meeting called for the purpose of voting on the Plan. The Plan was so approved on January 23, 1996. The Plan is terminable at any time by vote of a majority of the Trustees who are not "interested persons" and who have no direct or indirect financial interest in the operation of the Plan or in the Plan agreements or by vote of holders of a majority of the Portfolio's relevant Class of shares. A Plan agreement is terminable, as to the Portfolio, without penalty, at any time, by such vote of the Trustees, upon not more than 60 days' written notice to the parties to such agreement or by vote of the holders of a majority of the Portfolio's Class A and Class C shares. A Plan agreement will terminate automatically, as to the Portfolio, in the event of its assignment (as defined in the 1940 Act). For the period from June 16, 1995 (commencement of operations) through March 31, 1996, the Portfolio paid Bear Stearns $38,956 with respect to Class A shares and $61,049 with respect to Class C shares under the Plan. With respect to Class A, of the $38,956 paid under the Plan, $38,621 was paid to brokers or dealers and $335 was paid for advertising. With respect to Class C, the entire amount paid under the Plan was paid to brokers or dealers. Expenses. All expenses incurred in the operation of the Fund are borne by the Fund, except to the extent specifically assumed by BSFM. The expenses borne by the Fund include: organizational costs, taxes, interest, loan commitment fees, interest and distributions paid on securities sold short, brokerage fees and commissions, if any, fees of Board members who are not officers, directors, employees or holders of 5% or more of the outstanding voting securities of BSFM, Symphony or their affiliates, Securities and Exchange Commission fees, state Blue Sky qualification fees, advisory, administrative and fund accounting fees, charges of custodians, transfer and dividend disbursing agents' fees, certain insurance premiums, industry association fees, outside auditing and legal expenses, costs of maintaining the Fund's existence, costs of independent pricing services, costs attributable to investor services (including, without limitation, telephone and personnel expenses), costs of shareholders' reports and meetings, costs of preparing and printing certain prospectuses and statements of additional information, and any extraordinary expenses. Expenses attributable to a particular portfolio are charged against the assets of that portfolio; other expenses of the Fund are allocated among the portfolios on the basis determined by the Board, including, but not limited to, proportionately in relation to the net assets of each portfolio. Expense Limitation. BSFM agreed that if, in any fiscal year, the aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest on borrowings and (with the prior written consent of the necessary state securities commissions) extraordinary expenses, exceed the expense limitation of any state having jurisdiction over the Portfolio, the Fund may deduct from the payment to be made to BSFM, such excess expense to the extent required by state law. Such deduction or payment, if any, will be estimated daily, and reconciled and effected or paid, as the case may be, on a monthly basis. PURCHASE AND REDEMPTION OF SHARES The following information supplements and should be read in conjunction with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and "How to Redeem Shares." The Distributor. Bear Stearns serves as the Portfolio's distributor on a best efforts basis pursuant to an agreement dated February 22, 1995 which is renewable annually. For the period from June 16, 1995 (commencement of operations) through March 31, 1996, Bear Stearns retained $502,600 from the sales loads on Class A shares and $9,000 from contingent deferred sales charges ("CDSC") on Class C shares. In some states, banks or other institutions effecting transactions in Portfolio shares may be required to register as dealers pursuant to state law. Purchase Order Delays. The effective date of a purchase order may be delayed if PFPC, the Portfolio's transfer agent, is unable to process the purchase order because of an interruption of services at its processing facilities. In such event, the purchase order would become effective at the purchase price next determined after such services are restored. Sales Loads--Class A. Set forth below is an example of the method of computing the offering price of the Class A shares of the Portfolio. The example assumes a purchase of Class A shares aggregating less than $50,000 subject to the schedule of sales charges set forth in the Prospectus at a price based upon the net asset value of the Class A shares on March 31, 1996. Net Asset Value per Share $14.00 Per Share Sales Charge - 4.75% of offering price (4.99% of net asset value per share) $ 0.70 Per Share Offering Price to the Public $14.70 Redemption Commitment. The Portfolio has committed itself to pay in cash all redemption requests by any shareholder of record, limited in amount during any 90-day period to the lesser of $250,000 or 1% of the value of the Portfolio's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the Securities and Exchange Commission. In the case of requests for redemption in excess of such amount, the Board of Trustees reserves the right to make payments in whole or in part in securities or other assets in case of an emergency or any time a cash distribution would impair the liquidity of the Portfolio to the detriment of the existing shareholders. In this event, the securities would be valued in the same manner as the Portfolio is valued. If the recipient sold such securities, brokerage charges would be incurred. Were the Portfolio to redeem securities in kind, it first would seek to distribute readily marketable securities. Suspension of Redemptions. The right of redemption may be suspended or the date of payment postponed (a) during any period when the New York Stock Exchange is closed (other than customary weekend and holiday closings), (b) when trading in the markets the Portfolio ordinarily utilizes is restricted, or when an emergency exists as determined by the Securities and Exchange Commission so that disposal of the Portfolio's investments or determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit to protect Portfolio shareholders. DETERMINATION OF NET ASSET VALUE The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "How to Buy Shares." Valuation of Portfolio Securities. Portfolio securities, including covered call options written by the Portfolio, are valued at the last sale price on the securities exchange or national securities market on which such securities primarily are traded. Securities not listed on an exchange or national securities market, or securities in which there were no transactions, are valued at the average of the most recent bid and asked prices, except in the case of open short positions where the asked price is used for valuation purposes. Bid price is used when no asked price is available. Short-term investments are carried at amortized cost, which approximates value. Any securities or other assets for which recent market quotations are not readily available are valued at fair value as determined in good faith by the Fund's Board of Trustees. Expenses and fees, including the management fee and distribution and service fees, are accrued daily and taken into account for the purpose of determining the net asset value of the Portfolio's shares. Because of the differences in operating expenses incurred by each Class, the per share net asset value of each Class will differ. Restricted securities, as well as securities or other assets for which market quotations are not readily available, or are not valued by a pricing service approved by the Board of Trustees, are valued at fair value as determined in good faith by the Board of Trustees. The Board of Trustees will review the method of valuation on a current basis. In making their good faith valuation of restricted securities, the Trustees generally will take the following factors into consideration: restricted securities which are, or are convertible into, securities of the same class of securities for which a public market exists usually will be valued at market value less the same percentage discount at which purchased. This discount will be revised periodically by the Board of Trustees if the Trustees believe that it no longer reflects the value of the restricted securities. Restricted securities not of the same class as securities for which a public market exists usually will be valued initially at cost. Any subsequent adjustment from cost will be based upon considerations deemed relevant by the Board of Trustees. New York Stock Exchange Closings. The holidays (as observed) on which the New York Stock Exchange is closed currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. DIVIDENDS, DISTRIBUTIONS AND TAXES The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "Dividends, Distributions and Taxes." Management of the Fund believes that the Portfolio has qualified for the fiscal year ended March 31, 1996 as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"). The Portfolio intends to continue to so qualify if qualification is in the best interests of its shareholders. Qualification as a regulated investment company relieves the Portfolio from any liability for Federal income taxes on net investment income and net realized securities gains to the extent that such income and gains are distributed to shareholders in accordance with applicable provisions of the Code. The term "regulated investment company" does not imply the supervision of management or investment practices or policies by any government agency. Any dividend or distribution paid shortly after an investor's purchase may have the effect of reducing the net asset value of the shares below the cost of the investment. Such a dividend or distribution would be a return of investment in an economic sense, although taxable as stated above. In addition, the Code provides that if a shareholder holds shares of the regulated investment company for six months or less and has received a capital gain distribution with respect to such shares, any loss incurred on the sale of such shares will be treated as long-term capital loss to the extent of the capital gain distribution received. Depending on the composition of a regulated investment company's income, dividends paid by the regulated investment company from net investment income may qualify for the dividends received deduction allowable to certain U.S. corporate shareholders ("dividends received deduction"). In general, dividend income of the regulated investment company distributed to qualifying corporate shareholders will be eligible for the dividends received deduction only to the extent that (i) the regulated investment company's income consists of dividends paid by U.S. corporations and (ii) the regulated investment company would have been entitled to the dividends received deduction with respect to such dividend income if the regulated investment company were not a regulated investment company under the Code. The dividends received deduction for qualifying corporate shareholders may be further reduced if the shares of the regulated investment company held by such shareholders with respect to which dividends are received are treated as debt-financed or deemed to have been held for less than 46 days. In addition, the Code provides other limitations with respect to the ability of a qualifying corporate shareholder to claim the dividends received deduction in connection with holding shares of a regulated investment company. Ordinarily, gains and losses realized from portfolio transactions will be treated as capital gain and loss. However, a portion of the gain or loss from the disposition of non-U.S. dollar denominated securities (including debt instruments, certain financial forward futures and option contracts and certain preferred stock) may be treated as ordinary income or loss under Section 988 of the Code. In addition, all or a portion of any gain realized from the sale or other disposition of certain market discount bonds will be treated as ordinary income under Section 1276. Finally, all or a portion of the gain realized from engaging in "conversion transactions" may be treated as ordinary income under Section 1258. "Conversion transactions" are defined to include certain forward, futures, option and straddle transactions, transactions marketed or sold to produce capital gains, or transactions described in Treasury regulations to be issued in the future. Under Section 1256 of the Code, any gain or loss realized by a regulated investment company from certain futures and forward contracts and options transactions will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. Gain or loss will arise upon exercise or lapse of such contracts and options as well as from closing transactions. In addition, any such contracts or options remaining unexercised at the end of a regulated investment company's taxable year will be treated as sold for their then fair market value, resulting in additional gain or loss to such regulated investment company characterized in the manner described above. Offsetting positions held by a regulated investment company involving certain contracts or options may constitute "straddles." "Straddles" are defined to include "offsetting positions" in actively traded personal property. The tax treatment of "straddles" is governed by Sections 1092 and 1258 of the Code, which, in certain circumstances, overrides or modifies the provisions of Section 1256 and 988. If a regulated investment company were treated as entering into "straddles" by reason of its engaging in certain forward contracts or options transactions, such "straddles" would be characterized as "mixed straddles" if the contracts or options transactions comprising a part of such "straddles" were governed by Section 1256 of the Code. A regulated investment company may make one or more elections with respect to "mixed straddles." Depending on which election is made, if any, the results to a regulated investment company may differ. If no election is made to the extent the "straddle" and conversion transactions rules apply to positions established by a regulated investment company, losses realized by the regulated investment company will be deferred to the extent of unrealized gain in the offsetting position. Moreover, as a result of the "straddle" rules, short-term capital loss on "straddle" positions may be recharacterized as long-term capital loss, and long-term capital gains may be treated as short-term capital gains or ordinary income. Investment by a regulated investment company in securities issued or acquired at a discount, or providing for deferred interest or for payment of interest in the form of additional obligations could under special tax rules affect the amount, timing and character of distributions to shareholders by causing a regulated investment company to recognize income prior to the receipt of cash payments. For example, a regulated investment company could be required to accrue a portion of the discount (or deemed discount) at which the securities were issued and to distribute such income in order to maintain its qualification as a regulated investment company. In such case, the regulated investment company may have to dispose of securities which it might otherwise have continued to hold in order to generate cash to satisfy these distribution requirements. PORTFOLIO TRANSACTIONS Symphony assumes general supervision over placing orders on behalf of the Portfolio for the purchase or sale of investment securities. Allocation of brokerage transactions, including their frequency, is made in Symphony's best judgment and in a manner deemed fair and reasonable to shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected will include those that supplement Symphony's research facilities with statistical data, investment information, economic facts and opinions. Information so received is in addition to and not in lieu of services required to be performed by Symphony and Symphony's fees are not reduced as a consequence of the receipt of such supplemental information. Such information may be useful to Symphony in serving both the Portfolio and the other funds which it advises and, conversely, supplemental information obtained by the placement of business of other clients may be useful to Symphony in carrying out its obligations to the Portfolio. Sales of Portfolio shares by a broker may be taken into consideration, and brokers also will be selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. Large block trades may, in certain cases, result from two or more funds advised or administered by Symphony being engaged simultaneously in the purchase or sale of the same security. Certain of Symphony's transactions in securities of foreign issuers may not benefit from the negotiated commission rates available to the Portfolio for transactions in securities of domestic issuers. When transactions are executed in the over-the-counter market, the Portfolio will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Portfolio turnover may vary from year to year as well as within a year. The turnover rate for the Portfolio for the period June 16, 1995 (commencement of operations) through March 31, 1996 was 93%. In periods in which extraordinary market conditions prevail, Symphony will not be deterred from changing investment strategy as rapidly as needed, in which case higher turnover rates can be anticipated which would result in greater brokerage expenses. The overall reasonableness of brokerage commissions paid is evaluated by Symphony based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. To the extent consistent with applicable provisions of the 1940 Act and the rules and exemptions adopted by the Securities and Exchange Commission thereunder, the Board of Trustees has determined that transactions for the Portfolio may be executed through Bear Stearns if, in the judgment of BSFM, the use of Bear Stearns is likely to result in price and execution at least as favorable as those of other qualified broker-dealers, and if, in the transaction, Bear Stearns charges the Portfolio a rate consistent with that charged to comparable unaffiliated customers in similar transactions. In addition, under rules recently adopted by the Securities and Exchange Commission, Bear Stearns may directly execute such transactions for the Portfolio on the floor of any national securities exchange, provided (i) on the Board of Trustees has expressly authorized Bear Stearns to effect such transactions, and (ii) Bear Stearns annually advises the Board of Trustees of the aggregate compensation it earned on such transactions. Over-the-counter purchases and sales are transacted directly with principal market makers except in those cases in which better prices and executions may be obtained elsewhere. For the period June 16, 1995 (commencement of operations) through March 31, 1996, the Portfolio paid total brokerage commissions of $38,019, of which $26,339 was paid to Bear Stearns. The Portfolio paid 69.28% of its commissions to Bear Stearns, and, with respect to all the securities transactions for the Portfolio, 39.40% of the transactions involved commissions being paid to Bear Stearns. PERFORMANCE INFORMATION The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "Performance Information." Average annual total return is calculated by determining the ending redeemable value of an investment purchased at net asset value (maximum offering price in the case of Class A) per share with a hypothetical $1,000 payment made at the beginning of the period (assuming the reinvestment of dividends and distributions), dividing by the amount of the initial investment, taking the "n"th root of the quotient (where "n" is the number of years in the period) and subtracting 1 from the result. A Class' average annual total return figures calculated in accordance with such formula assume that in the case of Class A the maximum sales load has been deducted from the hypothetical initial investment at the time of purchase or in the case of Class C the maximum applicable CDSC has been paid upon redemption at the end of the period. The total return for Class A for the period June 16, 1995 (commencement of investment operations) to March 31, 1996 was 11.20%. Based on net asset value per share, the total return for Class A was 16.75% for this period. The total return for Class C for the same period was 15.33%. Without giving effect to the applicable CDSC, the total return for Class C was 16.33% for this period. The total return for Class Y for the period June 20, 1995 (commencement of initial public offering) to March 31, 1996 was 15.98%. Total return is calculated by subtracting the amount of the Portfolio's net asset value (maximum offering price in the case of Class A) per share at the beginning of a stated period from the net asset value per share at the end of the period (after giving effect to the reinvestment of dividends and distributions during the period and any applicable CDSC), and dividing the result by the net asset value (maximum offering price in the case of Class A) per share at the beginning of the period. Total return also may be calculated based on the net asset value per share at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class C shares. In such cases, the calculation would not reflect the deduction of the sales load with respect to Class A shares or any applicable CDSC with respect to Class C shares, which, if reflected would reduce the performance quoted. INFORMATION ABOUT THE FUND The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "General Information." Each Portfolio share has one vote and, when issued and paid for in accordance with the terms of the offering, is fully paid and non-assessable. Portfolio shares have no preemptive, subscription or conversion rights and are freely transferable. The Fund will send annual and semi-annual financial statements to all its shareholders. As of May 31, 1996, the following shareholders owned, directly or indirectly, 5% or more of the indicated class of the Portfolio's outstanding shares. Percent of Class Y Name and Address Shares Outstanding Master Works 401k Trustee 32.2% FBO Barra 401k Plan c/o Wells Fargo Bank 420 Montgomery St., 8th Flr San Francisco, CA 94104 Bear Stearns Securities Corp. 5.6% FBO 048-02528-16 1 Metrotech Center North Brooklyn, NY 11201-3859 A shareholder who beneficially owns, directly or indirectly, more than 25% of a Portfolio's voting securities may be deemed a "control person" (as defined in the 1940 Act) of the Portfolio. CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL AND INDEPENDENT AUDITORS Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the Portfolio's custodian. Under the custody agreement with the Portfolio, CTC holds the Portfolio's securities and keeps all necessary accounts and records. For its services, CTC receives an annual fee of the greater of .015% of the value of the domestic assets held in custody or $5,000, such fee to be payable monthly based upon the total market value of such assets, as determined on the last business day of the month. In addition, CTC receives certain securities transactions charges which are payable monthly. PFPC, Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the Portfolio's transfer agent, dividend disbursing agent and registrar. Neither CTC nor PFPC has any part in determining the investment policies of the Portfolio or which securities are to be purchased or sold by the Portfolio. Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York 10004-2696, as counsel for the Fund, has rendered its opinion as to certain legal matters regarding the due authorization and valid issuance of the shares of beneficial interest being sold pursuant to the Portfolio's Prospectus. Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281-1434, independent auditors, have been selected as auditors of the Fund. FINANCIAL STATEMENTS The Portfolio's Annual Report to Shareholders for the fiscal year ended March 31, 1996 is a separate document supplied with this Statement of Additional Information, and the financial statements, accompanying notes and report of independent auditors appearing therein are incorporated by reference into this Statement of Additional Information. BSF-S-003-06 THE BEAR STEARNS FUNDS PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements for the Large Cap Value Portfolio, Small Cap Value Portfolio, Total Return Bond Portfolio, S&P STARS Portfolio, S&P STARS Master Series and The Insiders Select Fund. Contained in Part A of the Registration Statement is Condensed Financial Information. Contained in Part B through incorporation by reference to the Annual Report filed with the Securities and Exchange Commission on May 29, 1996 are the following: (1) Portfolio of Investments as of March 31, 1996 (excluding S&P STARS Portfolio). (2) Statements of Assets and Liabilities as of March 31, 1996. (3) Statements of Operations for the period ended March 31, 1996. (4) Statements of Changes in Net Assets for the period ended March 31, 1996. (5) Financial Highlights for the period ended March 31, 1996. (6) Report of Deloitte & Touche LLP, Independent Auditors, dated May 9, 1996. (b) Exhibits: (1)(a) Agreement and Declaration of Trust is incorporated by reference to Exhibit (1)(a) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (1)(b) Amendment to Agreement and Declaration of Trust is incorporated by reference to Exhibit (1)(b) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (2) By-Laws are incorporated by reference to Exhibit (2) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (5)(a) Investment Advisory Agreement between the Registrant and Bear Stearns Funds Management Inc. ("BSFM") is incorporated by reference to Exhibit (5)(a) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (5)(b) Administration Agreement between the Registrant and BSFM is incorporated by reference to Exhibit (5)(b) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (5)(c) Administrative Services Agreement, as amended, between the Registrant and PFPC Inc. is incorporated by reference to Exhibit (5)(c) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (5)(d) Sub-Investment Advisory Agreement between BSFM and Symphony Asset Management is incorporated by reference to Exhibit (5)(d) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (6)(a) Distribution Agreement between the Registrant and Bear, Stearns & Co. Inc. is incorporated by reference to Exhibit (6)(a) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (6)(b) Form of Dealer Agreement. (8) Custody Agreements between the Registrant and Custodial Trust Company are incorporated by reference to Exhibit (8) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (10) Opinion (including consent) of Stroock & Stroock & Lavan is incorporated by reference to Exhibit (10) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (11) Consent of Independent Auditors. (15) Distribution and Shareholder Servicing Plan is incorporated by reference to Exhibit (15) of Post- Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (16) Schedules of Computation of Performance Data are incorporated by reference to Exhibit (16) of Post- Effective Amendment No. 5 to the Registration Statement on Form N-1A, filed September 1, 1995 and to Exhibit (16) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed on November 10, 1995. (17) Financial Data Schedule. (18) Rule 18f-3 Plan, as revised. Other Exhibit: (a) Certificate of Corporate Secretary is incorporated by reference to Other Exhibit (a) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A, filed November 10, 1995. (b) Powers of attorney are incorporated by reference to Other Exhibit (b) of Post- Effective Amendment No. 8 to the Registration on Form N-1A, filed April 12, 1996. ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Not Applicable Item 26. NUMBER OF HOLDERS OF SECURITIES (1) (2) Number of Record TITLE OF CLASS HOLDERS* Shares of beneficial interest, $.001 par value per share, of the following portfolios: S&P STARS Portfolio--Class A 3,330 S&P STARS Portfolio--Class C 1,963 S&P STARS Portfolio--Class Y 290 Large Cap Value Portfolio--Class A 148 Large Cap Value Portfolio--Class C 179 Large Cap Value Portfolio--Class Y 92 Small Cap Value Portfolio--Class A 549 Small Cap Value Portfolio--Class C 481 Small Cap Value Portfolio--Class Y 236 Total Return Bond Portfolio--Class A 124 Total Return Bond Portfolio--Class C 46 Total Return Bond Portfolio--Class Y 20 The Insiders Select Fund--Class A 1,192 The Insiders Select Fund--Class C 700 The Insiders Select Fund--Class Y 95 - -------------- * As of May 31, 1996. Item 27. INDEMNIFICATION Reference is made to Article VIII of the Registrant's Declaration of Trust previously filed as Exhibit 1(a). The application of these provisions is limited by Article 10 of the Registrant's ByLaws filed as Exhibit 2 and by the following undertaking set forth in the rules promulgated by the Securities and Exchange Commission: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is, therefore, unenforce- able. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a trustee, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue. Reference also is made to the Distribution Agreement previously filed as Exhibit 6(a). ITEM 28(A). BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Registrant is fulfilling the requirement of this Item 28(a) to provide a list of the officers and directors of Bear Stearns Funds Management Inc. ("BSFM"), the investment adviser of the Registrant, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by BSFM or those of its officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV filed with the SEC pursuant to the Investment Advisers Act of 1940 by BSFM (SEC File No. 801-29862). ITEM 28(B). BUSINESS AND OTHER CONNECTIONS OF SUB-INVESTMENT ADVISER Registrant is fulfilling the requirement of this Item 28(b) to provide a list of the officers and directors of Symphony Asset Management ("Symphony"), the sub-investment adviser of the Registrant's The Insiders Select Fund, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by Symphony or those of its officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV filed with the SEC pursuant to the Investment Advisers Act of 1940 by Symphony (SEC File No. 801-46388). ITEM 29. PRINCIPAL UNDERWRITERS (a) Bear, Stearns & Co. Inc. ("Bear Stearns") acts as principal underwriter or depositor for the following investment companies: o Municipal Securities Trust, High Income Series 1 (and Subsequent Series) o Bear Stearns Investment Trust -- Emerging Markets Debt Fund (b) Set forth below is a list of each executive officer and director of Bear Stearns. The principal business address of each such person is 245 Park Avenue, New York, New York 10167, except as set forth below. Positions and Positions and Offices with Offices with NAME BEAR STEARNS REGISTRANT DIRECTORS Alan C. Greenberg Chairman James E. Cayne John L. Knight Mark E. Lehman Michael L. Tarnopol Alan D. Schwartz John H. Slade Director Emeritus Warren J. Spector EXECUTIVE OFFICERS Alan C. Greenberg Chairman of Board James E. Cayne Chief Executive Officer/ President William J. Montgoris Chief Operating Officer/ Chief Financial Officer/ Chief Operations Officer (designation) Michael L. Tarnopol Executive Vice President Alan D. Schwartz Executive Vice President Warren J. Spector Executive Vice President Kenneth L. Edlow Secretary Michael Minikes Treasurer Michael J. Abatemarco(1) Controller/Assistant Secretary - -------- (1) Michael J. Abatemarco's principal business address is 1 MetroTech Center North, Brooklyn, New York 11201-3859. Mark E. Lehman Executive Vice President- General Counsel Chief Legal Officer (designation) Samuel L. Molinaro, Jr. Senior Vice President - Finance Frederick B. Casey Assistant Treasurer ITEM 30. LOCATION OF ACCOUNTS AND RECORDS 1. Bear Stearns Funds Management Inc. 245 Park Avenue New York, New York 10167 2. The Bear Stearns Funds 245 Park Avenue New York, New York 10167 3. Custodial Trust Company 101 Carnegie Center Princeton, New Jersey 08540 4. PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, Delaware 19809 ITEM 31. MANAGEMENT SERVICES Not Applicable ITEM 32. UNDERTAKINGS Registrant hereby undertakes (1) to call a meeting of shareholders for the purpose of voting upon the question of removal of a trustee or trustees when requested in writing to do so by the holders of at least 10% of the Registrant's outstanding shares of beneficial interest and in connection with such meeting to comply with the provisions of Section 16(c) of the Investment Company Act of 1940 relating to shareholder communications; and (2) to furnish each person to whom a prospectus is delivered with a copy of its most current annual report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of the Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 18th day of June, 1996. THE BEAR STEARNS FUNDS (Registrant) By: /S/ NEIL T. EIGEN* ------------------------- Neil T. Eigen, President Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. /S/ NEIL T. EIGEN* President (Principal June 18, 1996 - ------------------------- Executive Officer) Neil T. Eigen /S/ FRANK J. MARESCA Vice President and June 18, 1996 - ------------------------ Treasurer Frank J. Maresca (Principal Financial and Accounting Officer) /S/ PETER M. BREN* Trustee June 18, 1996 - ------------------------- Peter M. Bren /S/ ALAN J. DIXON* Trustee June 18, 1996 - ------------------------- Alan J. Dixon /S/ JOHN R. MCKERNAN, JR.* Trustee June 18, 1996 - ------------------------- John R. McKernan, Jr. /S/ M.B. OGLESBY, JR.* Trustee June 18, 1996 - ------------------------- M.B. Oglesby, Jr. /S/ ROBERT S. REITZES* Trustee June 18, 1996 - ------------------------- Robert S. Reitzes * By: /S/ FRANK J. MARESCA --------------------- Frank J. Maresca, Attorney-in-Fact SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Amendment to Registration Statement to be signed, in respect of Registrant's S&P STARS Portfolio only, by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 18th day of June, 1996. S&P STARS FUND By: /S/ BARRY NIX* -------------------- Barry Nix, President Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed below, in respect of Registrant's S&P STARS Portfolio only, by the following persons in the capacities and on the dates indicated. /S/ BARRY NIX* President June 18, 1996 - ------------------------- (Principal Executive Barry Nix Officer) /S/ JAMES FERGUS MCKEON* Treasurer and June 18, 1996 - ------------------------- Secretary James Fergus McKeon Principal Financial and Accounting Officer) /S/ ROBERT S. REITZES* Chairman of the June 18, 1996 - -------------------------- Board Robert S. Reitzes /S/ JOHN J. DANILOVICH* Trustee June 18, 1996 - ------------------------- John J. Danilovich /S/ VINCENT ANTHONY WALSH* Trustee June 18, 1996 - ------------------------- Vincent Anthony Walsh * By: /S/ FRANK J. MARESCA --------------------- Frank J. Maresca, Attorney-in-Fact EX-99 2 EXHIBITS THE BEAR STEARNS FUNDS Post-Effective Amendment No. 9 to Registration Statement on Form N-1A under the Securities Act of 1933 and the Investment Company Act of 1940 EXHIBITS INDEX TO EXHIBITS (6)(b) Form of Dealer Agreement (11) Consent of Independent Auditors (17) Financial Data Schedule (18) Rule 18f-3 Plan, as revised Exhibit 6(b) THE BEAR STEARNS FUNDS Shares of Beneficial Interest DEALER AGREEMENT ________________, 199_ Ladies and Gentlemen: Bear, Stearns & Co. Inc. ("Bear Stearns") has entered into a distribution agreement (the "Distribution Agreement"), dated February 22, 1995 with The Bear Stearns Funds (the "Trust"), pursuant to which Bear Stearns has agreed to act as distributor (the "Distributor") of shares of each Class of each Series of the Trust set forth on Schedule 1 hereto, as such Schedule may be revised from time to time (each, a "Series"). For purposes of this Agreement, the term "Shares" shall mean the authorized shares of the relevant Series or Class of the Trust, as the case may be. This Dealer Agreement shall herein be referred to as the "Agreement." For purposes of this Agreement, "Bear Stearns" shall mean Bear, Stearns & Co. Inc. in our capacity as Distributor. 1. The Offering. The Shares will be offered initially during an initial offering period (the "Initial Offering Period") for those Series set forth as having an Initial Offering Period on Schedule 1. The Initial Offering Period, for each Series subject to one, will end on the date specified in the relevant Prospectus. After the Initial Offering Period terminates, the Trust intends to commence the continuous offering period (the "Continuous Offering Period") referred to in the Prospectus relating to such Shares. Shares of the other Series will be sold on a continuous basis. 2. Role of Bear Stearns. Pursuant to the Distribution Agreement, we have agreed to use our best efforts to make arrangements for securities dealers which can make the representation set forth in Section 7(b) of this Agreement to solicit from the public orders to purchase Shares. You are hereby invited to become one of such securities dealers (each such securities dealer, an "Authorized Dealer"). This will confirm our mutual agreement as to the terms and conditions applicable to your participation as an Authorized Dealer, such agreement to be effective on your confirmation hereof. You understand (a) that we may, at any time at our option, act as an Authorized Dealer, (b) that we are seeking to enter into this Agreement in counterparts with you and certain other securities dealers, which also may act as Authorized Dealers, (c) that, except as we may otherwise agree with you, we may enter into agreements (which may or may not be the same as this Agreement) with Authorized Dealers, (d) that the Trust and we may modify, suspend, terminate or withdraw entirely the offering of Shares at any time without giving notice to you pursuant to Section 11 and without incurring any liability or obligation to you, (e) that we may, upon notice, change the public offering price, sales load, or dealer allowance or modify, cancel or change the terms of this Agreement, and (f) we shall be under no liability to you except for lack of good faith and for obligations expressly assumed by us herein. All purchases of Shares from, and redemptions of Shares by, the Trust shall be effected through us acting on behalf of the Trust. You understand that we shall have no obligation to sell Shares to you at such times as we are not acting as Distributor for the Shares. 3. Role of Authorized Dealers. (a) As an Authorized Dealer, you shall have no obligation to purchase or sell or to solicit the purchase or sale of Shares. As, when and if you determine to purchase Shares or you receive a customer order for the purchase of Shares and you determine to accept such order, you shall comply with the procedures for the purchase of Shares set forth in the relevant Prospectus and Statement of Additional Information as most currently amended or supplemented (the "SAI"). The procedure relating to the handling of orders shall be subject to such further instructions as we shall forward to you in writing from time to time. (b) You agree to offer Shares to the public at the then applicable public offering price and subject to the minimum investment amount set forth in the relevant Prospectus and SAI, subject to any waivers or reductions of sales load (the "Sales Load") or dealer allowances (the "Dealer Allowances") as described in the Prospectus as amended from time to time. Any amendment to a Prospectus which affects the Sales Load, Dealer Allowances, waivers or discounts shall not affect Sales Load, Dealer Allowances, discounts or waivers with respect to sales on which orders have been accepted by us prior to the date of notice of such amendment. Your placement of an order for Shares after the date of any notice of such amendment shall conclusively evidence your agreement to be bound thereby. The Trust and Bear Stearns reserve the right to modify the minimum investment requirement, the subsequent investment requirement, the manner in which Shares are offered and the Sales Load rates applicable to future purchases of Shares. You also acknowledge that the amounts charged to the public for Shares may include such transaction fees ("Transaction Fees") as may be described in the relevant Prospectus and SAI. Bear Stearns shall make a reasonable effort to notify you of any redetermination or suspension of the public offering price, but Bear Stearns shall be under no liability for failure to do so. Reduced Sales Loads also may be available as a result of a cumulative discount or pursuant to a right of accumulation as set forth in the relevant Prospectus. You agree to advise us promptly as to the amounts of any sales made by you to the public qualifying for reduced Sales Loads. (c) You agree to purchase Shares from us only to cover purchase orders already received from your customers, or for your own bona fide investment. Any order of Shares from us as part of an initial distribution for those Series set forth as having an Initial Offering Period on Schedule 1 must be received by Bear Stearns on or before the close of business on the last day of the Initial Offering Period (the "Closing Date"); after the Closing Date and prior to the commencement of the Continuous Offering Period, orders for Shares may be made by you only in respect of orders from your customers who have purchased Shares as a part of the initial distribution. You will not withhold placing with us orders received from your customers so as to profit yourself as a result of such withholding. All orders for Shares are subject to acceptance or rejection by Bear Stearns or the Trust in the sole discretion of either. (d) In purchasing Shares through us, you shall rely solely on the representations contained in the relevant Prospectus, relevant SAI and the registration statement, as most recently amended (the "Registration Statement"), relating to the Shares. You will not furnish to any person any information relating to the Shares, the Trust, any Series or us that is inconsistent with information contained in the relevant Prospectus, relevant SAI, the Registration Statement or any printed information issued by the Trust or us as information supplemental to such Prospectus or cause any advertisement to be published or posted in any public place without our consent and the consent of the Trust. (e) In all sales of Shares to the public, you shall act as dealer for your own account, whether as agent or principal. Nothing herein shall be deemed to constitute you or any other Authorized Dealer as agent for the Trust, us, or any other Authorized Dealer. You agree not to act as our agent and not to claim to act as our agent or as agent of any of the foregoing. You shall be deemed an independent contractor and you shall have no authority to act for or represent the Trust. You will not act as an "underwriter" or "distributor" of Shares, as those terms are used in the Investment Company Act of 1940, as amended (the "Investment Company Act"), the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations thereunder. You agree to buy Shares only through us and not from any other sources and to sell Shares only to us, as the Trust's redemption agent, and not to any other purchasers. (f) You agree to accept orders for the redemption of Shares and to transmit to the Trust such orders and all additional material, as may be required to complete the redemption as described in the relevant Prospectus and SAI. (g) You agree that we shall have full authority to act upon your express instructions to repurchase or exchange Shares through us on behalf of your customers under the terms and conditions provided in the relevant Prospectus and SAI. You agree to hold us harmless as a result of any action taken with respect to authorized repurchases or exchanges upon your express instructions. 4. Compensation. (a) You will be entitled to receive that portion of the Sales Load allocated to Authorized Dealers as set forth in the relevant Prospectus in connection with purchases of Shares effected to or through you. You acknowledge that the Prospectuses will set forth a description of waivers or reduction of the Sales Load in certain cases and you hereby waive such portion of the Sales Load otherwise allocated to you. We will promptly remit or cause to be remitted to you, by wire transfer of same day funds to an account you shall designate, that portion of the Sales Load or Transaction Fees, if any, to which you are entitled, after deduction of the portion allocated to us, which was received by us and not yet paid to you. (b) If payment in Federal Funds is not received by the fifth business day after the Subscription Date or, in case of orders during the Continuous Offering Period, within five business days after the execution of the order, Bear Stearns reserves the right, without any notice, to cancel the sale and to hold you responsible for any loss, including loss of profits, suffered by Bear Stearns or by the Trust resulting from such failure. 5. Orders and Payment for Shares. Upon receipt from you of any order to purchase Shares and, if a new account, an Account Information Form, we shall confirm such order to you in writing or by wire to be followed by a confirmation in writing. Additional instructions may be forwarded to you from time to time. Payment for Shares ordered from us shall be made in Federal Funds and must be received by the Trust's agent, PFPC Inc., within five business days of a receipt and acceptance by us of an order. 6. Blue Sky and Other Qualifications. The Trust has registered an indefinite number of Shares under the Securities Act. Upon application by you, we shall inform you as to any advice received by us concerning the jurisdictions in which the Shares have been qualified for offer or sale or are exempt under the securities or blue sky laws of such jurisdictions, but we assume no obligation or responsibility as to your right to offer or sell Shares in any jurisdiction (other than under the federal laws of the United States). If you propose to offer or sell Shares outside the United States, its territories or its possessions, you will take, at your expense, such action, if any, as may be necessary to comply with the laws of such foreign jurisdictions. 7. Representations, Warranties and Undertakings. You represent and warrant to and undertake that: (a) You are familiar with Rule 15c2-8 under the Securities Exchange Act of 1934 (the "Exchange Act"), Section 4(3) of Securities Act and Section 24(d) of the Investment Company Act relating to the distribution and delivery of preliminary and final prospectuses and agree that you will comply therewith. You agree to deliver thereafter to any purchaser whose Shares you are holding as record holder copies of the annual and interim reports and proxy solicitation materials relating to the Shares. You further agree to make reasonable efforts to endeavor to obtain proxies from such purchasers whose Shares you are holding as record holder. Additional copies of the Trust's Prospectuses, SAI, annual or interim reports, proxy solicitation materials and any other printed information supplemental to such material will be supplied to you as you reasonably request. (b) You are a member of good standing of the National Association of Securities Dealers, Inc. (the "NASD") or, if you are not such a member, you are a foreign bank, dealer or institution not eligible for membership in the NASD which agrees to make no sales within the United States, its territories or its possessions or to persons who are citizens thereof or residents therein, and in making other sales to comply, as though you were a member of NASD, with the provisions of Sections 8, 24 and 36 of Article III of the Rules of Fair Practice of the NASD and with Section 25 thereof as that Section applies to a non-NASD member broker or dealer in a foreign country. (c) You undertake to comply with respect to your offering of Shares to the public pursuant to this Agreement with all applicable provisions of the Securities Act, the Exchange Act and the Investment Company Act and the rules and regulations thereunder and with the applicable rules of the NASD. (d) You represent that any compensation payable to you hereunder (i) will be disclosed to your customers; (ii) will be authorized by your customers; and (iii) will not result in an excessive fee to you. In addition, if an issue relating to a Class' 12b-1 Plan (as defined below) is submitted for shareholder approval, you will vote any Shares held for your own account in the same proportion as the vote of the Shares held by your customers on such issue. You further represent that in effecting the purchase or redemption of Shares in accordance with the terms of this Agreement, you represent as follows: (i) you shall act solely as agent for the account of your customer; (ii) purchases or redemptions of Shares shall be initiated solely upon the instruction and order of your customer; (iii) the customer will have full beneficial ownership of any Shares purchased upon its authorization and order; and (iv) all transactions shall be for the account of the customer and under no circumstances for your account, and shall be without recourse to you. Under no circumstances will you make any oral or written representations to the contrary. 8. 12b-1 Plan. Those Series or Classes set forth as having a 12b-1 Plan on Schedule 1 have adopted a plan under Rule 12b-1 of the Investment Company Act (a "12b-1 Plan") as described in the Prospectuses. To the extent you provide services of the type contemplated by the 12b-1 Plan, you may be entitled to receive compensation from us as set forth in the 12b-1 Plan. All compensation, including fees under the 12b-1 Plan, shall be payable to you only to the extent that funds are received and in the possession of the Distributor. 9. Indemnification. The parties to this Agreement hereby agree to indemnify and hold harmless each other, their officers and directors, and any person who is or may be deemed to be a controlling person of each other, from and against any losses, claims, damages, liabilities or expenses (including reasonable fees of counsel) to which any such person or entity may become subject insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) arise out of or are based upon (a) any untrue statement or alleged untrue statement of material fact, or any omission or alleged omission to state a material fact made or omitted by it herein, or (b) any willful misfeasance or gross misconduct by it in the performance of its duties and obligations hereunder. 10. NSCC Indemnity - Shareholder and House Accounts. In consideration of the Distributor liquidating, exchanging and/or transferring unissued Shares for your customers without the use of original or underlying documentation supporting such instruction (e.g. a signed stock power or signature guarantees), you hereby agree to indemnify the Distributor and the Trust against any losses, including reasonable attorney's fees, that may arise from such liquidation, exchange and/or transfer of unissued Shares upon your direction. This indemnification shall apply only to the liquidation, exchange and/or transfer of unissued Shares in shareholder and house accounts executed as wire orders transmitted via NSCC's Fund/SERV system. You represent and warrant to the Trust and the Distributor that all such transactions shall be authorized by your customers. This indemnification shall not apply to any losses (including attorneys fees) caused by the Distributor or the Trust to comply with any of your instructions governing any of the above transactions, or any negligent act or omission of the Distributor or the Trust, or any of their directors, officers, employees or agents. All transactions shall be settled upon your confirmation through NSCC transmission to the Distributor. The Distributor or the Trust may revoke the indemnity contained in this Section 10 upon written notice to each of the other parties hereto, and in the case of such revocation, this indemnity agreement shall remain effective as to trades made prior to such revocation. 11. Termination. Either party to this Agreement may cancel this Agreement, as to any Series or Class, as the case may be, by written notice to the other party. Such cancellation shall be effective upon receipt of such notice. Bear Stearns agrees to cancel this Agreement upon instruction by a majority of the Trustees who are not "interested persons" of the Trust (as defined in the Investment Company Act) and who have no direct or indirect financial interest in the operation of this Agreement or by a vote of a majority of the relevant Series' or Class' outstanding voting securities. 12. Representations to Survive. The agreements, representations, warranties and other statements set forth in or made pursuant to this Agreement will remain in full force and effect, to the extent permitted by applicable law, regardless of any investigation made by or on behalf of us or any Authorized Dealer. The provisions of Sections 7 and 9 of this Agreement shall survive the offer and sale of the Shares, to the extent permitted by applicable law, and the termination or cancellation of this Agreement. 13. No Association. Nothing herein contained constitutes an agreement to become partners with you or with any other Authorized Dealer, but you shall be liable for your proportionate share of any tax, liability or expense based on any claim arising from the sale of Shares under this Agreement. We shall not be under any liability to you, except for obligations expressly assumed by us in this Agreement and liabilities under Section 11(f) of the Securities Act of 1933, as amended, and no obligations on our part shall be implied or inferred herefrom. We and you hereby elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended, and agree not to take any position inconsistent with that election. 14. Recordkeeping. You will maintain all records required by law to be kept by you relating to transactions in the Shares and, upon request by the Trust, promptly make such of these records available to the Trust as the Trust may reasonably request in connection with its operations. 15. Notices. Notices hereunder shall be deemed to have been duly given if delivered by hand or facsimile (a) if to you, at your address or facsimile number set forth below and (b) if to us, to Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention: Frank J. Maresca or, in each case, such other address as may be notified to the other party. 16. Amendments. We may modify this Agreement at any time by written notice to you. The first order placed by you subsequent to the giving of such notice shall be deemed acceptance by you of the modification described in such notice. 17. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 18. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall be settled by arbitration in accordance with the Rules of the New York Stock Exchange, Inc. Such arbitration shall be commenced within one year after the cause of action forming the basis of the controversy or claim accrued. The arbitration shall be conducted in New York, New York before three arbitrators, all of whom shall be from the securities industry. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Please confirm your agreement by signing and returning to us the two enclosed duplicate copies of this Agreement. Upon our acceptance hereof, the Agreement shall constitute a valid and binding contract between us. After our acceptance, we will deliver to you one fully executed copy of this Agreement. Very truly yours, BEAR, STEARNS & CO. INC. By: ____________________________ Name: Title: Confirmed: ___________, 199 - -------------------------------- (Name of Authorized Dealer) By: ____________________________ (Authorized Signature) Name: Title: - -------------------------------- Street Address - -------------------------------- City State Zip - -------------------------------- Fax No. - -------------------------------- Telephone No. - -------------------------------- Telex No. - -------------------------------- Firm Taxpayer Identification No. SCHEDULE 1 Name of Series Offering Type 12b-1 Plan S&P STARS Portfolio Class A Continuous Basis Yes Class C Continuous Basis Yes Class Y Continuous Basis No Large Cap Value Portfolio Class A Continuous Basis Yes Class C Continuous Basis Yes Class Y Continuous Basis No Small Cap Value Portfolio Class A Continuous Basis Yes Class C Continuous Basis Yes Class Y Continuous Basis No Total Return Bond Portfolio Class A Continuous Basis Yes Class C Continuous Basis Yes Class Y Continuous Basis No The Insiders Select Fund Class A Continuous Basis Yes Class C Continuous Basis Yes Class Y Continuous Basis No Exhibit 11 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Post-Effective Amendment No. 9 to Registration Statement No. 33-84842 of The Bear Stearns Funds on Form N-1A of our reports dated May 9, 1996 appearing in the Annual Report of Large Cap Value Portfolio, Small Cap Value Portfolio, and Total Return Bond Portfolio for the period ended March 31, 1996. We also consent to the reference to us under the heading "Condensed Financial Information" appearing in the Prospectus, which is a part of this Registration Statement. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP New York, New York May 29, 1996 Exhibit 11 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Post-Effective Amendment No. 9 to Registration Statement No. 33-84842 of The Bear Stearns Funds on Form N-1A of our report dated May 9, 1996 appearing in the Annual Report of S&P STARS Portfolio for the period ended March 31, 1996. We also consent to the reference to us under the heading "Condensed Financial Information" appearing in the Prospectus, which is a part of this Registration Statement. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP New York, New York May 29, 1996 Exhibit 11 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Post-Effective Amendment No. 9 to Registration Statement No. 33-84842 of The Bear Stearns Funds on Form N-1A of our report dated May 9, 1996 appearing in the Annual Report of The Insiders Select Fund for the period ended March 31, 1996. We also consent to the reference to us under the heading "Condensed Financial Information" appearing in the Prospectus, which is a part of this Registration Statement. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP New York, New York May 29, 1996 Exhibit (18) THE BEAR STEARNS FUNDS Rule 18f-3 Plan Rule 18f-3 under the Investment Company Act of 1940, as amended (the "1940 Act"), requires that the Board of an investment company desiring to offer multiple classes pursuant to said Rule adopt a plan setting forth the separate arrangement and expense allocation of each class, and any related conversion features or exchange privileges. The Board, including a majority of the non-interested Board members, of the above-referenced fund (the "Fund") which desires to offer multiple classes for the series set forth on Schedule A (the "Series") has determined that the following plan is in the best interests of each class individually and the Fund as a whole: 1. Class Designation: Each Series' shares shall be divided into Class A, Class C and Class Y. 2. Differences in Services: The services offered to shareholders of each Class shall be substantially the same, except that Right of Accumulation and Letter of Intent shall be available only to holders of Class A shares. 3. Differences in Distribution Arrangements: Class A shares shall be offered with a front-end sales charge, as such term is defined in Article III, Section 26(b), of the Rules of Fair Practice of the National Association of Securities Dealers, Inc., and a deferred sales charge (a "CDSC"), as such term is defined in said Section 26(b), may be assessed on certain redemptions of Class A shares purchased without an initial sales charge as part of an investment of $1 million or more. The amount of the sales charge and the amount of and provisions relating to the CDSC pertaining to the Class A shares are set forth on Schedule B hereto. Class C shares shall not be subject to a front-end sales charge, but shall be subject to a CDSC. The amount of and provisions relating to the CDSC pertaining to Class C shares are set forth on Schedule C hereto. Class A and Class C shares shall be charged a fee pursuant to a Distribution and Shareholder Servicing Plan adopted under Rule 12b-1 under the 1940 Act. The amount of the fees under the Distribution and Shareholder Servicing Plan are set forth on Schedule D hereto. Class Y shares shall be offered at net asset value with no front-end sales charge, CDSC or distribution and shareholder servicing fees. Class Y shares are available to investors whose minimum initial purchase is at least $2.5 million, subject to such waivers or variations as from time to time may be in effect. 4. Expense Allocation. The following expenses will be allocated, to the extent practicable, on a Class-by-Class basis: (a) fees under the Distribution and Shareholder Servicing Plan; (b) printing and postage expenses related to preparing and distributing materials, such as shareholder reports, prospectuses and proxies, to current shareholders of a specific Class; (c) Securities and Exchange Commission and Blue Sky registration fees incurred by a specific Class; (d) the expense of administrative personnel and services as required to support the shareholders of a specific Class; (e) litigation or other legal expenses relating solely to a specific Class; and (f) Board members' fees incurred as a result of issues relating to a specific Class. 5. Conversion Features. On October 13, 1995, Class A Shares held by investors who are eligible to purchase Class Y Shares shall be converted to Class Y shares, based on the relative net value of such Classes as of the close of business on such date, without the imposition of any sales charge, fee or other charge. Thereafter, if a holder of Class A Shares notifies the Fund's distributor that it desires to have its Class A Shares converted to Class Y Shares because it then is eligible to purchase Class Y Shares, the shares which are the subject of the notice shall be converted to Class Y shares, without the imposition of any sales charge, fee or other charge, on the third business day following confirmation of the investor's eligibility to own Class Y Shares, at the relative net value of such Classes as of the close of business on such date. 6. Exchange Privileges. Shares of a Class are exchangeable only for (a) shares of the same Class of another Series or of other investment companies sponsored by the Fund's distributor and (b) shares of the Money Market Portfolio of The RBB Fund, Inc. Dated: March 24, 1995, as revised May 4, 1995, May 31, 1995, September 29, 1995 and April 12, 1996 SCHEDULE A S&P STARS Portfolio Large Cap Value Portfolio Small Cap Value Portfolio Total Return Bond Portfolio The Insiders Select Fund SCHEDULE B FRONT-END SALES CHARGE--CLASS A SHARES--The public offering price for Class A shares shall be the net asset value per share of that Class plus a sales load as shown below: (A) FOR S&P STARS PORTFOLIO, LARGE CAP VALUE PORTFOLIO, SMALL CAP VALUE PORTFOLIO AND THE INSIDERS SELECT FUND
Total Sales Load ----------------------------------------------------------- As a % of As a % of offering net asset price per value per Amount of Transaction share share ------------------------ ------------------------- Less than $50,000............................................... 4.75 4.99 $50,000 to less than $100,000................................... 4.25 4.44 $100,000 to less than $250,000.................................. 3.75 3.90 $250,000 to less than $500,000.................................. 3.25 3.36 $500,000 to less than $750,000.................................. 2.75 2.83 $750,000 to less than $1,000,000................................ 2.25 2.30 $1,000,000 and above............................................ 0.00 0.00
(B) FOR TOTAL RETURN BOND PORTFOLIO
Total Sales Load ----------------------------------------------------------- As a % of As a % of offering net asset price per value per Amount of Transaction share share ------------------------ ------------------------- Less than $50,000............................................... 3.75 3.90 $50,000 to less than $100,000................................... 3.25 3.36 $100,000 to less than $250,000.................................. 2.75 2.83 $250,000 to less than $500,000.................................. 2.25 2.30 $500,000 to less than $750,000.................................. 2.00 2.04 $750,000 to less than $1,000,000................................ 1.50 1.52 $1,000,000 and above............................................ 0.00 0.00
CONTINGENT DEFERRED SALES CHARGE--CLASS A SHARES--A CDSC of 1.00% (.50% in the case of the Total Return Bond Portfolio) shall be assessed at the time of redemption of Class A shares purchased without an initial sales charge as part of an investment of at least $1,000,000 and redeemed within one year after purchase. A CDSC of .50% (1% for shares purchased from April 15, 1996 through June 28, 1996 (or such other dates as the Board, from time to time, may determine)) shall be assessed at the time of redemption of Class A shares purchased without a sales charge with the proceeds from the redemption of shares of an investment company sold with a sales charge or commission and not distributed by the Fund's Distributor, if such shares are redeemed within one year of their purchase. The terms contained in Schedule C pertaining to the CDSC assessed on redemptions of Class C shares, including the provisions for waiving the CDSC, shall be applicable to the Class A shares subject to a CDSC. Letter of Intent and Right of Accumulation shall apply to such purchases of Class A shares. SCHEDULE C CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES--A CDSC of 1.00% payable to the Fund's Distributor shall be imposed on any redemption of Class C shares made within one year of the date of purchase. No CDSC shall be imposed to the extent that the net asset value of the Class C shares redeemed does not exceed (i) the current net asset value of Class C shares acquired through reinvestment of dividends or capital gain distributions, plus (ii) increases in the net asset value of the shareholder's Class C shares above the dollar amount of all payments for the purchase of Class C shares of the Fund held by such shareholder at the time of redemption. If the aggregate value of the Class C shares redeemed has declined below their original cost as a result of the Fund's performance, a CDSC may be applied to the then-current net asset value rather than the purchase price. In determining whether a CDSC is applicable to a redemption, the calculation shall be made in a manner that results in the lowest possible rate. Therefore, it shall be assumed that the redemption is made first of amounts representing shares acquired pursuant to the reinvestment of dividends and distributions; then of amounts representing the increase in net asset value of Class C shares above the total amount of payments for the purchase of Class C shares made during the preceding year; then of amounts representing the cost of shares purchased more than one year prior to the redemption; and finally, of amounts representing the cost of shares purchased within one year prior to redemption. WAIVER OF CDSC--The CDSC shall be waived in connection with (a) redemptions made within one year after the death or disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended (the "Code"), of the shareholder, (b) redemptions by employees participating in Eligible Benefit Plans, (c) redemptions as a result of a combination of any investment company with the Fund or Series by merger, acquisition of assets or otherwise, and (d) a distribution following retirement under a tax-deferred retirement plan or upon attaining age 70-1/2 in the case of an IRA or Keogh plan or custodial account pursuant to Section 403(b) of the Code. Any Fund shares subject to a CDSC which were purchased prior to the termination of such waiver shall have the CDSC waived as provided in the Fund's prospectus at the time of the purchase of such shares. SCHEDULE D AMOUNT OF DISTRIBUTION AND SHAREHOLDER SERVICING PLAN--Each Series shall pay a fee based on the value of the average daily net assets of the respective Class as follows: NAME OF SERIES CLASS A CLASS C S&P Stars Portfolio .50% 1.00% Large Cap Value Portfolio .50% 1.00% Small Cap Value Portfolio .50% 1.00% The Insiders Select Fund .50% 1.00% Total Return Bond Portfolio .35% .75% EX-27 3 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 011 LARGE CAP VALUE PORTFOLIO - CLASS A 12-MOS MAR-31-1996 MAR-31-1996 9202993 10342346 359010 94734 0 10796090 105620 0 141297 246917 0 9312645 239011 0 5140 0 92035 0 1139353 3616446 115115 2830 0 97734 20211 95147 1139353 1254711 0 4557 1184 0 315696 78059 332 10524165 0 0 0 0 45531 0 367923 2674106 12.00 .06 3.10 .02 .01 0 15.13 1.50 0 0
EX-27 4 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 012 LARGE CAP VALUE PORTFOLIO - CLASS C 12-MOS MAR-31-1996 MAR-31-1996 9202993 10342346 359010 94734 0 10796090 105620 0 141297 246917 0 9312645 233419 0 5140 0 92035 0 1139353 3519628 115115 2830 0 97734 20211 95147 1139353 1254711 0 0 1037 0 233174 865 68 10524165 0 0 0 0 45531 0 367923 2344462 12.00 (.01) 3.10 0 .01 0 15.08 2.00 0 0
EX-27 5 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 013 LARGE CAP VALUE PORTFOLIO - CLASS Y 12-MOS MAR-31-1996 MAR-31-1996 9202993 10342346 359010 94734 0 10796090 105620 0 141297 246917 0 9312645 225713 0 5140 0 92035 0 1139353 3413099 115115 2830 0 97734 20211 95147 1139353 1254711 0 10514 891 0 230011 4509 211 10524165 0 0 0 0 45531 0 367923 1935260 13.98 .07 1.16 .08 .01 0 15.12 1.00 0 0
EX-27 6 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 021 SMALL CAP VALUE PORTFOLIO - CLASS A 12-MOS MAR-31-1996 MAR-31-1996 19072002 21758395 679356 101579 0 22539330 214958 0 108127 323085 0 19326067 408008 0 (69561) 0 273346 0 2686393 6473911 104932 5353 0 179846 (69561) 544848 2686393 3161680 0 0 64256 0 670342 267203 3827 22191237 0 0 0 0 88955 0 460408 4577334 12.00 (.07) 4.17 0 .23 0 15.87 1.50 0 0
EX-27 7 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 022 SMALL CAP VALUE PORTFOLIO - CLASS C 12-MOS MAR-31-1996 MAR-31-1996 19072002 21758395 679356 101579 0 22539330 214958 0 108127 323085 0 19326067 427631 0 (69561) 0 273346 0 2686393 6753520 104932 5353 0 179846 (69561) 544848 2686393 3161680 0 0 72361 0 431865 9820 4544 22191237 0 0 0 0 88955 0 460408 3774118 12.00 (.10) 4.11 0 .22 0 15.79 2.00 0 0
EX-27 8 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 023 SMALL CAP VALUE PORTFOLIO - CLASS Y 12-MOS MAR-31-1996 MAR-31-1996 19072002 21758395 679356 101579 0 22539330 214958 0 108127 323085 0 19326067 567076 0 (69561) 0 273346 0 2686393 8988814 104932 5353 0 179846 (69561) 544848 2686393 3161680 0 0 134885 0 564644 6293 8725 22191237 0 0 0 0 88955 0 460408 4572655 13.09 0 3.05 0 .29 0 15.85 1.00 0 0
EX-27 9 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 031 TOTAL RETURN BOND PORTFOLIO - CLASS A 12-MOS MAR-31-1996 MAR-31-1996 18669734 18517342 546412 81543 0 19145297 189688 0 514893 704581 0 18542303 364510 0 0 0 50805 0 (152392) 4467447 0 750674 0 80240 670434 105601 (152392) 623643 0 232740 13644 0 412635 60606 11440 18415732 0 0 0 0 51869 0 414682 4072361 12.00 .71 .30 .71 .04 0 12.26 .85 0 0
EX-27 10 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 032 TOTAL RETURN BOND PORTFOLIO - CLASS C 12-MOS MAR-31-1996 MAR-31-1996 18669734 18517342 546412 81543 0 19145297 189688 0 514893 704581 0 18542303 144805 0 0 0 50805 0 (152392) 1774795 0 750674 0 80240 670434 105601 (152392) 623643 0 84059 5746 0 146761 6447 3450 18415732 0 0 0 0 51869 0 414682 1570063 12.00 .67 .30 .67 .04 0 12.26 1.25 0 0
EX-27 11 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 033 TOTAL RETURN BOND PORTFOLIO - CLASS Y 12-MOS MAR-31-1996 MAR-31-1996 18669734 18517342 546412 81543 0 19145297 189688 0 514893 704581 0 18542303 995312 0 0 0 50805 0 (152392) 12198474 0 750674 0 80240 670434 105601 (152392) 623643 0 353635 35406 0 1013077 33443 15678 18415732 0 0 0 0 51869 0 414682 10865384 12.35 .41 (.05) .41 .04 0 12.26 .45 0 0
EX-27 12 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 051 S&P STARS PORTFOLIO - CLASS A 12-MOS MAR-31-1996 MAR-31-1996 0 81922142 1269349 170568 0 83362059 1023063 0 430480 1453543 0 73938153 3019876 0 (47440) 0 2014786 0 6003017 45048671 695138 0 0 742578 (47440) 3768620 6003017 9724197 0 0 994461 0 3601121 640092 58847 81783500 0 0 0 0 0 0 747002 30568554 12.00 0 3.31 0 .39 0 14.92 1.50 0 0
EX-27 13 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 052 S&P STARS PORTFOLIO - CLASS C 12-MOS MAR-31-1996 MAR-31-1996 0 81922142 1269349 170568 0 83362059 1023063 0 430480 1453543 0 73938153 1889079 0 (47440) 0 2014786 0 6003017 28080540 695138 0 0 742578 (47440) 3768620 6003017 9724197 0 0 560676 0 2211148 356975 34906 81783500 0 0 0 0 0 0 747002 17630720 12.00 (.06) 3.28 0 .36 0 14.86 2.00 0 0
EX-27 14 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 053 S&P STARS PORTFOLIO - CLASS Y 12-MOS MAR-31-1996 MAR-31-1996 0 81922142 1269349 170568 0 83362059 1023063 0 430480 1453543 0 73938153 586530 0 (47440) 0 2014786 0 6003017 8779305 695138 0 0 742578 (47440) 3768620 6003017 9724197 0 14755 183942 0 595898 21986 12618 81783500 0 0 0 0 0 0 747002 5364146 14.13 .07 1.20 .03 .40 0 14.97 1.00 0 0
EX-27 15 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 041 THE INSIDERS SELECT PORTFOLIO - CLASS A 12-MOS MAR-31-1996 MAR-31-1996 21349488 22834956 431960 634781 0 23901697 14962 0 533781 548743 0 20993526 866314 0 17060 0 891092 0 1451276 12131893 264560 32076 0 267875 28761 891092 1451276 2371129 0 8222 0 0 1179728 313951 537 23352930 0 0 0 0 116606 0 543650 9827954 12.00 .03 1.98 .01 0 0 14.00 1.65 0 0
EX-27 16 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 042 THE INSIDERS SELECT PORTFOLIO - CLASS C 12-MOS MAR-31-1996 MAR-31-1996 21349488 22834956 431960 634781 0 23901697 14962 0 533781 548743 0 20993526 711278 0 17060 0 891092 0 1451276 9928357 264560 32076 0 267875 28761 891092 1451276 2371129 0 0 0 0 801061 89783 0 23352930 0 0 0 0 116606 0 543650 7698818 12.00 (.01) 1.97 0 0 0 13.96 2.15 0 0
EX-27 17 EXHIBIT 17
6 0000931145 THE BEAR STEARNS FUNDS 043 THE INSIDERS SELECT PORTFOLIO - CLASS Y 12-MOS MAR-31-1996 MAR-31-1996 21349488 22834956 431960 634781 0 23901697 14962 0 533781 548743 0 20993526 92191 0 17060 0 891092 0 1451276 1292704 264560 32076 0 267875 28761 891092 1451276 2371129 0 3479 0 0 116322 24357 226 23352930 0 0 0 0 116606 0 543650 827618 12.12 .07 1.87 .04 0 0 14.02 1.15 0 0
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