-----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, LB4VrkHZBQoxxikx6zWRiMnf/YM1O1RSEhb3Qdi3aC0VnTZyyjvphNsk6ZI8mxEl e5qtyMBrPiXbx+Ah8cnWaQ== 0000922423-97-000633.txt : 19970729 0000922423-97-000633.hdr.sgml : 19970729 ACCESSION NUMBER: 0000922423-97-000633 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970728 EFFECTIVENESS DATE: 19970728 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: 97646422 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08798 FILM NUMBER: 97646423 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. 13 As filed via EDGAR with the Securities and Exchange Commission on July 28, 1997 Registration Nos. 33-84842 ICA No. 811-8798 ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. ________ [ ] Post-Effective Amendment No. 13 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 13 [X] (Check appropriate box or boxes) THE BEAR STEARNS FUNDS (Exact Name of Registrant as Specified in Charter) 245 Park Avenue New York, New York 10167 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (212) 272-2000 copy to: Ellen Arthur, Esq. Jay G. Baris, Esq. Bear, Stearns & Co. Inc. Kramer, Levin, Naftalis & Frankel 245 Park Avenue 919 Third Avenue New York, New York 10167 New York, New York 10022 (Name and Address of Agent for Service) It is proposed that this filing will become effective (check appropriate box) immediately upon filing pursuant to paragraph (b) ----- X on July 29, 1997 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, 1997 was filed on May 27, 1997. THE BEAR STEARNS FUNDS THE INSIDERS SELECT FUND CROSS REFERENCE SHEET Pursuant to Rule 495(a) under the Securities Act of 1933 N-1A Item No. Location - ------------- -------- Part A Prospectus Caption - ------ ---------- ------- Item 1. Cover Page Cover Page Item 2. Synopsis Fee Table Item 3 . Condensed Financial Information Condensed Financial Information Item 4. General Description of Description of the Registrant Fund; General Information; Appendix Item 5. Management of the Fund Management of the Fund Item 5A. Management's Discussion of Performance Fund's Performance Information Item 6. Capital Stock and Other Not Applicable Securities Item 7. Purchase of Securities Being Alternative Purchase Offered Methods; How to Buy Shares Item 8 . Redemption or Repurchase How to Redeem Shares Item 9. Pending Legal Proceedings Not Applicable -ii- Statement of Additional Part B Information Caption ----------------------- Item 10. Cover Page Cover Page Item 11. Table of Contents Table of Contents Item 12. General Information and History Information About the Fund Item 13. Investment Objectives and Investment Objective Policies and Management Policies; Appendix Item 14. Management of the Fund Management of the Fund Item 15. Control Persons and Principal Information About the Fund Holders of Securities Item 16. Investment Advisory and Other Management Arrangements; Services Custodian, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors Item 17. Brokerage Allocation Portfolio Transactions Item 18. Capital Stock and Other Not Applicable Securities Item 19. Purchase, Redemption and Pricing Management of the of Securities Fund; Purchase and Redemption of Shares; Determination of Net Asset Value Item 20. Tax Status Dividends, Distributions and Taxes Item 21. Underwriters Cover Page Item 22. Calculation of Performance Data Performance Information Item 23. Financial Statements Financial Statements Part C - ------ Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of the Registration Statement. -iii- T H E B E A R S T E A R N S F U N D S 2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7 1 . 8 0 0 . 7 6 6 . 4 1 1 1 PROSPECTUS The Insiders Select Fund CLASS A AND C SHARES THE BEAR STEARNS FUNDS (the "Fund") is an open-end management investment company, known as a mutual fund. The Fund permits you to invest in separate portfolios. By this Prospectus, shares of The Insiders Select Fund, a non- diversified portfolio (the "Portfolio") are offered. The Portfolio's investment objective is capital appreciation. By this Prospectus, the Portfolio is offering 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 is also referred to herein as the "Adviser." BEAR, STEARNS & CO. INC. ("Bear Stearns"), an affiliate of BSFM, serves as the Portfolio's distributor. ---------------------- THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE PORTFOLIO THAT YOU SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. Part B (also known as the Statement of Additional Information), dated July 29, 1997, which may be revised from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, write to the address or call one of the telephone numbers listed under "General Information" in this Prospectus. ---------------------- Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. The net asset value for 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. JULY 29, 1997 Table of Contents
PAGE Fee Table.................................................................. 3 Financial Highlights....................................................... 4 Alternative Purchase Methods............................................... 5 Description of the Portfolio............................................... 5 Risk Factors............................................................. 9 Management of the Fund..................................................... 10 How to Buy Shares.......................................................... 12 Shareholder Services....................................................... 16 How to Redeem Shares....................................................... 17 Dividends, Distributions and Taxes......................................... 20 Performance Information.................................................... 21 General Information........................................................ 22 Appendix................................................................... A-1
2 Fee Table
- ------------------------------------------------------------------------------- CLASS A CLASS C - ------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........................................ 4.75% None 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) Advisory 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, Advisory Fees stated above would be 1.00%, Other Expenses would be 1.97% for Class A and 1.96% for Class C, and Total Portfolio Operating Expenses would be 3.47% for Class A and 3.96% for Class C. ***The Advisory Fee is payable at an annual rate equal to 1% of the Portfolio's average daily net assets, subject to increase or decrease by up to 0.50% annually depending on the Portfolio's performance. See "Management of the Fund--Investment Adviser." THE AMOUNTS LISTED IN THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE INDICATED. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE PORTFOLIO'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN 5%. The purpose of the foregoing table is to assist you in understanding the costs and expenses borne by the Portfolio and investors, the payment of which will reduce investors' annual return. In addition to the expenses noted above, the Fund will charge $7.50 for each wire redemption. See "How to Redeem Shares." Long-term investors could pay more in 12b-1 fees than the economic equivalent of paying a front-end sales charge. For a description of the expense reimbursements or fee waiver arrangements in effect, see "Management of the Fund." 3 Financial Highlights The information in the table below covering the Portfolio's investment results for the periods indicated has been audited by Deloitte & Touche LLP. Further financial data and related notes appear in the Portfolio's Annual Report for the fiscal year ended March 31, 1997 which is incorporated by reference into the Portfolio's Statement of Additional Information which is available upon request. Contained below is per share operating performance data, total investment return, ratios to average net assets and other supplemental data for Class A and C shares of the Portfolio for the periods indicated. This information has been derived from information provided in the Portfolio's financial statements.
FOR THE PERIOD FOR THE FISCAL JUNE 16, 1995* YEAR ENDED THROUGH MARCH 31, 1997 MARCH 31, 1996 ---------------- ------------------- CLASS A CLASS C CLASS A CLASS C ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period........................... $ 14.00 $ 13.96 $ 12.00 $ 12.00 ------- ------- ------- ------- Net investment income/(loss) (1).. 0.02 (0.06) 0.03 (0.01) Net realized and unrealized gain on investments and securities sold short (2)................... 2.48 2.47 1.98 1.97 ------- ------- ------- ------- Net increase in net assets resulting from operations........ 2.50 2.41 2.01 1.96 ------- ------- ------- ------- Dividends and distributions to shareholders from Net investment income............. (0.01) -- (0.01) -- Net realized capital gains........ (1.91) (1.89) -- -- ------- ------- ------- ------- (1.92) (1.89) (0.01) -- ------- ------- ------- ------- Net asset value, end of period.... $ 14.58 $14.48 $ 14.00 $13.96 ======= ======= ======= ======= Total investment return (3)....... 18.31% 17.69% 16.75% 16.33% ======= ======= ======= ======= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted).......................... $13,860 $9,519 $12,132 $9,928 Ratio of expenses to average net assets (1)........................ 1.65% 2.15% 1.65%(4) 2.15%(4) Ratio of net investment income/(loss) to average net assets (1)....................... 0.11% (0.38)% 0.38%(4) (0.12)%(4) Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements................... 1.82% 1.81% 1.87%(4) 1.92%(4) Portfolio turnover rate........... 128.42% 128.42% 93.45%(5) 93.45%(5) Average commission rate per share (6)......................... $0.0264 $0.0264 $0.0294 $0.0294
- ------ * Commencement of investment operations. ** Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses in investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. (3) Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. (4)Annualized. (5)Not annualized. (6) Represents average commission rate per share charged to the Portfolio on purchases and sales of investments subject to such commissions during each period. Further information about performance is contained in the Portfolio's Annual Report, which may be obtained without charge by writing to the address or calling one of the telephone numbers listed under "General Information." 4 Alternative Purchase Methods By this Prospectus, the Portfolio offers investors two methods of purchasing its shares; investors may choose the class of shares that best suits their needs, given the amount of purchase, the length of time the investor expects to hold the shares and any other relevant circumstances. Each Portfolio share represents an identical pro rata interest in the Portfolio's investment portfolio. Class A shares 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." Class A shares of the Portfolio are subject to an annual distribution and shareholder servicing fee at the rate of 0.50 of 1% of the value of the average daily net assets. 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 shares. The decision as to which class of shares is more beneficial to each investor depends on the amount and the intended length of time of the investor's investment. Each investor should consider whether, during the anticipated life of the investor's investment in the Portfolio, the accumulated distribution and shareholder servicing fee and CDSC, if any, on Class C shares would be less than the initial sales charge on Class A shares purchased at the same time, and to what extent, if any, such differential would be offset by the investment return of Class A shares. 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, for example, Class A shares would be more appropriate for investors who invest $1,000,000 or more in the Portfolio's shares, but may not be appropriate for investors who invest less than $50,000 in the Portfolio's shares, depending on the investor's time horizon. Description of the Portfolio INVESTMENT OBJECTIVE The Portfolio's investment objective is capital appreciation. The Portfolio's investment objective cannot be changed without approval by the holders of a majority as defined in the Investment Company Act of 1940, as amended, (the "1940 Act") of the Portfolio's outstanding voting shares. There can be no assurance that the Portfolio's investment objective will be achieved. INVESTMENT STRATEGY The Adviser selects portfolio securities by analyzing the behavior of (i) corporate insiders--officers, directors and significant stockholders--through an analysis of their publicly filed reports of their trading activities in the equity securities of the companies for which they are insiders, (ii) financial analysts, through an analysis of their published reports about covered companies, including predicted earnings and revisions to predicted earnings, and (iii) the company itself, through an analysis of its behavior as to corporate finance matters, such as stock repurchase programs, dividend policies and new securities issuance. Corporate insiders are believed by the Adviser to be in the best position to understand the near-term prospects of their companies. The Adviser believes that insider behavior can be observed and analyzed since insiders are required to disclose transactions in their company's equity securities to the Securities and Exchange Commission generally no later than the tenth day of the month following the transaction. Each month many thousands of these disclosures are received. The Adviser believes that collecting, classifying and analyzing these transactions provides valuable investment management information. 5 These insiders may have many reasons for transacting in company stock and stock options. Many of these are entirely incidental to the future of the company. For example, an insider may sell stock to buy a home or finance a college education for his or her child. Likewise a new management team may wish to signal confidence in the company by making token purchases of the company's equity. Many other transactions, however, are related directly to the insider's beliefs about the near-term price expectations for the company's stock. An insider who exercises long-term options early for small profits likely believes the stock soon will decline. Insiders who exercise options, hold the stock, and buy in the open market probably believe that the stock soon will rise. Clusters of insiders making substantial buys or sells indicate broad agreement within a firm as to the direction of the stock. Financial analysts use a variety of means to learn more about the companies they follow. Among these are visits to the company and in-depth discussions with management. Successful analysts learn to interpret the words and actions of management and the firm itself. Likewise, management uses its discussions with certain analysts as a means of signaling their views to the marketplace. The Adviser monitors changes in analysts' predicted earnings and ratings. The Adviser believes that analysts' revisions can be a valuable indicator of future returns for the company's stock. Part of the normal activity of every public company is its financing decisions. A company must routinely decide whether to maintain or change its dividend policy, whether to buy its own stock in the open market or whether to issue new securities. From time to time the company may decide that its stock is undervalued. Many companies see undervaluation as an opportunity to purchase the company's stock in the open market. The Adviser believes that by monitoring changes in shares outstanding (in the hands of the public), a useful signal can be extracted relating to the companies beliefs about its prospects. Similarly, the company's decision to sell securities to the public or another firm can be an indication that the company believes that its stock has reached a near-term high, a potentially useful sell signal. Insiders, analysts and the company each send signals that can be analyzed by the Adviser to produce valuable information about the prospects for individual companies. The Adviser believes that the most powerful analysis, however, comes from the interaction of all three sources. While no one signal alone determines whether a security will be purchased or sold, no security will be considered for purchase or sale unless a positive or negative signal, as the case may be, is received from insider behavior. In its analysis, the Adviser uses only data that is available to the public. The Adviser obtains the data on insider trading activity from CDA/Investnet, which compiles this information from publicly available Securities and Exchange Commission filings. MANAGEMENT POLICIES Under normal market conditions, the Adviser invests substantially all of the Portfolio's assets in the equity securities of U.S. issuers. The Adviser selects equity securities believed by it to provide opportunities for capital appreciation or gains through short selling. Issuers are selected without regard to market capitalization, although the Adviser anticipates that the issuers principally will be mid- to large capitalization companies; that is, those with market capitalizations exceeding $1 billion. The Adviser selects from the universe of U.S. equity securities those securities it believes, in the aggregate, will approximate or exceed the total return performance of the Standard & Poor's 500 Stock Index* (the "S&P 500 Index"). The S&P 500 Index is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The composition of the S&P 500 Index is determined by Standard & Poor's based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representative of stocks in a particular industry group, and may be changed from time to time. The weightings of stocks in the S&P 500 Index are based on each stock's relative total market capitalization; that is, its market price per share times the number of shares outstanding. Because of this weighting, as of March 31, 1997, approximately 48% of the S&P 500 Index was composed of the 50 largest companies. The Portfolio will not invest in all or substantially all of the common stocks included in the S&P 500 Index and may invest in stocks that are not included in the S&P 500 index. The Portfolio expects ordinarily to invest in approximately 60 to 150 stocks. By investing in this manner--that is purchasing other equity securities in a manner intended to approximate or exceed the performance of the S&P 500 Index--the Adviser seeks to exceed the total return of the S&P 500 Index. - ------ *"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. 6 Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which the Portfolio may invest will be rated at least investment grade by a nationally recognized statistical rating organization at the time of purchase. Convertible securities rated in the lowest investment grade rating may be considered to have speculative characteristics. Preferred stock generally receives dividends before distributions are paid on common stock and ordinarily has a priority claim over common stockholders if the issuer of the stock is liquidated. The Portfolio may invest, in anticipation of investing cash positions, in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase agreements, as set forth in the Appendix. Under normal market conditions, the Portfolio expects to have less than 15% of its assets invested in money market instruments. However, when the Adviser determines that adverse market conditions exist, the Portfolio may adopt a temporary defensive posture and invest all of its assets in money market instruments. The Fund is a "series fund," which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the 1940 Act, and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As described below, for certain matters Fund shareholders vote together as a group; as to others they vote separately by portfolio. By this Prospectus, shares of the Portfolio are being offered. From time to time, other portfolios may be established and sold pursuant to other offering documents. See "General Information." INVESTMENT TECHNIQUES The Portfolio may engage in various investment techniques, such as short selling, lending portfolio securities and options and futures transactions, each of which involves risk. Options and futures transactions involve "derivative securities." Short selling and futures transactions are discussed below. For a discussion of these other investment techniques and their related risks, see "Appendix--Investment Techniques" and "Risk Factors." SHORT SELLING Short sales are transactions in which the Portfolio sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio. Until the security is replaced, the Portfolio is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Until the Portfolio replaces a borrowed security in connection with a short sale, the Portfolio will: (a) maintain daily a segregated account, containing liquid securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the current value of the security sold short; or (b) otherwise cover its short position in accordance with positions taken by the staff of the Securities and Exchange Commission. The Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. The Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Portfolio may be required to pay in connection with a short sale. The Portfolio may purchase call options to provide a hedge against an increase in the price of a security sold short by the Portfolio. See "Appendix--Investment Techniques--Options Transactions." The Portfolio anticipates that the frequency of short sales will vary substantially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. However, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net assets. The Portfolio may not sell short the securities of any single issuer listed on a national securities 7 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 the Adviser's ability to predict correctly movements in the direction of the market or foreign currencies and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if the Portfolio has hedged against the possibility of a decline in the market adversely affecting the value of securities held in its portfolio and prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market. The Portfolio may have to sell securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Securities and Exchange Commission, the Portfolio may be required to segregate cash or 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 8 contemplated for use by the Portfolio or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Portfolio's investment objective and legally permissible for the Portfolio. Before entering into such transactions or making any such investment, the Portfolio will provide appropriate disclosure in its prospectus. CERTAIN FUNDAMENTAL POLICIES The Portfolio may (i) borrow money to the extent permitted under the 1940 Act; and (ii) invest up to 25% of the value of its total assets in the securities of issuers in a single industry, provided that there is no such limitation on investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. This paragraph describes fundamental policies that cannot be changed as to the Portfolio without approval by the holders of a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting shares. See "Investment Objective and Management Policies--Investment Restrictions" in the Statement of Additional Information. CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES The Portfolio may (i) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to secure permitted borrowings; and (ii) invest up to 15% of the value of its net assets in repurchase agreements providing for settlement in more than seven days after notice and in other illiquid securities. See "Investment Objective and Management Policies--Investment Restrictions" in the Statement of Additional Information. RISK FACTORS No investment is free from risk. Investing in the Portfolio will subject investors to certain risks which should be considered. NET ASSET VALUE FLUCTUATIONS The Portfolio's net asset value per share is not fixed and should be expected to fluctuate. Investors should purchase Portfolio shares only as a supplement to an overall investment program and only if investors are willing to undertake the risks involved. EQUITY SECURITIES Investors should be aware that equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and that fluctuations can be pronounced. Changes in the value of the equity securities in the Portfolio's portfolio will result in changes in the value of the Portfolio's shares and thus the Portfolio's yield and total return to investors. CERTAIN INVESTMENT TECHNIQUES The use of investment techniques such as short selling, lending portfolio securities and engaging in options and futures transactions, involves greater risk than that incurred by many other funds with a similar objective. Using these techniques may produce higher than normal portfolio turnover and may affect the degree to which the Portfolio's net asset value fluctuates. See "Appendix--Investment Techniques." The Portfolio's ability to engage in certain short-term transactions may be limited by the requirement that, to qualify as a regulated investment company, it must earn less than 30% of its gross income from the disposition of securities held for less than three months. This 30% test limits the extent to which the Portfolio may sell securities held for less than three months, effect short sales of securities held for less than three months, write options expiring in less than three months and invest in certain futures contracts, among other strategies. With the exception of the above requirement, the amount of portfolio activity will not be a limiting factor when making portfolio decisions. Under normal market conditions, the Portfolio's portfolio turnover rate generally will not exceed 150%. Higher portfolio turnover rates are likely to result in comparatively greater brokerage commissions or transaction costs. Short-term gains realized from portfolio transactions are taxable to shareholders as ordinary income. See "Portfolio Transactions" in the Portfolio's Statement of Additional Information. NON-DIVERSIFIED STATUS The Portfolio's classification as a "non-diversified" investment company means that the proportion of its assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. However, the Portfolio intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which requires that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of the Portfolio's total assets be invested in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the 9 Portfolio's total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets be invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). Since a relatively high percentage of the Portfolio's assets may be invested in the securities of a limited number of issuers, some of which may be within the same industry or economic sector, the Portfolio's securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company. SIMULTANEOUS INVESTMENTS Investment decisions for the Portfolio are made independently from those of other investment companies or accounts advised by the Adviser. However, if such other investment companies or accounts are prepared to invest in, or desire to dispose of, securities of the type in which the Portfolio invests at the same time as the Portfolio, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Portfolio or the price paid or received by the Portfolio. Management of the Fund BOARD OF TRUSTEES The Fund's business affairs are managed under the general supervision of its Board of Trustees. The Portfolio's Statement of Additional Information contains the name and general business experience of each Trustee. INVESTMENT ADVISER The Portfolio's investment adviser is BSFM, a wholly-owned subsidiary of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear Stearns, is a leading United States investment banking, securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. BSFM is a registered investment adviser and offers, either directly or through affiliates, investment advisory and administrative services to open-end and closed-end investment funds and other managed pooled investment vehicles with net assets at March 31, 1997 of over $2.9 billion. BSFM supervises and assists in the overall management of the Portfolio's affairs under an Investment Advisory Agreement between BSFM and the Fund, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. BSFM uses a team approach to money management consisting of portfolio managers, assistant portfolio managers and analysts performing as a dynamic unit to manage the assets of the Portfolio. The team consists of Mark Kurland, Senior Portfolio Manager; Robert Reitzes, Senior Portfolio Manager; Jim McCluskey, Senior Portfolio Manager; Gail Sprute, Portfolio Manager/Analyst and Harris Cohen, Portfolio Manager/Analyst. Jim McCluskey leads the portfolio manager team for the Portfolio. Mr. McCluskey, a Chartered Financial Analyst, joined BSFM in May 1997 as a Senior Managing Director and Senior Portfolio Manager. From 1989 through 1997, he was a Senior Portfolio Manager at Spare, Kaplan, Bischel & Associates, an institutional asset management firm where he co-managed over $2 billion in assets. The Portfolio pays BSFM an advisory fee at an annual rate equal to 1% of the Portfolio's average daily net assets which will be adjusted monthly depending on the extent to which the investment performance of Portfolio shares exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. Under the terms of the Investment Advisory Agreement, the Portfolio has agreed to pay BSFM a monthly fee at the annual rate of 1% of the Portfolio's average daily net assets (the "Basic Fee") which will be adjusted monthly (the "Monthly Performance Adjustment") depending on the extent to which the investment performance of the class of shares (currently, Class C) expected to bear the highest total Portfolio operating expenses, after expenses, exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. The Monthly Performance Adjustment may increase or decrease the total advisory fee payable to BSFM (the "Total Advisory Fee") by up to 0.50% per year of the value of the Portfolio's average daily net assets. 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 10 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% 0.50% 1.50% +2.75 percentage points or more but less than +3.00 percentage points...... 1% 0.40% 1.40% +2.50 percentage points or more but less than +2.75 percentage points...... 1% 0.30% 1.30% +2.25 percentage points or more but less than +2.50 percentage points...... 1% 0.20% 1.20% +2.00 percentage points or more but less than +2.25 percentage points...... 1% 0.10% 1.10% Less than +2.00 percentage points but more than - -2.00 percentage points................ 1% 0.00% 1.00% - -2.00 percentage points or less but more than -2.25 percentage points...... 1% -0.10% 0.90% - -2.25 percentage points or less but more than -2.50 percentage points...... 1% -0.20% 0.80% - -2.50 percentage points or less but more than -2.75 percentage points...... 1% -0.30% 0.70% - -2.75 percentage points or less but more than -3.00 percentage points...... 1% -0.40% 0.60% - -3.00 percentage points or less........ 1% -0.50% 0.50%
The period over which performance is measured is a rolling twelve-month period and the performance of the S&P 500 Index is calculated as the sum of the change in the level of the S&P 500 Index during the period, plus the value of any dividends or distributions made by the companies whose securities comprise the S&P 500 Index. For the fiscal year ended March 31, 1997, no fees were paid by the Portfolio pursuant to a voluntary undertaking by BSFM. The Portfolio's administrator is BSFM. Under the terms of an Administration Agreement with the Fund, BSFM generally supervises all aspects of the operation of the Portfolio, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. For providing administrative services to the Portfolio, the Fund has agreed to pay BSFM a monthly fee at the annual rate of 0.15 of 1% of the Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Fund, PFPC Inc. provides certain administrative services to the Portfolio. For providing these services, the Fund has agreed to pay PFPC Inc. an annual fee, as follows: 0.10 of 1% per annum of the first $200 million of the Portfolio's average daily net assets, 0.075 of 1% per annum of the next $200 million up to $400 million of the Portfolio's average daily net assets, 0.05 of 1% of the next $200 million up to $600 million of the Portfolio's average daily net assets, 0.03 of 1% of per annum of average daily net assets in excess of $600 million. These advisory fees are subject to a monthly minimum fee of $11,000. For the fiscal year ended March 31, 1997, the Portfolio paid PFPC Inc. a monthly fee at the effective annual rate of 0.45 of 1% of the Portfolio's average daily net assets. From time to time, BSFM may waive receipt of its fees and/or voluntarily assume certain Portfolio expenses, which would have the effect of lowering the Portfolio's expense ratio and increasing yield to investors at the time such amounts are waived or assumed, as the case may be. The Portfolio will 11 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. 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 Under a plan adopted by the Fund's Board of Trustees pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Portfolio pays Bear Stearns for distributing Portfolio shares and for providing personal services to, and/or maintaining accounts of, Portfolio shareholders a fee at the annual rate of 0.50% and 1% 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 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. 12 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. PURCHASE PROCEDURES Purchases through Bear Stearns account executives or Authorized Dealers may be made by check (except that a check drawn on a foreign bank will not be accepted), Federal Reserve draft or by wiring Federal Funds with funds held in brokerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal Reserve drafts should be made payable as follows: (i) to Bear Stearns or an investor's Authorized Dealer or (ii) to "The Bear Stearns Funds--The Insiders Select Fund" if purchased directly from the Portfolio, and should be directed to the Transfer Agent: PFPC Inc., Attention: The Bear Stearns Funds--The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960. Direct overnight deliveries to PFPC Inc., 400 Bellevue Parkway, Suite 108, Wilmington, Delaware 19809. Payment by check or Federal Reserve draft must be received within three business days of receipt of the purchase order by Bear Stearns or an Authorized Dealer. Shareholders may not purchase shares of the Portfolio with a check issued by a third party and endorsed over to the Portfolio. Orders placed directly with the Transfer Agent must be accompanied by payment. Bear Stearns (or an investor's Authorized Dealer) is responsible for forwarding payment promptly to the Fund. The Fund will charge $7.50 for each wire redemption. The payment proceeds of a redemption of shares recently purchased by check may be delayed as described under "How to Redeem Shares." Investors who are not Bear Stearns clients may purchase Portfolio shares through the Transfer Agent. To make an initial investment in the Portfolio, an investor must establish an account with the Portfolio by furnishing necessary information to the Fund. An account with the Portfolio may be established by completing and signing the Account Information Form, a copy of which is attached to this Prospectus, indicating which class of shares is being purchased and mailing it, together with a check to cover the purchase, to PFPC Inc., Attention: The Bear Stearns Funds--The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960. Subsequent purchases of shares may be made by checks made payable to the Fund and directed to the address set forth in the preceding paragraph. The account number should appear on the check. Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer Agent before the close of regular trading on the New York Stock Exchange (currently 4:00 p.m., New York time) on any day the Portfolio calculates its net asset value are priced according to the net asset value determined on that date. Purchase orders received after the close of trading on the New York Stock Exchange are priced as of the time the net asset value is next determined. Shares of the Portfolio are sold on a continuous basis. Net asset value per share is determined as of the close of regular trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New York time) on each business day. The net asset value per share of each class of the Portfolio is computed by dividing the value of the Portfolio's net assets represented by such class (i.e., the value of its assets less liabilities) by the total number of shares of such class outstanding. The Portfolio's investments are valued based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by, or in accordance with procedures established by, the Fund's Board of Trustees. For further information regarding the methods employed in valuing the Portfolio's investments, see "Determination of Net Asset Value" in the Portfolio's Statement of Additional Information. Federal regulations require that investors provide a certified Taxpayer Identification Number (a "TIN") upon opening or reopening an account. See "Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the Fund could subject the investor to backup withholding and a $50 penalty imposed by the Internal Revenue Service (the "IRS"). 13 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 1.00
There is no initial sales charge on purchases of $1,000,000 or more of Class A shares. However, if an investor purchases Class A shares without an initial sales charge as part of an investment of at least $1,000,000 and redeems those shares within one year after purchase, a CDSC of 1.00% will be imposed at the time of redemption. The terms contained in the section of the Fund's Prospectus entitled "How to Redeem Shares--Contingent Deferred Sales Charge--Class C Shares" are applicable to the Class A shares subject to a CDSC. Letter of Intent and Right of Accumulation apply to such purchases of Class A shares. The dealer concession may be changed from time to time but will remain the same for all dealers. From time to time, Bear Stearns may make or allow additional payments or promotional incentives to dealers that sell Class A shares. In some instances, these incentives may be offered only to certain dealers who have sold or may sell significant amounts of Class A shares. Dealers may receive a larger percentage of the sales load from Bear Stearns than they receive for selling most other funds. Class A shares may be sold at net asset value to (a) the Adviser, its affiliates or its officers, directors or employees (including retired employees), any partnership of which the Adviser is a general partner, any Trustee or officer of the Fund and designated family members of any of the above individuals; (b) qualified retirement plans of the Adviser; (c) any employee or registered representative of any Authorized Dealer or their respective spouses and minor children; (d) trustees or directors of investment companies for which the Adviser or an affiliate acts as sponsor; (e) any state, county or city, or any instrumentality, department, authority or agency thereof, which is prohibited by applicable investment laws from paying a sales load or commission in connection with the purchase of Portfolio shares; (f) any institutional investment clients including corporate sponsored pension and profit-sharing plans and other benefit plans (excluding Keogh Plans, IRAs and SEP-IRAs), and insurance companies; (g) any pension funds (excluding Keogh Plans, IRAs and SEP-IRAs), state and municipal governments or funds, Taft- Hartley plans and qualified non-profit organizations, foundations and endowments; (h) trust institutions (including bank trust departments) investing on their own behalf or on behalf of their clients; and (i) accounts as to which an Authorized Dealer charges an asset management fee. To take advantage of these exemptions, a purchaser must indicate its eligibility for an exemption to Bear Stearns along with its Account Information Form. Such purchaser agrees to notify Bear Stearns if, at any time of any additional purchases, it is no longer eligible for an exemption. Bear Stearns reserves the right to request certification or additional information from a purchaser in order to verify that such purchaser is eligible for an exemption. Bear Stearns reserves the right to limit the participation of its employees in Class A shares of the Portfolio. Dividends and distributions reinvested in Class A shares of the Portfolio will be made at the net asset value per share on the reinvestment date. 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. 14 -------------------------------------------------------------------------- The Bear Stearns Funds -------------------------------------------------------------------------- Account Information Form Please Note: Do not use this form to open a retirement plan account. For retirement plan forms call 1-800-766-4111. For assistance in completing this form, contact PFPC Inc. at 1-800-447-1139. (1) Account Type (Please print indicate only one registration type) [_] Individual [_] Joint Tenant --------------------------------------------------------------------------- NAME --------------------------------------------------------------------------- JOINT REGISTRANT, IF ANY (SEE NOTES 1 AND 2) - - - ------ --- ------ ----- ---------------- SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER OF PRIMARY OWNER (1) Use only the Social Security number or Taxpayer Identification Number of the first listed joint tenant. (2) For joint registrations, the account registrants will be joint tenants with right of survivorship and not tenants in common unless tenants in common or community property registrations are requested. --------------------------------------------------------------------------- [_] Uniform Gift to Minors, or [_] Uniform Transfer to Minors (where allowed by law) --------------------------------------------------------------------------- NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED) --------------------------------------------------------------------------- NAME OF MINOR (ONLY ONE PERMITTED) Under the _______________________ Uniform Gift/Transfers to Minors Act. STATE RESIDENCE OF MINOR / / - - ------ ----- ------ ------ --- ------ MINOR'S DATE OF BIRTH MINOR'S SOCIAL SECURITY NUMBER (REQUIRED TO OPEN AN ACCOUNT) -------------------------------------------------------------------------- [_] Corporation [_] Partnership [_] Trust* [_] Other -------------------------------------------------------------------------- NAME OF CORPORATION, PARTNERSHIP, OR OTHER -------------------------------------------------------------------------- NAME(S) OF TRUSTEE(S) DATE OF THE TRUST AGREEMENT - - - ------ ----- ------ ----- ---------------- SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER (REQUIRED TO OPEN ACCOUNT) (REQUIRED TO OPEN ACCOUNT) * If a Trust, include date of trust instrument and list of trustees if they are to be named in the registration. (2) Mailing Address --------------------------------------------------------------------------- STREET OF P.O. BOX APARTMENT NUMBER --------------------------------------------------------------------------- CITY STATE ZIP CODE ( ) ( ) ---------------------------------- ----------------------------------- DAY TELEPHONE EVENING TELEPHONE (3) Investment Information Method of Investment [_] I have enclosed a check for a minimum investment of $1,000 per Fund. [_] I have enclosed a check for a minimum subsequent investment of $250 per Fund or completed the Systematic Investment Plan information in Section 13. [_] I purchased ____________ shares of __________________ through my broker on____/____/_____. Confirm #__________________. Please make my investment in the Funds designated below: --------------------------------------------------------------------------- CLASS A CLASS C BEAR STEARNS FUNDS INVESTMENT AMOUNT --------------------------------------------------------------------------- S&P STARS Portfolio $ ------ ------- -------------- Large Cap Value Portfolio $ ------ ------- -------------- Small Cap Value Portfolio $ ------ ------- -------------- Total Return Bond Portfolio $ ------ ------- -------------- The Insiders Select Fund $ ------ ------- -------------- Emerging Markets Debt Portfolio $ ------ ------- -------------- Money Market Portfolio $ ------ ------- -------------- N/A Focus List Portfolio $ ------ ------- -------------- TOTAL INVESTMENT AMOUNT $ ============== Note: All shares purchased will be held in a shareholder account for the investor at the Transfer Agent. Checks drawn on foreign banks and checks made payable to persons or entities other than the Fund will not be accepted. Checks should be made payable to the Fund which you are investing in. If no class is designated, your investment will be made in Class A shares. NOT PART OF THE PROSPECTUS (4) Reduced Sales Charge (Available for Class A Shares) Method of Investment Are you a shareholder in another Bear Stearns Fund? Yes [_] No [_] I apply for Right of Accumulation reduced sales charges based on the following Bear Stearns Fund Accounts (excluding Class C Shares). --------------------------------------------------------------------------- FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER --------------------------------------------------------------------------- FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER --------------------------------------------------------------------------- FUND ACCOUNT NUMBER OR SOCIAL SECURITY NUMBER Letter of Intent [_] I am already investing under an existing Letter of Intent. [_] I agree to the Letter of Intent provisions in the Fund's current prospectus. During a 13-month period, I plan to invest a dollar amount of at least [_] $50,000 [_] $100,000 [_] $250,000 [_] $500,000 [_] $750,000 [_] $1,000,000 Net Asset Value Purchase [_] I qualify for an exemption from the sales charge by meeting the conditions set forth in the prospectus. (Please attach certification to this form.) [_] I qualify to purchase shares at net asset value, with proceeds received from a mutual fund or closed-end fund not distributed by Bear Stearns. (Please attach proof of fund share redemption.) (5) Distribution Options Dividends and capital gains may be reinvested or paid by check. If no options are selected below, both dividends and capital gains will be reinvested in additional Fund shares. Dividends [_] Pay by check. [_] Reinvest. Capital Gains [_] Pay by check. [_] Reinvest. The Redirected Distribution Option allows an investor to have dividends and any other distributions from a Fund automatically used to purchase shares of the same class of any other Fund. The receiving account must be in the same name as your existing account. [_] Please reinvest dividends and capital gains from the __________________ (NAME OF FUND) to the _________________. (NAME OF FUND) If you elect to have distributions paid by check, distributions will be sent to the address of record. Distributions may also be sent to another payee: --------------------------------------------------------------------------- NAME --------------------------------------------------------------------------- STREET OR P.O. BOX APARTMENT NUMBER --------------------------------------------------------------------------- CITY STATE ZIP CODE --------------------------------------------------------------------------- Optional Features (6) Automatic Withdrawal Plan [_] Fund Name [_] Amount --------------------------------- ------------ [_] Startup Month ----------------------- Frequency option: [_] Monthly [_] Every other month [_] Quarterly [_] Semiannually [_] Annually * A minimum account value of $5,000 in a single account is required to establish an automatic withdrawal plan. * Payments will be made on or near the 25th of the month * Shareholders holding share certificates are not eligible for the Automatic Withdrawal Plan. [_] Please mail checks to Address of Record (Named in Section 2) [_] Please electronically credit my Bank of Record (Named in Section 9) [_] Special payee as specified below: --------------------------------------------------------------------------- NAME --------------------------------------------------------------------------- STREET OR P.O. BOX APARTMENT NUMBER --------------------------------------------------------------------------- CITY STATE ZIP CODE (7) Telephone Exchange Privilege Unless indicated below, I authorize the Transfer Agent to accept instructions from any persons to exchange shares in my account(s) by telephone, in accordance with the procedures and conditions set forth in the Fund's current prospectus. [_] I DO NOT want the Telephone Exchange Privilege. NOT PART OF THE PROSPECTUS (8) Telephone Redemption Privilege [_] I authorize the Transfer Agent to accept instructions from any person to redeem shares in my account(s) by telephone, in accordance with the procedures and conditions set forth in the Fund's current prospectus. Checks for redemption of proceeds will be sent by check via U.S. Mail to the address of record, unless the information in Section 9 is completed for redemption by wire of $500 or more. (9) Bank of Record (for Telephone Redemptions and/or Systematic Investment Plans) Please attach a voided check (for electronic credit to your checking account) in the space provided in Section 13. --------------------------------------------------------------------------- BANK NAME --------------------------------------------------------------------------- STREET OR P.O. BOX APARTMENT NUMBER --------------------------------------------------------------------------- CITY STATE ZIP CODE --------------------------------------------------------------------------- BANK ASA NUMBER BANK ACCOUNT NUMBER --------------------------------------------------------------------------- ACCOUNT NAME (10) Signature and Taxpayer Certification The undersigned warrants that I (we) have full authority and, if a natural person, I (we) am (are) of legal age to purchase shares pursuant to this Account Information Form, and have received a current prospectus for the Bear Stearns Fund(s) in which I (we) am (are) investing. The undersigned acknowledges that the Telephone Exchange Privilege is automatic and that I (we) may bear the risk of loss in event of fraudulent use of the Privilege. If I (we) do not want the Telephone Exchange Privilege, I (we) have so indicated on this Account Information Form. Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is required to have the following certification: Under penalty of perjury, I certify that: (1) The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding because (a) I am exempt from backup withholding or (b) I have not been notified by the Internal Revenue Service that I am subject to 31% backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. Certification Instructions -- You must cross out item (2) above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting of interest or dividends on your tax return. Mutual fund shares are not deposits of, or guaranteed by, any depository institution, nor are they insured by the FDIC. Investment in the funds involves investment risks, including possible loss of principal. [_] Exempt from backup withholding [_] Nonresident alien (Form W-8 attached) --------------------------------- COUNTRY OF CITIZENSHIP --------------------------------------------------------------------------- AUTHORIZED SIGNATURE TITLE DATE --------------------------------------------------------------------------- AUTHORIZED SIGNATURE TITLE DATE (11) For Authorized Dealer Use Only (Please Print) We hereby authorize the Transfer Agent to act as our agent in connection with the transactions authorized by the Account Information Form and agree to notify the Transfer Agent of any purchases made under a Letter of Intent or Right of Accumulation. If this Account Information Form includes a Telephone Exchange Privilege authorization, a Telephone Redemption Privilege authorization or an Automatic Withdrawal Plan request, we guarantee the signature(s) above. --------------------------------------------------------------------------- DEALER'S NAME DEALER NUMBER --------------------------------------------------------------------------- MAIN OFFICE ADDRESS BRANCH NUMBER --------------------------------------------------------------------------- REPRESENTATIVE'S NAME REP. NUMBER ( ) ----------------------------------------------------- -------------------- BRANCH ADDRESS TELEPHONE NUMBER --------------------------------------------------------------------------- AUTHORIZED SIGNATURE OF DEALER TITLE DATE (12) Additional Account Statements (Please Print) In addition to myself and my representative, please send copies of my account statements to: ------------------------------------- ------------------------------------ NAME NAME ------------------------------------- ------------------------------------ ADDRESS ADDRESS ------------------------------------- ------------------------------------ CITY, STATE, ZIP CODE CITY, STATE, ZIP CODE NOT PART OF THE PROSPECTUS (13) Systematic Investment Plan The Systematic Investment Plan, which is available to shareholders of The Bear Stearns Funds, makes possible regularly scheduled purchases of Fund shares to allow dollar-cost averaging. The Funds' Transfer Agent can arrange for an amount of money selected by you ($100) minimum to be deducted from your checking account and used to purchase shares of a specified Bear Stearns Fund. A $250 minimum initial investment is required. This may not be used in conjunction with the Automatic Withdrawal Plan. Please debit $ ____________ from my checking account (named in Section 9) on or about the 20th of the month. Depending on the Application receipt date, the Plan may take 10 to 20 days to be in effect. [_] Monthly [_] Every alternate month [_] Quarterly [_] Other _______________ $_____________ into the __________________ Fund _____________ Start Month. $100 MINIMUM $_____________ into the __________________ Fund _____________ Start Month. $100 MINIMUM $_____________ into the __________________ Fund _____________ Start Month. $100 MINIMUM If you are applying for the Telephone Redemption Privilege or Systematic Investment Plan, please tape your voided check on top of our sample below. --------------------------------------------------------------------------- John Smith 000 123 First Avenue Anytown, USA 12345 $[_____] ------------------------------------------------------------ -------------------------------------------------------------------- V O I D -------------------------- -------------------------------------- --------------------------------------------------------------------------- Service Assistance Our knowledgeable Client Services Representatives are available to assist you between 8:00 a.m. and 6:00 p.m. Eastern Time at: 1-800-447-1139 Mailing or Fax Instructions Mail your completed Account Information Form and check to: The Bear Stearns Funds c/o PFPC Inc. P.O. Box 8960 Wilmington, DE 19899-8960 Fax: 302-791-1777 If applications will be faxed, please call and notify Client Services at 1-800-447-1139 before placing an order. Bear Stearns & Co. Inc. 7.97 NOT PART OF THE PROSPECTUS 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. 15 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 to obtain the appropriate forms. The Systematic Investment Plan does not assure a profit and does not protect against loss in declining markets. Since the Systematic Investment Plan involves the continuous investment in the Portfolio regardless of fluctuating price levels of the Portfolio's shares, investors should consider their financial ability to continue to purchase through periods of low price levels. The Fund may modify or terminate the Systematic Investment Plan at any time or charge a service fee. No such fee currently is contemplated. Shareholder Services EXCHANGE PRIVILEGE The Exchange Privilege enables an investor to purchase, in exchange for shares of a class of the Portfolio, shares of the same class of the Fund's other portfolios or shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale in the investor's state of residence. These funds have different investment objectives which may be of interest to investors. To use this Privilege, investors should consult their account executive at Bear Stearns, their account executive at an Authorized Dealer or the Transfer Agent to determine if it is available and whether any conditions are imposed on its use. To use this privilege, exchange instructions must be given to the Transfer Agent in writing or by telephone. A shareholder wishing to make an exchange may do so by sending a written request to the Transfer Agent at the address given above in "How to Buy Shares--General." Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the account application that they do not wish to use this privilege. Shareholders holding share certificates are not eligible to exchange shares of the Portfolio by phone because share certificates must accompany all exchange requests. To add this feature to an existing account that previously did not provide for this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing. If the exchanging shareholder does not currently own shares of the portfolio or fund whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and Authorized Dealer of record as the account from which shares are exchanged, unless otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as described below. To participate in the Systematic Investment Plan or establish automatic withdrawal for the new account, however, an exchanging shareholder must file a specific written request. The Exchange Privilege may be modified or terminated at any time, or from time to time, by the Fund on 60 days notice to the affected portfolio or fund shareholders. The Fund, BSFM and Bear Stearns will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine. In attempting to confirm that telephone instructions are genuine, the Fund will use such procedures as are considered reasonable, including recording those instructions and requesting information as to account registration (such as the name in which an account is registered, the account number, recent transactions in the account, and the account holder's Social Security number, address and/or bank). 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 16 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 a 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 directly in connection with exchanges, although the Fund reserves the right, upon not less than 60 days written notice, to charge shareholders a $5.00 fee in accordance with rules promulgated by the Securities and Exchange Commission. The Fund reserves the right to reject any exchange request in whole or in part. The Exchange Privilege may be modified or terminated at any time upon notice to shareholders. The exchange of shares of one portfolio or fund for shares of another is treated for federal income tax purposes as a sale of the shares given in exchange by the shareholder and, therefore, an exchanging shareholder may recognize a taxable gain or loss. REDIRECTED DISTRIBUTION OPTION The Redirected Distribution Option enables a shareholder to invest automatically dividends and/or capital gain distributions, if any, paid by the Portfolio in shares of the same class of another portfolio of the Fund or a fund advised or sponsored by Bear Stearns of which the shareholder is an investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be purchased at the 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. 17 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 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 70 1/2 in the case of an IRA or Keogh plan or custodial account pursuant to Section 403(b) of the Code. If the Fund's Trustees determine to discontinue the waiver of the CDSC, the disclosure in the Portfolio's prospectus will be revised appropriately. Any Portfolio shares subject to a CDSC which were purchased prior to the 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. 18 PROCEDURES Clients with a brokerage account may submit redemption requests to their account executives or Authorized Dealers in person or by telephone, mail or wire. As the Fund's agent, Bear Stearns or Authorized Dealers may honor a redemption request by repurchasing Fund shares from a redeeming shareholder at the shares' net asset value next computed after receipt of the request by Bear Stearns or the Authorized Dealer. Under normal circumstances, within three days, redemption proceeds will be paid by check or credited to the shareholder's brokerage account at the election of the shareholder. Bear Stearns account executives or Authorized Dealers are responsible for promptly forwarding redemption requests to the Transfer Agent. If an investor authorizes telephone redemption, the Transfer Agent may act on telephone instructions from any person representing himself or herself to be a representative of Bear Stearns or the Authorized Dealer and reasonably believed by the Transfer Agent to be genuine. The Fund will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Transfer Agent or the Fund may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Fund nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. REDEMPTION THROUGH THE TRANSFER AGENT Shareholders who are not clients with a brokerage account who wish to redeem shares must redeem their shares through the Transfer Agent by mail; other shareholders also may redeem Fund shares through the Transfer Agent. Mail redemption requests should be sent to the Transfer Agent at: PFPC Inc., Attention: The Bear Stearns Funds--The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960. ADDITIONAL INFORMATION ABOUT REDEMPTIONS A shareholder may have redemption proceeds of $500 or more wired to the shareholder's brokerage account or a commercial bank account designated by the shareholder. A transaction fee of $7.50 will be charged for payments by wire. Questions about this option, or redemption requirements generally, should be referred to the shareholder's Bear Stearns account executive, to any Authorized Dealer, or to the Transfer Agent if the shares are not held in a brokerage account. If share certificates have been issued, written redemption instructions, indicating the portfolio from which shares are to be redeemed, and duly endorsed share certificates, must be received by the Transfer Agent in proper form and signed exactly as the shares are registered. If the proceeds of the redemption would exceed $25,000, or if the proceeds are not to be paid to the record owner at the record address, or if the shareholder is a corporation, partnership, trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor institution. A signature guarantee is designed to protect the shareholders and the Portfolio against fraudulent transactions by unauthorized persons. A signature guarantee may be obtained from a domestic bank or trust company, broker, dealer, clearing agency or savings association who are participants in a medallion program recognized by the securities transfer association. The three recognized medallion programs are Securities Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP). Signature Guarantees which are not a part of these programs will not be accepted. Please note that a notary public stamp or seal is not acceptable. The Fund reserves the right to amend or discontinue its signature guarantee policy at any time and, with regard to a particular redemption transaction, to require a signature guarantee at its discretion. Any questions with respect to signature-guarantees should be directed to the Transfer Agent by calling 1- 800-447-1139. During times of drastic economic or market conditions, investors may experience difficulty in contacting Bear Stearns or Authorized Dealers by telephone to request a redemption of Portfolio shares. In such cases, investors should consider using the other redemption procedures described herein. Use of these other redemption procedures may result in the redemption request being processed at a later time than it would have been if telephone redemption had been used. During the delay, the Portfolio's net asset value may fluctuate. AUTOMATIC WITHDRAWAL Automatic Withdrawal permits investors to request withdrawal of a specified dollar amount (minimum of $25) on either a monthly or quarterly basis if the investor has a $5,000 minimum account. An 19 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 shares. See "Fee Table." Dividends derived from net investment income, together with distributions from net realized short-term securities gains and all or a portion of any gains realized from the sale or disposition of certain market discount bonds, paid by the Portfolio will be taxable to U.S. shareholders as ordinary income, whether received in cash or reinvested in additional shares of the Portfolio or redirected into another portfolio or fund. Distributions from net realized long-term securities gains of the Portfolio will be taxable to U.S. shareholders as long-term capital gains for federal income tax purposes, regardless of how long shareholders have held their Portfolio shares and whether such distributions are received in cash or reinvested in, or redirected into other, shares. The Code provides that the net capital gain of an individual generally will not be subject to federal income tax at a rate in excess of 28%. Dividends and distributions may be subject to state and local taxes. 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. 20 Generally, the Fund must withhold ("backup withholding") and remit to the U.S. Treasury 31% of dividends, distributions from net realized securities gains and the proceeds of any redemption, regardless of the extent to which gain or loss may be realized, paid to a shareholder if such shareholder fails to certify that the TIN furnished in connection with opening an account is correct and that such shareholder has not received notice from the IRS of being subject to backup withholding as a result of a failure to properly report taxable dividend or interest income on a federal income tax return. Furthermore, the IRS may direct the Fund to institute backup withholding if the IRS determines that a shareholder's TIN is incorrect or if a shareholder has failed to properly report taxable dividend and interest income on a federal income tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account, and may be claimed as a credit on the record owner's federal income tax return. While the Portfolio is not expected to have any federal tax liability, investors should expect to be subject to federal, state or local taxes in respect of their investment in Portfolio shares. Management of the Fund believes that the Portfolio has qualified for the fiscal year ended March 31, 1997 as a "regulated investment company" under the Code. The Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Such qualification relieves the Portfolio of any liability for federal income tax to the extent its earnings are distributed in accordance with applicable provisions of the Code. The Portfolio may be subject to a non-deductible 4% excise tax, measured with respect to certain undistributed amounts of taxable investment income and capital gains. Each investor should consult its tax adviser regarding specific questions as to federal, state or local taxes applicable to an investment in the Portfolio. Performance Information For purposes of advertising, performance for each class may be calculated on the basis of average annual total return and/or total return. These total return figures reflect changes in the price of the shares and assume that any income dividends and/or capital gains distributions made by the Portfolio during the measuring period were 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 shares should be expected to be lower than that of Class A shares. Performance for each class will be calculated separately. Average annual total return is calculated pursuant to a standardized formula which assumes that an investment in the Portfolio was purchased with an initial payment of $1,000 and that the investment was redeemed at the end of a stated period of time, after giving effect to the reinvestment of dividends and distributions during the period. The return is expressed as a percentage rate which, if applied on a compounded annual basis, would result in the redeemable value of the investment at the end of the period. Advertisements of the Portfolio's performance will include the Portfolio's average annual total return for one, five and ten year periods, or for shorter periods depending upon the length of time during which the Portfolio has operated. Computations of average annual total return for periods of less than one year represent an annualization of the Portfolio's actual total return for the applicable period. Total return is computed on a per share basis and assumes the reinvestment of dividends and distributions. Total return generally is expressed as a percentage rate which is calculated by combining the income and principal changes for a specified period and dividing by the net asset value (or maximum public offering price in the case of Class A shares) per share at the beginning of the period. Class 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. 21 Performance will vary from time to time and past results are not necessarily representative of future results. Investors should remember that performance is a function of portfolio management in selecting the type and quality of portfolio securities and is affected by operating expenses. Performance information, such as that described above, may not provide a basis for comparison with other investments or other investment companies using a different method of calculating performance. Comparative performance information may be used from time to time in advertising or marketing the Portfolio's shares, including data from Lipper Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price Index, Wilshire 4500 Stock Index, Russell Small Cap Index, the Dow Jones Industrial Average and other industry publications. General Information The Fund was organized as a business trust under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994. The Fund commenced operations on or about April 3, 1995 in connection with the offer of shares of certain of its other portfolios. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. The Portfolio's shares are classified into 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 seven portfolios of shares. All consideration received by the Fund for shares of one of the portfolios and all assets in which such consideration is invested will belong to that portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, one portfolio (and as to classes within a portfolio) are treated separately from those of the other portfolios (and classes). The Fund has the ability to create, from time to time, new portfolios of shares without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, Rule 18f-2 exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of Rule 18f-2. The Transfer Agent maintains a record of share ownership and will send confirmations and statements of account. Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766- 4111. 22 Appendix INVESTMENT TECHNIQUES In connection with its investment objective and policies, the Portfolio may employ, among others, the following investment techniques which may involve certain risks. Options transactions involve "derivative securities." OPTIONS TRANSACTIONS The Portfolio is permitted to invest up to 5% of its total assets, represented by the premium paid, in the purchase of call and put options in respect of specific securities (or groups or "baskets" of specific securities) in which the Portfolio may invest. The Portfolio may write and sell covered call option contracts on securities owned by the Portfolio not exceeding 20% of the value of its net assets at the time such option contracts are written. The Portfolio also may purchase call options to enter into closing purchase transactions. The Portfolio also may write covered put option contracts to the extent of 20% of the value of its net assets at the time such option contracts are written. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at the exercise price at any time during the option period. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at the exercise price at any time during the option period. A covered put option sold by the Portfolio exposes the Portfolio during the term of the option to a decline in price of the underlying security or securities. A put option sold by the Portfolio is covered when, among other things, cash or liquid securities are placed in a segregated account with the Fund's custodian to fulfill the obligation undertaken. The Portfolio may purchase and sell call and put options on stock indexes listed on U.S. securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Portfolio will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Successful use by the Portfolio of options will be subject to the Adviser's ability to predict correctly movements in the direction of individual stocks, the stock market generally, foreign currencies or interest rates. To the extent the Adviser's predictions are incorrect, the Portfolio may incur losses which could adversely affect the value of a shareholder's investment. LENDING PORTFOLIO SECURITIES From time to time, the Portfolio may lend securities from its portfolio of investments to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. Such loans may not exceed 33 1/3% of the value of the Portfolio's total assets. In connection with such loans, the Portfolio will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Portfolio can increase its income through the investment of such collateral. The Portfolio continues to be entitled to payments in amounts equal to the interest, dividends and other distributions payable on the loaned security and receives interest on the amount of the loan. Such loans will be terminable at any time upon specified notice. The Portfolio might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with the Portfolio. BORROWING MONEY As a fundamental policy, the Portfolio is permitted to borrow to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 33 1/3% of the value of such company's total assets. However, the Portfolio currently intends to borrow money only for temporary or emergency (not leveraging) purposes, in an amount up to 15% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of the Portfolio's total assets, the Portfolio will not make any additional investments. A-1 CERTAIN PORTFOLIO SECURITIES CONVERTIBLE SECURITIES Convertible securities are fixed-income securities that may be converted at either a stated price or stated rate into a specified number of shares of common stock of the same or a different issuer. Convertible securities have general characteristics similar to both fixed-income and equity securities. Although to a lesser extent than with fixed-income securities generally, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock, and, therefore, also will react to variations in the general market for equity securities. A unique feature of convertible securities is that as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. As fixed-income securities, convertible securities are investments that provide for a stable stream of income with generally higher yields than common stocks. Of course, like all fixed-income securities, there can be no assurance of current income because the issuers of the convertible securities may default on their obligations. Convertible securities, however, generally offer lower interest or dividend yields than non-convertible securities of similar quality because of the potential for capital appreciation. A convertible security, in addition to providing fixed income, offers the potential for capital appreciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. There can be no assurance of capital appreciation, however, because securities prices fluctuate. Convertible securities generally are subordinated to other similar but non- convertible securities of the same issuer, although convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. Because of the subordination feature, however, convertible securities typically have lower ratings than similar non-convertible securities. MONEY MARKET INSTRUMENTS The Portfolio may invest, in the circumstances described under "Description of the Fund--Management Policies," in the following types of money market instruments, each of which at the time of purchase must have or be deemed to have under rules of the Securities and Exchange Commission remaining maturities of 13 months or less. U.S. GOVERNMENT SECURITIES The Portfolio may purchase securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, which include U.S. Treasury securities that differ in their interest rates, maturities and times of issuance. Treasury Bills have initial maturities of one year or less; Treasury Notes have initial maturities of one to ten years; and Treasury Bonds generally have initial maturities of greater than ten years. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the U.S. Treasury; others, such as those issued by the Federal National Mortgage Association, by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. These securities bear fixed, floating or 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, A-2 domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, the Portfolio may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, the possible imposition of foreign withholding taxes on interest income payable on the securities, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on these securities and the possible seizure or nationalization of foreign deposits. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by the Portfolio will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. The Portfolio will not invest more than 15% of the value of its net assets in time deposits maturing in more than seven days and in other securities that are illiquid. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. REPURCHASE AGREEMENTS Repurchase agreements involve the acquisition by the Portfolio of an underlying debt instrument, subject to an obligation of the seller to repurchase, and the Portfolio to resell, the instrument at a fixed price usually not more than one week after its purchase. Certain costs may be incurred by the Portfolio in connection with the sale of the securities if the seller does not repurchase them in accordance with the repurchase agreement. In addition, if bankruptcy proceedings are commenced with respect to the seller of the securities, realization on the securities by the Portfolio may be delayed or limited. COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by the Portfolio will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's Investors Service Inc. ("Moody's"), A-1 by Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), F-1 by Fitch Investors Service, L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), (b) issued by companies having an outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by the Adviser to be of comparable quality to those rated obligations which may be purchased by the Portfolio. The Portfolio may purchase floating and variable rate demand notes and bonds, which are obligations ordinarily having stated maturities in excess of one year, but which permit the holder to demand payment of principal at any time or at specified intervals. WARRANTS The Portfolio may invest up to 5% of its net assets in warrants, except that this limitation does not apply to warrants acquired in units or attached to securities. Included in such amount, but not to exceed 2% of the value of the Portfolio's net assets, may be warrants which are not listed on the New York or American Stock Exchange. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specified amount of the corporation's capital stock at a set price for a specified period of time. INVESTMENT COMPANY SECURITIES The Portfolio may invest in securities issued by other investment companies. Under the 1940 Act, the Portfolio's investment in such securities currently is limited to, subject to certain exceptions, (i) 3% of the total voting stock of any one investment company, (ii) 5% of the Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Investments in the securities of other investment companies will involve duplication of advisory fees and certain other expenses. A-3 ILLIQUID SECURITIES The Portfolio may invest up to 15% of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. Such securities may include securities that are not readily marketable, such as certain securities that are subject to legal or contractual restrictions on resale, repurchase agreements providing for settlement in more than seven days after notice, and options traded in the over-the-counter market and securities used to cover such options. As to these securities, the Portfolio is subject to a risk that should the Portfolio desire to sell them when a ready buyer is not available at a price the Portfolio deems representative of their value, the value of the Portfolio's net assets could be adversely affected. A-4 The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1-800-766-4111 Distributor Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 Investment Adviser Bear Stearns Funds Management Inc. 245 Park Avenue New York, NY 10167 Custodian Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 Transfer & Dividend Disbursement Agent PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 Counsel Kramer, Levin, Naftalis & Frankel 919 Third Avenue New York, NY 10022 Independent Auditors Deloitte & Touche LLP Two World Financial Center New York, NY 10281-1434 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE 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-005-04 T H E B E A R S T E A R N S F U N D S 2 4 5 P A R K A V E N U E N E W Y O R K, N Y 1 0 1 6 7 1 . 8 0 0 . 7 6 6 . 4 1 1 1 PROSPECTUS The Insiders Select Fund CLASS Y SHARES THE BEAR STEARNS FUNDS (the "Fund") is an open-end management investment com- pany, known as a mutual fund. The Fund permits you to invest in separate port- folios. By this Prospectus, Class Y shares of The Insiders Select Fund, a non- diversified portfolio (the "Portfolio"), are offered. The Portfolio's invest- ment objective is capital appreciation. 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 clas- ses of shares should call 1-800-766-4111 or ask their sales representative or the Portfolio's distributor. BEAR STEARNS FUNDS MANAGEMENT INC. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the Portfolio's investment adviser. BSFM is also referred to herein as the "Adviser." BEAR, STEARNS & CO. INC. ("Bear Stearns"), an affiliate of BSFM, serves as the Portfolio's distributor. ---------------------- THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE PORTFOLIO THAT YOU SHOULD KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE REFER- ENCE. Part B (also known as the Statement of Additional Information), dated July 29, 1997, which may be revised from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, write to the address or call one of the telephone numbers listed under "General Information" in this Prospectus. ---------------------- Mutual fund shares are not deposits or obligations of, or guaranteed or en- dorsed by, any bank, and are not federally insured by the Federal Deposit In- surance Corporation, the Federal Reserve Board, or any other agency. The net asset value for funds of this type will fluctuate. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC- CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. JULY 29, 1997 Table of Contents
PAGE Fee Table.................................................................. 3 Financial Highlights....................................................... 4 Description of the Portfolio............................................... 5 Risk Factors............................................................. 8 Management of the Fund..................................................... 9 How to Buy Shares.......................................................... 11 Shareholder Services....................................................... 13 How to Redeem Shares....................................................... 14 Dividends, Distributions and Taxes......................................... 15 Performance Information.................................................... 16 General Information........................................................ 17 Appendix................................................................... A-1
2 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) Advisory 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 ex- ceed 1.15% for Class Y. Without such waiver and expense reimbursement, Advi- sory Fees stated above would be 1.00%, Other Expenses would be 1.96% and Total Portfolio Operating Expenses would be 2.96% for Class Y. **The Advisory Fee is payable at an annual rate equal to 1% of the Portfolio's average daily net assets, subject to increase or decrease by up to 0.50% annu- ally depending on the Portfolio's performance. See "Management of the Fund-- 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 ef- fect, see "Management of the Fund." 3 Financial Highlights The information in the table below covering the Portfolio's investment results for the periods indicated has been audited by Deloitte & Touche LLP. Further financial data and related notes appear in the Portfolio's Annual Report for the fiscal year ended March 31, 1997 which is incorporated by reference into the Portfolio's Statement of Additional Information which is available upon request. Contained below is per share operating performance data, total investment re- turn, ratios to average net assets and other supplemental data for Class Y shares of the Portfolio for the periods indicated. This information has been derived from information provided in the Portfolio's financial statements.
FOR THE PERIOD JUNE 20, 1995* FOR THE FISCAL YEAR ENDED THROUGH MARCH 31, 1997 MARCH 31, 1996 ------------------------- -------------- CLASS Y CLASS Y ------------------------- -------------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period. $ 14.02 $ 12.12 ------- ------- Net investment income (1)............ 0.08 0.07 Net realized and unrealized gain on investments and securities sold short (2)........................... 2.49 1.87 ------- ------- Net increase in net assets resulting from operations..................... 2.57 1.94 ------- ------- Dividends and distributions to shareholders from Net investment income.............. (0.02) (0.04) Net realized capital gains......... (1.91) -- ------- ------- (1.93) (0.04) ------- ------- Net asset value, end of period ...... $ 14.66 $ 14.02 ======= ======= Total investment return (3).......... 18.81% 15.98%(4) ======= ======= RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)............................ $ 1,557 $ 1,293 Ratio of expenses to average net assets (1).......................... 1.15% 1.15%(4) Ratio of net investment income to av- erage net assets (1)................ 0.60% 0.97%(4) Decrease reflected in above expense ratios and net investment income due to waivers and reimbursements....... 1.81% 2.04%(4) Portfolio turnover rate.............. 128.42% 93.45%(5) Average commission rate per share (6)................................. $0.0264 $0.0294
- ------ * Class Y shares commenced its initial public offering on June 20, 1995. ** Calculated based on shares outstanding on the first and last day of the re- spective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amounts shown for a share outstanding throughout the period are not in accord with the changes in the aggregate gains and losses in investments during the period because of the timing of sales and repurchases of Port- folio shares in relation to fluctuating net asset value during the period. (3) Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total in- vestment return is not annualized. (4) Annualized. (5) Not annualized. (6) Represents average commission rate per share charged to the Portfolio on purchases and sales of investments subject to such commissions during each period Further information about performance is contained in the Portfolio's Annual Report, which may be obtained without charge by writing to the address or calling one of the telephone numbers listed under "General Information." 4 Description of the Portfolio INVESTMENT OBJECTIVE The Portfolio's investment objective is capital appreciation. The Portfolio's investment objective cannot be changed without approval by the holders of a majority as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), of the Portfolio's outstanding voting shares. There can be no as- surance that the Portfolio's investment objective will be achieved. INVESTMENT STRATEGY The Adviser selects portfolio securities by analyzing the behavior of (i) cor- porate 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 compa- nies, including predicted earnings and revisions to predicted earnings, and (iii) the company itself, through an analysis of its behavior as to corporate finance matters, such as stock repurchase programs, dividend policies and new securities issuance. Corporate insiders are believed by the Adviser to be in the best position to understand the near- term prospects of their companies. The Adviser believes that insider behavior can be observed and analyzed since insiders are required to disclose transactions in their company's equity securities to the Securi- ties and Exchange Commission generally no later than the tenth day of the month following the transaction. Each month many thousands of these disclo- sures are received. The Adviser believes that collecting, classifying and ana- lyzing these transactions provides valuable investment management information. These insiders may have many reasons for transacting in company stock and stock options. Many of these are entirely incidental to the future of the com- pany. For example, an insider may sell stock to buy a home or finance a col- lege 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 insid- er'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 be- lieves the stock soon will decline. Insiders who exercise options, hold the stock, and buy in the open market probably believe that the stock soon will rise. Clusters of insiders making substantial buys or sells indicate broad agreement within a firm as to the direction of the stock. Financial analysts use a variety of means to learn more about the companies they follow. Among these are visits to the company and in-depth discussions with management. Successful analysts learn to interpret the words and actions of management and the firm itself. Likewise, management uses its discussions with certain analysts as a means of signaling their views to the marketplace. The Adviser monitors changes in analysts' predicted earnings and ratings. The Adviser believes that analysts' revisions can be a valuable indicator of fu- ture returns for the company's stock. Part of the normal activity of every public company is its financing deci- sions. A company must routinely decide whether to maintain or change its divi- dend policy, whether to buy its own stock in the open market or whether to is- sue new securities. From time to time the company may decide that its stock is undervalued. Many firms see undervaluation as an opportunity to purchase the company's stock in the open market. The Adviser believes that by monitoring changes in shares outstanding (in the hands of the public), a useful signal can be extracted relating to the companies' beliefs about its prospects. Similarly, the company's decision to sell securities to the public or another firm can be an indication that the company believes that its stock has reached a near-term high, a potentially useful sell signal. Insiders, analysts and the company each send signals that can be analyzed by the Adviser to produce valuable information about the prospects for individual companies. The Adviser believes that the most powerful analysis, however, comes from the interaction of all three sources. While no one signal alone de- termines whether a security will be purchased or sold, no security will be considered for purchase or sale unless a positive or negative signal, as the case may be, is received from insider behavior. In its analysis, the Adviser uses only data that is available to the public. The Adviser obtains the data on insider trading activity from CDA/Investnet, which compiles this informa- tion from publicly available Securities and Exchange Commission filings. 5 MANAGEMENT POLICIES Under normal market conditions, the Adviser invests substantially all of the Portfolio's assets in the equity securities of U.S. issuers. The Adviser selects equity securities believed by it to provide opportunities for capital appreciation or gains through short selling. Issuers are selected without regard to market capitalization, although the Adviser anticipates that the issuers principally will be mid- to large capitalization companies; that is, those with market capitalizations exceeding $1 billion. The Adviser selects from the universe of U.S. equity securities those securities it believes, in the aggregate, will approximate or exceed the total return performance of the Standard & Poor's 500 Stock Index* (the "S&P 500 Index"). The S&P 500 Index is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The composition of the S&P 500 Index is determined by Standard & Poor's based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representative of stocks in a particular industry group, and may be changed from time to time. The weightings of stocks in the S&P 500 Index are based on each stock's relative total market capitalization; that is, its market price per share times the number of shares outstanding. Because of this weighting, as of March 31, 1997, approximately 48% of the S&P 500 Index was composed of the 50 largest companies. The Portfolio will not invest in all or substantially all of the common stocks included in the S&P 500 Index and may invest in stocks that are not included in the S&P 500 index. The Portfolio expects ordinarily to invest in approximately 60 to 150 stocks. By investing in this manner--that is, purchasing other equity securities in a manner intended to approximate or exceed the performance of the S&P 500 Index--the Adviser seeks to exceed the total return of the S&P 500 Index. Equity securities consist of common stocks, convertible securities and preferred stocks. The convertible securities and preferred stocks in which the Portfolio may invest will be rated at least investment grade by a nationally recognized statistical rating organization at the time of purchase. Convertible securities rated in the lowest investment grade rating may be considered to have speculative characteristics. Preferred stock generally receives dividends before distributions are paid on common stock and ordinarily has a priority claim over common stockholders if the issuer of the stock is liquidated. The Portfolio may invest, in anticipation of investing cash positions, in money market instruments consisting of U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase agreements, as set forth in the Appendix. Under normal market conditions, the Portfolio expects to have less than 15% of its assets invested in money market instruments. However, when the Adviser determines that adverse market conditions exist, the Portfolio may adopt a temporary defensive posture and invest all of its assets in money market instruments. The Fund is a "series fund," which is a mutual fund divided into separate portfolios. Each portfolio is treated as a separate entity for certain matters under the 1940 Act, and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As described below, for certain matters Fund shareholders vote together as a group; as to others they vote separately by portfolio. By this Prospectus, shares of the Portfolio are being offered. From time to time, other portfolios may be established and sold pursuant to other offering documents. See "General Information." INVESTMENT TECHNIQUES The Portfolio may engage in various investment techniques, such as short selling, lending portfolio securities and options and futures transactions, each of which involves risk. Options and futures transactions involve "derivative securities." Short selling and futures transactions are discussed below. For a discussion of these other investment techniques and their related risks, see "Appendix--Investment Techniques" and "Risk Factors". SHORT SELLING Short sales are transactions in which the Portfolio sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio then is obligated to replace the security - ------ *"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 pro- moted by Standard & Poor's or The McGraw-Hill Companies, Inc. 6 borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio. Until the security is replaced, the Portfolio is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed out. Until the Portfolio replaces a borrowed security in connection with a short sale, the Portfolio will: (a) maintain daily a segregated account, containing liquid securities, at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral always equals the cur- rent value of the security sold short; or (b) otherwise cover its short posi- tion in accordance with positions taken by the staff of the Securities and Ex- change Commission. The Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Portfolio replaces the borrowed security. The Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Portfolio may be required to pay in connection with a short sale. The Portfolio may purchase call options to provide a hedge against an increase in the price of a security sold short by the Portfolio. See "Appendix--Investment Techniques--Options Transactions." The Portfolio anticipates that the frequency of short sales will vary substan- tially in different periods, and it does not intend that any specified portion of its assets, as a matter of practice, will be invested in short sales. How- ever, no securities will be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net assets. The Portfolio may not sell short the securities of any single issuer listed on a national securities ex- change to the extent of more than 5% of the value of its net assets. The Port- folio may not sell short the securities of any class of an issuer to the ex- tent, at the time of the transaction, of more than 2% of the outstanding secu- rities of that class. In addition to the short sales discussed above, the Portfolio may make short sales "against the box," a transaction in which the Portfolio enters into a short sale of a security which the Portfolio owns. The proceeds of the short sale will be held by a broker until the settlement date at which time the Portfolio delivers the security to close the short position. The Portfolio re- ceives the net proceeds from the short sale. The Portfolio at no time will have more than 15% of the value of its net assets in deposits on short sales against the box. It currently is anticipated that the Portfolio will make short sales against the box for purposes of protecting the value of the Port- folio's net assets. 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 Tech- niques--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 sub- ject to rules of the Commodity Futures Trading Commission (the "CFTC") limit- ing 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 ac- count unrealized profits and unrealized losses on such contracts it has en- tered 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 cal- culating the 5% limitation. 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 mar- ket will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permit- ted in futures contract prices during a single trading 7 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 trad- ing, thereby preventing prompt liquidation of futures positions and poten- tially subjecting the Portfolio to substantial losses. In addition, engaging in futures transactions in foreign markets may involve greater risks than trading on domestic exchanges. Successful use of futures by the Portfolio also is subject to the Adviser's ability to predict correctly movements in the direction of the market or foreign currencies and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if the Portfolio has hedged against the possibility of a decline in the market adversely affecting the value of securities held in its portfolio and prices increase instead, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market. The Portfolio may have to sell securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Securities and Exchange Commission, the Portfolio may be required to segregate cash or 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 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) pledge, hypothecate, mortgage or otherwise encumber its assets, but only to secure permitted borrowings; and (ii) invest up to 15% of the value of its net assets in repurchase agreements providing for settlement in more than seven days after notice and in other illiquid securities. See "Investment Objective and Management Policies--Investment Restrictions" in the Statement of Additional Information. RISK FACTORS No investment is free from risk. Investing in the Portfolio will subject investors to certain risks which should be considered. NET ASSET VALUE FLUCTUATIONS The Portfolio's net asset value per share is not fixed and should be expected to fluctuate. Investors should purchase Portfolio shares only as a supplement to an overall investment program and only if investors are willing to undertake the risks involved. EQUITY SECURITIES Investors should be aware that equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and that fluctuations can be pronounced. Changes in the value of the equity securities in the Portfolio's portfolio will result in changes in the value of the Portfolio's shares and thus the Portfolio's yield and total return to investors. 8 CERTAIN INVESTMENT TECHNIQUES The use of investment techniques such as short selling, lending portfolio securities and engaging in options and futures transactions, involves greater risk than that incurred by many other funds with a similar objective. Using these techniques may produce higher than normal portfolio turnover and may affect the degree to which the Portfolio's net asset value fluctuates. See "Appendix--Investment Techniques." The Portfolio's ability to engage in certain short-term transactions may be limited by the requirement that, to qualify as a regulated investment company, it must earn less than 30% of its gross income from the disposition of securities held for less than three months. This 30% test limits the extent to which the Portfolio may sell securities held for less than three months, effect short sales of securities held for less than three months, write options expiring in less than three months and invest in certain futures contracts, among other strategies. With the exception of the above requirement, the amount of portfolio activity will not be a limiting factor when making portfolio decisions. Under normal market conditions, the Portfolio's portfolio turnover rate generally will not exceed 150%. Higher portfolio turnover rates are likely to result in comparatively greater brokerage commissions or transaction costs. Short-term gains realized from portfolio transactions are taxable to shareholders as ordinary income. See "Portfolio Transactions" in the Portfolio's Statement of Additional Information. NON-DIVERSIFIED STATUS The Portfolio's classification as a "non-diversified" investment company means that the proportion of its assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. However, the Portfolio intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended (the "Code"), which requires that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of the Portfolio's total assets be invested in cash, U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Portfolio's total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets be invested in the securities of any one issuer (other than U.S. Government securities or the securities of other regulated investment companies). Since a relatively high percentage of the Portfolio's assets may be invested in the securities of a limited number of issuers, some of which may be within the same industry or economic sector, the Portfolio's securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company. SIMULTANEOUS INVESTMENTS Investment decisions for the Portfolio are made independently from those of other investment companies or accounts advised by the Adviser. However, if such other investment companies or accounts are prepared to invest in, or desire to dispose of, securities of the type in which the Portfolio invests at the same time as the Portfolio, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by the Portfolio or the price paid or received by the Portfolio. Management of the Fund BOARD OF TRUSTEES The Fund's business affairs are managed under the general supervision of its Board of Trustees. The Portfolio's Statement of Additional Information contains the name and general business experience of each Trustee. INVESTMENT ADVISER The Portfolio's investment adviser is BSFM, a wholly-owned subsidiary of The Bear Stearns Companies Inc., which is located at 245 Park Avenue, New York, New York 10167. The Bear Stearns Companies Inc. is a holding company which, through its subsidiaries including its principal subsidiary, Bear Stearns, is a leading United States investment banking, securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. BSFM is a registered investment adviser and offers, either directly or through affiliates, investment advisory and administrative services to open-end and closed-end investment funds and other managed pooled investment vehicles with net assets at March 31, 1997 of over $2.9 billion. 9 BSFM supervises and assists in the overall management of the Portfolio's affairs under an Investment Advisory Agreement between BSFM and the Fund, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. BSFM uses a team approach to money management consisting of portfolio managers, assistant portfolio managers and analysts performing as a dynamic unit to manage the assets of the Portfolio. The team consists of Mark Kurland, Senior Portfolio Manager; Robert Reitzes, Senior Portfolio Manager; Jim McCluskey, Senior Portfolio Manager; Gail Sprute, Portfolio Manager/Analyst and Harris Cohen, Portfolio Manager/Analyst. Jim McCluskey leads the portfolio management team for the Portfolio. Mr. McCluskey, a Chartered Financial Analyst, joined BSFM in May 1997 as a Senior Managing Director and Senior Portfolio Manager. From 1989 through 1997, he was a Senior Portfolio Manager at Spare, Kaplan, Bischel & Associates, an institutional asset management firm where he co-managed over $2 billion in assets. The Portfolio pays BSFM an advisory fee at an annual rate equal to 1% of the Portfolio's average daily net assets which will be adjusted monthly depending on the extent to which the investment performance of Portfolio shares exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. Under the terms of the Investment Advisory Agreement, the Portfolio has agreed to pay BSFM a monthly fee at the annual rate of 1% of the Portfolio's average daily net assets (the "Basic Fee") which will be adjusted monthly (the "Monthly Performance Adjustment") depending on the extent to which the investment performance of the class of shares (currently, Class C) expected to bear the highest total Portfolio operating expenses, after expenses, exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. The Monthly Performance Adjustment may increase or decrease the total advisory fee payable to BSFM (the "Total Advisory Fee") by up to 0.50% per year of the value of the Portfolio's average daily net assets. 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% 0.50% 1.50% +2.75 percentage points or more but less than +3.00 percentage points...... 1% 0.40% 1.40% +2.50 percentage points or more but less than +2.75 percentage points...... 1% 0.30% 1.30% +2.25 percentage points or more but less than +2.50 percentage points...... 1% 0.20% 1.20% +2.00 percentage points or more but less than +2.25 percentage points...... 1% 0.10% 1.10% Less than +2.00 percentage points but more than - -2.00 percentage points................ 1% 0.00% 1.00% - -2.00 percentage points or less but more than -2.25 percentage points...... 1% -0.10% 0.90% - -2.25 percentage points or less but more than -2.50 percentage points...... 1% -0.20% 0.80% - -2.50 percentage points or less but more than -2.75 percentage points...... 1% -0.30% 0.70% - -2.75 percentage points or less but more than -3.00 percentage points...... 1% -0.40% 0.60% - -3.00 percentage points or less........ 1% -0.50% 0.50%
The period over which performance is measured is a rolling twelve-month period and the performance of the S&P 500 Index is calculated as the sum of the change in the level of the S&P 500 Index during the period, plus the value of any dividends or distributions made by the companies whose securities comprise the S&P 500 Index. For the fiscal year ended March 31, 1997, no fees were paid by the Portfolio pursuant to a voluntary undertaking by BSFM. 10 The Portfolio's administrator is BSFM. Under the terms of an Administration Agreement with the Fund, BSFM generally supervises all aspects of the opera- tion of the Portfolio, subject to the overall authority of the Fund's Board of Trustees in accordance with Massachusetts law. For providing administrative services to the Portfolio, the Fund has agreed to pay BSFM a monthly fee at the annual rate of 0.15 of 1% of the Portfolio's average daily net assets. Un- der 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 as fol- lows: 0.10 of 1% per annum of the first $200 million of the Portfolio's aver- age daily net assets, 0.075 of 1% per annum of the next $200 million up to $400 million of the Portfolio's average daily net assets, 0.05 of 1% of the next $200 million up to $600 million of the Portfolio's average daily net as- sets, 0.03 of 1% of per annum of average daily net assets in excess of $600 million. These advisory fees are subject to a monthly minimum fee of $11,000. For the fiscal year ended March 31, 1997, the Portfolio paid PFPC Inc. a monthly fee at the effective annual rate of 0.45 of 1% of the Portfolio's average daily net assets. From time to time, BSFM may waive receipt of its fees and/or voluntarily as- sume 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 re- imburse 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 re- voke 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 Addi- tional Information. Bear Stearns has agreed to permit the Fund to use the name "Bear Stearns" or derivatives thereof as part of the Fund name for as long as the Investment Ad- visory Agreement is in effect. DISTRIBUTOR Bear Stearns, located at 245 Park Avenue, New York, New York 10167, serves as the 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 no- tice 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 as- sets for the fiscal year, BSFM may waive a portion of its investment advisory fee or bear other expenses to the extent of the excess expense. How to Buy Shares GENERAL The minimum initial investment is $2.5 million. Subsequent investments may be made in any amount. Share certificates are issued only upon written request. The 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 11 to the minimum investment requirement. In addition, accounts under management of Bear Stearns, its affiliates or authorized dealers 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 Port- folio'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 Trans- fer Agent (the "trade date"). Payment for Portfolio shares generally is due to Bear Stearns or the Authorized Dealer on the third business day (the "settle- ment date") after the trade date. Investors who make payment before the set- tlement date may permit the payment to be held in their brokerage accounts or may designate a temporary investment for payment until the settlement date. If a temporary investment is not designated, Bear Stearns or the Authorized Dealer will benefit from the temporary use of the funds if payment is made be- fore the settlement date. PURCHASE PROCEDURES Purchases through Bear Stearns account executives or Authorized Dealers may be made by check (except that a check drawn on a foreign bank will not be accept- ed), Federal Reserve draft or by wiring Federal Funds with funds held in bro- kerage accounts at Bear Stearns or the Authorized Dealer. Checks or Federal Reserve drafts should be made payable as follows: (i) to Bear Stearns or an investor's Authorized Dealer or (ii) to "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. Direct overnight deliveries to PFPC Inc. 400 Bellevue Parkway, Suite 108, Wilmington, Delaware 19809. Payment by check or Federal Reserve draft must be received within three business days of receipt of the purchase order by Bear Stearns or an Authorized Dealer. Shareholders may not purchase shares of the Portfolio with a check payable by a third party and endorsed over to the Portfolio. Orders placed directly with the Transfer Agent must be accompa- nied by payment. Bear Stearns (or an investor's Authorized Dealer) is respon- sible 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 re- cently purchased by check may be delayed as described under "How to Redeem Shares." Investors who are not Bear Stearns clients may purchase Portfolio shares through the Transfer Agent. To make an initial investment in the Portfolio, an investor must establish an account with the Portfolio by furnishing necessary information to the Fund. An account with the Portfolio may be established by completing and signing the Account Information Form, a copy of which is at- tached to this Prospectus, indicating which class of shares is being purchased and mailing it, together with a check to cover the purchase, to PFPC Inc., At- tention: 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. Purchase orders received by Bear Stearns, an Authorized Dealer or the Transfer Agent before the close of regular trading on the New York Stock Exchange (cur- rently 4:00 p.m., New York time) on any day the Portfolio calculates its net asset value are priced according to the net asset value determined on that date. Purchase orders received after the close of trading on the New York Stock Exchange are priced as of the time the net asset value is next deter- mined. Shares of the Portfolio are sold on a continuous basis. Net asset value per share is determined as of the close of regular trading on the floor of the New York Stock Exchange (currently 4:00 p.m., New York time) on each business day. The net asset value per share of Class Y of the Portfolio is computed by di- viding the value of the Portfolio's net assets represented by Class Y (i.e., the value of its assets less liabilities) by the total number of shares of Class Y outstanding. The Portfolio's investments are valued based on market value or, where market quotations are not readily available, based on fair value as determined in good faith by, or in accordance with procedures estab- lished by, the Fund's 12 Board of Trustees. For further information regarding the methods employed in valuing the Portfolio's investments, see "Determination of Net Asset Value" in the Portfolio's Statement of Additional Information. Federal regulations require that investors provide a certified Taxpayer Iden- tification Number (a "TIN") upon opening or reopening an account. See "Divi- dends, Distributions and Taxes." Failure to furnish a certified TIN to the Fund could subject the investor to backup withholding and a $50 penalty im- posed by the Internal Revenue Service (the "IRS"). Shareholder Services EXCHANGE PRIVILEGE The Exchange Privilege enables an investor to purchase, in exchange for Class Y shares of the Portfolio, Class Y shares of the Fund's other portfolios or shares of certain other funds sponsored or advised by Bear Stearns, including the Emerging Markets Debt Portfolio of Bear Stearns Investment Trust, and the Money Market Portfolio of The RBB Fund, Inc., to the extent such shares are offered for sale in the investor's state of residence. These funds have dif- ferent investment objectives which may be of interest to investors. To use this privilege, investors should consult their account executive at Bear Stearns, their account executive at an Authorized Dealer or the Transfer Agent to determine if it is available and whether any conditions are imposed on its use. To use this privilege, exchange instructions must be given to the Transfer Agent in writing or by telephone. A shareholder wishing to make an exchange may do so by sending a written request to the Transfer Agent at the address given above in "How to Buy Shares--General." Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the account application that they do not wish to use this privilege. Shareholders holding share certificates are not eligible to ex- change shares of the Portfolio by phone because share certificates must accom- pany all exchange requests. To add this feature to an existing account that previously did not provide for this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once this election has been made, the shareholder may contact the Transfer Agent by telephone at 1-800-447-1139 to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange re- quests to the Transfer Agent in writing. If the exchanging shareholder does not currently own Class Y shares of the portfolio or fund whose shares are being acquired, a new account will be es- tablished with the same registration, dividend and capital gain options and Authorized Dealer of record as the account from which shares are exchanged, unless otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as described below. The Ex- change Privilege may be modified or terminated at any time, or from time to time, by the Fund on 60 days notice to the affected portfolio or fund share- holders. The Fund, BSFM and Bear Stearns will not be liable for any loss, lia- bility, cost or expense for acting upon telephone instructions that are rea- sonably believed to be genuine. In attempting to confirm that telephone in- structions are genuine, the Fund will use such procedures as are considered reasonable, including recording those instructions and requesting information as to account registration (such as the name in which an account is regis- tered, the account number, recent transactions in the account, and the account holder's Social Security number, address and/or bank). Before any exchange, the investor must obtain and should review a copy of the current prospectus of the portfolio or fund into which the exchange is being made. Prospectuses may be obtained free of charge from Bear Stearns, any Au- thorized Dealer or the Transfer Agent. When establishing a new account by ex- change, the Class Y shares being exchanged must have a value of at least the minimum initial investment required for the portfolio or fund into which the exchange is being made; if making an exchange to an existing account, the dol- lar value must equal or exceed the applicable minimum for subsequent invest- ments. If any amount remains in the investment portfolio from which the ex- change is being made, such amount must not be below the minimum account value required by the Portfolio or Fund. Class Y Shares will be exchanged at the next determined net asset value. No fees currently are charged shareholders directly in connection with exchanges, although the Fund reserves the right, 13 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 recognize a taxable gain or loss. REDIRECTED DISTRIBUTION OPTION The Redirected Distribution Option enables a shareholder to invest automatically dividends and/or capital gain distributions, if any, paid by the Portfolio in Class Y shares of another portfolio of the Fund or a fund advised or sponsored by Bear Stearns of which the shareholder is an investor, or the Money Market Portfolio of The RBB Fund, Inc. Shares of the other portfolio or fund will be purchased at the then-current net asset value. This privilege is available only for existing accounts and may not be used to open new accounts. Minimum subsequent investments do not apply. The Fund may modify or terminate this privilege at any time or charge a service fee. No such fee currently is contemplated. How to Redeem Shares GENERAL Investors may request redemption of Portfolio shares at any time. Redemption requests may be made as described below. When a request is received in proper form, the Portfolio will redeem the shares at the next determined net asset value. If the investor holds Portfolio shares of more than one class, any 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. REDEMPTION PROCEDURES 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 14 -------------------------------------------------------------------------- The Bear Stearns Funds -------------------------------------------------------------------------- Account Information Form (1) Account Type (Please print, indicate only one registration type) [_] Individual [_] Joint Tenant --------------------------------------------------------------------------- NAME --------------------------------------------------------------------------- JOINT REGISTRANT, IF ANY (SEE NOTES 1 AND 2) - - - ------ --- ------ ----- ---------------- SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER OF PRIMARY OWNER (1) Use only the Social Security number or Taxpayer Identification Number of the first listed joint tenant. (2) For joint registrations, the account registrants will be joint tenants with right of survivorship and not tenants in common unless tenants in common or community property registrations are requested. --------------------------------------------------------------------------- [_] Uniform Gift to Minors, or [_] Uniform Transfer to Minors (where allowed by law) --------------------------------------------------------------------------- NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED) --------------------------------------------------------------------------- NAME OF MINOR (ONLY ONE PERMITTED) Under the __________________________ Uniform Gift/Transfers to Minors Act. STATE RESIDENCE OF MINOR / / - - ------ ----- ------ ------ --- ------ MINOR'S DATE OF BIRTH MINOR'S SOCIAL SECURITY NUMBER (REQUIRED TO OPEN AN ACCOUNT) --------------------------------------------------------------------------- [_] Corporation [_] Partnership [_] Trust* [_] Other --------------------------------------------------------------------------- NAME OF CORPORATION, PARTNERSHIP, OR OTHER --------------------------------------------------------------------------- NAME(S) OF TRUSTEES DATE OF THE TRUST AGREEMENT - - - ------ ----- ------ ----- ---------------- SOCIAL SECURITY NUMBER TAXPAYER IDENTIFICATION NUMBER (REQUIRED TO OPEN ACCOUNT) *If a Trust, include date of trust instrument and list of trustees if they are to be named in the registration. (2) Mailing Address -------------------------------------------------------------------------- STREET OR P.O. BOX APARTMENT NUMBER -------------------------------------------------------------------------- CITY STATE ZIP CODE ( ) ( ) -------------------------------------- ---------------------------------- DAY TELEPHONE EVENING TELEPHONE (3) Investment Information Method of Investment [_] I have enclosed a check for a minimum initial investment of $2,500,000 per Fund. [_] I will wire the minimum initial investment of $2,500,000 per Fund. [_] I have enclosed a check for an additional investment of $___________ per Fund [_] I will wire an additional investment of $__________ per Fund [_] I purchased ___________ shares of _______________ through my broker on ____/____/____. Confirm #_________. NOT PART OF THE PROSPECTUS (3) Investment Information continued Writing Instructions A. Telephone the Fund's transfer agent, PFPC Inc., toll-free 1-800-447- 1139, and provide it with your name, address, telephone number, Social Security or Taxpayer Identification Number, the Fund or Funds selected, the amount being wired, and by which bank. PFPC Inc. will then provide a Fund account number. (Investors with existing accounts should also notify the Fund's transfer agent prior to writing funds.) B. Instruct your bank or broker to wire the specified amount, together with your assigned account number, to the Transfer Agent: PFPC Inc. ABA-0310-0005-3 Credit account number: 86-1030-3398 From: (name of investor) Account number: (investor's account number with the Fund) For purchase of (name of the Fund) Amount: (amount to be invested) Please make my investment in the Funds designated below: --------------------------------------------------------------------------- CLASS Y BEAR STEARNS FUNDS INVESTMENT AMOUNT --------------------------------------------------------------------------- S & P STARS Portfolio $ --------------- -------------------- Large Cap Value Portfolio $ --------------- -------------------- Small Cap Value Portfolio $ --------------- -------------------- Total Return Bond Portfolio $ --------------- -------------------- The Insiders Select Fund $ --------------- -------------------- Money Market Portfolio $ --------------- -------------------- Emerging Markets Debt Portfolio $ --------------- -------------------- TOTAL INVESTMENT AMOUNT $ ==================== NOTE: All shares purchased will be held in a shareholder account for the investor at the Transfer Agent. Checks drawn on foreign banks and checks made payable to persons or entities other than the Fund will not be accepted. Checks should be made payable to the Fund which you are investing in. (4) Distribution Options Dividends and capital gains may be reinvested or paid by check. If no options are selected below, both dividends and capital gains will be reinvested in additional Fund Shares. Dividends [_] Pay by check. [_] Reinvest. Capital Gains [_] Pay by check. [_] Reinvest. The Redirected Distribution Option allows an investor to have dividends and any other distributions from a Fund automatically used to purchase shares of the same class of any other Fund. The receiving account must be in the same name as your existing account. [_] Please reinvest dividends and capital gains from the ------------------ (NAME OF FUND) to the . ---------------------- (NAME OF FUND) If you elect to have distributions paid by check, distributions will be sent to the address of record. Distributions may also be sent to another payee: --------------------------------------------------------------------------- NAME --------------------------------------------------------------------------- STREET OR P.O. BOX APARTMENT NUMBER --------------------------------------------------------------------------- CITY STATE ZIP CODE --------------------------------------------------------------------------- Optional Features (5) Telephone Exchange Privilege Unless indicated below, I authorize the Transfer Agent to accept instructions from any persons to exchange shares in my account(s) by telephone, in accordance with the procedures and conditions set forth in the Fund's current prospectus. [_] I DO NOT want the Telephone Exchange Privilege. (6) Telephone Redemption Privilege [_] I authorize the Transfer Agent to accept instructions from any person to redeem shares in my account(s) by telephone, in accordance with the procedures and conditions set forth in the Fund's current prospectus. Checks for redemption of proceeds will be sent by check via U.S. Mail to the address of record, unless the information in Section 7 is completed for redemption by wire of $500 or more. N O T P A R T O F T H E P R O S P E C T U S (7) Bank of Record (for Telephone Redemptions) Please attach a voided check (for electronic credit to your checking account) in the space provided in Section 11. --------------------------------------------------------------------------- BANK NAME --------------------------------------------------------------------------- STREET OR P.O. BOX APARTMENT NUMBER --------------------------------------------------------------------------- CITY STATE ZIP CODE --------------------------------------------------------------------------- BANK ABA NUMBER BANK ACCOUNT NUMBER --------------------------------------------------------------------------- ACCOUNT NAME (8) Signature and Taxpayer Certification The undersigned warrants that I(we) have full authority and, if a natural person, I(we) am(are) of legal age to purchase shares pursuant to this Account Information Form, and have received a current prospectus for the Bear Stearns Fund(s) in which I(we) am(are)investing. The undersigned acknowledges that the Telephone Exchange Privilege is automatic and that I(we) may bear the risk of loss in event of fraudulent use of the Privilege. If I(we) do not want the Telephone Exchange Privilege, I(we) so not want the Telephone Exchange Privilege, I(we) have so indicated on this Account Information Form. Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is required to have the following certification: Under penalty of perjury, I certify that: (1) The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding because (a) I am exempt from backup withholding or (b) I have not been notified by the Internal Revenue Service that I am subject to 31% backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. Certification Instructions -- You must cross out item (2) above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting of interest or dividends on your tax return. Mutual fund shares are not deposits of, or guaranteed by, any depository institution, nor are they insured by the FDIC. Investment in the funds involves investment risks, including possible loss of principal. [ ] Exempt from backup withholding [ ] Nonresident alien (form W-8 attached) ------------------------------ COUNTRY OF CITIZENSHIP --------------------------------------------------------------------------- AUTHORIZED SIGNATURE TITLE DATE --------------------------------------------------------------------------- AUTHORIZED SIGNATURE TITLE DATE (9) For Authorized Dealer Use Only (Please Print) We hereby authorize the Transfer Agent to act as our agent in connection with the transactions authorized by the Account Information Form. If this Account Information Form includes a Telephone Exchange Privilege authorization or a Telephone Redemption Privilege, we guarantee the signature(s) above. --------------------------------------------------------------------------- DEALER'S NAME DEALER NUMBER --------------------------------------------------------------------------- MAIN OFFICE ADDRESS BRANCH NUMBER --------------------------------------------------------------------------- REPRESENTATIVE'S NAME REP. NUMBER ( ) ------------------------------------------------- ------------------------ BRANCH ADDRESS TELEPHONE NUMBER --------------------------------------------------------------------------- AUTHORIZED SIGNATURE OF DEALER TITLE DATE (10) Additional Account Statements (Please Print) In addition to myself and my representative, please send copies of my account statements to: ----------------------------------- ------------------------------------- NAME NAME ----------------------------------- ------------------------------------- ADDRESS ADDRESS ----------------------------------- ------------------------------------- CITY, STATE, ZIP CODE CITY, STATE, ZIP CODE NOT PART OF THE PROSPECTUS (11) If you are applying for the Telephone Redemption Privilege, please tape your voided check on top of our sample below. - -------------------------------------------------------------------------------- John Smith 000 123 First Avenue Anytown, USA 12345 $[_____] ------------------------------------------------------------ -------------------------------------------------------------------- -------------------------- -------------------------------------- - -------------------------------------------------------------------------------- Service Assistance Our knowledgeable Client Services Representatives are available to assist you between 8:00 a.m. and 6:00 p.m. Eastern Time at: 1-800-447-1139 Mailing or Fax Instructions Mail your completed Account Information Form and check to: The Bear Stearns Funds c/o PFPC Inc. P.O. Box 8960 Wilmington, DE 19899-8960 Fax: 302-791-1777 If applications will be faxed, please call and notify Client Services at 1-800-447-1139 before placing an order. NOT PART OF THE PROSPECTUS 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. If share certificates have been issued, written redemption instructions, indi- cating the portfolio from which shares are to be redeemed, and duly endorsed share certificates, must be received by the Transfer Agent in proper form and signed exactly as the shares are registered. If the proceeds of the redemption would exceed $25,000, or if the proceeds are not to be paid to the record owner at the record address, or if the shareholder is a corporation, partner- ship, trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor institution. A signature guarantee is designed to protect the share- holders and the Portfolio against fraudulent transactions by unauthorized per- sons. A signature guarantee may be obtained from a domestic bank or trust com- pany, broker, dealer, clearing agency or savings association who are partici- pants in a medallion program recognized by the securities transfer associa- tion. The three recognized medallion programs are Securities Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP). Signature Guaran- tees which are not a part of these programs will not be accepted. Please note that a notary public stamp or seal is not acceptable. The Fund reserves the right to amend or discontinue its signature guarantee policy at any time and, with regard to a particular redemption transaction, to require a signature guarantee at its discretion. Any questions with respect to signature-guaran- tees should be directed to the Transfer Agent by calling 1-800-447-1139. During times of drastic economic or market conditions, investors may experience difficulty in contacting Bear Stearns or Authorized Dealers by telephone to request a redemption of Portfolio shares. In such cases, investors should consider using the other redemption procedures described herein. Use of these other redemption procedures may result in the redemption request being processed at a later time than it would have been if telephone redemption had been used. During the delay, the Portfolio's net asset value may fluctuate. 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, 15 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. Generally, the Fund must withhold ("backup withholding") and remit to the U.S. Treasury 31% of dividends, distributions from net realized securities gains and the proceeds of any redemption, regardless of the extent to which gain or loss may be realized, paid to a shareholder if such shareholder fails to certify that the TIN furnished in connection with opening an account is correct and that such shareholder has not received notice from the IRS of being subject to backup withholding as a result of a failure to properly report taxable dividend or interest income on a Federal income tax return. Furthermore, the IRS may direct the Fund to institute backup withholding if the IRS determines that a shareholder's TIN is incorrect or if a shareholder has failed to properly report taxable dividend and interest income on a federal income tax return. A TIN is either the Social Security number or employer identification number of the record owner of the account. Any tax withheld as a result of backup withholding does not constitute an additional tax imposed on the record owner of the account, and may be claimed as a credit on the record owner's federal income tax return. While the Portfolio is not expected to have any federal tax liability, investors should expect to be subject to federal, state or local taxes in respect of their investment in Portfolio shares. Management of the Fund believes that the Portfolio has qualified for the fiscal year ended March 31, 1997 as a "regulated investment company" under the Code. The Portfolio intends to continue to so qualify if such qualification is in the best interests of its shareholders. Such qualification relieves the Portfolio of any liability for federal income tax to the extent its earnings are distributed in accordance with applicable provisions of the Code. The Portfolio may be subject to a non-deductible 4% excise tax, measured with respect to certain undistributed amounts of taxable investment income and capital gains. Each investor should consult its tax adviser regarding specific questions as to federal, state or local taxes applicable to an investment in the Portfolio. Performance Information For purposes of advertising, performance for 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 16 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 a business trust under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust (the "Trust Agreement") dated September 29, 1994. The Fund commenced operations on or about April 3, 1995 in connection with the offer of shares of certain of its other portfolios. The Fund is authorized to issue an unlimited number of shares of beneficial interest, par value $.001 per share. The Portfolio's shares are classified into 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 seven portfolios of shares. All consideration received by the Fund for shares of one of the portfolios and all assets in which such consideration is invested will belong to that portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The assets attributable to, and the expenses of, one portfolio (and as to classes within a portfolio) are treated separately from those of the other portfolios (and classes). The Fund has the ability to create, from time to time, new portfolios of shares without shareholder approval. 17 Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of such portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. However, Rule 18f-2 exempts the selection of independent accountants and the election of Trustees from the separate voting requirements of Rule 18f-2. The Transfer Agent maintains a record of share ownership and will send confirmations and statements of account. Shareholder inquiries may be made by writing to the Fund at PFPC Inc., Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960, by calling 1-800-447-1139 or by calling Bear Stearns at 1-800-766- 4111. 18 Appendix INVESTMENT TECHNIQUES In connection with its investment objective and policies, the Portfolio may employ, among others, the following investment techniques which may involve certain risks. Options transactions involve "derivative securities." OPTIONS TRANSACTIONS The Portfolio is permitted to invest up to 5% of its total assets, represented by the premium paid, in the purchase of call and put options in respect of specific securities (or groups or "baskets" of specific securities) in which the Portfolio may invest. The Portfolio may write and sell covered call option contracts on securities owned by the Portfolio not exceeding 20% of the value of its net assets at the time such option contracts are written. The Portfolio also may purchase call options to enter into closing purchase transactions. The Portfolio also may write covered put option contracts to the extent of 20% of the value of its net assets at the time such option contracts are written. A call option gives the purchaser of the option the right to buy, and obli- gates 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 liq- uid 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 in- cluded in the index. Because the value of an index option depends upon move- ments in the level of the index rather than the price of a particular stock, whether the Portfolio will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Successful use by the Portfolio of options will be subject to the Adviser's ability to predict correctly movements in the direction of individual stocks or the stock market generally, foreign currencies or interest rates. To the extent the Adviser's predictions are incorrect, the Portfolio may incur losses which could adversely affect the value of a shareholder's investment. LENDING PORTFOLIO SECURITIES From time to time, the Portfolio may lend securities from its portfolio of in- vestments to brokers, dealers and other financial institutions needing to bor- row securities to complete certain transactions. Such loans may not exceed 33 1/3% of the value of the Portfolio's total assets. In connection with such loans, the Portfolio will receive collateral consisting of cash, U.S. Govern- ment 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 in- vestment of such collateral. The Portfolio continues to be entitled to pay- ments in amounts equal to the interest, dividends and other distributions pay- able on the loaned security and receives interest on the amount of the loan. Such loans will be terminable at any time upon specified notice. The Portfolio might experience risk of loss if the institution with which it has engaged in a portfolio loan transaction breaches its agreement with the Portfolio. BORROWING MONEY As a fundamental policy, the Portfolio is permitted to borrow to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 33 1/3% of the value of such company's total assets. However, the Portfolio currently intends to borrow money only for temporary or emergency (not leveraging) purposes, in an amount up to 15% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. While borrowings exceed 5% of the Portfolio's total as- sets, the Portfolio will not make any additional investments. A-1 CERTAIN PORTFOLIO SECURITIES 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 appreciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. There can be no assurance of capital appreciation, however, because securities prices fluctuate. Convertible securities generally are subordinated to other similar but non- convertible securities of the same issuer, although convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. Because of the subordination feature, however, convertible securities typically have lower ratings than similar non-convertible securities. MONEY MARKET INSTRUMENTS The Portfolio may invest, in the circumstances described under "Description of the Fund--Management Policies," in the following types of money market instruments, each of which at the time of purchase must have or be deemed to have under rules of the Securities and Exchange Commission remaining maturities of 13 months or less. U.S. GOVERNMENT SECURITIES The Portfolio may purchase securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, which include U.S. Treasury securities that differ in their interest rates, maturities and times of issuance. Treasury Bills have initial maturities of one year or less; Treasury Notes have initial maturities of one to ten years; and Treasury Bonds generally have initial maturities of greater than ten years. Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the right of the issuer to borrow from the U.S. Treasury; others, such as those issued by the Federal National Mortgage Association, by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, such as those issued by the Student Loan Marketing Association, only by the credit of the agency or instrumentality. These securities bear fixed, floating or 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, A-2 domestic savings and loan associations and other banking institutions. With respect to such securities issued by foreign branches of domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign branches of foreign banks, the Portfolio may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. Such risks include possible future political and economic developments, the possible imposition of foreign withholding taxes on interest income payable on the securities, the possible establishment of exchange controls or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on these securities and the possible seizure or nationalization of foreign deposits. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by the Portfolio will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. The Portfolio will not invest more than 15% of the value of its net assets in time deposits maturing in more than seven days and in other securities that are illiquid. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The other short-term obligations may include uninsured, direct obligations bearing fixed, floating or variable interest rates. REPURCHASE AGREEMENTS Repurchase agreements involve the acquisition by the Portfolio of an underlying debt instrument, subject to an obligation of the seller to repurchase, and the Portfolio to resell, the instrument at a fixed price usually not more than one week after its purchase. Certain costs may be incurred by the Portfolio in connection with the sale of the securities if the seller does not repurchase them in accordance with the repurchase agreement. In addition, if bankruptcy proceedings are commenced with respect to the seller of the securities, realization on the securities by the Portfolio may be delayed or limited. COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS Commercial paper consists of short-term, unsecured promissory notes issued to finance short-term credit needs. The commercial paper purchased by the Portfolio will consist only of direct obligations which, at the time of their purchase, are (a) rated not lower than Prime-1 by Moody's Investors Service Inc. ("Moody's"), A-1 by Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P"), F-1 by Fitch Investors Service, L.P. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), (b) issued by companies having an outstanding unsecured debt issue currently rated not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated, determined by the Adviser to be of comparable quality to those rated obligations which may be purchased by the Portfolio. The Portfolio may purchase floating and variable rate demand notes and bonds, which are obligations ordinarily having stated maturities in excess of one year, but which permit the holder to demand payment of principal at any time or at specified intervals. WARRANTS The Portfolio may invest up to 5% of its net assets in warrants, except that this limitation does not apply to warrants acquired in units or attached to securities. Included in such amount, but not to exceed 2% of the value of the Portfolio's net assets, may be warrants which are not listed on the New York or American Stock Exchange. A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specified amount of the corporation's capital stock at a set price for a specified period of time. INVESTMENT COMPANY SECURITIES The Portfolio may invest in securities issued by other investment companies. Under the 1940 Act, the Portfolio's investment in such securities currently is limited to, subject to certain exceptions, (i) 3% of the total voting stock of any one investment company, (ii) 5% of the Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Investments in the securities of other investment companies will involve duplication of advisory fees and certain other expenses. A-3 ILLIQUID SECURITIES The Portfolio may invest up to 15% of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. Such securities may include securities that are not readily marketable, such as certain securities that are subject to legal or contractual restrictions on resale, repurchase agreements providing for settlement in more than seven days after notice, and options traded in the over-the-counter market and securities used to cover such options. As to these securities, the Portfolio is subject to a risk that should the Portfolio desire to sell them when a ready buyer is not available at a price the Portfolio deems representative of their value, the value of the Portfolio's net assets could be adversely affected. A-4 The Bear Stearns Funds 245 Park Avenue New York, NY 10167 1-800-766-4111 Distributor Bear, Stearns & Co. Inc. 245 Park Avenue New York, NY 10167 Investment Adviser Bear Stearns Funds Management Inc. 245 Park Avenue New York, NY 10167 Custodian Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 Transfer & Dividend Disbursement Agent PFPC Inc. Bellevue Corporate Center 400 Bellevue Parkway Wilmington, DE 19809 Counsel Kramer, Levin, Naftalis & Frankel 919 Third Avenue New York, NY 10022 Independent Auditors Deloitte & Touche LLP Two World Financial Center New York, NY 10281-1434 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE 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. - -------------------------------------------------------------------------------- THE BEAR STEARNS FUNDS THE INSIDERS SELECT FUND CLASS A, CLASS C AND CLASS Y PART B (STATEMENT OF ADDITIONAL INFORMATION) JULY 29, 1997 - -------------------------------------------------------------------------------- This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the current relevant Prospectus dated July 29, 1997 of The Insiders Select Fund (the "Portfolio") of The Bear Stearns Funds (the "Fund"), as each may be revised from time to time. To obtain a free copy of such prospectus, please write to the Fund at PFPC Inc. ("PFPC"), Attention: The Insiders Select Fund, P.O. Box 8960, Wilmington, Delaware 19899-8960, call 1-800-447-1139 or call Bear, Stearns & Co. Inc. ("Bear Stearns") at 1-800-766-4111. Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., serves as the Portfolio's investment adviser. BSFM is referred to herein as the "Adviser." Bear Stearns, an affiliate of BSFM, serves as distributor of the Portfolio's shares. TABLE OF CONTENTS Page ---- Investment Objective and Management Policies ...................... B-2 Management of the Fund ............................................ B- 9 Management Arrangements ........................................... B- 11 Purchase and Redemption of Shares ................................. B- 14 Determination of Net Asset Value .................................. B- 15 Dividends, Distributions and Taxes ................................ B- 15 Portfolio Transactions ............................................ B- 23 Performance Information ........................................... B- 24 Code of Ethics .................................................... B-24 Information About the Fund ........................................ B- 25 Custodian, Transfer and Dividend Disbursing Agent, Counsel and Independent Auditors ................................ B- 26 Financial Statements .............................................. B- 26 B-1 INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "Description of the Fund." Portfolio Securities Bank Obligations. Domestic commercial banks organized under Federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System and to have their deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state law are supervised and examined by state banking authorities but are members of the Federal Reserve System only if they elect to join. In addition, state banks whose certificates of deposit ("CDs") may be purchased by the Portfolio are insured by the FDIC (although such insurance may not be of material benefit to the Portfolio, depending on the principal amount of the CDs of each bank held by the Portfolio) and are subject to Federal examination and to a substantial body of Federal law and regulation. As a result of Federal or state laws and regulations, domestic branches of domestic banks whose CDs may be purchased by the Portfolio generally are required, among other things, to maintain specified levels of reserves, are limited in the amounts which they can loan to a single borrower and are subject to other regulation designed to promote financial soundness. However, not all of such laws and regulations apply to the foreign branches of domestic banks. Obligations of foreign branches of domestic banks, foreign subsidiaries of domestic banks and domestic and foreign branches of foreign banks, such as CDs and time deposits ("TDs"), may be general obligations of the parent banks in addition to the issuing branch, or may be limited by the terms of a specific obligation and governmental regulation. Such obligations are subject to different risks than are those of domestic banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. These foreign branches and subsidiaries are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, auditing and financial record keeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank or about a foreign bank than about a domestic bank. Obligations of United States branches of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation or by Federal or state regulation as well as governmental action in the country in which the foreign bank has its head office. A domestic branch of a foreign bank with assets in excess of $1 billion may be subject to reserve requirements imposed by the Federal Reserve System or by the state in which the branch is located if the branch is licensed in that state. In addition, Federal branches licensed by the Comptroller of the Currency and branches licensed by certain states ("State Branches") may be required to: (1) pledge to the regulator, by depositing assets with a designated bank within the state, a certain percentage of their assets as fixed from time to time by the appropriate regulatory authority; and (2) maintain assets within the state in an amount equal to a specified percentage of the aggregate amount of liabilities of the foreign bank payable at or through all of its agencies or branches within the state. The B-2 deposits of Federal and State Branches generally must be insured by the FDIC if such branches take deposits of less than $100,000. In view of the foregoing factors associated with the purchase of CDs and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of domestic banks, by foreign branches of foreign banks or by domestic branches of foreign banks, BSFM carefully evaluates such investments on a case-by-case basis. Repurchase Agreements. The Portfolio's custodian or sub-custodian will have custody of, and will hold in a segregated account, securities acquired by the Portfolio under a repurchase agreement. Repurchase agreements are considered by the staff of the Securities and Exchange Commission to be loans by the Portfolio. In an attempt to reduce the risk of incurring a loss on a repurchase agreement, the Portfolio will enter into repurchase agreements only with domestic banks with total assets in excess of one billion dollars, or primary government securities dealers reporting to the Federal Reserve Bank of New York, with respect to securities of the type in which the Portfolio may invest, and will require that additional securities be deposited with it if the value of the securities purchased should decrease below the resale price. The Adviser will monitor on an ongoing basis the value of the collateral to assure that it always equals or exceeds the repurchase price. The Portfolio will consider on an ongoing basis the credit worthiness of the institutions with which it enters into repurchase agreements. Commercial Paper and Other Short-Term Corporate Obligations. Variable rate demand notes include variable amount master demand notes, which are obligations that permit the Portfolio to invest fluctuating amounts at varying rates of interest pursuant to direct arrangements between the Portfolio, as lender, and the borrower. These notes permit daily changes in the amounts borrowed. As mutually agreed between the parties, the Portfolio may increase the amount under the notes at any time up to the full amount provided by the note agreement, or decrease the amount, and the borrower may repay up to the full amount of the note without penalty. Because these obligations are direct lending arrangements between the lender and the borrower, it is not contemplated that such instruments generally will be traded, and there generally is no established secondary market for these obligations, although they are redeemable at face value, plus accrued interest, at any time. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Portfolio's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. In connection with floating and variable rate demand obligations, the Advisers will consider, on an ongoing basis, earning power, cash flow and other liquidity ratios of the borrower, and the borrower's ability to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies, and the Portfolio may invest in them only if at the time of an investment the borrower meets the criteria set forth in the Portfolio's Prospectus for other commercial paper issuers. Illiquid Securities. When purchasing securities that have not been registered under the Securities Act of 1933, as amended, and are not readily marketable, the Portfolio will endeavor to obtain the right to registration at the expense of the issuer. Generally, there will be a lapse of time between the Portfolio's decision to sell any such security and the registration of the security permitting sale. During any such period, the price of the securities will be subject to market fluctuations. However, if a substantial market of qualified institutional buyers develops for certain unregistered securities purchased by the Portfolio pursuant to Rule 144A under the Securities Act of 1933, as amended ("Rule 144A"), the Portfolio intends to treat them as liquid securities in accordance with procedures approved by the Fund's Board of Trustees. Because it is not possible to predict with assurance how the market for restricted securities pursuant to B-3 Rule 144A will develop, the Fund's Board of Trustees has directed the Advisers to monitor carefully the Portfolio's investments in such securities with particular regard to trading activity, availability of reliable price information and other relevant information. To the extent that, for a period of time, qualified institutional buyers cease purchasing restricted securities pursuant to Rule 144A, the Portfolio's investing in such securities may have the effect of increasing the level of illiquidity in the Portfolio during such period. Management Policies The Portfolio engages in the following practices in furtherance of its objective. Options Transactions. The Portfolio may engage in options transactions, such as purchasing or writing covered call or covered put options. The principal reason for writing covered call options, which are call options with respect to which the Portfolio owns the underlying security or securities, is to realize, through the receipt of premiums, a greater return than would be realized on the Portfolio's securities alone. In return for a premium, the writer of a covered call option forfeits the right to any appreciation in the value of the underlying security above the strike price for the life of the option (or until a closing purchase transaction can be effected). Nevertheless, the call writer retains the risk of a decline in the price of the underlying security. Similarly, the principal reason for writing covered put options is to realize income in the form of premiums. The writer of a covered put option accepts the risk of a decline in the price of the underlying security. The size of the premiums that the Portfolio may receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option-writing activities. Options written by the Portfolio ordinarily will have expiration dates between one and nine months from the date written. The exercise price of the options may be below, equal to or above the market values of the underlying securities at the time the options are written. In the case of call options, these exercise prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money," respectively. The Portfolio may write: (a) in-the-money call options when the Adviser expects that the price of the underlying security will remain stable or decline moderately during the option period, (b) at-the-money call options when the Adviser expects that the price of the underlying security will remain stable or advance moderately during the option period and (c) out-of-the-money call options when the Adviser expects that the premiums received from writing the call option plus the appreciation in market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. In these circumstances, if the market price of the underlying security declines and the security is sold at this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Out-of-the-money, at-the-money and in-the-money put options (the reverse of call options as to the relation of exercise price to market price) may be utilized in the same market environments that such call options are used in equivalent transactions. So long as the Portfolio's obligation as the writer of an option continues, the Portfolio may be assigned an exercise notice by the broker-dealer through which the option was sold, requiring the Portfolio to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates when the option expires or the Portfolio effects a closing purchase transaction. The Portfolio can no longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice. B-4 While it may choose to do otherwise, the Portfolio generally will purchase or write only those options for which the Adviser believes there is an active secondary market so as to facilitate closing transactions. There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times have rendered certain clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that otherwise may interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If as a covered call option writer the Portfolio is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. Stock Index Options. The Portfolio may purchase and write put and call options on stock indexes listed on U.S. or foreign securities exchanges or traded in the over-the-counter market. A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indexes are similar to options on stock except : (a) the expiration cycles of stock index options are generally monthly, while those of stock options are currently quarterly, and (b) the delivery requirements are different. Instead of giving the right to take or make delivery of a stock at a specified price, an option on a stock index gives the holder the right to receive a cash "exercise settlement amount" equal to (i) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised. Futures Contracts and Options on Futures Contracts. The Portfolio may trade futures contracts and options on futures contracts in U.S. domestic markets, such as the Chicago Board of Trade and the International Monetary Market of the Chicago Mercantile Exchange. Initially, when purchasing or selling futures contracts the Portfolio will be required to deposit with the Fund's custodian in the broker's name an amount of cash or cash equivalents up to approximately 10% of the contract amount. This amount is subject to change by the exchange or board of trade on which the contract is traded and members of such exchange or board of trade may impose their own higher requirements. This amount is known as "initial margin" and is in the nature of a performance bond or good faith deposit on the contract which is returned to the Portfolio upon termination of the futures position, assuming all contractual obligations have been satisfied. Subsequent payments, known as "variation margin," to and from the broker will be made daily as the price of the index or securities underlying the futures contract fluctuates, making the long and B-5 short positions in the futures contract more or less valuable, a process known as "marking-to-market." At any time prior to the expiration of a futures contract, the Portfolio may elect to close the position by taking an opposite position, at the then prevailing price, which will operate to terminate the Portfolio's existing position in the contract. Although the Portfolio intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Portfolio to substantial losses. If it is not possible, or the Portfolio determines not to close a futures position in anticipation of adverse price movements, the Portfolio will be required to make daily cash payments of variation margin. In such circumstances, an increase in the value of the portion of the portfolio being hedged, if any, may offset partially or completely losses on the futures contract. However, no assurance can be given that the price of the securities being hedged will correlate with the price movements in a futures contract and thus provide an offset to losses on the futures contract. In addition, to the extent the Portfolio is engaging in a futures transaction as a hedging device, due to the risk of an imperfect correlation between securities owned by the Portfolio that are the subject of a hedging transaction and the futures contract used as a hedging device, it is possible that the hedge will not be fully effective in that, for example, losses on the portfolio securities may be in excess of gains on the futures contract or losses on the futures contract may be in excess of gains on the portfolio securities that were the subject of the hedge. In futures contracts based on indexes, the risk of imperfect correlation increases as the composition of the Portfolio's investments varies from the composition of the index. In an effort to compensate for the imperfect correlation of movements in the price of the securities being hedged and movements in the price of futures contracts, the Portfolio may buy or sell futures contracts in a greater or lesser dollar amount than the dollar amount of the securities being hedged if the historical volatility of the futures contract has been less or greater than that of the securities. Such "over hedging" or "under hedging" may adversely affect the Portfolio's net investment results if market movements are not as anticipated when the hedge is established. Upon exercise of an option, the writer of the option will deliver to the holder of the option the futures position and the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. The potential loss related to the purchase of options on futures contracts is limited to the premium paid for the option (plus transaction costs). Because the value of the option is fixed at the time of sale, there are no daily cash payments to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change would be reflected in the net asset value of each Portfolio. Lending Portfolio Securities. To a limited extent, the Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions, provided it receives cash collateral which at all times is maintained in an amount equal to at least 100% of the current market value of the securities loaned. By lending its portfolio securities, the B-6 Portfolio can increase its income through the investment of the cash collateral. For purposes of this policy, the Portfolio considers collateral consisting of U.S. Government securities or irrevocable letters of credit issued by banks whose securities meet the standards for investment by the Portfolio to be the equivalent of cash. From time to time, the Portfolio may return to the borrower or a third party which is unaffiliated with the Portfolio, and which is acting as a "placing broker," a part of the interest earned from the investment of collateral received for securities loaned. The Securities and Exchange Commission currently requires that the following conditions must be met whenever portfolio securities are loaned: (1) the Portfolio must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the Portfolio must be able to terminate the loan at any time; (4) the Portfolio must receive reasonable interest on the loan, as well as any dividends, interest or other distributions payable on the loaned securities, and any increase in market value; (5) the Portfolio may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Fund's Board of Trustees must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. These conditions may be subject to future modification. Investment Restrictions. The Portfolio has adopted investment restrictions numbered 1 through 8 as fundamental policies. These restrictions cannot be changed without approval by the holders of a majority (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")) of the Portfolio's outstanding voting shares. Investment restrictions numbered 9 through 14 are not fundamental policies and may be changed by vote of a majority of the Trustees at any time. The Portfolio may not: 1. Invest more than 25% of the value of its total assets in the securities of issuers in any single industry, provided that there shall be no limitation on the purchase of obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. 2. Invest in commodities, except that the Portfolio may purchase and sell options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 3. Purchase, hold or deal in real estate, real estate limited partnership interests, or oil, gas or other mineral leases or exploration or development programs, but the Portfolio may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. 4. Borrow money, except to the extent permitted under the 1940 Act. The 1940 Act permits an investment company to borrow in an amount up to 33 1/3% of the value of such company's total assets. For purposes of this Investment Restriction, the entry into options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes shall not constitute borrowing. 5. Make loans to others, except through the purchase of debt obligations and the entry into repurchase agreements. However, the Portfolio may lend its portfolio securities in an amount not to exceed 33 1/3% of the value of its total assets. Any loans of portfolio securities will be made according to guidelines established by the Securities and Exchange Commission and the Fund's Board of Trustees. B-7 6. Act as an underwriter of securities of other issuers, except to the extent the Portfolio may be deemed an underwriter under the Securities Act of 1933, as amended, by virtue of disposing of portfolio securities. 7. Issue any senior security (as such term is defined in Section 18(f) of the 1940 Act). 8. Purchase securities on margin, but the Portfolio may make margin deposits in connection with transactions in options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 9. Purchase securities of any company having less than three years' continuous operations (including operations of any predecessor) if such purchase would cause the value of the Portfolio's investments in all such companies to exceed 5% of the value of its total assets. 10. Invest in the securities of a company for the purpose of exercising management or control, but the Portfolio will vote the securities it owns in its portfolio as a shareholder in accordance with its views. 11. Pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings and to the extent related to the purchase of securities on a when-issued or forward commitment basis and the deposit of assets in escrow in connection with writing covered put and call options and collateral and initial or variation margin arrangements with respect to options, forward contracts, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 12. Purchase, sell or write puts, calls or combinations thereof, except as described in the Portfolio's Prospectus and Statement of Additional Information. 13. Enter into repurchase agreements providing for settlement in more than seven days after notice or purchase securities which are illiquid, if, in the aggregate, more than 15% of the value of its net assets would be so invested. 14. Purchase securities of other investment companies, except to the extent permitted under the 1940 Act. If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such restriction. The Fund may make commitments more restrictive than the restrictions listed above so as to permit the sale of the Portfolio's shares in certain states. Should the Fund determine that a commitment is no longer in the best interest of the Portfolio and its shareholders, the Fund reserves the right to revoke the commitment by terminating the sale of Fund shares in the state involved. B-8 MANAGEMENT OF THE FUND Trustees and officers of the Fund, together with information as to their principal business occupations during at least the last five years, are shown below. Each Trustee who is an "interested person" of the Fund, as defined in the 1940 Act, is indicated by an asterisk. Name and Address Position Principal Occupation (and age) with Fund During Past Five Years - ---------------- --------- ---------------------- Peter M. Bren (63) Trustee President of The Bren Co. 126 East 56th Street since 1969; President of New York, NY 10021 Koll, Bren Realty Advisors and Senior Partner for Lincoln Properties prior thereto. Alan J. Dixon* (69) Trustee Partner of Bryan Cave, a law 7535 Claymont Court firm in St. Louis since Apt. #2 January 1993; United States Belleville, IL 62223 Senator of Illinois from 1981 to 1993. John R. McKernan, Jr. (49) Trustee Chairman and Chief Executive P.O. Box 15213 Officer of McKernan Portland, ME 04112 Enterprises since January 1995; Governor of Maine prior thereto. M.B. Oglesby, Jr. (55) Trustee President and Chief 700 13th St., N.W., Executive Officer, Suite 400 Association of American Washington, D.C. 20005 Railroads since June 23, 1997; Vice Chairman of Cassidy & Associates since February 1996; Senior Vice President of RJR Nabisco, Inc. from April 1989 to February 1996; Former Deputy Chief of Staff-White House from 1988 to January 1989. Robert S. Reitzes* (53) Chairman of the Director of Mutual Funds- 245 Park Avenue Board Bear Stearns Asset New York, NY 10167 Management and Senior Managing Director of Bear Stearns since March 1994; Co-Director of Research and Senior Chemical Analyst of C.J. Lawrence/Deutsche Bank Securities Corp. from January 1991 to March 1994. Peter B. Fox (45) Executive Vice Managing Director -Emeritus, Three First National Plaza President Bear Stearns Since February Chicago, IL 60602 1997, Bear Stearns Senior Managing Director, Public Finance since September 1987. William J. Montgoris (50) Executive Vice Chief Financial Officer and 245 Park Avenue President Chief Operating Officer, New York, NY 10167 Bear Stearns. B-9 Name and Address Position Principal Occupation (and age) with Fund During Past Five Years - ---------------- --------- ---------------------- Stephen A. Bornstein (54) Vice President Managing Director, Legal 245 Park Avenue Department, Bear Stearns New York, NY 10167 since September 1990. Frank J. Maresca (39) Vice President Managing Director of Bear 245 Park Avenue and Treasurer Stearns since September New York, NY 10167 1994; Associate Director of Bear Stearns from September 1993 to September 1994; Executive Vice President of BSFM since March 1992; Vice President of Bear Stearns from March 1992 to September 1993. Donalda L. Fordyce (38) Vice President Senior Managing Director, 245 Park Avenue Bear Stearns Asset New York, NY 10167 Management since March, 1996; previously, Vice President, Asset Management Group, Goldman Sachs from 1986 to 1996. Ellen T. Arthur (44) Secretary Associate Director of Bear 245 Park Avenue Stearns since January 1996; New York, NY 10167 Senior Counsel and Corporate Vice President of PaineWebber Incorporated from April 1989 to September 1995. Vincent L. Pereira (32) Assistant Associate Director of Bear 245 Park Avenue Treasurer Stearns since September 1995 New York, NY 10167 and Vice President of BSFM since May 1993; Vice President of Bear Stearns from May 1993 to September 1995; Assistant Vice President of Mitchell Hutchins from October 1992 to May 1993. Eileen M. Coyle (31) Assistant Vice President of Bear 245 Park Avenue Secretary Stearns since September New York, NY 10167 1995; Manager of BSFM since 1995; Senior Fund Administrator and Supervisor for BSFM from January 1994 to 1995; Accounting Supervisor and Senior Accountant for Bear Stearns since 1990. The Fund pays its non-affiliated Board members an annual retainer of $5,000 and a per meeting fee of $500 and reimburses them for their expenses. The Fund does not compensate its officers. The aggregate amount of compensation paid to each Board member by the Fund and by all other funds in the Bear Stearns Funds for which such person is a Board member (the number of which is set forth in parenthesis next to each Board member's total compensation) for the fiscal year ended March 31, 1997 is as follows: B-10
(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 $11,500 Alan J. Dixon None None $6,500 $7,000 John R. McKernan, Jr. $7,000 None None $12,000 M.B. Oglesby, Jr. $7,000 None None $12,000 Robert S. Reitzes None None None None
- --------------------- * Amount does not include reimbursed expenses for attending Board meetings, which amounted to approximately $7,000 for Board members of the Fund, as a group. Board members and officers of the Fund, as a group, owned less than 1% of the Portfolio's shares outstanding on May 31, 1997. For so long as the Plan described in the section captioned "Management Arrangements--Distribution and Shareholder Servicing Plan" remains in effect, the Fund's Trustees who are not "interested persons" of the Fund, as defined in the 1940 Act, will be selected and nominated by the Trustees who are not "interested persons" of the Fund. No meetings of shareholders of the Fund will be held for the purpose of electing Trustees unless and until such time as less than a majority of the Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Under the 1940 Act, shareholders of record of not less than two-thirds of the outstanding shares of the Fund may remove a Trustee through a declaration in writing or by vote cast in person or by proxy at a meeting called for that purpose. Under the Fund's Agreement and Declaration of Trust, the Trustees are required to call a meeting of shareholders for the purpose of voting upon the question of removal of any such Trustee when requested in writing to do so by the shareholders of record of not less than 10% of the Fund's outstanding shares. MANAGEMENT ARRANGEMENTS The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "Management of the Fund." Investment Advisory Agreement. BSFM provides investment advisory services to the Portfolio pursuant to the Investment Advisory Agreement (the "Agreement") dated February 22, 1995, as revised May 4, 1995, with the Fund. The Agreement is subject to annual approval by: (i) the Fund's Board of Trustees or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Portfolio, provided that in either event the continuance also is approved by a majority of the Board of Trustees who are not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Board of Trustees, including a majority of the Trustees who are not "interested persons" of any party to the Agreement, last approved the Agreement at a meeting as to the Portfolio, held on January 28, 1997. The Agreement is terminable, as to the Portfolio, without penalty, on 60 days 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 B-11 BSFM. As to the Portfolio, the Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). BSFM is a wholly owned subsidiary of The Bear Stearns Companies Inc. The following persons are directors and/or senior officers of BSFM: Mark A. Kurland, Chief Executive Officer, President, Chairman of the Board and Director; Robert S. Reitzes, Executive Vice President and Director; Frank J. Maresca, Executive Vice President; Donalda L. Fordyce, Executive Vice President; Vincent L. Pereira, Vice President and Treasurer ; Ellen T. Arthur, Secretary; and Michael Minikes, Warren J. Spector and Robert M. Steinberg, Directors. As compensation for BSFM's advisory services, the Fund has agreed to pay BSFM a monthly fee at the annual rate of 1% of value of the Portfolio's average daily net assets which will be adjusted monthly ("Monthly Performance Adjustment") depending on the extent to which the Portfolio's investment performance exceeded or was exceeded by the percentage change in the investment record of the S&P 500 Index. The Monthly Performance Adjustment may increase or decrease the total advisory fee payable to BSFM by up to 0.50% per year of the value of the Portfolio's average daily net assets. For the period from June 16, 1995 (commencement of investment operations) through March 31, 1996, the investment advisory fees payable amounted to $116,606. For the fiscal year ended March 31, 1997, the investment advisory fees payable amounted to $182,313. These amounts were waived pursuant to a voluntary undertaking by BSFM, resulting in no fees being paid by the Portfolio. In addition, the Adviser reimbursed $243,945, in order to maintain the voluntary expense limitation. Administration Agreement. BSFM provides certain administrative services to the Fund pursuant to the Administration Agreement dated February 22, 1995, as revised April 11, 1995 and June 2, 1997, with the Fund. The Administration Agreement will continue until February 22, 1998 and thereafter will be subject to annual approval by (i) the Fund's Board or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Portfolio, provided that in either event its continuance also is approved by a majority of the Fund's Board members who are not "interested persons" (as defined in the 1940 Act) of the Fund or BSFM, by vote cast in person at a meeting called for the purpose of voting on such approval. The Administration Agreement is terminable without penalty, on 60 days notice, by the Fund's Board or by vote of the holders of a majority of the Portfolio's shares or upon not less than 90 days notice by BSFM. The Administration Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). As compensation for BSFM's administrative services, the Fund has agreed to pay BSFM a monthly fee at the annual rate of .15 of 1% of the Portfolio's average daily net assets. For the period from June 16, 1995 (commencement of operations) through March 31, 1996 and the fiscal year ended March 31, 1997, the administration fees accrued amounted to $21,806 and $35,873 and the amount paid was $18,824 and $32,547, respectively. Administrative Services Agreement. PFPC provides certain administrative services to the Fund pursuant to the Administrative Services Agreement dated February 22, 1995, with the Fund. The Administrative Services Agreement is terminable upon 60 days' notice by either the Fund or PFPC. PFPC may assign its rights or delegate its duties under the Administrative Services Agreement to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund 30 days notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee) promptly provide information requested by the Fund in connection with such delegation. B-12 As compensation for PFPC's administrative services, the Fund has agreed to pay PFPC a monthly fee at the rate set forth in the Portfolio's Prospectus. For the period from June 16, 1995 (commencement of investment operations) through March 31, 1996 and the fiscal year ended March 31, 1997, the administrative fees payable by the Portfolio amounted to $104,500 and $141,467, respectively. These amounts were reduced to $44,282 and $107,174, respectively, as a result of a waiver of fees by PFPC. Distribution and Shareholder Servicing Plan. Rule 12b-1 (the "Rule") adopted by the Securities and Exchange Commission under the 1940 Act provides, among other things, that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Fund's Trustees have adopted such a plan with respect to Class A and Class C shares (the "Plan"). The Fund's Trustees believe that there is a reasonable likelihood that the Plan will benefit the Portfolio and the holders of its Class A and Class C shares. A quarterly report of the amounts expended under the Plan, and the purposes for which such expenditures were incurred, must be made to the Trustees for their review. In addition, the Plan provides that it may not be amended to increase materially the costs which holders of a Class of shares may bear pursuant to the Plan without approval of such effected shareholders and that other material amendments of the Plan must be approved by the Board of Trustees, and by the Trustees who are neither "interested persons" (as defined in the 1940 Act) of the Fund nor have any direct or indirect financial interest in the operation of the Plan or in the related Plan agreements, by vote cast in person at a meeting called for the purpose of considering such amendments. The Plan and related agreements are subject to annual approval by such vote cast in person at a meeting called for the purpose of voting on the Plan. The Plan was so approved on January 28, 1997. The Plan is terminable at any time 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 fiscal year ended March 31, 1997, the Portfolio paid Bear Stearns $65,276 with respect to Class A shares and $94,265 with respect to Class C shares under the Plan. With respect to Class A, of the $56,284 paid under the Plan, $4,029 was paid to brokers or dealers and $4,963 was paid for advertising. With respect to Class C, the entire amount paid under the Plan was paid to brokers or dealers. Expenses. All expenses incurred in the operation of the Fund are borne by the Fund, except to the extent specifically assumed by BSFM. The expenses borne by the Fund include: organizational costs, taxes, interest, loan 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 B-13 are allocated among the portfolios on the basis determined by the Board, including, but not limited to, proportionately in relation to the net assets of each portfolio. Expense Limitation. BSFM has agreed that if, in any fiscal year, the aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest on borrowings and (with the prior written consent of the necessary state securities commissions) extraordinary expenses, exceed the expense limitation of any state having jurisdiction over the Portfolio, the Fund may deduct from the payment to be made to BSFM, such excess expense to the extent required by state law. Such deduction or payment, if any, will be estimated daily, and reconciled and effected or paid, as the case may be, on a monthly basis. PURCHASE AND REDEMPTION OF SHARES The following information supplements and should be read in conjunction with the sections in the Portfolio's Prospectus entitled "How to Buy Shares" and "How to Redeem Shares." The Distributor. Bear Stearns serves as the Portfolio's distributor on a best efforts basis pursuant to an agreement dated February 22, 1995 which is renewable annually. For the period from June 16, 1995 (commencement of operations) through March 31, 1996 and the fiscal year ended March 31, 1997, Bear Stearns retained $502,600 and $163,000, respectively, from the sales loads on Class A shares and $9,000 and $14,300, respectively, from contingent deferred sales charges ("CDSC") on Class C shares. In some states, banks or other institutions effecting transactions in Portfolio shares may be required to register as dealers pursuant to state law. Purchase Order Delays. The effective date of a purchase order may be delayed if PFPC, the Portfolio's transfer agent, is unable to process the purchase order because of an interruption of services at its processing facilities. In such event, the purchase order would become effective at the purchase price next determined after such services are restored. Sales Loads--Class A. Set forth below is an example of the method of computing the offering price of the Class A shares of the Portfolio. The example assumes a purchase of Class A shares aggregating less than $50,000 subject to the schedule of sales charges set forth in the Prospectus at a price based upon the net asset value of the Class A shares on March 31, 1997. Net Asset Value per Share $14.58 Per Share Sales Charge - 4.75% of offering price (4.99% of net asset value per share) $ 0.73 Per Share Offering Price to the Public $15.31 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 B-14 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, Reverend Dr. Martin Luther King Jr. Day, Thanksgiving and Christmas Day. DIVIDENDS, DISTRIBUTIONS AND TAXES The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "Dividends, Distributions and Taxes." B-15 The following is only a summary of certain additional tax considerations generally affecting the Portfolio and its shareholders that are not described in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Portfolio or its shareholders, and the discussions here and in the Prospectus are not intended as substitutes for careful tax planning. Qualification as a Regulated Investment Company The Portfolio has elected to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a regulated investment company, a Portfolio is not subject to federal income tax on the portion of its net investment income (i.e., taxable interest, dividends and other taxable ordinary income, net of expenses) and capital gain net income (i.e., the excess of capital gains over capital losses) that it distributes to shareholders, provided that it distributes at least 90% of its investment company taxable income (i.e., net investment income and the excess of net short-term capital gain over net long-term capital loss) for the taxable year (the "Distribution Requirement"), and satisfies certain other requirements of the Code that are described below. Distributions by the Portfolio made during the taxable year or, under specified circumstances, within twelve months after the close of the taxable year, will be considered distributions of income and gains of the taxable year and will, therefore, satisfy the Distribution Requirement. In addition to satisfying the Distribution Requirement, a regulated investment company must: (1) derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gains are directly related to the regulated investment company's principal business of investing in stock or securities) and other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies (the "Income Requirement"); and (2) derive less than 30% of its gross income (exclusive of certain gains on designated hedging transactions that are offset by realized or unrealized losses on offsetting positions) from the sale or other disposition of stock, securities or foreign currencies (or options, futures or forward contracts thereon) held for less than three months (the "Short-Short Gain Test"). However, foreign currency gains, including those derived from options, futures and forwards, will not in any event be characterized as Short-Short Gain if they are directly related to the regulated investment company's investments in stock or securities (or options or futures thereon). Because of the Short-Short Gain Test, the Portfolio may have to limit the sale of appreciated securities that it has held for less than three months. However, the Short-Short Gain Test will not prevent the Portfolio from disposing of investments at a loss, since the recognition of a loss before the expiration of the three-month holding period is disregarded for this purpose. Interest (including original issue discount) received by the Portfolio at maturity or upon the disposition of a security held for less than three months will not be treated as gross income derived from the sale or other disposition of such security within the meaning of the Short-Short Gain Test. However, income that is attributable to realized market appreciation will be treated as gross income from such sale or other disposition of securities for this purpose. In general, a gain or loss recognized by the Portfolio on the disposition of an asset will be a capital gain or a capital loss. However, a gain recognized on the disposition of a debt obligation purchased by the Portfolio at a market discount (generally, at a price less than its principal amount) will be treated as ordinary income to the extent of the portion of the market discount which accrued during the period of time the Portfolio held the debt obligation. In addition, under the rules of Code section 988, gain or loss recognized on the disposition of a debt obligation denominated in a foreign currency or an option with respect thereto (but only to the extent B-16 attributable to changes in foreign currency exchange rates), and gain or loss recognized on the disposition of a foreign currency forward contract, futures contract, option or similar financial instrument, or of foreign currency itself, except for regulated futures contracts or non-equity options subject to Code section 1256 (unless a Portfolio elects otherwise), will generally be treated as ordinary income or loss. Further, the Code also treats as ordinary income a portion of the capital gain attributable to a transaction where substantially all of the return realized is attributable to the time value of the Portfolio's net investment in the transaction and: (1) the transaction consists of the acquisition of property by the Portfolio and a contemporaneous contract to sell substantially identical property in the future; (2) the transaction is a straddle within the meaning of section 1092 of the Code; (2) the transaction is one that was marketed or sold to the Portfolio on the basis that it would have the economic characteristics of a loan but the interest-like return would be taxed as capital gain; or (4) the transaction is described as a conversion transaction in the Treasury Regulations. The amount of the gain recharacterized generally will not exceed the amount of the interest that would have accrued on the net investment for the relevant period at a yield equal to 120% of the federal long-term, mid-term, or short-term rate, depending upon the type of instrument at issue, reduced by an amount equal to: (1) prior inclusions of ordinary income items from the conversion transaction and (2) the capital interest on acquisition indebtedness under Code section 263(g). Built-in losses will be preserved where the Portfolio has a built-in loss with respect to property that becomes a part of a conversion transaction. No authority exists that indicates that the converted character of the income will not be passed to the Portfolio's shareholders. In general, for purposes of determining whether capital gain or loss recognized by the Portfolio on the disposition of an asset is long-term or short-term, the holding period of the asset may be affected if (depending on the type of the Portfolio) (1) the asset is used to close a "short sale" (which includes for certain purposes the acquisition of a put option) or is substantially identical to another asset so used, (2) the asset is otherwise held by the Portfolio as part of a "straddle" (which term generally excludes a situation where the asset is stock and the Portfolio grants a qualified covered call option (which, among other things, must not be deep-in-the-money) with respect thereto, or (3) the asset is stock and the Portfolio grants an in-the-money qualified covered call option with respect thereto. However, for purposes of the Short-Short Gain Test, the holding period of the asset disposed of may be reduced only in the case of clause (1) above. In addition, the Portfolio may be required to defer the recognition of a loss on the disposition of an asset held as part of a straddle to the extent of any unrecognized gain on the offsetting position. Any gain recognized by the Portfolio on the lapse of, or any gain or loss recognized by the Portfolio from a closing transaction with respect to, an option written by the Portfolio will be treated as a short-term capital gain or loss. For purposes of the Short-Short Gain Test, the holding period of an option written by the Portfolio will commence on the date it is written and end on the date it lapses or the date of a closing transaction is entered into. Accordingly, the Portfolio may be limited in its ability to write options which expire within three months and to enter into closing transactions at a gain within three months of the writing of options. Certain transactions that may be engaged in by the Portfolio (such as regulated futures contracts, certain foreign currency contracts, and options on stock indexes and futures contracts) will be subject to special tax treatment as "Section 1256 contracts." Section 1256 contracts are treated as if they are sold for their fair market value on the last business day of the taxable year, even though a taxpayer's obligations (or rights) under such contracts have not terminated (by delivery, exercise, entering into a closing transaction or otherwise) as of such date. Any gain or loss recognized as a B-17 consequence of the year-end deemed disposition of Section 1256 contracts is taken into account for the taxable year together with any other gain or loss that was previously recognized upon the termination of Section 1256 contracts during that taxable year. Any capital gains or losses for the taxable year with respect to Section 1256 contracts (including any capital gain or loss arising as a consequence of the year-end deemed sale of such contracts) is generally treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. The Portfolio, however, may elect not to have this special tax treatment apply to Section 1256 contracts that are part of a "mixed straddle" with other investments of the Portfolio that are not Section 1256 contracts. Under Treasury Regulations, gains arising from Section 1256 contracts will be treated for purposes of the Short-Short Gain Test as being derived from securities held for not less than three months if the gains arise as a result of a constructive sale under Code Section 1256. The Portfolio may purchase securities of certain foreign investment funds or trusts which constitute passive foreign investment companies ("PFICs") for federal income tax purposes. If the Portfolio invests in a PFIC, it may elect to treat the PFIC as a qualified electing fund (a "QEF"), in which event the Portfolio will each year have ordinary income equal to its pro rata share of the PFIC's ordinary earnings for the year and long-term capital gain equal to its pro rata share of the PFIC's net capital gain for year, regardless of whether the Portfolio receives distributions of any such ordinary earnings or capital gains from the PFIC. If the Portfolio does not elect to treat the PFIC as a QEF, then, in general, (1) any gain recognized by the Portfolio upon sale or other disposition of its interest in the PFIC or any excess distribution received by the Portfolio from the PFIC will be allocated ratably over the Portfolio's holding period of its interest in the PFIC, (2) the portion of such gain or excess distribution so allocated to the year in which the gain is recognized or the excess distribution is received shall be included in the Portfolio's gross income for such year as ordinary income (and the distribution of such portion by the Portfolio to shareholders will be taxable as an ordinary income dividend, but such portion will not be subject to tax at the Portfolio level), (3) the Portfolio shall be liable for tax on the portions of such gain or excess distribution so allocated to prior years in an amount equal to, for each such prior year, (i) the amount of gain or excess distribution allocated to such prior year multiplied by the highest tax rate (individual or corporate) in effect for such prior year plus (ii) interest on the amount determined under clause (i) for the period from the due date for filing a return for such prior year until the date for filing a return for the year in which the gain is recognized or the excess distribution is received at the rates and methods applicable to underpayments of tax for such period, and (4) the distribution by the Portfolio to shareholders of the portions of such gain or excess distribution so allocated to prior years (net of the tax payable by the Portfolio thereon) will again be taxable to the shareholders as an ordinary income dividend. Under proposed Treasury Regulations, the Portfolio can elect to recognize as gain the excess, as of the last day of its taxable year, of the fair market value of each share of PFIC stock over the Portfolio's adjusted tax basis in that share ("mark to market gain"). Such mark to market gain will be included by the Portfolio as ordinary income and will not be subject to the Short-Short Gain Test, and the Portfolio's holding period with respect to such PFIC stock will commence on the first day of the next taxable year. If the Portfolio makes such election in the first taxable year it holds PFIC stock, it will not incur the tax described in the preceding paragraphs. Treasury Regulations permit a regulated investment company, in determining its investment company taxable income and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) for any taxable year, to elect (unless it has made a taxable year election for excise tax purposes as discussed below) to treat all or any part of any net capital loss, any net long-term capital loss or any net foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year. B-18 In addition to satisfying the requirements described above, the Portfolio must satisfy an asset diversification test in order to qualify as a regulated investment company. Under this test, at the close of each quarter of the Portfolio's taxable year, at least 50% of the value of the Portfolio's assets must consist of cash and cash items, U.S. Government securities, securities of other regulated investment companies, and securities of other issuers (as to each of which the Portfolio has not invested more than 5% of the value of the Portfolio's total assets in securities of such issuer and does not hold more than 10% of the outstanding voting securities of such issuer), and no more than 25% of the value of its total assets may be invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated investment companies), or in two or more issuers which the Portfolio controls and which are engaged in the same or similar trades or businesses. Generally, an option (call or put) with respect to a security is treated as issued by the issuer of the security, not the issuer of the option. If for any taxable year the Portfolio does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) will be subject to a tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to the shareholders as ordinary dividends to the extent of the Portfolio's current and accumulated earnings and profits. Such distributions generally will be eligible for the dividends-received deduction in the case of corporate shareholders. Excise Tax on Regulated Investment Companies. A 4% non-deductible excise tax is imposed on a regulated investment company that fails to distribute in each calendar year an amount equal to 98% of capital gain net income for the one-year period ended on October 31 of such calendar year (or, at the election of a regulated investment company having a taxable year ending November 30 or December 31, for its taxable year (a "taxable year election")). The balance of such income must be distributed during the next calendar year. For the foregoing purposes, a regulated investment company is treated as having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year. For purposes of the excise tax, a regulated investment company shall: (1) reduce its capital gain net income (but not below its net capital gain) by the amount of any net ordinary loss for the calendar year and (2) exclude foreign currency gains and losses incurred after October 31 of any year (or after the end of its taxable year if it has made a taxable year election) in determining the amount of ordinary taxable income for the current calendar year (and, instead, include such gains and losses in determining ordinary taxable income for the succeeding calendar year). The Portfolio intends to make sufficient distributions or deemed distributions of its ordinary taxable income and capital gain net income prior to the end of each calendar year to avoid liability for the excise tax. However, investors should note that the Portfolio may in certain circumstances be required to liquidate portfolio investments to make sufficient distribution to avoid excise tax liability. Portfolio Distributions The Portfolio anticipates distributing substantially all of its investment company taxable income for each taxable year. Such distributions will be taxable to shareholders as ordinary income and treated as dividends for federal income tax purposes, but will qualify for the 70% dividends-received deduction for corporate shareholders only to the extent discussed below. Dividends paid on Class A, Class C, and Class Y shares are calculated at the same time and in the same manner. In general, dividends on Class C B-19 shares are expected to be lower than those on Class A shares due to the higher distribution expenses borne by the Class C shares. Dividends may also differ between classes as a result of differences in other class specific expenses. The Portfolio may either retain or distribute to shareholders its net capital gain for each taxable year. The Portfolio currently intends to distribute any such amounts. Net capital gain that is distributed and designated as a capital gain dividend will be taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has held his shares or whether such gain was recognized by the Portfolio prior to the date on which the shareholder acquired his shares. The Code provides, however, that under certain conditions only 50% of the capital gain recognized upon the Portfolio's disposition of domestic "small business" stock will be subject to tax. Conversely, if the Portfolio elects to retain its net capital gain, the Portfolio will be taxed thereon (except to the extent of any available capital loss carryovers) at the 35% corporate tax rate. If the Portfolio elects to retain its net capital gain, it is expected that the Portfolio also will elect to have shareholders of record on the last day of its taxable year treated as if each received a distribution of his pro rata share of such gain, with the result that each shareholder will be required to report his pro rata share of such gain on his tax return as long-term capital gain, will receive a refundable tax credit for his pro rata share of tax paid by the Portfolio on the gain, and will increase the tax basis for his shares by an amount equal to the deemed distribution less the tax credit. Ordinary income dividends paid by the Portfolio with respect to a taxable year will qualify for the 70% dividends-received deduction generally available to corporations (other than corporations, such as S corporations, which are not eligible for the deduction because of their special characteristics and other than for purposes of special taxes such as the accumulated earnings tax and the personal holding company tax) to the extent of the amount of qualifying dividends received by the Portfolio from domestic corporations for the taxable year. A dividend received by the Portfolio will not be treated as a qualifying dividend (1) if it has been received with respect to any share of stock that the Portfolio has held for less than 46 days (91 days in the case of certain preferred stock), excluding for this purpose under the rules of Code section 246(c)(3)and (4) (i) any day more than 45 days (or 90 days in the case of certain preferred stock) after the date on which the stock becomes ex-dividend and (ii) any period during which the Portfolio has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such (or substantially identical) stock; (2) to the extent that the Portfolio is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property; or (3) to the extent that the stock on which the dividend is paid is treated as debt-financed under the rules of Code section 246A. Moreover, the dividends-received deduction for a corporate shareholder may be disallowed or reduced (1) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the Portfolio or (2) by application of Code section 246(b) which in general limits the dividends-received deduction to 70% of the shareholder's taxable income (determined without regard to the dividends-received deduction and certain other items). Alternative minimum tax ("AMT") is imposed in addition to, but only to the extent it exceeds, the regular tax and is computed at a maximum marginal rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over an exemption amount. For purposes of the corporate AMT, the corporate dividends-received deduction is not itself an item of tax preference that must be added back to taxable income or is otherwise disallowed in determining a B-20 corporation's AMTI. However, a corporate shareholder will generally be required to take the full amount of any dividend received from the Portfolio into account (without a dividends-received deduction) in determining its adjusted current earnings, which are used in computing an additional corporate preference item (i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings over its AMTI (determined without regard to this item and the AMT net operating loss deduction)) includable in AMTI. Investment income that may be received by the Portfolio from sources within foreign countries may be subject to foreign taxes withheld at the source. The United States has entered into tax treaties with many foreign countries which entitle the Portfolio to a reduced rate of, or exemption from, taxes on such income. It is impossible to determine the effective rate of foreign tax in advance since the amount of the Portfolio's assets to be invested in various countries is not known. Distributions by the Portfolio that do not constitute ordinary income dividends or capital gain dividends will be treated as a return of capital to the extent of (and in reduction of) the shareholder's tax basis in his shares; any excess will be treated as gain from the sale of his shares, as discussed below. Distributions by the Portfolio will be treated in the manner described above regardless of whether such distributions are paid in cash or reinvested in additional shares of another portfolio (or another fund). Shareholders receiving a distribution in the form of additional shares will be treated as receiving a distribution in an amount equal to the fair market value of the shares received, determined as of the reinvestment date. In addition, if the net asset value at the time a shareholder purchases shares of the Portfolio reflects undistributed net investment income or recognized capital gain net income, or unrealized appreciation in the value of the assets of the Portfolio, distributions of such amounts will be taxable to the shareholder in the manner described above, although they economically constitute a return of capital to the shareholder. Ordinarily, shareholders are required to take distributions by the Portfolio into account in the year in which the distributions are made. However, dividends declared in October, November or December of any year and payable to shareholders of record on a specified date in such month will be deemed to have been received by the shareholders (and made by the Portfolio) on December 31 of such calendar year if such dividends are actually paid in January of the following year. Shareholders will be advised annually as to the U.S. federal income tax consequences of distributions made (or deemed made) during the year. The Portfolio will be required in certain cases to withhold and remit to the U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and the proceeds of redemption of shares, paid to any shareholder (1) who has provided either an incorrect tax identification number or no number at all, (2) who is subject to backup withholding for failure to report the receipt of interest or dividend income properly, or (3) who has failed to certify to the Portfolio that it is not subject to backup withholding or that it is an exempt recipient (such as a corporation). Sale or Redemption of Shares A shareholder will recognize a gain or loss on the sale or redemption of shares of the Portfolio in an amount equal to the difference between the proceeds of the sale or redemption and the shareholder's adjusted tax basis in the shares. All or a portion of any loss so recognized may be disallowed if the shareholder purchases other shares of the Portfolio within 30 days before or after the sale or redemption. In general, any gain or loss arising from (or treated as arising from) the sale or redemption of shares of the Portfolio will be considered capital gain or B-21 loss and will be long-term capital gain or loss if the shares were held for longer than one year. However, any capital loss arising from the sale or redemption of shares held for six months or less will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received on such shares. For this purpose, the special holding period rules of Code section 246(c)(3) and (4) (discussed above in connection with the dividends-received deduction for corporations) generally will apply in determining the holding period of shares. Long-term capital gains of noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than the maximum rate applicable to ordinary income. Capital losses in any year are deductible only to the extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income. If a shareholder (1) incurs a sales load in acquiring shares of the Portfolio,(2) disposes of such shares less than 91 days after they are acquired, and (3) subsequently acquires shares of the Portfolio or another fund at a reduced sales load pursuant to a right to reinvest at such reduced sales load acquired in connection with the acquisition of the shares disposed of, then the sales load on the shares disposed of (to the extent of the reduction in the sales load on the shares subsequently acquired) shall not be taken into account in determining gain or loss on the shares disposed of but shall be treated as incurred on the acquisition of the shares subsequently acquired. Foreign Shareholders Taxation of a shareholder who, as to the U.S., is a non-resident alien individual, foreign trust or estate, foreign corporation, or foreign partnership ("Foreign Shareholder") depends on whether the income from a Portfolio is "effectively connected" with a U.S. trade or business carried on by such shareholder. If the income from the Portfolio is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, ordinary income dividends paid to a foreign shareholder will be subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty rate) upon the gross amount of the dividend. Such Foreign Shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale of shares of a Portfolio, capital gain dividends, and amounts retained by the Portfolio that are designated as undistributed capital gains. If the income from the Portfolio is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends, and any gains realized upon the sale of shares of the Portfolio will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations. In the case of foreign noncorporate shareholders, the Portfolio may be required to withhold U.S. federal income tax at the rate of 31% on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless such shareholders furnish the Portfolio with proper notification of their foreign status. The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Foreign shareholders are urged to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Portfolio, including the applicability of foreign taxes. Effect of Future Legislation; State and Local Tax Considerations The foregoing general discussion of U.S. federal income tax consequences is based on the Code and the Treasury Regulations issued thereunder as in effect on the date of this Statement of Additional Information. Future legislative or administrative changes or court decisions may significantly B-22 change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein. Rules of state and local taxation of ordinary income dividends and capital gain dividends from regulated investment companies often differ from the rules for U.S. federal income taxation described above. Shareholders are urged to consult their tax advisers as to the consequences of these and other state and local tax rules affecting investment in the Portfolios. PORTFOLIO TRANSACTIONS The Adviser assumes general supervision over placing orders on behalf of the Portfolio for the purchase or sale of investment securities. Allocation of brokerage transactions, including their frequency, is made in the Adviser's best judgment and in a manner deemed fair and reasonable to shareholders. The primary consideration is prompt execution of orders at the most favorable net price. Subject to this consideration, the brokers selected will include those that supplement the Adviser's research facilities with statistical data, investment information, economic facts and opinions. Information so received is in addition to and not in lieu of services required to be performed by the Adviser and the Adviser's fees are not reduced as a consequence of the receipt of such supplemental information. Such information may be useful to the Adviser in serving both the Portfolio and the other funds which it advises and, conversely, supplemental information obtained by the placement of business of other clients may be useful to the Adviser in carrying out its obligations to the Portfolio. Sales of Portfolio shares by a broker may be taken into consideration, and brokers also will be selected because of their ability to handle special executions such as are involved in large block trades or broad distributions, provided the primary consideration is met. Large block trades may, in certain cases, result from two or more funds advised or administered by the Adviser being engaged simultaneously in the purchase or sale of the same security. Certain of the Adviser's transactions in securities of foreign issuers may not benefit from the negotiated commission rates available to the Portfolio for transactions in securities of domestic issuers. When transactions are executed in the over-the-counter market, the Portfolio will deal with the primary market makers unless a more favorable price or execution otherwise is obtainable. Portfolio turnover may vary from year to year as well as within a year. The turnover rate for the Portfolio for the period June 16, 1995 (commencement of investment operations) through March 31, 1996 and the fiscal year ended March 31, 1997 was 93.45% and 128.42%, respectively. In periods in which extraordinary market conditions prevail, the Adviser will not be deterred from changing investment strategy as rapidly as needed, in which case higher turnover rates can be anticipated which would result in greater brokerage expenses. The overall reasonableness of brokerage commissions paid is evaluated by the Adviser based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. 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 B-23 Portfolio on the floor of any national securities exchange, provided (i) the Board of Trustees has expressly authorized Bear Stearns to effect such transactions, and (ii) Bear Stearns annually advises the Board of Trustees of the aggregate compensation it earned on such transactions. Over-the-counter purchases and sales are transacted directly with principal market makers except in those cases in which better prices and executions may be obtained elsewhere. For the period June 16, 1995 (commencement of operations) through March 31, 1996, the Portfolio paid total brokerage commissions of $38,019, of which $26,339 was paid to Bear Stearns. The Portfolio paid 69.28% of its commissions to Bear Stearns, and, with respect to all the securities transactions for the Portfolio, 39.40% of the transactions involved commissions being paid to Bear Stearns. For the fiscal year ended March 31, 1997, the Portfolio paid total brokerage commissions of $39,790, of which $8,925 was paid to Bear Stearns. The Portfolio paid 22.43% of its commissions to Bear Stearns, and, with respect to all the securities transactions for the Portfolio, 22.18% of the transactions involved commissions being paid to Bear Stearns. PERFORMANCE INFORMATION The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "Performance Information." Average annual total return is calculated by determining the ending redeemable value of an investment purchased at net asset value (maximum offering price in the case of Class A) per share with a hypothetical $1,000 payment made at the beginning of the period (assuming the reinvestment of dividends and distributions), dividing by the amount of the initial investment, taking the "n"th root of the quotient (where "n" is the number of years in the period) and subtracting 1 from the result. A Class' average annual total return figures calculated in accordance with such formula assume that in the case of Class A the maximum sales load has been deducted from the hypothetical initial investment at the time of purchase or in the case of Class C the maximum applicable CDSC has been paid upon redemption at the end of the period. The average annual total return for Class A (at maximum offering price) for the period June 16, 1995 (commencement of investment operations) through March 31, 1997 was 16.52%. Based on net asset value per share, the average annual total return for Class A was 19.72% for this period. The average annual total return for Class C was 19.13% for this period. The average annual total return for Class Y for the period June 20, 1995 (commencement of initial public offering) through March 31, 1997 was 19.69%. Total return is calculated by subtracting the amount of the Portfolio's net asset value (maximum offering price in the case of Class A) per share at the beginning of a stated period from the net asset value per share at the end of the period (after giving effect to the reinvestment of dividends and distributions during the period and any applicable CDSC), and dividing the result by the net asset value (maximum offering price in the case of Class A) per share at the beginning of the period. Total return also may be calculated based on the net asset value per share at the beginning of the period instead of the maximum offering price per share at the beginning of the period for Class A shares or without giving effect to any applicable CDSC at the end of the period for Class 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. B-24 The total return for Class A (at maximum offering price) for the period June 16, 1995 (commencement of investment operations) through March 31, 1997 was 31.57%. Based on net asset value per share, the total return for Class A was 38.13% for this period. The total return for Class C was 36.91% for this period. The total return for Class Y for the period June 20, 1995 (commencement of initial public offering) through March 31, 1997 was 37.79%. The total return for Class A (at maximum offering price) for the fiscal year ended March 31, 1997 was 12.69%. Based on net asset value per share, the total return for Class A was 18.31% for this period. The total return for Class C was 17.69% for this period. The total return for Class Y for this period was 18.81%. CODE OF ETHICS The Fund, on behalf of the Portfolio, has adopted an amended and restated Code of Ethics (the "Code of Ethics"), which established standards by which certain access persons of the Fund must abide relating to personal securities trading conduct. Under the Code of Ethics, access persons which include, among others, trustees and officers of the Trust and employees of the Fund and BSFM, are prohibited from engaging in certain conduct, including: (1) the purchase or sale of any security being purchased or sold, or being considered for purchase or sale, by the Portfolio, without prior approval by the Fund or without the applicability of certain exemptions; (2) the recommendation of a securities transaction without disclosing his or her interest in the security or issuer of the security; (3) the commission of fraud in connection with the purchase or sale of a security held by or to be acquired by the Portfolio; (4) the purchase of any securities in an initial public offering or private placement transaction eligible for purchase or sale by the Portfolio without prior approval by the Fund; and (5) the acceptance of gifts of more than a de minimus value from those doing business with or on behalf of the Portfolio. Certain transactions are exempt from item (1) of the previous sentence, including: (1) purchases or sales on the account of an access person that are not under the control of or that are non-volitional with respect to that person; (2) purchases or sales of securities not eligible for purchase or sale by the Portfolio; (3) purchases or sales relating to rights issued by an issuer pro rata to all holders of a class of its securities; and (4) any securities transaction, or series of related transactions, involving 500 or fewer shares of an issuer having a market capitalization greater than $1 billion. The Code of Ethics specifies that access persons shall place the interests of the shareholders of the Portfolio first, shall avoid potential or actual conflicts of interest with the Portfolio, and shall not take unfair advantage of their relationship with the Portfolio. Under certain circumstances, the Investment Manager to the Portfolio may aggregate or bunch trades with other clients provided that no client is materially disadvantaged. Access persons are required by the Code of Ethics to file quarterly reports of personal securities investment transactions. However, an access person is not required to report a transaction over which he or she had no control. Furthermore, a trustee of the Fund who is not an "interested person" (as defined in the Investment Company Act) of the Fund is not required to report a transaction if such person did not know or, in the ordinary course of his duties as a trustee of the Fund, should have known, at the time of the transaction, that, within a 15 day period before or after such transaction, the security that such person purchased or sold was either purchased or sold, or was being considered for purchase or sale, by the Portfolio. The Code of Ethics specifies that certain designated supervisory persons and/or designated compliance officers shall supervise implementation and enforcement of the Code of Ethics and shall, at their sole discretion, grant or deny approval of transactions required by the Code of Ethics. B-25 INFORMATION ABOUT THE FUND The following information supplements and should be read in conjunction with the section in the Portfolio's Prospectus entitled "General Information." Each Portfolio share has one vote and, when issued and paid for in accordance with the terms of the offering, is fully paid and non-assessable. Portfolio shares have no preemptive, subscription or conversion rights and are freely transferable. The Fund will send annual and semi-annual financial statements to all its shareholders. As of May 31, 1997, the following shareholders owned, directly or indirectly, 5% or more of the indicated class of the Portfolio's outstanding shares. Percent of Class Y Name and Address Shares Outstanding Master Works 401k Trustee 44.73% FBO Barra 401k Plan c/o Wells Fargo Bank 420 Montgomery St., 8th Flr San Francisco, CA 94104 A shareholder who beneficially owns, directly or indirectly, more than 25% of a Portfolio's voting securities may be deemed a "control person" (as defined in the 1940 Act) of the Portfolio. CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL AND INDEPENDENT AUDITORS Custodial Trust Company ("CTC"), 101 Carnegie Center, Princeton, New Jersey 08540, an affiliate of Bear Stearns, is the Portfolio's custodian. Under the custody agreement with the Portfolio, CTC holds the Portfolio's securities and keeps all necessary accounts and records. For its services, CTC receives an annual fee of the greater of 0.015% of the value of the domestic assets held in custody or $5,000, such fee to be payable monthly based upon the total market value of such assets, as determined on the last business day of the month. In addition, CTC receives certain securities transactions charges which are payable monthly. PFPC, Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809, is the Portfolio's transfer agent, dividend disbursing agent and registrar. Neither CTC nor PFPC has any part in determining the investment policies of the Portfolio or which securities are to be purchased or sold by the Portfolio. Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022, as counsel for the Fund, has rendered its opinion as to certain legal matters regarding the due authorization and valid issuance of the shares of beneficial interest being sold pursuant to the Portfolio's Prospectus. Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281-1434, independent auditors, have been selected as auditors of the Fund. B-26 FINANCIAL STATEMENTS The Portfolio's Annual Report to Shareholders for the fiscal year ended March 31, 1997 is a separate document supplied with this Statement of Additional Information, and the financial statements, accompanying notes and report of independent auditors appearing therein are incorporated by reference into this Statement of Additional Information. B-27 THE BEAR STEARNS FUNDS PART C. OTHER INFORMATION ------------------------- Item 24. Financial Statements and Exhibits (a) Financial Statements: Part A: (i) Financial Highlights are included in Part A (ii) Annual Report to Shareholders is incorporated by reference in Part A. Part B: Annual Report to Shareholders for the fiscal year ended March 31, 1997 for The Insiders Select Fund is incorporated by reference in Part B and filed herewith as Exhibit 99.B12. (b) Exhibits: EX-99.B1(a) Agreement and Declaration of Trust is incorporated by reference to Exhibit (1)(a) of Post-Effective Amendment No. 7 to the Registration Statement on Form N- 1A filed electronically on November 9, 1995, accession number 0000950130-95- 002359. EX-99.B1(b) Amendment to Agreement and Declaration of Trust is incorporated by reference to Exhibit (1)(b) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95-002359. EX-99.B2 By-Laws are incorporated by reference to Exhibit (2) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95-002359. EX-99.B3 None. EX-99.B4 None. EX-99.B5(a) Investment Advisory Agreement between the Registrant and Bear Stearns Funds Management Inc. ("BSFM") is incorporated C-1 by reference to Exhibit (5)(a) of Post- Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95- 002359. EX-99.B5(b) Investment Advisory Agreement between the Registrant and BSFM, with respect to the Prime Money Market Portfolio, is filed herewith. EX-99.B5(c) Administration Agreement between the Registrant and BSFM is incorporated by reference to Exhibit (5)(b) of Post- Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95- 002359. EX-99.B5(d) Administrative Services Agreement, as amended, between the Registrant and PFPC Inc. is incorporated by reference to Exhibit (5)(c) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95-002359. EX-99.B6(a) Distribution Agreement between the Registrant and Bear, Stearns & Co. Inc. is incorporated by reference to Exhibit (6)(a) of Post-Effective Amendment No. 7 to the Registration Statement on Form N -1A filed electronically on November 9, 1995, accession number 0000950130-95- 002359. EX-99.B6(b) Form of Dealer Agreement is incorporated by reference to Exhibit (6)(b) of Post- Effective Amendment No. 9 to the Registration Statement on Form N-1A filed electronically on June 20, 1996, accession number 0000899681-96-000180. EX-99.B7 None. EX-99.B8 Custody Agreements between the Registrant and Custodial Trust Company are incorporated by reference to Exhibit (8) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95- 002359. EX-99.B9 None. EX-99.B10 Opinion (including consent) of Stroock & Stroock & Lavan is incorporated by reference to Exhibit (10) of Post- Effective Amendment No. 7 to the Registration Statement on Form N-1A C-2 filed electronically on November 9, 1995, accession number 0000950130-95- 002359. EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel is filed herewith. EX-99.B11(b) Consent of Independent Auditors is filed herewith. EX-99.B12 Annual Report to Shareholders for the fiscal year ended March 31, 1997 for The Insiders Select Fund is filed herewith. EX-99.B13 None. EX-99.B14 None. EX-99.B15 Distribution and Shareholder Servicing Plan is incorporated by reference to Exhibit (15) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95-002359. EX-99.B16 Schedules of Computation of Performance Data are incorporated by reference to Exhibit (16) of Post Effective Amendment No. 5 to the Registration Statement on Form N-1A filed September 1, 1995 and to Exhibit (16) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95-002359. EX-99.B17 Financial Data Schedules are filed herewith as Exhibit 27. EX-99.B18 Rule 18f-3 Plan, as revised is incorporated by reference to Exhibit (18) of Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A filed electronically on June 20, 1996, accession number 0000950130-95- 002359. Other Exhibits: EX-99.A Certificate of Corporate Secretary is incorporated by reference to Other Exhibit (a) of Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on C-3 November 9, 1995, accession number 0000950130-95-002359. EX-99.B Powers of attorney are incorporated by reference to Other Exhibit (b) of Post- Effective Amendment No. 7 to the Registration Statement on Form N-1A filed electronically on November 9, 1995, accession number 0000950130-95-002359 and to Other Exhibit (b) of Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A filed electronically on April 12, 1996, accession number 0000950130-96-001230. Item 25. Persons Controlled by or Under Common Control with Registrant Not Applicable Item 26. Number of Holders of Securities (1) (2) Number of Record Holders as of Title of Class June 23, 1997 -------------- ---------------- Shares of beneficial interest, $.001 par value per share, of the following portfolios: S&P STARS Portfolio--Class A 4467 S&P STARS Portfolio--Class C 2707 S&P STARS Portfolio--Class Y 436 Large Cap Value Portfolio--Class A 187 Large Cap Value Portfolio--Class C 195 Large Cap Value Portfolio--Class Y 110 Small Cap Value Portfolio--Class A 833 Small Cap Value Portfolio--Class C 749 Small Cap Value Portfolio--Class Y 310 Total Return Bond Portfolio--Class A 111 Total Return Bond Portfolio--Class C 43 Total Return Bond Portfolio--Class Y 35 The Insiders Select Fund--Class A 1361 The Insiders Select Fund--Class C 672 The Insiders Select Fund--Class Y 105 Focus List Fund--Class A N/A Focus List Fund--Class Y N/A Prime Money Market Portfolio--Class Y N/A Item 27. Indemnification Reference is made to Article VIII of the Registrant's Declaration of Trust (filed as Exhibit 1(a) to Registrant's Post- Effective Amendment No. 7 filed electronically on November 9, 1995, accession number 0000950130-95-002359 and incorporated herein by C-4 reference). The application of these provisions is limited by Article 10 of the Registrant's By-Laws (filed as Exhibit 2 to Registrant's Post-Effective Amendment No. 7 filed electronically on November 9, 1995, accession number 0000950130-95-002359 and incorporated herein by reference) and by the following undertaking set forth in the rules promulgated by the Securities and Exchange Commission: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a trustee, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue. Reference also is made to the Distribution Agreement previously filed as Exhibit 6(a) to Registrant's Post-Effective Amendment No. 7 filed electronically on November 9, 1995, accession number 0000950130-95-002359 and incorporated herein by reference. Item 28(a). Business and Other Connections of Investment Adviser Registrant is fulfilling the requirement of this Item 28(a) to provide a list of the officers and directors of Bear Stearns Funds Management Inc. ("BSFM"), the investment adviser of the Registrant, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by BSFM or those of its officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV filed with the SEC pursuant to the Investment Advisers Act of 1940 by BSFM (SEC File No. 801-29862). Item 29. Principal Underwriters (a) Bear, Stearns & Co. Inc. ("Bear Stearns") acts as principal underwriter or depositor for the following investment companies: o Bear Stearns Investment Trust -- Emerging Markets Debt Portfolio C-5 o Managed Income Securities Plus Fund, Inc. (b) Set forth below is a list of each executive officer and director of Bear Stearns. All Directors and Executive Officers are also Senior Managing Directors. The principal business address of each such person is 245 Park Avenue, New York, New York 10167, except as set forth below. Positions and Positions and Offices with Offices with Name Bear Stearns Registrant - ---- ------------ ---------- Directors James E. Cayne Alan C. Greenberg Chairman of the Board John L. Knight Mark E. Lehman Alan D. Schwartz Warren J. Spector John H. Slade Director Emeritus Executive Officers Alan C. Greenberg Chairman of the Board James E. Cayne Chief Executive Officer/President William J. Montgoris Chief Operating Officer Executive Vice President Mark E. Lehman Executive Vice President/ General Counsel/Chief Legal Officer Alan D. Schwartz Executive Vice President Warren J. Spector Executive Vice President Kenneth L. Edlow Secretary Michael Minikes Treasurer Michael J. Abatemarco (1) Controller/Assistant Secretary Samuel L. Molinaro, Jr Chief Financial Officer Senior Vice President - Finance Frederick B. Casey Assistant Treasurer - --------------- 1 Michael J. Abatemarco's principal business address is 1 Metrotech Center North, Brooklyn, New York 11201-3859. C-6 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. C-7 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 25th day of July, 1997. THE BEAR STEARNS FUNDS (Registrant) By: /s/ Robert S. Reitzes ----------------------- President Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. /s/ Robert S. Reitzes President (Principal July 25, 1997 - -------------------- Robert S. Reitzes Executive Officer) /s/ Frank J. Maresca Vice President and July 25, 1997 - -------------------- Frank J. Maresca Treasurer (Principal Financial and Accounting Officer) * - ------------------- Trustee Peter M. Bren * - ------------------ Trustee Alan J. Dixon * - ------------------ Trustee John R. McKernan, Jr. * - ------------------ Trustee M.B. Oglesby, Jr. /s/ Robert S. Reitzes Trustee July 25, 1997 - --------------------- Robert S. Reitzes *By: /s/ Frank J. Maresca --------------------- Frank J. Maresca, Attorney-in-Fact C-8 INDEX TO EXHIBITS EX-99.B5(b) Investment Advisory Agreement between the Registrant and BSFM, with respect to Prime Money Market Portfolio EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel EX-99.B11(b) Consent of Independent Auditors EX-99.B12 Annual Report to Shareholders for the fiscal year ended March 31, 1997 for The Insiders Select Fund EX-27 Financial Data Schedules C-9 EX-99.B5(B) 2 INVESTMENT ADVISORY AGREEMENT INVESTMENT ADVISORY AGREEMENT THE BEAR STEARNS FUNDS 245 Park Avenue New York, New York 10167 June 2, 1997 Bear Stearns Funds Management Inc. 245 Park Avenue New York, New York 10167 Dear Sirs: The above-named investment company (the "Fund"), with respect to the series named on Schedule 1 hereto, as such Schedule may be revised from time to time (each, a "Series"), herewith confirms its agreement with you as follows: The Fund desires to employ its capital by investing and reinvesting the same in investments of the type and in accordance with the limitations specified in its charter documents and in its offering documents (Part A and Part B) as from time to time in effect, copies of which have been or will be submitted to you, and in such manner and to such extent as from time to time may be approved by the Fund's Board. The Fund desires to employ you to act as its investment adviser. You may render services through your own employees or the employees of one or more affiliated companies that are qualified to act as an investment adviser to the Fund under applicable laws and are under your common control as long as all such persons are functioning as part of an organized group of persons, and such organized group of persons, with respect to the services used by the Fund, is managed at all times by your authorized officers. You will be as fully responsible to the Fund for the acts and omissions of such persons as you are for your own acts and omissions.The compensation of such person or persons shall be paid by you and no obligation may be incurred on the Fund's behalf in any such respect. Subject to the supervision and approval of the Fund's Board, you will provide investment management of each Series' portfolio in accordance with such Series' investment objectives and policies as stated in the Fund's offering documents (Part A and Part B) as from time to time in effect. In connection, therewith, you will obtain and provide investment research and will supervise each Series' investments and conduct a continuous program of investment, evaluation and, if appropriate, sale and reinvestment of such Series assets. You will furnish to the Fund such statistical information, with respect to the investments which a Series may hold or contemplate purchasing, as the Fund may reasonably request. The Fund wishes to be informed of important developments materially affecting any Series' portfolio and shall expect you, on your own initiative, to furnish to the Fund from time to time such information as you may believe appropriate for this purpose. You shall exercise your best judgment in rendering the services to be provided to the Fund hereunder, and the Fund agrees as an inducement to your undertaking the same that you shall not be liable hereunder for any error of judgment or mistake of law or for any loss suffered by one or more Series, provided that nothing herein shall be deemed to protect or purport to protect you against any liability to the Fund or a Series or to its security holders to which you would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence in the performance of your duties hereunder or by reason of your reckless disregard of your obligations or duties hereunder (hereinafter "Disabling Conduct") would otherwise be subject by reason of Disabling Conduct. In consideration of services rendered pursuant to this Agreement, the Fund will pay you on the first business day of each month a fee at the rate set forth opposite each Series' name on Schedule 1 hereto or will pay you in accordance with the methodology described on additional Schedules hereto. Net asset value shall be computed on such days and at such time or times as described in the Fund's then-current Part A and Part B. The fee for the period from the date of the commencement of sales of a Series' shares (after any sales are made to you) to the end of the month during which such sales shall have been commenced shall be pro-rated according to the proportion which such period bears to the full monthly period, and upon any termination of this Agreement before the end of any month, the fee for such part of a month shall be pro-rated according to the proportion which such period bears to the full monthly period and shall be payable upon the date of termination of this Agreement. For the purpose of determining fees payable to you, the value of each Series' net assets shall be computed in the manner specified in the Fund's charter documents for the computation of the value of each Series' net assets. You will bear all expenses in connection with the performance of your services under this Agreement. All other expenses to be incurred in the operation of the Fund will be borne by the Fund, except to the extent specifically assumed by you. The expenses to be borne by the Fund include, without limitation, the following: 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, Securities and Exchange Commission fees, state Blue Sky qualification fees, advisory, administration 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 independent pricing services, costs of maintaining the Series' existence, costs attributable to investor services (including, without limitation, telephone and personnel expenses), costs of preparing and printing prospectuses and statements of additional information for regulatory 2 purposes and for distribution to existing shareholders, costs of shareholders' reports and meetings, and any extraordinary expenses. The Fund understands that you now act, and that from time to time hereafter you may act, as investment adviser to one or more other investment companies and fiduciary or other managed accounts, and the Fund has no objection to your so acting, provided that when the purchase or sale of securities of the same issuer is suitable for the investment objectives of two or more companies or accounts managed by you which have available funds for investment, the available securities will be allocated in a manner believed by you to be equitable to each company or account. It is recognized that in some cases this procedure may adversely affect the price paid or received by one or more Series or the size of the position obtainable for or disposed of by one or more Series. In addition, it is understood that the persons employed by you to assist in the performance of your duties hereunder will not devote their full time to such service and nothing contained herein shall be deemed to limit or restrict your right or the right of any of your affiliates to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. Any person, even though also your officer, director, partner, employee or agent, who may be or become an officer, Board member, employee or agent of the Fund, shall be deemed, when rendering services to the Fund or acting on any business of the Fund, to be rendering such services to or acting solely for the Fund and not as your officer, director, partner, employee, or agent or one under your control or direction even though paid by you. The Fund will indemnify you, your officers, directors, employees and agents (each, an "indemnitee") against, and hold each indemnitee harmless from, any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) not resulting from Disabling Conduct by the indemnitee. Indemnification shall be made only following: (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the indemnitee was not liable by reason of Disabling Conduct or (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of Disabling Conduct by (a) the vote of a majority of a quorum of Board members who are neither "interested persons" of the Fund nor parties to the proceeding ("disinterested non-party Board members") or (b) an independent legal counsel in a written opinion. Each indemnitee shall be entitled to advances from the Fund for payment of the reasonable expenses incurred by it in connection with the matter as to which it is seeking indemnification in the manner and to the fullest extent permissible under the New York Business Corporation Law. Each indemnitee shall provide to the Fund a written affirmation of its good faith belief that the standard of conduct necessary for indemnification by the Fund has been met and a written undertaking to repay any such advance if it should ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following additional conditions shall be met: (a) the indemnitee shall provide security in form and amount acceptable to the Fund for its undertaking; (b) the Fund is insured against losses arising by reason of the advance; or (c) a 3 majority of a quorum of disinterested non-party Board members, or independent legal counsel, in a written opinion, shall have determined, based on a review of facts readily available to the Fund at the time the advance is proposed to be made, that there is reason to believe that the indemnitee will ultimately be found to be entitled to indemnification. No provision of this Agreement shall be construed to protect any Board member or officer of the Fund, or any indemnitee, from liability in violation of Sections 17(h) and (i) of the Investment Company Act of 1940, as amended (the "1940 Act"). As to each Series, this Agreement shall continue until the date set forth opposite such Series' name on Schedule 1 hereto (the "Reapproval Date") and thereafter shall continue automatically for successive annual periods ending on the day of each year set forth opposite the Series' name on Schedule 1 hereto (the "Reapproval Day"), provided such continuance is specifically approved at least annually by (i) the Fund's Board; or (ii) vote of a majority (as defined in the 1940 Act) of such Series' outstanding voting securities, 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 any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. As to each Series, this Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board or by vote of holders of a majority of such Series' shares or, upon not less than 90 days' notice, by you. This Agreement also will terminate automatically, as to the relevant Series, in the event of its assignment (as defined in the 1940 Act). The Fund recognizes that from time to time your directors, officers and employees may serve as trustees, directors, partners, officers and employees of other business trusts, corporations, partnerships or other entities (including other investment companies), and that such other entities may include the name "Bear Stearns" as part of their name, and that your corporation or its affiliates may enter into investment advisory or other agreements with such other entities. If you cease to act as the Fund's investment adviser, the Fund agrees that, at your request, the Fund will take all necessary action to change the name of the Fund to a name not including "Bear Stearns" in any form or combination of words. This Agreement has been executed on behalf of the Fund by the undersigned officer of the Fund in his capacity as an officer of the Fund. The obligations of this Agreement shall only be binding upon the assets and property of the relevant Series and shall not be binding upon any Board member, officer or shareholder of the Fund individually. 4 If the foregoing is in accordance with your understanding, will you kindly so indicate by signing and returning to us the enclosed copy hereof. Very truly yours, THE BEAR STEARNS FUNDS By: /s/ Ellen T. Arthur ----------------------- Ellen T. Arthur Secretary Accepted: BEAR STEARNS FUNDS MANAGEMENT INC. By: /s/ Frank J. Maresca ------------------------------- Frank J. Maresca Executive Vice President 5 SCHEDULE 1 Annual Fee as a Percentage of Average Daily Net Name of Series Assets Reapproval Date Reapproval Day - -------------- --------------- --------------- -------------- Prime Money Portfolio .20 of 1% June 1, 1999 June 1st EX-99.B11(A) 3 CONSENT OF KRAMER, LEVIN, NAFTALIS & FRANKEL Kramer, Levin, Naftalis & Frankel 919 THIRD AVENUE NEW YORK, N.Y. 10022 - 3852 (212) 715 - 9100 Arthur H. Aufses III Monica C. Lord Sherwin Kamin Thomas D. Balliett Richard Marlin Arthur B. Kramer Jay G. Baris Thomas E. Molner Maurice N. Nessen Philip Bentley Thomas H. Moreland Founding Partners Saul E. Burian Ellen R. Nadler Counsel Barry Michael Cass Gary P. Naftalis _____ Thomas E. Constance Michael J. Nassau Michael J. Dell Michael S. Nelson Martin Balsam Kenneth H. Eckstein Jay A. Neveloff Joshua M. Berman Charlotte M. Fischman Michael S. Oberman Jules Buchwald David S. Frankel Paul S. Pearlman Rudolph de Winter Marvin E. Frankel Susan J. Penry-Williams Meyer Eisenberg Alan R. Friedman Bruce Rabb Arthur D. Emil Carl Frischling Allan E. Reznick Maria T. Jones Mark J. Headley Scott S. Rosenblum Maxwell M. Rabb Robert M. Heller Michele D. Ross James Schreiber Philip S. Kaufman Howard J. Rothman Counsel Peter S. Kolevzon Max J. Schwartz _____ Kenneth P. Kopelman Mark B. Segall Michael Paul Korotkin Judith Singer M. Frances Buchinsky Shari K. Krouner Howard A. Sobel Abbe L. Dienstag Kevin B. Leblang Jeffrey S. Trachtman Ronald S. Greenberg David P. Levin Jonathan M. Wagner Debora K. Grobman Ezra G. Levin Harold P. Weinberger Christian S. Herzeca Larry M. Loeb E. Lisk Wyckoff, Jr. Jane Lee Pinchas Mendelson Lynn R. Saidenberg Special Counsel ----- FAX (212) 715-8000 --- WRITER'S DIRECT NUMBER (212)715-9100 ------------- July 25, 1997 The Bear Stearns Funds 245 Park Avenue New York, New York 10167 Re: The Bear Stearns Funds with respect to the following portfolios only: The Insiders Select Fund Registration No. 33-84842 Post-Effective Amendment to Registration Statement on Form N-1A ---------------------------------------------- Gentlemen: We consent to the reference to our Firm as Counsel in Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A. Very truly yours, /s/ Kramer, Levin, Naftalis & Frankel ------------------------------------- Kramer, Levin, Naftalis & Frankel EX-99.B11(B) 4 INDEPENDENT AUDITORS' CONSENT CONSENT OF INDEPENDENT AUDITORS The Bear Stearns Funds: We consent to the incorporation by reference in Post-Effective Amendment No. 13 to Registration Statement No. 33-84842 of our report dated May 9, 1997 relating to The Insiders Select Fund of The Bear Stearns Funds in the Statement of Additional Information, which is a part of such Registration Statement and to the references to us under the caption "Financial Highlights" in the Prospectuses, which also are a part of such Registration Statement. /s/ Deloitte & Touche LLP - ------------------------- DELOITTE & TOUCHE LLP New York, New York July 25, 1997 EX-99.B12 5 ANNUAL REPORT TO SHAREHOLDERS THE BEAR STEARNS FUNDS The Insiders Select Fund LETTER TO SHAREHOLDERS April 21, 1997 Dear Shareholders: We are pleased to present the annual report to shareholders for The Insiders Select Fund (the "Portfolio") for the fiscal year ended March 31, 1997. For this fiscal year, the Portfolio's class A shares (without giving effect to the sales charge) had a total return of 18.31%*, the class C shares (without giving effect to the contingent deferred sales charge) had a total return of 17.69% and the class Y shares returned 18.81%. The Portfolio's benchmark, the S&P 500 Composite Index (the "S&P 500"), returned 19.73% for the period. Additional performance data for each class of shares can be found in the "Financial Highlights" section of this report. We lagged our benchmark due to the fact that roughly 20% of the Portfolio was comprised of mid-cap stocks, which, as a whole, underperformed the larger stocks represented in the S&P 500. The Insiders Select Fund seeks to invest in companies where corporate insider accumulation is coupled with attractive stock valuation. Insiders include corporate officers and directors, as well as major shareholders. Insider accumulation has been quite selective over the past 12 months as the bull market in equities has driven up prices in many stocks. Insiders tend to be value-oriented investors and as such, find bargain-hunting difficult in a raging bull market. However, the correction in the stock market in late March made valuations more favorable. During the last quarter, our focus was on selectively accumulating stocks in the financial services, retail, pharmaceutical and technology sectors. Despite the fact that many of these stocks performed well over the past year, we think they still offer good earnings growth potential. We continue to favor smaller regional banks, many of which remain reasonably priced. Many health-care stocks have underperformed the market over the past year, and we are investing in stocks of those companies where insider accumulation is picking up. Looking ahead, we will continue to invest in sectors where insider accumulation is strong. We expect insider buying activity to pick up if the equity market corrects further. We value the confidence you have placed in us and would be pleased to address any questions or concerns you may have. Please feel free to call us at 1-800-766-4111. Sincerely, [SIG] [SIG] Robert S. Reitzes Praveen Gottipalli, Portfolio Manager Chairman of the Board and President Symphony Asset Management The Bear Stearns Funds Sub-Investment Adviser
* For the 12 months ended March 31, 1997, the Portfolio's class A shares had a total return of 12.69% including the initial maximum 4.75% sales charge. 1 THE BEAR STEARNS FUNDS The Insiders Select Fund COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS A AND C SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CLASS A SHARES CLASS C SHARES S&P 500 COMPOSITE INDEX June 16, 1995 $9,525.00 $10,000.00 $10,000.00 June 30, 1995 $9,580.56 $10,066.66 $10,099.36 Sept. 30, 1995 $10,469.56 $10,975.00 $10,900.86 Dec. 31, 1995 $10,802.30 $11,316.66 $11,554.74 March 31, 1996 $11,120.01 $11,633.33 $12,154.46 June 30, 1996 $11,683.95 $12,000.00 $12,688.09 Sept. 30, 1996 $12,208.18 $12,733.33 $13,064.72 Dec. 31, 1996 $13,111.41 $13,662.60 $14,122.63 Mar. 31, 1997 $13,157.00 $13,691.00 $14,490.67 $9,525 Investment made on June 16, 1995 Past performance is not predictive of future performance CONSUMER PRICE INDEX June 16, 1995 $10,000.00 June 30, 1995 $10,026.30 Sept. 30, 1995 $10,072.32 Dec. 31, 1995 $10,131.49 March 31, 1996 $10,230.11 June 30, 1996 $10,302.43 Sept. 30, 1996 $10,381.33 Dec. 31, 1996 $10,466.80 Mar. 31, 1997 $10,512.82 $9,525 Investment made on June 16, 1995 Past performance is not predictive of future performance
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL (3) ----------------- ------------- The Insiders Select Fund(2) Class A shares(4)............................................ 12.69% 16.52% Class C shares............................................... 17.69 19.13 S&P 500 Composite Index(1)....................................... 19.73 22.96 Consumer Price Index(1).......................................... 2.76 2.83
- --------- (1) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur sales charges or expenses and/or are not available for investment. (2) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses to maintain the expense limitation, as set forth in the notes to financial statements. Total returns shown include fee waivers and reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3) For the period June 16, 1995 (commencement of investment operations) through March 31, 1997. (4) Reflects the initial maximum 4.75% sales charge. Without the applicable sales charge, the average annual total returns would have been 18.31% and 16.52%, respectively, for each period shown. 2 THE BEAR STEARNS FUNDS The Insiders Select Fund COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CLASS Y SHARES(1)(2) VS. VARIOUS INDICES EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CLASS Y SHARES S&P 500 COMPOSITE INDEX Jun 20, 1995 10,000 10,000 Jun 30, 1995 9,967 10,012 Sept. 30, 1995 10,891 10,792 Dec. 31, 1995 11,259 11,440 Mar. 31, 1996 11,598 12,051 Jun 30, 1996 12,202 12,590 Sept. 30, 1996 12,756 12,975 Dec. 31, 1996 13,723 14,054 Mar. 31, 1997 13,779 14,428 Past performance is not predivtive of future performance CONSUMER PRICE INDEX Jun 20, 1995 10,000 Jun 30, 1995 10,027 Sept. 30, 1995 10,073 Dec. 31, 1995 10,132 Mar. 31, 1996 10,231 Jun 30, 1996 10,303 Sept. 30, 1996 10,382 Dec. 31, 1996 10,467 Mar. 31, 1997 10,513 Past performance is not predivtive of future performance
TOTAL RETURNS ONE YEAR ENDED AVERAGE MARCH 31, 1997 ANNUAL (3) ----------------- ------------- The Insiders Select Fund(2) Class Y shares............................................... 18.81% 19.69% S&P 500 Composite Index(1)....................................... 19.73 22.62 Consumer Price Index(1).......................................... 2.76 2.84
- --------- (1) The chart assumes a hypothetical $10,000 initial investment in the Portfolio and reflects all Portfolio expenses. Investors should note that the Portfolio is a professionally managed mutual fund while the indices are either unmanaged and do not incur expenses and/or are not available for investment. (2) Bear Stearns Funds Management Inc. waived its advisory fee and agreed to voluntarily reimburse a portion of the Portfolio's operating expenses, if necessary, to maintain the expense limitation, as set forth in the notes for the financial statements. Total returns shown include fee waivers and reimbursements; total returns would have been lower had there been no assumption of fees and expenses in excess of expense limitations. (3) For the period June 20, 1995 (initial public offering date) through March 31, 1997. 3 THE BEAR STEARNS FUNDS The Insiders Select Fund MARCH 31, 1997 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION (AS A PERCENTAGE OF NET ASSETS) - -------------------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Aerospace & Defense (5.35%) 5.35% Banks (6.36%) 6.36% Chemicals & Fertilizers (1.14%) 1.41% Computers & Office Equipment (3.14%) 3.14% Computer Services (2.76%) 2.76% Credit & Finance (10.23%) 10.23% Drugs & Hospital Supplies (12.97%) 12.97% Electrical Equipment (1.82%) 1.82% Electronics (4.27%) 4.27% Entertainment & Liesure (1.54%) 1.54% Healthcare (2.53%) 2.53% Lodging (2.32%) 2.32% Miscellaneous Manufacturing (1.94%) 1.94% Oil & Natural Gas (11.76%) 11.76% Publishing - Newspaper (1.34%) 1.34% Retailing - Department Stores (3.68%) 3.68% Retailing - Grocery Stores (3.75%) 3.75% Telecommunications (3.90%) 3.90% Tools (1.18%) 1.18% Cash & Cash Equivalents (4.21%) 4.21% Other (13.54%) 13.54%
- -------------------------------------------------------------------------------- TOP TEN HOLDINGS - --------------------------------------------------------------------------------
PERCENT OF RANK HOLDING SECTOR NET ASSETS - ---- -------------------------------------------------- --------------------------- ---------- 1. Merck & Co., Inc. ................................ Drugs & Hospital Supplies 3.65 2. Safeway Inc. ..................................... Retailing -- Grocery Stores 2.77 3. Texaco Inc. ...................................... Oil & Natural Gas 2.77 4. Microsoft Corp. .................................. Computer Services 2.76 5. Mobil Corp. ...................................... Oil & Natural Gas 2.72 6. Johnson & Johnson................................. Drugs & Hospital Supplies 2.65 7. Travelers Group, Inc. ............................ Credit & Finance 2.65 8. Intel Corp. ...................................... Electronics 2.62 9. City National Corp. .............................. Banks 2.39 10. Boeing Co. (The).................................. Aerospace & Defense 2.29
4 THE BEAR STEARNS FUNDS The Insiders Select Fund PORTFOLIO OF INVESTMENTS MARCH 31, 1997
---------------------------------------------------------- MARKET SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS--95.79% AEROSPACE & DEFENSE - 5.35% 5,800 Boeing Co. (The) ........................................... $ 572,025 2,000 General Dynamics Corp. ..................................... 134,750 5,500 Rockwell International Corp. ............................... 356,812 3,600 United Technologies Corp. .................................. 270,900 ----------- 1,334,487 ----------- APPLIANCES - HOUSEHOLD - 0.46% 5,600 Maytag Corp. ............................................... 115,500 ----------- AUTOMOTIVE PARTS & EQUIPMENT - 0.73% 3,500 TRW Inc. ................................................... 181,125 ----------- BANKS - 6.36% 4,100 BankAmerica Corp. .......................................... 413,075 27,100 City National Corp. ........................................ 596,200 2,100 First American Corp. - Tennessee.*.......................... 133,613 1,300 Republic New York Corp. .................................... 114,563 7,500 Summit Bancorp ............................................. 328,125 ----------- 1,585,576 ----------- BUILDING & CONSTRUCTION PRODUCTS - 0.57% 3,800 Lowes Companies ............................................ 142,025 ----------- CASINO SERVICES - 0.43% 6,600 International Game Technology .............................. 106,425 ----------- CHEMICALS & FERTILIZERS - 1.41% 6,100 Cytec Industries Inc.*...................................... 231,038 2,700 Praxair, Inc. .............................................. 121,163 ----------- 352,201 ----------- COMMERCIAL SERVICES - 0.96% 4,900 Dun & Bradstreet Corp. ..................................... 124,338 5,500 Ogden Corp. ................................................ 116,188 ----------- 240,526 ----------- ------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ COMPUTERS & OFFICE EQUIPMENT - 3.14% 6,500 Cadence Design Systems, Inc.*............................... $ 223,437 7,900 Data General Corp.*......................................... 134,300 3,200 Pitney Bowes, Inc. ........................................ 188,000 5,300 Seagate Technology, Inc.*................................... 237,838 ----------- 783,575 ----------- COMPUTER SERVICES - 2.76% 7,500 Microsoft Corp.*............................................ 687,656 ----------- COSMETICS & TOILETRIES - 0.44% 4,200 Alberto-Culver Co., Class B ................................ 109,725 ----------- CREDIT & FINANCE - 10.23% 8,800 Conseco Inc. ............................................... 313,500 8,500 Equitable Companies, Inc. .................................. 231,625 4,500 Freemont General Corp. ..................................... 126,563 5,900 Morgan Stanley Group Inc. .................................. 346,625 3,100 NAC Re Corp. ............................................... 110,437 7,700 Price (T. Rowe) Associates ................................. 285,862 3,400 Student Loan Marketing Association ......................... 323,850 4,000 SunAmerica Inc. ............................................ 150,500 13,800 Travelers Group, Inc. ...................................... 660,662 ----------- 2,549,624 ----------- DIVERSIFIED OPERATIONS - 0.92% 2,300 Kansas City Southern Industries, Inc. ...................... 115,000 2,100 Tyco International Ltd. .................................... 115,500 ----------- 230,500 ----------- DRUGS & HOSPITAL SUPPLIES - 12.97% 4,400 Abbott Laboratories ........................................ 246,950 3,700 Becton, Dickinson & Co. .................................... 166,500 7,200 Bristol-Myers Squibb Co. ................................... 424,800 6,700 Eli Lilly & Co. ............................................ 551,075 12,500 Johnson & Johnson .......................................... 660,938 10,800 Merck & Co.,Inc. ........................................... 909,900 4,100 Monsanto Co. ............................................... 156,825 1,600 Schering-Plough Corp. ...................................... 116,400 ----------- 3,233,388 -----------
The accompanying notes are an integral part of the financial statements. 5 THE BEAR STEARNS FUNDS The Insiders Select Fund PORTFOLIO OF INVESTMENTS MARCH 31, 1997
------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) ELECTRICAL EQUIPMENT - 1.82% 1,500 Harris Corp. ............................................... $ 115,312 5,000 Honeywell, Inc. ............................................ 339,375 ----------- 454,687 ----------- ELECTRONICS - 4.27% 2,300 Applied Materials, Inc.*.................................... 106,663 4,700 Intel Corp. ................................................ 653,888 4,000 Solectron Corp.*............................................ 200,500 1,400 Texas Instruments, Inc. .................................... 104,825 ----------- 1,065,876 ----------- ELECTRONICS - MILITARY - 0.96% 6,400 Coltec Industries, Inc.*.................................... 118,400 5,200 Tracor, Inc.*............................................... 120,900 ----------- 239,300 ----------- ENGINES - COMBUSTION - 0.47% 2,300 Cummins Engine Co., Inc. ................................... 117,875 ----------- ENTERTAINMENT & LEISURE - 1.54% 4,200 Brunswick Corp. ............................................ 112,875 7,500 MGM Grand, Inc.*............................................ 271,875 ----------- 384,750 ----------- FOOD - MISCELLANEOUS/DIVERSIFIED - 0.69% 2,200 Ralston-Ralston Purina Group ............................... 171,875 ----------- HEALTHCARE - 2.53% 16,500 Humana, Inc. ............................................... 363,000 5,600 United Healthcare Corp. .................................... 266,700 ----------- 629,700 ----------- HUMAN RESOURCES - 0.43% 6,700 Olsten Corp. ............................................... 108,038 ----------- INSTRUMENTS - SCIENTIFIC - 0.44% 1,700 Perkin-Elmer Corp. ......................................... 109,437 ----------- ------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ LODGING - 2.32% 14,900 Hilton Hotels Corp. ........................................ $ 361,325 6,500 Promus Hotel Corp.*......................................... 216,125 ----------- 577,450 ----------- MACHINERY - FARM - 1.14% 2,700 Deere & Co. ................................................ 117,450 5,500 Dresser Industries, Inc. ................................... 166,375 ----------- 283,825 ----------- MACHINERY - INDUSTRIAL - 0.62% 2,300 Dover Corp. ................................................ 120,750 800 Ingersoll-Rand Co. ......................................... 34,900 ----------- 155,650 ----------- MISCELLANEOUS MANUFACTURING - 1.94% 3,500 Case Corp. ................................................. 177,625 8,400 Harsco Corp. ............................................... 305,550 ----------- 483,175 ----------- METAL PROCESSORS & FABRICATORS - 0.89% 4,300 Allegheny Teledyne Inc. .................................... 120,937 3,300 Trinity Industries.......................................... 100,238 ----------- 221,175 ----------- OIL & NATURAL GAS - 11.76% 3,200 Baker Hughes, Inc. ......................................... 122,800 2,800 Columbia Gas Systems, Inc. ................................. 162,050 5,200 Mobil Corp. ................................................ 679,250 13,900 Oneok, Inc. ................................................ 361,400 3,900 Pacific Enterprises ........................................ 117,975 5,500 Rowan Companies, Inc.*...................................... 124,437 2,300 Royal Dutch Petroleum Co. .................................. 402,500 1,500 Schlumberger, Ltd. ......................................... 160,875 6,300 Texaco Inc. ................................................ 689,850 2,400 Tidewater, Inc. ............................................ 110,400 ----------- 2,931,537 ----------- PAPER & PAPER RELATED PRODUCTS - 1.12% 2,800 Kimberly-Clark Corp. ....................................... 278,250 -----------
The accompanying notes are an integral part of the financial statements. 6 THE BEAR STEARNS FUNDS The Insiders Select Fund PORTFOLIO OF INVESTMENTS MARCH 31, 1997
------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) PUBLISHING - BOOKS - 0.96% 4,700 McGraw-Hill Companies, Inc. ................................ $ 240,287 ----------- PUBLISHING - NEWSPAPER - 1.34% 5,700 Media General Inc., Class A ................................ 161,738 500 Washington Post Co. ........................................ 172,000 ----------- 333,738 ----------- RESPIRATORY PRODUCTS - 0.47% 6,700 Nellcor Puritan Bennett Inc.*............................... 118,088 ----------- RETAILING - DEPARTMENT STORES - 3.68% 6,600 Costco Inc.*................................................ 182,325 6,500 Federated Department Stores, Inc.*.......................... 213,687 3,500 Fred Meyer, Inc.*........................................... 144,375 7,500 Sears, Roebuck & Co. ....................................... 376,875 ----------- 917,262 ----------- RETAILING - GROCERY STORES - 3.75% 5,500 American Stores, Inc. ...................................... 244,750 14,900 Safeway Inc.*............................................... 690,988 ----------- 935,738 ----------- TELECOMMUNICATIONS - 3.90% 800 360 Degrees Communications Co.*............................. 13,800 6,700 Equifax Inc. ............................................... 182,575 11,300 Loral Space & Communications*............................... 159,612 11,100 Octel Communications Corp.*................................. 176,212 6,500 SBC Communications Inc. .................................... 342,062 6,500 Scientific-Atlanta Inc. .................................... 99,125 ----------- 973,386 ----------- ------------------------------------------------------------------------------ MARKET SHARES VALUE ------------------------------------------------------------------------------ TOOLS - 1.18% 2,100 Snap-On, Inc. .............................................. $ 81,375 5,600 Stanley Works (The) ........................................ 212,100 ----------- 293,475 ----------- UTILITIES - 0.84% 6,100 Texas Utilities Co. ....................................... 208,925 ----------- Total Common Stocks (cost - $21,642,520)........................................ 23,885,832 ----------- SHORT-TERM INVESTMENTS - 3.33% INVESTMENT COMPANIES - 3.33% 581,257 Federated Investors, Trust for Short-Term U.S. Government Securities**................................................ 581,257 84,713 The Milestone Funds Treasury Obligations Portfolio, Institutional Shares**...................................... 84,713 164,645 The Treasurers Fund Inc., U.S. Treasury Money Market Portfolio**................................................. 164,645 ----------- Total Short-Term Investments (cost - $830,615)........................................... 830,615 ----------- Total Investments (cost - $22,473,135) - 99.12%............................... 24,716,447 Other assets in excess of liabilities - 0.88%............... 218,628 ----------- Net Assets - 100.00%........................................ $24,935,075 ----------- -----------
- --------- * Non-income producing security. ** Money market fund. The accompanying notes are an integral part of the financial statements. 7 THE BEAR STEARNS FUNDS The Insiders Select Fund STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1997 ASSETS Investments, at value (cost - $22,473,135)...... $24,716,447 Receivable for investments sold................. 210,209 Receivable for Portfolio shares sold............ 76,276 Receivable from investment adviser.............. 32,013 Dividends and interest receivable............... 31,609 Deferred organization expenses and other assets......................................... 164,856 ----------- Total assets.............................. 25,231,410 ----------- LIABILITIES Payable for investments purchased............... 154,532 Distribution fee payable (class A and C shares)........................................ 41,745 Payable for Portfolio shares repurchased........ 19,674 Administration fee payable...................... 3,326 Custodian fee payable........................... 3,583 Accrued expenses................................ 73,475 ----------- Total liabilities......................... 296,335 ----------- NET ASSETS Capital stock, $0.001 par value (unlimited shares of beneficial interest authorized)...... 1,714 Paid-in capital................................. 21,598,953 Accumulated net realized gain from investments.................................... 1,091,096 Net unrealized appreciation on investments...... 2,243,312 ----------- Net assets................................ $24,935,075 ----------- ----------- CLASS A Net assets...................................... $13,859,782 ----------- Shares of beneficial interest outstanding....... 950,505 ----------- Net asset value per share....................... $14.58 ----------- ----------- Maximum offering price per share (net asset value plus sales charge of 4.75%* of the offering price)................................ $15.31 ----------- ----------- CLASS C Net assets...................................... $ 9,518,756 ----------- Shares of beneficial interest outstanding....... 657,363 ----------- Net asset value and offering price per share**........................................ $14.48 ----------- ----------- CLASS Y Net assets...................................... $ 1,556,537 ----------- Shares of beneficial interest outstanding....... 106,150 ----------- Net asset value, offering and redemption value per share...................................... $14.66 ----------- -----------
- -------- * On investments of $50,000 or more, the offering price is reduced. ** Redemption price per share is equal to the net asset value per share less any applicable contingent deferred sales charge. The accompanying notes are an intergral part of the financial statements. 8 THE BEAR STEARNS FUNDS The Insiders Select Fund STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 1997 INVESTMENT INCOME Dividends (net of withholding taxes of $879).... $ 359,727 Interest........................................ 60,861 ---------- 420,588 ---------- EXPENSES Advisory fees................................... 182,313 Distribution fees - class A..................... 65,276 Distribution fees - class C..................... 94,265 Transfer agent fees and expenses................ 125,229 Accounting fees................................. 107,174 Federal and state registration fees............. 72,508 Reports and notices to shareholders............. 52,000 Legal and auditing fees......................... 43,000 Amortization of organization expenses........... 36,394 Administration fees............................. 35,873 Custodian fees and expenses..................... 22,999 Insurance expenses.............................. 16,199 Trustees' fees and expenses..................... 3,401 Other........................................... 5,386 ---------- Total expenses before waivers and reimbursements............................. 862,017 Less: waivers and reimbursements.......... (426,258) ---------- Total expenses after waivers and reimbursements............................. 435,759 ---------- Net investment loss............................. (15,171) ---------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND SECURITY SOLD SHORT Net realized gain from investments.............. 3,006,957 Net change in unrealized appreciation on: Investments................................... 757,844 Security sold short........................... 34,192 ---------- Net realized and unrealized gain on investments and security sold short........................ 3,798,993 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................................... $3,783,822 ---------- ----------
The accompanying notes are an intergral part of the financial statements. 9 THE BEAR STEARNS FUNDS The Insiders Select Fund STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FOR THE JUNE 16, FISCAL YEAR 1995* ENDED THROUGH MARCH 31, MARCH 31, 1997 1996 ------------ ------------ INCREASE IN NET ASSETS FROM OPERATIONS Net investment income/(loss).................... $ (15,171) $ 28,761 Net realized gain from investments.............. 3,006,957 891,092 Net change in unrealized apppreciation on investments and security sold short............ 792,036 1,451,276 ------------ ------------ Net increase in net assets resulting from operations..................................... 3,783,822 2,371,129 ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income Class A shares................................ (8,066) (8,222) Class Y shares................................ (1,784) (3,479) ------------ ------------ (9,850) (11,701) ------------ ------------ Net realized capital gains Class A shares................................ (1,540,623) -- Class C shares................................ (1,088,043) -- Class Y shares................................ (170,326) -- ------------ ------------ (2,798,992) -- ------------ ------------ SHARES OF BENEFICIAL INTEREST Net proceeds from the sale of shares............ 7,652,245 26,820,998 Cost of shares repurchased...................... (9,576,787) (5,837,996) Shares issued in reinvestment of dividends...... 2,531,683 10,500 ------------ ------------ Net increase in net assets derived from shares of beneficial interest transactions............ 607,141 20,993,502 ------------ ------------ Total increase in net assets.................... 1,582,121 23,352,930 NET ASSETS Beginning of period............................. 23,352,954 24 ------------ ------------ End of period................................... $24,935,075 $23,352,954** ------------ ------------ ------------ ------------
- -------- * Commencement of investment operations. ** Includes undistributed net investment income of $17,060. The accompanying notes are an intergal part of the financial statements. 10 THE BEAR STEARNS FUNDS The Insiders Select Fund FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- Contained below is per share operating performance data for each class of shares outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from information provided in the financial statements. - --------------------------------------------------------------------------------
FOR THE PERIOD JUNE 16, 1995* FOR THE FISCAL YEAR ENDED THROUGH MARCH 31, 1997 MARCH 31, 1996 --------------------------------- --------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C -------- --------- -------- -------- --------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period........................... $ 14.00 $ 13.96 $ 14.02 $ 12.00 $ 12.00 -------- --------- -------- -------- --------- Net investment income/(loss)(1)................................ 0.02 (0.06) 0.08 0.03 (0.01) Net realized and unrealized gain on investments and security sold short(2)........................ 2.48 2.47 2.49 1.98 1.97 -------- --------- -------- -------- --------- Net increase in net assets resulting from operations........... 2.50 2.41 2.57 2.01 1.96 -------- --------- -------- -------- --------- Dividends and distributions to shareholders from Net investment income........................................ (0.01) -- (0.02) (0.01) -- Net realized capital gains................................... (1.91) (1.89) (1.91) -- -- -------- --------- -------- -------- --------- (1.92) (1.89) (1.93) (0.01) -- -------- --------- -------- -------- --------- Net asset value, end of period................................. $ 14.58 $ 14.48 $ 14.66 $ 14.00 $ 13.96 -------- --------- -------- -------- --------- -------- --------- -------- -------- --------- Total investment return(3)..................................... 18.31% 17.69% 18.81% 16.75% 16.33% -------- --------- -------- -------- --------- -------- --------- -------- -------- --------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)...................... $13,860 $ 9,519 $ 1,557 $12,132 $ 9,928 Ratio of expenses to average net assets(1)..................... 1.65% 2.15% 1.15% 1.65%(5) 2.15%(5) Ratio of net investment income/(loss) to average net assets(1)..................................................... 0.11% (0.38)% 0.60% 0.38%(5) (0.12)%(5) Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements............... 1.82% 1.81% 1.81% 1.87%(5) 1.92%(5) Portfolio turnover rate........................................ 128.42% 128.42% 128.42% 93.45%(6) 93.45%(6) Average commission rate per share(7)........................... $0.0264 $0.0264 $0.0264 $0.0294 $0.0294 FOR THE PERIOD JUNE 20, 1995* THROUGH MARCH 31, 1996 --------------- CLASS Y --------------- PER SHARE OPERATING PERFORMANCE** Net asset value, beginning of period........................... $ 12.12 ------- Net investment income/(loss)(1)................................ 0.07 Net realized and unrealized gain on investments and security sold short(2)........................ 1.87 ------- Net increase in net assets resulting from operations........... 1.94 ------- Dividends and distributions to shareholders from Net investment income........................................ (0.04) Net realized capital gains................................... -- ------- (0.04) ------- Net asset value, end of period................................. $ 14.02 ------- ------- Total investment return(3)..................................... 15.98%(4) ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's omitted)...................... $ 1,293 Ratio of expenses to average net assets(1)..................... 1.15%(5) Ratio of net investment income/(loss) to average net assets(1)..................................................... 0.97%(4)(5) Decrease reflected in above expense ratios and net investment income/(loss) due to waivers and reimbursements............... 2.04%(4)(5) Portfolio turnover rate........................................ 93.45%(6) Average commission rate per share(7)........................... $0.0294
- --------- * Commencement of investment operations. Class Y shares commenced its initial public offering on June 20, 1995. ** Calculated based on shares outstanding on the first and last day of the respective periods, except for dividends and distributions, if any, which are based on the actual shares outstanding on the date of distribution. (1) Reflects waivers and reimbursements. (2) The amounts shown for a share outstanding throughout the respective periods are not in accord with the changes in the aggregate gains and losses in investments during the respective periods because of the timing of sales and repurchases of Portfolio shares in relation to fluctuating net asset values during the respective periods. (3) Total investment return does not consider the effects of sales charges or contingent deferred sales charges. Total investment return is calculated assuming a purchase of shares on the first day and a sale of shares on the last day of each period reported and includes reinvestment of dividends and distributions, if any. Total investment return is not annualized. (4) The total investment return and ratios for class Y shares are not necessarily comparable to those of class A and C shares, due to timing differences in the commencement of the initial public offering of class Y shares. (5) Annualized. (6) Not annualized. (7) Represents average commission rate per share charged to the Portfolio on purchases and sales of investments subject to such commissions during each period. The accompanying notes are an integral part of the financial statements. 11 THE BEAR STEARNS FUNDS The Insiders Select Fund NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The Bear Stearns Funds (the "Fund") was organized as a Massachusetts business trust on September 29, 1994 and is registered with the Securities and Exchange Commission (the "Commission") under the Investment Company Act of 1940, as amended (the "Investment Company Act"), as an open-end management investment company. The Fund currently has five separate portfolios in operation: three diversified portfolios, Large Cap Value Portfolio, Small Cap Value Portfolio and Total Return Bond Portfolio and two non-diversified portfolios, The Insiders Select Fund ("Insiders" or the "Portfolio") and S&P STARS Portfolio (collectively, the "Portfolios"). Each portfolio is treated as a separate entity for certain matters under the Investment Company Act, and for other purposes, and a shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. As of the date hereof, the Portfolio offers three classes of shares, which have been designated as class A, C and Y shares. ORGANIZATIONAL MATTERS--Prior to commencing investment operations on June 16, 1995, the Portfolio did not have any transactions other than those relating to organizational matters and the sale of one class A share and one class C share of beneficial interest of the Portfolio to Bear, Stearns & Co. Inc. ("Bear Stearns" or the "Distributor"). Costs of $181,965 which were incurred by the Portfolio in connection with the organization, registration with the Commission and initial public offering of its shares, have been deferred and are being amortized using the straight-line method over the period of benefit not exceeding sixty months, beginning with the commencement of investment operations of the Portfolio. In the event that the Distributor or any transferee of the Distributor redeems any of its original shares in the Portfolio prior to the end of the sixty month period, the proceeds of the redemption payable in respect of such shares shall be reduced by the pro rata share (based on the proportionate share of the original shares redeemed to the total number of original shares outstanding at the time of the redemption) of the unamortized deferred organization expenses as of the date of such redemption. In the event that the Portfolio is liquidated prior to the end of the sixty month period, the Distributor or the transferee of the Distributor shall bear the unamortized deferred organization expenses. PORTFOLIO VALUATION--The Portfolio calculates the net asset value of and completes orders to purchase or repurchase its shares of beneficial interest on each business day, with the exception of those days on which the New York Stock Exchange is closed. 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 market value, unless this method does not represent fair 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 or under the direction of the Portfolio's Board of Trustees. Expenses and fees, including the investment advisory, administration and distribution fees, are accrued daily and taken into account for the purpose of determining the net asset value of 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. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are recorded on the trade date (the date on which the order to buy or sell is executed). Realized gains and losses from securities are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. The Portfolio's net investment income (other than distribution fees) and unrealized and realized gains or losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day (after adjusting for current capital share activity of the respective classes). 12 SHORT SELLING--When the Portfolio makes a short sale, an amount equal to the proceeds received by the Portfolio is recorded as a liability and is subsequently adjusted to the current market value of the short sale. Short sales represent obligations of the Portfolio to make future delivery of specific securities and, correspondingly, create an obligation to purchase the security at market prices prevailing at the later delivery date (or to deliver the security if already owned by the Portfolio). Upon the termination of a short sale, the Portfolio will recognize a gain, limited to the price at which the Portfolio sold the security short, if the market price is less than the proceeds originally received. The Portfolio will recognize a loss, unlimited in magnitude, if the market price at termination is greater than the proceeds originally received. As a result, short sales create the risk that the Portfolio's ultimate obligation to satisfy the delivery requirements may exceed the amount of the proceeds initially received or the liability recorded in the financial statements. The Portfolio had no securities short sold at March 31, 1997. U.S. FEDERAL TAX STATUS--The Portfolio intends to distribute substantially all of its taxable income and to comply with the other requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required. In addition, by distributing during each calendar year substantially all of its ordinary income and capital gains, if any, the Portfolio intends not to be subject to a U.S. federal excise tax. DIVIDENDS AND DISTRIBUTIONS--The Portfolio intends to distribute at least annually to shareholders substantially all of its net investment income. Distribution of net realized gains, if any, will be declared and paid at least annually by the Portfolio. Dividends and distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within capital accounts based on their US federal tax-basis treatment; temporary differences do not require reclassification. At March 31, 1997, the Portfolio reclassified within the composition of net assets a net operating loss of $7,961 to accumulated realized gains. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES During the fiscal year ended March 31, 1997, Bear Stearns Funds Management Inc. ("BSFM" or "Adviser"), a wholly-owned subsidiary of The Bear Stearns Companies Inc., served as the investment adviser pursuant to an Investment Advisory Agreement with the Portfolio. 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." BSFM is entitled to receive from the Portfolio a monthly fee equal to an annual rate of 1.00% of the Portfolio's average daily net assets from which BSFM, in turn, pays Symphony a monthly fee equal to an annual rate of 0.45% of the Portfolio's average daily net assets. In addition, starting in the thirteenth month of operation, BSFM is entitled to a monthly performance adjustment fee which may increase or decrease the total advisory fee by up to 0.50% per year of the value of the Portfolio's average daily net assets. The performance adjustment fee reduced the total advisory fee by $56,841 or 0.24% of the value of the Portfolio's average net assets due to underperformance in comparison to the S&P 500 Composite Index during the period. During the fiscal year ended March 31, 1997, BSFM (or the "Administrator") served as the administrator to the Portfolio pursuant to an Administration Agreement. The Administrator is entitled to receive from the Portfolio a monthly fee equal to an annual rate of 0.15% of the Portfolio's average daily net assets. Under the terms of an Administrative Services Agreement with the Portfolio, PFPC Inc. provides certain administrative services to the Portfolio. For providing these services, PFPC Inc. is entitled to receive a monthly fee equal to an annual rate of 0.10% of the Portfolio's average daily net assets up to $200 million, 0.075% of the next $200 million, 0.05% of the next $200 million and 0.03% of net assets above $600 million, subject to a minimum annual fee of approximately $100,000 for the Portfolio. During the fiscal year ended March 31, 1997, PFPC Inc. has voluntarily waived a portion of its fee. During the fiscal year ended March 31, 1997, the Adviser has voluntarily undertaken to limit the Portfolio's total operating expenses (exclusive of brokerage commissions, taxes, interest and extraordinary items) to a maximum annual level of 1.65% of the average daily net assets of its class A shares, 2.15% of the average daily net assets of its class C shares and 1.15% of the average daily net assets of its class Y shares. As necessary, this limitation is effected by waivers by the Adviser of its advisory fees and reimbursements of expenses exceeding the advisory fee. For the year ended March 31, 1997, the Adviser waived its advisory fee of $182,313. In addition, the Adviser reimbursed $243,945, in order to maintain the voluntary expense limitation. 13 For the fiscal year ended March 31, 1997, Bear Stearns, an affiliate of the Adviser and the Administrator, earned $8,925 in brokerage commissions from Portfolio transactions executed on behalf of the Portfolio. Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies Inc. and an affiliate of the Adviser and the Administrator, serves as custodian to the Portfolio. DISTRIBUTION PLAN The Fund, on behalf of the Portfolio, has entered into a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act. Under the Plan in effect for the fiscal year ended March 31, 1997, the Portfolio paid Bear Stearns a fee at an annual rate of 0.50% for class A shares and 1.00% for class C shares. Such fees are based on the average daily net assets in each class of the Portfolio and are accrued daily and paid monthly or at such other intervals as the Board of Trustees may determine. The fees paid to Bear Stearns under the Plan are payable without regard to actual expenses incurred. For the fiscal year ended March 31, 1997, Bear Stearns earned $159,541 in distribution fees. Bear Stearns uses these fees to pay dealers whose clients hold Portfolio shares and other distribution-related activities. In addition, as Distributor of the Portfolio, Bear Stearns collects the sales charges imposed on sales of the Portfolio's class A shares, and reallows a portion of such charges to dealers through which the sales are made. As a result of an undertaking by the Distributor, it reallowed all of the sales charges to its dealers selling Portfolio shares for the period June 16, 1995 (commencement of investment operations) through September 26, 1995 and the period February 15, 1996 through June 30, 1996. Furthermore, the Distributor has increased the compensation paid to its dealers selling Portfolio shares on net asset value transfers (purchases made by investors with the proceeds from a redemption of shares of an investment company sold with a sales charge or commission and not distributed by Bear Stearns) from 0.50% to 1.00% beginning April 15, 1996 until further notice. In addition, Bear Stearns advanced 1.00% in sales commissions on the sale of class C shares to dealers at the time of such sales. For the fiscal year ended March 31, 1997, Bear Stearns has advised the Portfolio that it received approximately $163,000 in front-end sales charges resulting from sales of class A shares of the Portfolio. From these fees, Bear Stearns paid such sales charges to dealers which in turn paid commissions to sales persons. In addition, Bear Stearns has advised the Portfolio that during the period, it received approximately $14,300 in contingent deferred sales charges upon certain redemptions by class C shareholders. INVESTMENTS IN SECURITIES For U.S. federal income tax purposes, the cost of securities owned at March 31, 1997 was $22,473,135. Accordingly, the net unrealized appreciation of investments of $2,243,312 was composed of gross appreciation of $2,734,543 for those investments having an excess of value over cost and $491,231 of gross depreciation for those investments having an excess of cost over value. For the fiscal year ended March 31, 1997, aggregate purchases and sales of investment securities (excluding short-term investments) for the Portfolio were $28,876,688 and $31,585,896, respectively. SHARES OF BENEFICIAL INTEREST The Portfolio offers class A, C and Y shares. Class A shares are sold with a front-end sales charge of up to 4.75%. Class C shares are sold with a contingent deferred sales charge ("CDSC") of 1.00% during the first year. There is no sales charge or CDSC on class Y shares, which are offered primarily to institutional investors. At March 31, 1997, there was an unlimited amount of $0.001 par value shares of beneficial interest authorized for the Portfolio, of which Bear Stearns owned one class A share and one class C share of the Portfolio. 14 Transactions in the classes of shares of beneficial interest for the fiscal year ended March 31, 1997 were as follows:
SALES REINVESTMENTS REPURCHASES ---------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ----------- ------ ---------- ------- ---------- Class A shares.................................... 331,726 $ 4,976,082 97,925 $1,381,727 345,460 $5,185,795 Class C shares.................................... 148,520 2,231,793 70,623 991,548 273,058 3,992,295 Class Y shares.................................... 29,508 444,370 11,179 158,408 26,728 398,697
Transactions in the classes of shares of beneficial interest for the period June 16, 1995 (commencement of investment operations) through March 31, 1996 were as follows:
SALES REINVESTMENTS REPURCHASES ---------------------- --------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ----------- ------ ------ ------- ---------- Class A shares.................................... 1,179,727 $15,128,116 537 $7,389 313,951 $4,288,010 Class C shares.................................... 801,060 10,158,978 -- -- 89,783 1,224,227 Class Y shares*................................... 116,322 1,533,904 226 3,111 24,357 325,759
- --------- *Class Y shares commenced its initial public offering on June 20, 1995. CREDIT AGREEMENT The Fund, on behalf of the Portfolio, has entered into a credit agreement with The First National Bank of Boston. S&P STARS Fund, S&P STARS Portfolio, Large Cap Value Portfolio, Small Cap Value Portfolio, Total Return Bond Portfolio and Bear Stearns Investment Trust, which consists of the Emerging Markets Debt Portfolio, are also parties to the credit agreement. The agreement provides that each party to the credit agreement is permitted to borrow in an amount up to 15% of the value of its total assets. Subject to Board approval and upon making necessary disclosure in its prospectus, each portfolio may, in accordance with the provisions of the credit agreement, borrow up to 25% of the value of its total assets, less all liabilities other than liabilities for borrowed money outstanding at the time. However, at no time is the aggregate outstanding principal amount of all loans to any of the portfolios to exceed $25,000,000. The line of credit will bear interest at the greater of: (i) the annual rate of interest announced from time to time from the bank at its head office as its Base Rate, or (ii) the Federal Funds Effective Rate plus 0.50%, or at the borrower's option, the rate quoted by The First National Bank of Boston. Each loan is payable on demand or upon termination of this credit agreement or, for money market loans, on the last day of the interest period and, in any event, not later than 14 days from the date the loan was advanced. The Portfolio uses the facility to borrow money only for temporary or emergency (not leveraging) purposes. The amount outstanding under the line of credit agreement for the Portfolio averaged $2,452 during the fiscal year ended March 31, 1997. The Portfolio did not have any amount outstanding at any month-end under such line of credit agreement during the fiscal year ended March 31, 1997. The average interest rate during the fiscal year ended March 31, 1997, on amounts outstanding under such line of credit agreement, was 8.25%. 15 THE BEAR STEARNS FUNDS The Insiders Select Fund REPORT OF INDEPENDENT AUDITORS The Board of Trustees and Shareholders, The Insiders Select Fund (A series of The Bear Stearns Funds): We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of The Insiders Select Fund (the "Portfolio") as of March 31, 1997, and the related statements of operations, changes in net assets and the financial highlights for the year ended March 31, 1997 and the period June 16, 1995 (commencement of operations) to March 31, 1996. These financial statements and financial highlights are the responsibility of the Portfolio's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at March 31, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of The Insiders Select Fund at March 31, 1997, the results of its operations, the changes in its net assets and the financial highlights for the periods presented in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York May 9, 1997 16 THE BEAR STEARNS FUNDS The Insiders Select Fund SHAREHOLDER TAX INFORMATION -- (UNAUDITED) The Portfolio is required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise its shareholders within 60 days of the Portfolio's fiscal year end (March 31, 1997) as to the U.S. federal tax status of distributions received by the Portfolio's shareholders in respect of such fiscal year. During the fiscal year ended March 31, 1997, the following dividends and distributions per share were paid by the Portfolio:
ORDINARY INCOME LONG-TERM CAPITAL GAINS - ------------------------------------- ------------------------------- CLASS A CLASS C CLASS Y CLASS A CLASS C CLASS Y - ----------- ----------- ----------- --------- --------- --------- $ 1.720 $ 1.700 $ 1.730 $ 0.200 $ 0.019 $ 0.200 - ----------- ----------- ----------- --------- --------- --------- - ----------- ----------- ----------- --------- --------- ---------
The percentage of ordinary income received from The Insiders Select Fund qualifying for the corporate dividends received deduction is 16.86%. All Portfolio dividends were derived from dividend income. Because the Portfolio's fiscal year is not the calendar year, another notification will be sent with respect to calendar year 1997. The second notification, which will reflect the amount to be used by calendar year taxpayers on their U.S. federal income tax returns, will be made in conjunction with Form 1099-DIV and will be mailed in January 1998. Foreign shareholders will generally be subject to U.S. withholding tax on the amount of their dividend. They will generally not be entitled to a foreign tax credit or deduction for the withholding taxes paid by the Portfolio. In general, dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be reported as taxable income for U.S. federal income tax purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this information for their annual information reporting. Shareholders are advised to consult their own tax advisers with respect to the tax consequences of their investment in the Portfolio. 17 (This page has been left blank intentionally.) BEAR STEARNS The Bear Stearns Funds 245 Park Avenue THE INSIDERS New York, NY 10167 SELECT FUND 1.800.766.4111 Robert S. Reitzes Chairman of the Board and President Peter B. Fox Executive Vice President William J. Montgoris Executive Vice President Peter M. Bren Trustee Alan J. Dixon Trustee John R. McKernan, Jr. Trustee M.B. Oglesby, Jr. Trustee Stephen A. Bornstein Vice President Donalda L. Fordyce Vice President Frank J. Maresca Vice President and Treasurer Ellen T. Arthur Secretary Vincent L. Pereira Assistant Treasurer Eileen M. Coyle Assistant Secretary Investment Adviser Sub-Investment Adviser and Administrator Symphony Asset Management Bear Stearns Funds 555 California Street Management Inc. Suite 2975 245 Park Avenue San Francisco, CA 94104 New York, NY 10167 Distributor Custodian Bear, Stearns & Co. Inc. Custodial Trust Company 245 Park Avenue 101 Carnegie Center New York, NY 10167 Princeton, NJ 08540 Transfer and Dividend Counsel Disbursement Agent Kramer, Levin, Naftalis & Frankel PFPC Inc. 919 Third Avenue Bellevue Corporate Center New York, NY 10022 400 Bellevue Parkway Wilmington, DE 19809 Independent Auditors Deloitte & Touche LLP Two World Financial Center New York, NY 10281 This report is submitted for the general ANNUAL REPORT information of the shareholders of the MARCH 31, 1997 Portfolio. It is not authorized for distribution to prospective investors in the Portfolio unless it is preceded or accompanied by a current prospectus which includes details regarding the Portfolio's objectives, policies, sales commissions and other information. Total investment return is based on historical results and is not intended to indicate future performance. The investment return and principal value of an investment in the Portfolio will fluctuate, so that an investors shares, when redeemed, may be worth more or less than original cost. EX-27.1 6 ARTICLE 6 - FINANCIAL DATA SCHEDULE
6 0000931145 THE BEAR STEARNS FUNDS 041 INSIDERS SELECT PORTFOLIO - CLASS A 6-MOS MAR-31-1997 MAR-31-1997 22473135 24716447 350107 164856 0 25231410 154532 0 141803 296335 0 21600667 1714018 1669783 0 0 1091096 0 2243312 24935075 359727 60861 0 435759 (15171) 3006957 792036 3783822 0 (9850) (2798992) 0 509754 (645246) 179727 1582121 17060 891092 0 0 182313 0 862017 13053841 14.00 .02 2.48 (.01) (1.91) 0 14.58 1.65 0 0
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