As filed with the Securities and Exchange Commission on July 17, 1996
1933 Act Registration No. 33-37928;1940 Act Registration No. 811-6259
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. 12 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 14
(Check appropriate box or boxes.)
STRATUS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
200 Centre Terrace, 1225 "L" Street
Lincoln, Nebraska 68508
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code: (402) 476-3000
Thomas C. Smith
STRATUS FUND, INC.
200 Centre Terrace, 1225 "L" Street
Lincoln, Nebraska 68508
(Name and Address of Agent for Service)
Copies of all communications to:
Thomas H. Duncan
Ballard Spahr Andrews & Ingersoll
1225 17th Street, Suite 2300
Denver, Colorado 80202
Approximate Date of Proposed Public Offering:
As soon as practicable after the
Registration Statement becomes effective.
It is proposed that this filing will become effective:
-- immediately upon filing pursuant to paragraph (b)
-- on (Date) pursuant to paragraph (b)
-- 60 days after filing pursuant to paragraph (a)(i)
-- on (Date) pursuant to paragraph (a)(i)
X 75 days after filing pursuant to paragraph (a)(ii)
-- on (Date) pursuant to paragraph (a)(ii) of Rule 485
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, and the Rule 24f-2 Notice for the fiscal year ended June 30, 1995 was
filed on or about August 25, 1995.
<PAGE>
STRATUS FUND, INC.
Cross-Reference Sheet
Required by Rule 404(a)
N-1A Item No. Location in Prospectus
PART A
1. Cover Page............................... Cover Page
2. Synopsis................................. Introduction
3. Condensed Financial Information.......... Financial Highlights
4. General Description of Registrant........ Investment Objectives and
Policies; General Information
5. Management of the Fund................... Management; General
Information
6. Capital Stock and Other Securities....... Cover Page; Redemption of
Shares; Dividends and Taxes;
General Information
7. Purchase of Securities Being Offered..... Purchase of Shares
8. Redemption or Repurchase................. Redemption of Shares
9. Pending Legal Proceedings................ Not Applicable
PART B
Location in Statement
of Additional Information
10. Cover Page............................... Cover Page
11. Table of Contents........................ Table of Contents
12. General Information and History.......... General Information
13. Investment Objective and Policies........ Investment Objectives,
Policies and Restrictions
14. Management of the Fund................... Directors and Executive
Officers; Investment Advisory
and Other Services
15. Control Persons and Principal
Holders of Securities.................... Investment Advisory and Other
Services; Capital Stock
16. Investment Advisory and Other Services... Investment Advisory and Other
Services
17. Brokerage Allocation and Other Practices. Portfolio Transactions and
Brokerage Allocations
18. Capital Stock and Other Securities....... Capital Stock and Control
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Net Asset Value and Public
Offering Price; Redemption
20. Tax Status............................... Tax Status
2
<PAGE>
21. Underwriters............................. Investment Advisory and Other
Services
22. Calculation of Performance Data.......... Calculation of Performance
Data
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 to this Registration
Statement.
3
<PAGE>
STRATUS FUND, Inc.
PROSPECTUS
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
GROWTH PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERNATIONAL PORTFOLIO
STRATUS FUND, Inc. (the "Fund"), is a Minnesota corporation operating
as an open-end management investment company. The Fund offers shares in five
different series, and each series is operated as a separate investment
portfolio. This Prospectus relates to the series designated Intermediate
Government Bond Portfolio, Government Securities Portfolio, Growth Portfolio,
Capital Appreciation Portfolio and International Portfolio (each a "Portfolio"
and collectively the "Portfolios").
Intermediate Government Bond Portfolio has an investment objective of
current income, some or all of which is exempt from state income tax, consistent
with the preservation of capital.
Government Securities Portfolio has an investment objective of current
income consistent with the preservation of capital.
Growth Portfolio has an investment objective of capital appreciation
and income.
Capital Appreciation Portfolio has an investment objective of capital
appreciation.
International Portfolio has an investment objective of high total
return consistent with reasonable risk by investing primarily in a diversified
portfolio of securities of companies located in countries other than the United
States.
This Prospectus concisely describes information about the Portfolios
that you ought to know before investing. Please read it carefully before
investing and retain it for future reference. A Statement of Additional
Information about the Portfolios dated as of the date of this Prospectus is
available free of charge from SMITH HAYES Financial Services Corporation, 200
Centre Terrace, 1225 "L" Street, Lincoln, Nebraska 68508, or telephone (402)
476-3000 or (800) 279-7437. The Statement of Additional Information has been
filed with the Securities and Exchange Commission and is incorporated in its
entirety by reference in this Prospectus.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OF, OR ENDORSED OR GUARANTEED
BY, UNION BANK AND TRUST COMPANY OR ANY OTHER BANK, NOR ARE THEY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. SHARES OF THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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.
The date of this Prospectus is October 1, 1996
<PAGE>
INTRODUCTION
STRATUS FUND, Inc. (the "Fund") is a Minnesota corporation operating as an
open-end management investment company, commonly called a mutual fund. The Fund,
which was organized in October, 1990, has one class of capital stock that is
issued in series, each series referred to as a Portfolio and operated as a
separate diversified, open-end management investment company. This Prospectus
relates to the series designated Intermediate Government Bond Portfolio,
Government Securities Portfolio, Growth Portfolio, Capital Appreciation
Portfolio and International Portfolio (each a "Portfolio" and collectively the
"Portfolios").
The Portfolios
The Portfolios each have their own distinct investment objectives and
policies which are briefly summarized below. For a complete discussion of the
investment objectives and policies see "Investment Objectives and Policies".
Intermediate Government Bond Portfolio has an investment objective of
current income, some or all of which is exempt from state income tax, consistent
with the preservation of capital. The Portfolio seeks to achieve its objective
by investing at least 80% of its assets in securities issued or guaranteed by
the U.S. Government, its agents or instrumentalities. The Portfolio will
maintain an average dollar weighted maturity of between three (3) and ten (10)
years.
Government Securities Portfolio has an investment objective of current
income consistent with the preservation of capital. The Portfolio seeks to
achieve its objective by investing at least 80% of its total assets in
securities issued or guaranteed by the U. S. Government, its agents or
instrumentalities and the remainder of its assets in marketable debt obligations
rated at the time of purchase within the three highest debt ratings established
by Moody's Investment Services, Inc. ("Moody's") or Standard and Poor's Ratings
Services ("S&P") (Aaa, Aa, and A for Moody's and AAA, AA and A for S&P),
obligations of commercial banks, including repurchase agreements and money
market instruments.
Growth Portfolio has an investment objective of capital appreciation
and income. The Portfolio seeks to achieve its objective by investing in a
diversified portfolio of common stock and securities convertible into common
stock, the majority of which will be of seasoned companies with market
capitalizations of $500 million or more. In addition, the Portfolio will
maintain at least 65% of its total assets in equity securities yielding
dividends and/or interest bearing securities convertible into common stock.
Capital Appreciation Portfolio has an investment objective of capital
appreciation. The Portfolio seeks to achieve its objective by investing in a
diversified portfolio of common stocks and convertible securities which are
anticipated to have earnings growth above market averages.
International Portfolio has an investment objective of high total
return consistent with reasonable risk by investing primarily in a diversified
portfolio of securities of companies located in countries other than the United
States.
Certain Risk Factors to Consider
An investment in the Portfolios is subject to certain risks, as set
forth in detail under "Risk Factors" and "Investment Objectives and Policies,"
including, with respect to the Growth Portfolio and Capital Appreciation
Portfolio, those risks associated with investing in special situations and
engaging in options transactions, with respect to the Capital Appreciation
Portfolio and the International Portfolio, those risk
2
<PAGE>
associated with investments in securities rated BBB by S&P or Baa by Moody's,
and with respect to the International Portfolio, those risks associated with
investing in foreign securities. As with other mutual funds, there can be no
assurance that the Portfolios will achieve their investment objectives.
Investment Adviser, Sub-Adviser and Administrator
The Portfolios are managed by Union Bank and Trust Company of Lincoln,
Nebraska (the "Adviser"). The Adviser has engaged Murray Johnstone
International, Inc., a corporation organized under the laws of Scotland, to act
as sub-adviser to the International Portfolio (the "Sub-Adviser"). Lancaster
Administrative Services, Inc. acts as the Fund's transfer agent and
administrator ("Administrator"). The Portfolios pay the Adviser and
Administrator monthly fees for advisory services and administrative services
rendered. See "Management - Investment Adviser, - Administrator" and "Management
- - Portfolio Brokerage."
The Distributor
SMITH HAYES Financial Services Corporation ("SMITH HAYES"), a wholly owned
subsidiary of Consolidated Investment Corporation, acts as the distributor
("Distributor") of the Fund's shares. See "Purchase of Shares."
Purchase of Shares
Shares of the Portfolios are offered to the public at the next
determined net asset value after receipt of an order by the Distributor plus a
sales charge of 3% of the offering price of shares of the Intermediate
Government Bond Portfolio and Government Securities Portfolio and 4% of the
offering price of shares of the Growth Portfolio, Capital Appreciation Portfolio
and International Portfolio. The sales charge is reduced on purchases of $50,000
or more. See "Purchase of Shares - Sales Charge." The minimum aggregate initial
investment in the Portfolios is $1,000 unless waived by the Fund. Subsequent
investments can be made in amounts of $1,000 or more.
Exchanges
An owner of shares of a Portfolio may exchange some or all of such
shares for shares of another Portfolio. Exchanges are generally made at net
asset value plus any applicable sales charge. However, no sales charge will be
imposed in connection with an exchange of shares of a Portfolio for shares of
another Portfolio if such exchange occurs more than 6 months after purchase of
the Portfolio shares disposed of in the exchange. See "Purchase and Exchange of
Shares."
Redemptions
Shares of the Portfolios may be redeemed at any time at their net asset
value next determined after receipt of a redemption request by the Distributor.
The Fund reserves the right, upon 30 days' written notice, to redeem a
shareholder's investment in a Portfolio if the net asset value of the shares
held by such shareholder falls below $500 as a result of redemptions or
transfers. See "Redemption of Shares Involuntary Redemption."
Dividends
Dividends are declared at least annually and will be automatically
reinvested unless the shareholder elects otherwise. See "Dividends and Taxes."
3
<PAGE>
EXPENSES
The table below is provided to assist the investor in understanding the
various expenses that an investor in the Portfolios will bear, whether directly
or indirectly, through an investment in the Portfolios. For more complete
descriptions of the various costs and expenses, see "Purchase and Exchange of
Shares -- Sales Charges," "Management -- Investment Adviser and Sub-Advisor,"
"Management -- Administrator" and "Management -- Expenses."
<TABLE>
<CAPTION>
Shareholder Transaction Expense
Intermediate Government Capital
Government Securities Growth Appreciation International
Bond Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses'
Maximum sales load
imposed on purchase of
shares (as a % of the
offering price)............... 3% 3% 4% 4% 4%
Annual Operating Expenses
The table below provides information regarding expenses for the Portfolios
expressed as annual percentages of average daily net assets based upon amounts
incurred during the most recent fiscal year. The "Other Expenses" amount for the
International Portfolio is an estimate.
Intermediate Government Capital
Government Securities Growth Appreciation International
Bond Portfolio Portfolio Portfolio Portfolio Portfolio
Management Fees .65% .50% .50% 1.40% 1.15%
Administration Fees .10% .10% .10% .10% .10%
Other Expenses .36% .20% .22% 1.19% .25%
--- --- --- ---- ---
Total Portfolio
Operating Expenses 1.11% .80% .82% 2.69% 1.50%
==== === === ==== ====
</TABLE>
Commencing January 4, 1994, the Capital Appreciation Portfolio began
paying the Adviser a basic investment advisory fee of 1.40% of average annual
net assets that is adjusted upward or downward based upon the Portfolio's
performance relative to the Standard and Poor's 500 Stock Index on a 12 month
average. Depending upon performance, the fee could be up to 2.80% of average
annual net assets or as low as 0. The management fees for the Capital
Appreciation Portfolio have been restated to reflect the basic fee of 1.40%
without adjustment. The annual management fee for the fiscal year July 1, 1994
until June 30, 1995 was .34%. Commencing February 1, 1996 the Administrator
reduced its annual fee to the Intermediate Government Bond Portfolio, Government
Securities Portfolio, Growth Portfolio and Capital Appreciation Portfolio from
.25% to .10% of average daily net assets. The expense information for those
Portfolios has been restated as if that fee reduction was in effect for the
prior fiscal year. Fees may be used by the Administrator to enter
Sub-Administration Agreements with various banks. Such fees may be rebated to
bank customers. See "Management - Administrator."
4
<PAGE>
<TABLE>
<CAPTION>
Example
You would pay these expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period.
Intermediate Government Capital
Government Securities Growth Appreciation International
PERIOD Bond Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
1 year $ 13 $ 10 $ 10 $ 20 $15
3 years $ 40 $ 30 $ 31 $ 88 $48
5 years $ 69 $ 52 $ 54 $150 N/A
10 years $152 $116 $120 $317 N/A
</TABLE>
The purpose of the table above is to assist investors in understanding
the various costs and expenses that an investor will bear directly or indirectly
as a result of an investment in the Portfolios. Such expenses do not include any
fees charged by financial institutions to customer accounts which may be
invested in shares of the Portfolios. See "Management" for a more complete
discussion of the shareholder transaction and annual operating expenses for the
Portfolios of the Fund. THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
Shareholder Inquiries
Any questions or communications regarding a shareholder account should
be directed to your SMITH HAYES investment executive or other broker-dealer.
General inquiries regarding the Portfolios should be directed to the Fund at one
of the telephone numbers set forth on the cover page of this Prospectus.
FINANCIAL HIGHLIGHTS
The following financial highlights provide selected data for a share of
the Intermediate Government Bond Portfolio, Government Securities Portfolio,
Growth Portfolio and Capital Appreciation Portfolio outstanding throughout the
periods and other information as indicated. The financial highlights (other than
for the six month period ended December 31, 1995) have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, to the extent of their
report appearing in the Fund's Annual Financial Report for its fiscal year ended
June 30, 1995 which is available upon request without charge as set forth on the
cover page of this Prospectus. Further information about the performance of the
Portfolios (other than the International Portfolio, which is expected to
commence operations on October 1, 1996) is also contained in the Fund's Annual
Financial Report.
5
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Intermediate Government Bond Portfolio
Six Months Ended December 31, 1995 and
Years Ended June 30, 1995, 1994, 1993, and 1992 and
for the period from May 15, 1991 (commencement of
operations) to June 30, 1991
Six Months
ended 1995 1994 1993 1992 1991
Dec. 31, 1995 ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Beginning of period: $10.56 10.29 10.84 10.72 10.02 10.00
------ ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income 0.27 0.50 0.48 0.38 0.94 0.07
Net realized and unrealized
gain (loss) on investments 0.14 0.27 (0.55) 0.34 0.70 (0.05)
---- ---- ------ ---- ---- ------
Total income (loss)
from investment operations 0.41 0.77 (0.08) 0.72 1.64 0.02
---- ---- ------ ---- ---- ----
Less distributions:
Dividends from net
investment income (0.27) (0.50) (0.47) (0.38) (0.94) --
Distributions from capital gains -- -- -- (0.22) -- --
-- -- -- ------ -- --
Total distributions (0.27) (0.50) (0.47) (0.60) (0.94) --
------- ------ ------ ------ ------ --
End of period $10.70 10.56 10.29 10.84 10.72 10.02
===== ====== ===== ===== ===== =====
Total return 3.9%* 7.9% (.8%) 8.9% 11.4% 1.6%*
====== ==== ==== ==== ==== ====
Ratios/Supplemental data:
Net assets, end of period $7,136,324 5,518,431 7,774,768 6,747,719 4,680,585 2,230,413
Ratio of expense to
average net assets 1.03%* 1.11% 1.05% 1.12% 1.04% 1.46%**
Ratio of net income to
average net assets 4.96%* 4.84% 4.41% 4.58% 5.31% 7.41%**
Portfolio turnover rate 4.33% 27.67% 21.02% 32.39% 205.89% --
*Total return is not annualized.
**Annualized for those periods less than twelve months in duration.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Government Securities Portfolio
Growth Portfolio
Six Months Ended December 31, 1995 and
Year ended June 30, 1995 and the period from
October 8, 1993 (commencement of operations) to June
30, 1994
Government Securities
Portfolio Growth Portfolio
---------------------------- ------------------------------------
Six Months Six Months
ended 1995 1994 ended 1995 1994
Dec. 31, 1995 ---- ---- Dec. 31, 1995 ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period: $9.77 9.40 10.00 11.47 9.84 10.00
----- ----- ----- ---- ---- -----
Income (loss) from investment operations:
Net investment income 0.25 0.45 0.27 0.12 0.22 0.19
Net realized and unrealized
gain (loss) on investments 0.17 0.37 (0.60) 1.38 1.72 (0.16)
---- ---- ------ ---- ---- ------
Total income (loss)
from investment 0.42 0.82 (0.33) 1.50 1.94 0.03
---- ---- ------ ---- ---- ----
operations
Less distributions:
Dividends from net
investment income 0.25) (0.45) (0.27) (0.12) (0.22) (0.19)
Distributions from capital gains -- -- -- (0.17) (0.09) --
-- -- -- ------ ------ --
Total distributions 0.25) (0.45) (0.27) (0.29) (0.31) (0.19)
----- ------ ------ ------ ------ ------
End of period $9.94 9.77 9.40 12.68 11.79 9.84
===== ===== ==== ===== ===== ====
Total return 4.3%* 9.0% (3.4%)* 12.9%* 20.3% (0.3%)*
==== ==== ==== ==== ==== ====
Ratios/Supplemental data:
Net assets, end of period $18,762,255 13,885,204 12,477,517 18,643,010 12,813,352 12,892,161
Ratio of expense to average
net assets 0.66%** 0.80% 0.74%** 0.70%** 0.82% 0.76%**
Ratio of net income to
average net assets 5.11%** 4.82% 3.89%** 1.96%** 2.14% 2.38%**
Portfolio turnover rate 6.90% 33.88% 17.36% 34.75% 19.89% 10.05%
*Total return is not annualized.
**Annualized for those periods less than twelve months in duration.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Capital Appreciation Portfolio
Six Months Ended December 31, 1995 and
Years Ended June 30, 1995 and 1994 and for the
period from January 4, 1993 (commencement of
operations) to June 30, 1993
Six Months
ended
Dec. 31, 1995 1995 1994 1993
(Unaudited) ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value:
Beginning of period: $11.23 8.95 9.40 10.00
------ ----- ---- -----
Income (loss) from investment operations:
Net investment loss (0.10) (0.15) (0.12) (0.04)
Net realized and unrealized gain (loss) on
investments 1.26 2.62 (0.33) (0.56)
---- ---- ------ ------
Total income (loss) from investment
operations 1.16 2.47 (0.45) (0.60)
----- ---- ------ ------
Less distributions from capital gains: (0.84) (0.19) -- --
----- ------ -- --
End of period $11.55 11.23 8.95 9.40
======= ====== ==== ====
Total return 10.4%* 28.6% (4.8%) (6.0%)*
======= ===== ===== =====
Ratios/Supplemental data:
Net assets, end of period $1,053,804 748,588 653,757 583,403
Ratio of expenses to average net assets 2.93%** 2.69% 2.13% 2.41%
Ratio of net loss to average net assets (1.72%)** (1.59%) (1.27%) (1.04%)
Portfolio turnover rate 98.24% 214.47% 9.09% 4.42%
*Total return is not annualized.
**Annualized for those periods less than twelve months in duration.
</TABLE>
8
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each of the Portfolios listed below is
fundamental and cannot be changed without shareholder approval in the manner
described under the caption "Special Investment Methods - Investment
Restrictions." In view of the risks inherent in all investments in securities,
there is no assurance that these objectives will be achieved. The investment
policies and techniques employed in pursuit of the Portfolios' objectives may be
changed without shareholder approval, unless otherwise noted. See "Special
Investment Methods" for definitions and discussion regarding certain types of
securities and the risks of investing in such securities.
Intermediate Government Bond Portfolio
Investment Objective
The investment objective of the Intermediate Government Bond Portfolio
is to provide current income, some or all of which is exempt from state income
tax, consistent with the preservation of capital.
Investment Policies
In order to achieve its objective, at least 80% of the assets of the
Portfolio will be invested, at the time of purchase, in securities issued or
guaranteed by the U.S. Government, its agencies or its instrumentalities.
Additionally, the Portfolio may invest in money market instruments. See "Special
Investment Methods - Money Market Instruments."
The Portfolio will maintain an average dollar weighted maturity with
respect to all of the debt securities in which it will invest between three (3)
and ten (10) years.
In seeking to achieve its objective of current income, the Portfolio
will normally purchase securities with a view to holding them rather than
selling them to achieve short-term trading profits. However, the Portfolio
reserves the right to sell any security without regard to the length of time it
has been held if general economic, industry or securities market conditions
warrant such action. The Portfolio expects that annual portfolio turnover rate
will normally not exceed 100%. The higher the portfolio turnover rate, the
higher will be its expenditures for brokerage commissions and related
transaction costs.
The Portfolio is not a money market fund. The value of an investment in
the Portfolio will fluctuate daily as the value of the Portfolio's assets
change.
Government Securities Portfolio
Investment Objective
The investment objective of the Government Securities Portfolio is to
provide current income, consistent with the preservation of capital.
Investment Policies
In order to achieve this objective, at least 80% of the total assets of
the Portfolio will be invested in securities issued or guaranteed by the U. S.
Government, its agencies or its instrumentalities. In addition, the Portfolio
will invest its remaining assets in the following securities:
9
<PAGE>
1. Domestic issues of marketable debt obligations, rated at time of
purchase within the three highest debt rating categories established by Moody's
or S&P. A description of these debt rating categories (Moody's Aaa, Aa, and A,
and S&P AAA, AA, and A) is found in Appendix A to the Statement of Additional
Information. In selecting domestic issues of marketable debt securities for the
Portfolio, the Adviser will utilize a fundamental analysis of the issuer's
financial condition and operations, including an analysis of products and
services and competition, management research and development activities. Such
issuers generally will have a debt to capital ratio of less than 60% and have
market capitalization in excess of $500,000,000.
2. Obligations of commercial banks, including negotiable certificates
of deposit, banker's acceptances and repurchase agreements on securities issued
or guaranteed by the U.S. Government. Certificates of deposit and banker's
acceptances evidence the obligation of the banking institution to repay funds
deposited with it for a specified period of time at a stated interest rate. A
repurchase agreement involves the sale of securities and an agreement by the
seller to repurchase the securities at the same price plus an amount equal to an
agreed upon interest rate within a specified time period, usually until the next
business day but occasionally for longer periods. Repurchase agreements involve
certain risks which are described in greater detail in the Statement of
Additional Information.
3. Money market instruments. See "Special Investment Methods -
Money Market Instruments."
In seeking to achieve its objective of current income, the Portfolio
will normally purchase securities with a view to holding them rather than
selling them to achieve short-term trading profits. However, the Portfolio
reserves the right to sell any security without regard to the length of time it
has been held if general economic, industry or securities market conditions
warrant such action. The Portfolio expects that annual portfolio turnover rate
will normally not exceed 100%. The higher the Fund's portfolio turnover rate,
the higher will be its expenditures for brokerage commissions and related
transaction costs.
The Portfolio is not a money market fund. The value of an investment in
the Portfolio will fluctuate daily as the value of the Portfolio's assets
change. The average dollar-weighted maturity of the Portfolio's investments in
debt instruments will normally be between three and seven years.
Growth Portfolio
Investment Objective
The investment objective of the Growth Portfolio is capital
appreciation and income.
Investment Policies
The Growth Portfolio seeks to achieve its investment objective by
investing in a diversified portfolio of common stocks and convertible securities
convertible into common stock. Except during periods when the Growth Portfolio
assumes a temporary defensive position and invests in U.S. Government
securities, repurchase agreements and money market instruments, the Growth
Portfolio will have at least 65% of its total assets invested in common stocks
or in securities convertible to common stock. In addition, the Growth Portfolio
will maintain at least 65% of its total assets in equity securities yielding
dividends and/or interest bearing securities convertible into common stock. The
remaining assets (up to 35% of the Portfolio) may be invested in U.S. Government
securities, put and call options and money market instruments.
10
<PAGE>
The Growth Portfolio intends to invest principally in medium and large
capitalization companies (greater than $500 million market capitalization),
which, in the view of the Adviser, possess attractive growth characteristics,
market valuations and dividends. Stock market capitalizations are calculated by
multiplying the total number of common shares outstanding by the market price
per share of the stock.
The Growth Portfolio seeks to identify and invest in companies whose
earnings and dividends the Adviser believes will grow faster than inflation and
faster than the economy in general and whose growth the Adviser believes has not
yet been fully reflected in the market price of the companies' shares and which
will outperform the Standard and Poor's Equity Index on a risk adjusted basis
(an evaluation of return adjusted by a factor reflecting the volatility of the
issue versus the S & P 500 index). In seeking these investments, the Adviser
relies on a company-by-company analysis and a broader analysis of industry or
economic sector trends and considers such matters as the quality of a company's
management, the existence of a leading or dominant position in a major product
line or market and the soundness of the company's financial position. Once
companies are identified as possible investments, the Adviser applies a number
of valuation measures to determine the relative attractiveness of each company
and selects those companies whose shares are most attractively priced. The
Adviser may use options in hedging strategies designed to protect the Growth
Portfolio's holdings. See "Special Investment Methods - Options Transactions."
The Growth Portfolio intends periodically to invest in special situations.
A special situation arises when, in the opinion of the Adviser, the securities
of a particular company will, within a reasonably estimable period of time, be
accorded market recognition at an appreciated value solely by reason of a
development particularly or uniquely applicable to that company and regardless
of general business conditions or movements of the stock market as a whole.
Developments creating special situations might involve, among others, the
following: "workouts" such as liquidations, reorganizations, recapitalizations
or mergers; material litigation; technological breakthroughs; and new management
or management policies. Special situations involve a different type of risk than
is inherent in ordinary investment securities; that is, a risk involving the
likelihood or timing of specific events rather than general economic market or
industry risks. As with any securities transaction, investment in special
situations involves the risk of decline or total loss of the value of the
investment. However, the Adviser will not invest in special situations unless,
in its judgment, the risk involved is reasonable in light of the Portfolio's
investment objective, the amount to be invested and the expected investment
results.
The convertible securities in which the Growth Portfolio may invest
include convertible debt and convertible preferred stock which is rated in the
three highest ratings categories of Moody's and S&P for such securities. For a
description of the Moody's and S&P's ratings see Appendix A to the Statement of
Additional Information.
When the Investment Adviser believes that prevailing market or economic
conditions warrant a temporary defensive investment position, the Growth
Portfolio may invest a portion or all of its assets in high grade
non-convertible preferred stock, non-convertible debt securities and United
States Government, state and municipal and governmental agency and
instrumentality obligations, or funds may be retained in cash or cash
equivalents, such as money market mutual fund shares. Securities issued or
guaranteed by the United States Government may include, for example, Treasury
Bills, Bonds and Notes which are direct obligations of the United States
Government. Obligations issued or guaranteed by United States Government
agencies or instrumentalities may include, for example, those of Federal
Intermediate Credit Banks, Federal Home Loan Banks, Federal National Mortgage
Association and Farmers Home Administration. Such securities will include, for
example, those supported by the full faith and credit of the United States
Treasury or the right of the agency or instrumentality to borrow from the
Treasury as well as those supported only by the credit of the issuing agency or
instrumentality. State and municipal obligations, which are typically tax
exempt, may include both general obligation and revenue obligations,
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issued for a variety of public purposes such as highways, schools, sewer
and water facilities, as well as industrial revenue bonds by public bodies to
finance private commercial and industrial facilities. The Growth Portfolio was
previously named the "Equity Income Portfolio".
Capital Appreciation Portfolio
Investment Objective
The Investment Objective of the Capital Appreciation Portfolio is capital
appreciation.
Investment Policies
The Portfolio seeks to achieve this objective by investing in a
diversified portfolio of common stocks and securities convertible into common
stocks. The Adviser intends to invest principally in companies which it believes
will have earnings growth above the market averages with an emphasis toward
companies whose growth the Adviser believes has not been fully reflected in the
market price of such companies' shares. While the Portfolio may assume from time
to time temporary defensive positions and invest in U.S. Government debt
securities, repurchase agreements and money market instruments, the Portfolio
will maintain at least 65% of its total assets in common stocks or in securities
convertible into common stock at all times.
In making investment selections, the Adviser relies primarily on a
market momentum based analysis for security selection. However, securities may
also be selected for investment based upon considerations such as the quality of
a company's management, the existence of a leading or dominant position in a
major product line market and the soundness of a company's financial position.
As companies are identified as possible investments, the Adviser further
evaluates such companies by application of a number of valuation techniques to
determine the relative attractiveness of each company. Based upon these factors,
the Adviser will attempt to select those companies whose shares, in its
estimation, are most attractively priced.
The Capital Appreciation Portfolio will also periodically invest in special
situations. A special situation arises when, in the opinion of the Adviser, the
securities or particular company will, within a reasonable period of time, be
accorded market recognition at an appreciated value solely by reason of a
development particularly or uniquely applicable to that company and regardless
of general business conditions or movements of the stock market as a whole.
Developments creating special situations include recapitalizations or mergers,
material litigation, technological breakthroughs, and new management or
management policies. Special situations involve a different type of risk than is
inherent in ordinary investment securities; that is, a risk that the Investment
Adviser may inaccurately predict the likelihood or timing of specific events
rather than general economic or industry risks and as a result fail to achieve
the investment objective. As in any securities transaction, an investment in a
special situation may result in the decline or total loss of the value of the
particular investment. The Adviser will not, however, invest in special
situations, unless, in its judgment, the risk involved is reasonable in light of
the Portfolio's investment objective, the amount to be invested and the expected
investment results.
The Capital Appreciation Portfolio may invest in convertible securities
including convertible debt and convertible preferred stock. Such convertible
debt and convertible preferred stock shall be rated BBB or higher by S&P or Baa
by Moody's. For a description of Moody's and S&P's ratings see Appendix A to the
Statement of Additional Information. The Adviser may also use options and
hedging strategies designed to protect the Portfolio's holdings.
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International Portfolio
Investment Objective
The investment objective of the International Portfolio is high total
return consistent with reasonable risk by investing primarily in a diversified
portfolio of securities of companies located in countries other than the United
States.
Investment Policies
The Portfolio will invest primarily (under normal circumstances, at
least 65% of its total assets) in common stocks of established foreign companies
believed by the Sub-Adviser to have potential for capital growth, income or
both. The Portfolio may invest up to 35% of its total assets in any other type
of security including, but not limited to, convertible securities, preferred
stock, bonds, notes and other debt securities of companies (including
Euro-currency instruments and securities) or of any international agency (such
as the World Bank, Asian Development Bank or Inter-American Development Bank) or
obligations of domestic or foreign governments and their political subdivisions,
and in foreign currency transactions.
The Portfolio will make investments in various countries. Under normal
circumstances, business activities in a number of different foreign countries
will be represented in the Portfolio's investments with at least 65% of the
Portfolio's total assets invested in the securities of issuers in no less than
three countries. The Portfolio may, from time to time, have more than 25% of its
assets invested in any major industrial or developed country which in the view
of the Sub-Adviser poses no unique investment risk. The Sub-Adviser considers an
investment in a given foreign country to have "no unique investment risk" if the
Portfolio's investment in that country is not disproportionate to the relative
size of the country's market versus the Morgan Stanley Capital International
Europe, Australia and Far East (EAFE) or World Index or other comparable index,
and if the capital markets in that country are mature, and of sufficient
liquidity and depth. Under exceptional economic or market conditions, the
Portfolio may invest substantially all of its assets in only one or two
countries. In determining the appropriate distribution of investments among
various countries and geographic regions, the Sub-Adviser ordinarily will
consider the following factors: prospects of relative economic growth among
foreign countries; expected levels of inflation; relative price levels of the
various capital markets; government policies influencing business conditions;
the outlook for currency relationship; and the range of individual investment
opportunities available to the global investor.
The Portfolio may make investments in developing countries, which
involve exposure to economic structures that are generally less diverse and
mature than in the United States, and to political systems which may be less
stable. A country is considered by the Sub-Adviser to be a developing country if
it is not included in the Morgan Stanley Capital International World Index.
Examples of developing countries would currently include countries such as
Argentina, Brazil, Chile, India, Indonesia, Korea, Mexico, Taiwan and Turkey.
Investing in developing countries often involves risk of high inflation, high
sensitivity to commodity prices, and government ownership of the biggest
industries in that country. Investing in developing countries also involves a
higher probability of occurrence of the risks of investing in foreign securities
in general, including but not limited to, less financial information available,
relatively illiquid markets, and the possibility of adverse government action
(see "Risk Factors" below). No more than 30% of the Portfolio's net assets may
be invested in the securities of issuers located in developing countries. In the
past, markets of developing countries have been more volatile than the markets
of developed countries; however, such markets often have provided higher
long-term rates of return to investors. The Sub-Adviser believes that these
characteristics may be expected to continue in the future.
Generally, the Portfolio will not trade in securities for short-term
profits, but, when circumstances warrant, securities may be sold without regard
to the length of time held. Frequent trades may result in
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higher brokerage and other costs to the Portfolio and greater tax liability to
Portfolio shareholders by reason of more short-term capital gains. The
Sub-Adviser expects that the portfolio turnover for the International Portfolio
will be less than 100%.
Although the Portfolio invests primarily in equity securities, it may
invest up to 35% of its net assets in debt securities, excluding money market
instruments. Of this, at least 30% will be of the highest credit quality
available (rated AAA or Aaa by S&P or Moody's, respectively, or if not rated by
S&P or Moody's, then determined by the Sub-Adviser to be of equivalent credit
quality). The remaining 5% of Portfolio assets that may be invested in debt
securities may be rated lower than AAA or Aaa, but in no event lower than BBB or
Baa, or, if unrated, then determined by the Sub-Adviser to be of equivalent
credit quality. The Sub-Adviser does not intend to purchase any bonds rated
lower than AAA unless the instrument provides an opportunity to invest in an
attractive company in which an equity investment is not currently available or
desirable.
The Portfolio will not buy any bonds rated less than investment grade
(rated at least BBB by S&P or Baa by Moody's). If a change in credit quality
after acquisition by the Portfolio causes the bond to no longer be investment
grade, the Portfolio will dispose of the bond, if necessary to keep its
holdings, if any, of such bonds to 5% or less of the Portfolio's net assets. See
the Statement of Additional Information for more information on bond ratings and
credit quality.
The Portfolio may from time to time invest in the debt instruments of
foreign sovereign governments. These may include short-term treasury bills,
notes and long-term bonds, and will only be considered for investment by the
Portfolio if they have the full guarantee of the government in question. The
Portfolio will not invest in foreign government securities with a rating by
Moody's lower than AA3.
Securities of foreign issuers purchased by the International Portfolio may
be purchased on U.S. registered exchanges, over-the-counter markets or in the
form of American Depository Receipts ("ADRs") and other securities representing
underlying securities of foreign issuers including securities, such as Country
Baskets or World Equity Benchmark Shares, that attempt to track an index for
securities of a particular foreign country. The International Portfolio does not
currently intend to purchase securities in foreign markets. Prior to purchasing
securities in foreign markets, the International Portfolio will made
arrangements for such securities to be held by a qualified foreign custodian in
accordance with rules of the Securities and Exchange Commission.
ADRs are securities, typically issued by a U.S. financial institution
(a "depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. ADRs
may be available through "sponsored" or "unsponsored" facilities. A sponsored
facility is established jointly by the issuer of the security underlying the
receipts and a depositary, whereas an unsponsored facility may be established by
a depositary without participation by the issuer of the underlying security.
Holders of unsponsored depositary receipts generally bear all the costs of the
unsponsored facility. The depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through, to the holders of the
receipts, voting rights with respect to the deposited securities.
The Portfolio may establish and maintain reserves for temporary
defensive purposes or to enable it to take advantage of buying opportunities.
The Portfolio's reserves may be invested in domestic as well as foreign
short-term money market instruments including, but not limited to, U.S. and
foreign government and agency obligations, and obligations of supranational
entities, certificates of deposit, bankers' acceptances, time deposits, and
obligations of supranational entities, certificates of deposit, bankers'
acceptances, time deposits, commercial paper, short-term corporate debt
securities and repurchase agreements. During temporary defensive periods as
determined by the Sub-Adviser, the Portfolio may hold up to 100% of its total
assets in short-term obligations of the types described above. Any money market
instruments will be rated at least A-2/P-2 or better by a nationally recognized
statistical rating
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organization, such as S&P or Moody's, or, if unrated, determined by the
Sub-Adviser to be of equivalent credit quality.
The Portfolio may invest in the shares of other investment companies to the
extent permitted under the Investment Company Act of 1940 and may also engage in
certain options transactions for hedging purposes. See "Special Investment
Methods - Options Transactions."
RISK FACTORS
Foreign Securities
Investments by the International Portfolio in foreign securities,
whether denominated in U.S. currencies or foreign currencies, may entail all of
the risks set forth below.
Currency Risk. The value of the Portfolio's foreign investments will be
affected by changes in currency exchange rates. The U.S. dollar value of a
foreign security decreases when the value of the U.S. dollar rises against the
foreign currency in which the security is denominated, and increases when the
value of the U.S. dollar falls against such currency.
Political and Economic Risk. The economies of many of the countries in
which the Portfolio may invest and not as developed as the United States economy
and may be subject to significantly different forces. Political or social
instability, expropriation or confiscatory taxation, and limitations on the
removal of funds or other assets could also adversely affect the value of the
Portfolios investments.
Regulatory Risk. Foreign companies are not registered with the SEC and
are generally not subject to the regulatory controls imposed on the United
States issuers and, as a consequence, there is generally less publicly available
information about foreign securities than is available about domestic
securities. Foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to domestic companies. Income from foreign securities owned by
the Portfolio may be reduced by a withholding tax at the source, which tax would
reduce dividend income payable to the Portfolio's shareholders.
Emerging Markets. Foreign securities purchased by the Portfolio may be
issued by foreign companies located in developing countries in various regions
of the world. A "developing country" is a country in the initial stages of its
industrial cycle. As compared to investment in the securities markets of
developed countries, investment in the securities markets of developing
countries involves exposure to markets that may have substantially less trading
volume and greater price volatility, economic structures that are less diverse
and mature, and political systems that may be less stable.
Lower Rated Securities
The Capital Appreciation Portfolio and International Portfolio are
permitted to invest in securities rated Baa by Moody's or BBB by S&P. Although
considered investment grade, such securities may be subject to greater risk than
higher rated securities. Such securities may have speculative characteristics
and changes in economic circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds.
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Other Permitted Investments
Certain of the other investments permitted for the Portfolios pose
special risks in addition to those described above. See "Special Investment
Methods" in this Prospectus.
SPECIAL INVESTMENT METHODS
Some or all of the Portfolios may invest in U.S. Government Securities,
repurchase agreements, convertible securities, options for hedging purposes and
money market instruments. Descriptions of such securities, and the inherent
risks of investing in such securities, are set forth below.
U.S. Government Securities
The Portfolios may invest in U.S. Government Securities which are
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Obligations issued by the U.S. Treasury include Treasury
Bills, Notes and Bonds which differ from each other mainly in their interest
rates and the length of their maturity at original issue. In this regard,
Treasury Bills have a maturity of one year or less, Treasury Notes have
maturities of one to ten years and Treasury Bonds generally have maturities
greater than ten years. Such Treasury Securities are backed by the full faith
and credit of the U.S.
Government.
The obligations of U.S. Government agencies or instrumentalities are
guaranteed or backed in a variety of ways by the U.S. Government, its agencies
or instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-related securities, and obligations of the Farmers
Home Administration, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers Home Administration are backed by the discretionary
authority of the U.S. Government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, the Farmers Home
Administration, Federal Farm Credit Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation are backed by the
credit of the agency or instrumentality issuing the obligations.
As with all fixed income securities, various market forces influence
the value of such securities. There is an inverse relationship between the
market value of such securities and yield. As interest rates rise, the value of
the securities falls; conversely, as interest rates fall, the market value of
such securities rises.
Repurchase Agreements
The Government Securities Portfolio, Growth Portfolio and Capital
Appreciation Portfolio may enter into repurchase agreements for U.S. Government
Securities for temporary defensive purposes. A repurchase agreement involves the
purchase by a Portfolio of U.S. Government Securities with the condition that
after a stated period of time (usually seven days or less) the original seller
will buy back the same securities ("collateral") at a predetermined price or
yield. Repurchase agreements involve certain risks not associated with direct
investments in securities. In the event the original seller defaults on its
obligation to repurchase, as a result of its bankruptcy or otherwise, the
Portfolio will seek to sell the collateral, which action could involve costs or
delays. In such case, the Portfolio's ability to dispose of the collateral to
recover such investment may be restricted or delayed. While collateral will at
all times be maintained in an amount equal to the repurchase price under the
agreement (including accrued interest due thereunder), to the extent proceeds
from the sale of collateral were less than the repurchase price, a Portfolio
would suffer a loss.
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Options Transactions
The Growth Portfolio, Capital Appreciation Portfolio and International
Portfolio may purchase put options, solely for hedging purposes, in order to
protect portfolio holdings in an underlying security against a substantial
decline in the market value of such holdings ("protective puts"). Such
protection is provided during the life of the put because the Portfolio may sell
the underlying security at the put exercise price, regardless of a decline in
the underlying security's market price. Any loss to the Portfolio is limited to
the premium paid for, and transaction costs paid in connection with, the put
plus the initial excess, if any, of the market price of the underlying security
over the exercise price. However, if the market price of such security
increases, the profit a Portfolio realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount for which the put
is sold.
The Growth Portfolio, Capital Appreciation Portfolio and International
Portfolio may also purchase call options solely for the purpose of hedging
against an increase in prices of securities that the Portfolio ultimately wants
to buy. Such protection is provided during the life of the call option because
the Portfolio may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Portfolio will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
The Growth Portfolio, Capital Appreciation Portfolio and International
Portfolio may only purchase exchange-traded put and call options.
Exchange-traded options are third party contracts with standardized strike
prices and expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while other options may
not. See "Special Investment Methods Investment Restrictions."
Use of options in hedging strategies is intended to protect performance
but can result in poorer performance than without hedging with options, if the
Adviser is incorrect in its forecasts of the direction of stock prices.
Normally, the Portfolio will only invest in options to protect existing
positions and as a result, will normally invest no more than 10% of the
Portfolio's assets in options.
Convertible Securities
Convertible securities are securities that may be exchanged or
converted into a predetermined number of the issuer's underlying common shares
at the option of the holder during a specified time period. Convertible
securities may take the form of convertible preferred stock, convertible bonds
or debentures, or a combination of the features of these securities. The
investment characteristics of convertible securities vary widely, allowing
convertible securities to be employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed income
securities entitling the holder to receive the fixed income of a bond or the
dividend preference of a preferred stock until the holder elects to exercise the
conversion privilege. They are senior securities, and, therefore, have a claim
to assets of the issuer prior to the common stock in the case of liquidation.
However, convertible securities are generally subordinated to non-convertible
securities of the same company. The interest income and dividends from
convertible bonds and preferred stocks provide a stream of income with generally
higher yields than common stocks, but lower than non-convertible securities of
similar quality.
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As with all fixed income securities, various market forces influence
the market value of convertible securities, including changes in the prevailing
level of interest rates. As the level of interest rates increases, the market
value of convertible securities tends to decline and, conversely, as interest
rates decline, the market value of convertible securities tends to increase. The
unique investment characteristic of convertible securities (the right to
exchange for the issuer's common stock) causes the market value of the
convertible securities to increase when the value of the underlying common stock
increases. However, because security prices fluctuate, there cannot be an
assurance of capital appreciation. Most convertible securities will not reflect
as much capital appreciation as their underlying common stocks. When the
underlying common stock is experiencing a decline, the value of the convertible
security tends to decline to a level approximating the yield-to-maturity basis
of straight non-convertible debt of similar quality, often called "investment
value," and may not experience the same decline as the underlying common stock.
Most convertible securities sell at a premium over their conversion
values (i.e., the number of shares of common stock to be received upon
conversion multiplied by the current market price of the stock). This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed income security with a possibility of capital appreciation
due to the conversion privilege. If this appreciation potential is not realized,
the premium may not be recovered.
Money Market Instruments
The Government Securities Portfolio, Growth Portfolio and Capital
Appreciation Portfolio may invest in money market instruments which include:
(i) U.S. Treasury Bills;
(ii) U.S. Treasury Notes with maturities of 18 months or less;
(iii) U.S. Government Securities subject to repurchase agreements;
(iv) Obligations of domestic branches of U.S. banks (including certificates
of deposit and bankers' acceptances with maturities of 18 months or less) which
at the date of investment have capital, surplus, and undivided profits (as of
the date of their most recently published financial statements) in excess of
$10,000,000 and obligations of other banks or savings and loan associations if
such obligations are insured by the Federal Deposit Insurance Corporation
("FDIC");
(v) Commercial paper which at the date of investment is rated A-1 by S&P or
P-1 by Moody's or, if not rated, is issued or guaranteed as to payment of
principal and interest by companies which at the date of investment have an
outstanding debt issue rated AA or better by S&P or Aa or better by Moody's;
(vi) Short-term (maturing in one year or less) corporate obligations which
at the date of investment are rated AA or better by S&P or Aa or better by
Moody's; and
(vii) Shares of no-load money market mutual funds (subject to the ownership
restrictions of the Investment Company Act of 1940). See "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information.
The Intermediate Government Bond Portfolio may invest in the Money Market
Instruments described in (i), (ii), (iv) and (vii) above, provided that
investments in shares of no load money market mutual funds shall be further
invested in those money market mutual funds which invest solely in those
securities otherwise permitted for the Portfolio. Investment by a Portfolio in
shares of a money market mutual fund
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indirectly results in the investor paying not only the advisory fee and related
fees charged by the Portfolio, but also the advisory fees and related fees
charged by the adviser and other entities providing services to the money market
mutual fund.
Borrowing
The Portfolios may borrow money from banks for temporary or emergency
purposes in an amount of up to 10% of the value of the Portfolio's total assets.
Interest paid by a Portfolio on borrowed funds would decrease the net earnings
of that Portfolio. None of the Portfolios will purchase portfolio securities
while outstanding borrowings exceed 5% of the value of the Portfolio's total
assets. Each of the Portfolios may mortgage, pledge, or hypothecate its assets
in an amount not exceeding 10% of the value of its total assets to secure
temporary or emergency borrowing. The policies set forth in this paragraph are
fundamental and may not be changed with respect to a Portfolio without the
approval of a majority of that Portfolio's shares.
Portfolio Turnover
While it is not the policy of any of the Portfolios to trade actively for
short-term (less than six months) profits, each Portfolio will dispose of
securities without regard to the time they have been held when such action
appears advisable to the Adviser, subject to, among other factors, the
constraints imposed on regulated investment companies by Subchapter M of the
Internal Revenue Code. See "Dividends, and Taxes." The portfolio turnover rate
for the Capital Appreciation Portfolio was 214% for the Fund's fiscal year ended
June 30, 1995. That rate of portfolio turnover results in increased brokerage
and other costs and can result in shareholders receiving distributions of
capital gains that are subject to taxation.
The methods of calculating portfolio turnover rate are set forth in the
Statement of Additional Information under "Investment Objectives, Policies and
Restrictions - Portfolio Turnover."
Investment Restrictions
The Fund has adopted certain investment restrictions applicable to the
Portfolios which are set forth in the Statement of Additional Information. Some
of these restrictions, which are fundamental and may not be changed without
shareholder approval, include the following: (1) no Portfolio will invest 25% or
more of its total assets in any one industry (this restriction does not apply to
securities of the U.S. Government or its agencies and instrumentalities and
repurchase agreements relating thereto; however, utility companies, gas,
electric, telephone, telegraph, satellite, and microwave communications
companies are considered as separate industries); (2) no security can be
purchased by a Portfolio, except the Intermediate Government Bond Portfolio if,
as a result, more than 5% of 75% of the total assets of that Portfolio would
then be invested in the securities of a single issuer (other than U.S.
Government obligations); (3) as to the Intermediate Government Bond Portfolio,
no security may be purchased by it if, as a result, more than 5% of the value of
100% of its total assets would be invested in the securities of a single issuer
(other than U.S. Government obligations); (4) no security can be purchased by a
Portfolio if as a result more than 10% of any class of securities, or more than
10% of the outstanding voting securities of an issuer, would be held by that
Portfolio; and (5) no Portfolio will cause more than 10% of the value of its
total assets to be invested collectively in repurchase agreements maturing in
more than seven days and other illiquid securities. Additional investment
restrictions are set forth in the Statement of Additional Information.
If a percentage restriction set forth under "Investment Objectives and
Policies" is adhered to at the time of an investment, a later increase or
decrease in percentage resulting from changes in values or assets will not
constitute a violation of such restriction. The foregoing investment
restrictions, as well as
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all investment objectives and those policies designated by the Fund as
fundamental policies, may not be changed without the approval of a "majority" of
a Portfolio's shares outstanding, defined as the lesser of: (a) 67% of the votes
cast at a meeting of shareholders for a Portfolio at which more than 50% of the
shares are represented in person or by proxy, or (b) a majority of the
outstanding voting shares of that Portfolio. These provisions apply to each
Portfolio if the action proposed to be taken affects that Portfolio. The Adviser
may also agree to certain additional investment policies in order to qualify the
shares of some of the Portfolios in various states.
MANAGEMENT
Board of Directors
As in all corporations, the Fund's Board of Directors has the primary
responsibility for overseeing the overall management of the Fund. The Board of
Directors meets periodically to review the activities of the Portfolios and the
Adviser and to consider policy matters relating to the Portfolios and the Fund.
Investment Adviser and Sub-Adviser
Union Bank and Trust Company has been retained under an Investment Advisory
Agreement with the Fund to act as the Portfolios' Adviser subject to the
authority of the Board of Directors. The Adviser has engaged Murray Johnstone
International to act as Sub-Adviser for the International Portfolio.
Union Bank and Trust Company was chartered as a state bank in 1918 and
through its Trust Department has been managing investments for its trust
accounts for many years; however, until the organization of the Fund, Union had
not previously advised mutual funds. Union is substantially owned by Farmers and
Merchants Investment, Inc., a Nebraska one bank holding company, which is
controlled by members of the Dunlap family, which includes Michael S. Dunlap, an
officer and director of the Fund. The address of the Adviser is 3643 So. 48th,
Lincoln, Nebraska 68506.
The Adviser furnishes the Portfolios with investment advice and, in
general, supervises the management and investment programs of the Fund. The
Adviser furnishes at its own expense all necessary administrative services:
office space, equipment, clerical personnel for servicing the investments of the
Portfolios, investment advisory facilities, executive and supervisory personnel
for managing the investments and effecting the securities transactions of the
Portfolios. In addition, the Adviser pays the salaries and fees of all officers
and directors of the Fund who are affiliated persons of the Adviser. Under the
Investment Advisory Agreement, the Adviser receives a monthly fee computed
separately on the daily average net asset value of the respective Portfolio at
an annual rate of .50% for the Government Securities and Growth Portfolios; .65%
for the Intermediate Government Bond Portfolio; 1.40% of the daily net asset
value of the Capital Appreciation Portfolio plus a performance-based adjustment
described below; and 1.15% for the International Portfolio.
With regard to the investment advisory fee paid for the Capital
Appreciation Portfolio, the Capital Appreciation Portfolio pays the Adviser a
basic monthly management fee computed at the annual rate of 1.40% of its daily
average net asset value. In addition, the Capital Appreciation Portfolio pays
the Adviser an incentive adjustment, by which the basic fee may be increased or
decreased by up to 1.40% of the average daily net asset value during the latest
12 months (a rolling average method) of the Portfolio, depending upon the
performance of the Portfolio relative to the S&P 500. See the Statement of
Additional Information for a detailed discussion of the incentive fee. For the
period ended June 30, 1995, the Fund paid the Adviser $2,292, which when
annualized represented a fee equivalent to .34% of average annual net assets.
This basic fee is higher than that paid by most other investment companies.
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William S. Eastwood, CFA, Jon C. Gross, CFA, and Curtis R. LeValley are
responsible for the day-to-day management of the Portfolio's investments.
William S. Eastwood has been affiliated with Union Bank & Trust Company and the
management of the Fund and of the various common trust funds of Union Bank &
Trust Company since March of 1995. Prior to joining Union Bank & Trust, Mr.
Eastwood was statewide manager of trust investments for a regional bank. Mr.
Eastwood was responsible for the management of equity and fixed income common
funds at that bank from 1979 to 1995. Mr. Eastwood holds the Chartered Financial
Analyst (CFA) professional designation. Jon C. Gross is currently a Trust
Investment Officer/Portfolio Manager and has been affiliated with Union Bank &
Trust Company since 1988 and has been actively involved in management of the
Fund and the common and collective funds of the Bank since July, 1991. Mr. Gross
holds the Chartered Financial Analyst (CFA) professional designation. Curtis
LeValley is currently a Trust Investment Officer/Portfolio Manager and has been
affiliated with Union Bank & Trust Company since May of 1995. Prior to joining
Union Bank & Trust, Mr. LeValley managed investment accounts for high net worth
individuals. Mr. LeValley is currently enrolled in the CFA program.
The Adviser and Murray Johnstone International have entered into a
Sub-Advisory Agreement pursuant to which the Sub-Adviser has agreed to provide
investment advisory services for the International Portfolio. Pursuant to the
Sub-Advisory Agreement, the Sub-Adviser directs the investments of the
International Portfolio and formulates and implements a continuing program for
managing the assets of the International Portfolio, subject to the supervision
of the Adviser and the Board of Directors of the Fund. The Adviser is obligated
under the Sub-Advisory Agreement to compensate the Sub-Adviser for the services
it provides thereunder.
The Sub-Adviser is an international investment manager based in Glasgow,
Scotland. The firm oversees financial assets in excess of $7.0 billion around
the globe, with North American clients' assets exceeding $1 billion. The
Sub-Adviser has offices in Chicago, Singapore, Paris, and London, as well as
regional offices in the United Kingdom, and is a wholly-owned subsidiary of
United Asset Management Corporation.
Founded in 1907, the Sub-Adviser was among the earliest overseas investors
in Japan, Europe, and the Far East. The firm follows a "top-down" factor driven
approach to allocating investors' funds to specific countries. These factors can
be categorized into four groups: Macro-economic, Monetary, Value and
Performance. The Sub-Adviser also believes strongly in the importance of
controlling risk through rigorous fundamental analysis, asset diversification,
and comprehensive monitoring.
Rodger F. Scullion MSI, Andrew V. Preston BA, and James Clumic are
responsible for the day-to-day management of the International Portfolio's
investments.
Rodger has over 25 years of investment experience, the last 13 years based
in Glasgow with Murray Johnstone. He joined Murray Johnstone in 1983 after 12
years with the Glasgow-based investment management firm where he was a Director
and held management responsibilities for investments in the United States, Japan
and the Far East. He was appointed a Director of Murray Johnstone Limited in
1988 and was responsible for all Japanese investments. In 1992, Rodger became
the Director in charge of country allocation for Murray Johnstone International
(MJI). Rodger is MJI's Chief Investment Officer and a Director of Murray
Johnstone Limited.
Andrew studied at Melbourne University where he took an Honours degree in
Arts, majoring in Economics and Oriental Studies (including Chinese and Japanese
languages). This was followed by a post graduate course at Ritsumeikan
University in Kyoto, Japan, prior to joining the Australian Department of
Foreign Affairs. He joined Murray Johnstone in January 1985, initially as an
analyst in the UK and US Departments, before being appointed a Portfolio Manager
in the Japanese Department. He played a prominent role in the establishment and
operation of Yamaichi-Murray Johnstone, a joint venture company formed in 1986
to invest Japanese institutional funds internationally and remains a Director of
the company. In 1992, he joined Murray Johnstone International to develop and
manage its Canadian operations and to support the company's growing US business.
He was appointed a Director of Murray Johnstone International in January 1993
and is a member of the asset/country allocation team.
James graduated in 1989 with Honours in Mathematics and Statistics from
Edinburgh University. He joined Murray Johnstone in July 1989 as an analyst in
the UK department, researching various market sectors and subsequently becoming
a portfolio manager. He is an Associate of the Institute of Investment
Management and Research (this is a British investment management qualification),
and a CFA (American qualification). He joined Murray Johnstone International in
1992, becoming a member of the asset allocation team for international and
global investment accounts. He was involved in research into the performance and
development of the MJI asset allocation model. In 1993, James supported
marketing in the United State by the Calvert Group for the MJI-managed,
responsibly invested Calvert Global Equity Fund and until the end of 1995, James
was a member of the team servicing private clients in North America. He was then
promoted to the role of portfolio manager - country allocation team and is based
in our Glasgow headquarters.
Administrator
Lancaster Administrative Services, Inc., has been retained as the Fund's
Administrator under a Transfer Agent and Administrative Services Agreement with
the Fund. The Administrator provides, or contracts with others to provide, all
necessary recordkeeping services and share transfer services for the Fund. The
Administrator is entitled to receive an administration fee, computed and paid
monthly, at an annual rate of .10% of the average daily net assets of each
Portfolio. The Administrator intends to enter into Sub-Administration Agreements
with various banks and financial institutions pursuant to which such banks and
financial institutions will provide subaccounting and other shareholder services
to their customers who invest in the Portfolios. These Sub-Administration
Agreements will provide for the payment of a fee of up to .10% of average daily
net assets of the Portfolios represented by shares held by the banks. Banks may
reimburse customer accounts for such fees if required by local trust laws.
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<PAGE>
Expenses
The expenses paid by the Portfolios are deducted from total income before
dividends are paid. These expenses include, but are not limited to, the fees
paid to the Adviser and the Administrator, taxes, interest, ordinary and
extraordinary legal and auditing fees, custodial charges, registration and blue
sky fees incurred in registering and qualifying the Portfolios under state and
federal securities laws, association fees, director fees paid to directors who
are not affiliated with the Adviser, and any other fees not expressly assumed by
the Adviser or Administrator. Any general expenses of the Fund that are not
readily identifiable as belonging to a particular Portfolio will be allocated to
the Portfolios on a pro rata basis, at the time such expenses are accrued. The
Portfolios pay their own brokerage commissions and related transactions costs.
Portfolio Brokerage
The primary consideration in effecting transactions for the Portfolios is
execution at the most favorable prices. Except as specifically noted above, the
Adviser and Sub-Adviser have complete freedom as to the markets in and the
broker-dealers through or with which (acting on an agency basis or as principal)
they seek execution at the most favorable prices. The Adviser and Sub-Adviser
may consider a number of factors in determining which broker-dealers to use for
the Portfolios' transactions. These factors, which are more fully discussed in
the Statement of Additional Information, include, but are not limited to,
research services, the reasonableness of commissions and quality of services and
execution. Portfolio transactions for the Portfolios may be effected through
SMITH HAYES, which also acts as the Distributor of the Fund's shares, if the
commissions, fees or other remuneration received by SMITH HAYES are reasonable
and fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on an exchange during a comparable period of time. SMITH
HAYES has represented that, in executing portfolio transactions for the Fund, it
intends to charge commissions which are substantially less than non-discounted
retail commissions. In effecting portfolio transactions through SMITH HAYES, the
Fund intends to comply with Section 17(e)(1) of the Investment Company Act of
1940 (the "1940 Act"), as amended.
Banking Law Matters
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Federal Bank Holding Company Act of
1956 or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares and prohibit banks generally
from issuing, underwriting, selling or distributing securities. The same laws
and regulations generally permit a bank or bank affiliate to act as investment
adviser, administrator transfer agent or custodian to an investment company and
to purchase shares of the investment company as agent for and upon the order of
a customer. The Fund believes that the Adviser and any other bank or bank
affiliate that may perform advisory or sub-transfer agent or similar services
may perform the services described in this Prospectus for the Fund and its
shareholders without violating applicable federal banking laws or regulations.
However, judicial or administrative decisions or interpretations of, as
well as changes in, either federal or state statutes or regulations relating to
the activities of banks and their affiliates could prevent a bank or bank
affiliate from continuing to perform all or a part of the activities
contemplated by this Prospectus. If a bank or bank affiliate were prohibited
from so acting, its shareholder customers would be permitted to remain
shareholders of the Fund and an alternative means of continuing the servicing of
such shareholders would be sought. In such event, changes in the operation of
the Fund might occur and a shareholder serviced by such bank or bank affiliate
might no longer be able to avail itself of their services.
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<PAGE>
It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
Performance Information
From time to time, performance information for the Portfolios showing a
Portfolio's average annual total return, aggregate total return and/or yield may
be presented in advertisements and sales literature. Such performance figures
are based on historical earnings and are not intended to indicate future
performance. Average annual total return will be calculated for the period since
the establishment of the Portfolio for which performance is being calculated.
Average annual total return is measured by comparing the value of an investment
in a Portfolio at the beginning of the relevant period to the redeemable value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions). Aggregate total return is
calculated similarly to average annual total return except that the return
figure is aggregated over the relevant period instead of annualized. Yield will
be computed by dividing a Portfolio's net investment income per share (as
calculated on a yield to maturity basis) earned during a recent 30-day period by
that Portfolio's per share maximum offering price (reduced by any undeclared
earned income expected to be paid shortly as a dividend) earned on the last day
of the period and annualizing the result.
In addition, from time to time the Portfolios may present their
distribution rate in supplemental sales literature which is accompanied or
preceded by a prospectus and in its shareholder reports. Distribution rates will
be computed by dividing the distribution per share made by a Portfolio over a
12-month period by the maximum offering price per share. The calculation of
income and the distribution rate includes both income and capital gains
dividends and does not reflect unrealized gains or losses. The distribution rate
differs from the yield, because it includes capital items which are often
non-reoccurring in nature, whereas yield does not include such items.
Investors may also judge the performance of each Portfolio by comparing its
performance to the performance of other mutual funds or other mutual fund
portfolios with comparable investment objectives and policies through various
mutual fund or market indices and to data prepared by various services, which
indices or data may be published by such services or by other services or
publications. In addition to performance information, general information about
the Portfolios that appears in such publications may be included in
advertisements and reports to shareholders.
Yield and total return are functions of the type and quality of instruments
held by a Portfolio, operating expenses and market conditions. Consequently,
current yields and total return will fluctuate and are not necessarily
representative of future results. Any fees charged by the Adviser or any of its
affiliates with respect to customer accounts for investing in shares of any of
the Portfolios will not be included in performance calculations; such fees, if
charged, will reduce the actual performance by that quoted. In addition, if the
Adviser, the Administrator, or other parties providing services to the Fund,
voluntarily reduce all or part of their respective fees for a Portfolio, the
yield and total return for that Portfolio will be higher than it would otherwise
be in the absence of such voluntary fee reductions.
PURCHASE OF SHARES
General
SMITH HAYES acts as the principal distributor of the Fund's shares. The
Portfolios' shares may be purchased at the net asset value per share from
registered representatives of SMITH HAYES and from certain other broker-dealers
who have sales agreements with SMITH HAYES. The address of SMITH HAYES is that
of the Fund. Shareholders will receive written confirmation of their purchases.
Stock
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<PAGE>
certificates will not be issued in order to facilitate redemptions and exchanges
between the Portfolios. SMITH HAYES reserves the right to reject any purchase
order.
Investors may purchase shares by completing the Purchase Application
included in this Prospectus and submitting it with a check payable to:
STRATUS FUND, Inc.
200 Centre Terrace
1225 "L" Street
Lincoln, Nebraska 68508
For subsequent purchases, the name of the account and the account number
should be included with any purchase order to properly identify your account.
Payment for shares may also be made by bank wire. To do so, the investor must
direct his or her bank to wire immediately available funds directly to the
Custodian as indicated below:
1. Telephone the Fund (402) 476-3000 and furnish the name, the account
number and the telephone number of the investor as well as the amount being
wired and the name of the wiring bank. If a new account is being opened,
additional account information will be requested and an account number will be
provided.
2. Instruct the bank to wire the specific amount of immediately available
funds to the Custodian. The Fund will not be responsible for the consequences of
delays in the bank or Federal Reserve wire system. The investor's bank must
furnish the full name of the investor's account and the account number.
The wire should be addressed as follows:
UNION BANK AND TRUST COMPANY Lincoln, Nebraska Fund Department, ABA
#104910795 Lincoln, Nebraska 68506 Account of STRATUS FUND, Inc.
-----------------------------
FBO (Account Registration name)
#_____________________________
3. Complete a Purchase Application and mail it to the Fund, if shares being
purchased by bank wire transfer represent an initial purchase. (The completed
Purchase Application must be received by the Fund before subsequent instructions
to redeem Fund shares will be accepted). Banks may impose a charge for the wire
transfer of funds.
Minimum Investments
Except as provided under the Automatic Investment Plan a minimum initial
aggregate investment of $1,000 is required, unless waived by the Distributor.
All investments must be made through your SMITH HAYES investment executive or
other broker-dealer.
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Automatic Investment Plan
Under an automatic investment plan, money is withdrawn each month from a
shareholder's predesignated bank account for investment in a Portfolio. The
minimum investment is $50 per Portfolio. A shareholder must make an initial
investment of at least $50 in each receiving Portfolio. By investing the same
dollar amount each month, a shareholder will purchase more shares when a
Portfolio's net asset value is low and fewer shares when the net asset value is
high. This means that the shareholder's average purchase price per share can be
lower than if he or she purchased the same total number of shares in a single
transaction. While periodic investing can help build significant savings over
time, it does not assure a profit or protect against loss in a declining market.
Investor's must notify their account representative to establish an
automatic investment plan, and his or her bank must be a member of the Automated
Clearing House. The shareholder may revoke the plan at any time, but it may take
up to 15 days from the date a written revocation notice is received to terminate
the plan. Any purchases of shares made during the period shall be considered
authorized. If an automatic withdrawal cannot be made from the shareholder's
predesignated bank account to provide funds for automatic share purchases, the
shareholder's plan will be terminated.
Sales Charges
The purchase of shares of the Portfolios is subject to a sales charge which
varies depending on the size of the purchase. The following table shows the
regular sales charges on Portfolio shares to a single purchaser, together with
the reallowance paid to dealers and the agency commission paid to brokers
(collectively, the "Commission").
Intermediate Government Bond Portfolio
Government Securities Portfolio
Sales Charge as Reallowance and
Sales Charge as a Percentage of Broker Commission
a percent of Net Amount as a Percentage
Amount of Purchase Offering Price Invested of Offering Price
- --------------------------------------------------------------------------------
less than $50,000 3% 3.10% 2.25%
$50,000 but less than $100,000 2% 2.04% 1.50%
$100,000 and over(1) 0% 0% 0%
- ------------------------------------------------------------------------------
(1) Although no sales charge is paid by a Customer investing amounts over
$100,000, a brokerage commission may be paid in connection with such
transactions.
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Growth Portfolio
Capital Appreciation Portfolio
International Portfolio
Sales Charge as Reallowance and
Sales Charge as a Percentage of Broker Commission
a percent of Net Amount as a Percentage
Amount of Purchase Offering Price Invested of Offering Price
- ------------------------------------------------------------------------------
less than $50,000 4% 4.17% 3.00%
$50,000 but less than $100,000 3% 3.09% 2.25%
$100,000 and over(1) 0% 0% 0%
- --------------------------------------------------------------------------------
(1) Although no sales charge is paid by a Customer investing amounts over
$100,000, a brokerage commission may be paid in connection with such
transactions.
Under certain circumstances, commissions up to the amount of the entire sales
charge may be reallowed to certain investment professionals, who might then be
deemed to be "underwriters" under the Securities Act of 1933, as amended.
Reduction of Sales Charge: Right of Accumulation.
In calculating the sales charge rates applicable to current purchases
of shares of the Portfolio, a single purchaser is entitled to combine current
purchases with the current market value of previously purchased shares of the
Portfolio. The right of accumulation will be available only if the purchaser
notifies the Distributor in writing at the time of purchase of purchaser's prior
purchase of Portfolio shares.
Reinstatement Privilege
A shareholder who has redeemed shares of the Portfolio has a one-time
right to reinvest the redemption proceeds in shares of the Portfolio at net
asset value as of the time of reinvestment. Such a reinvestment must be made
within 30 days of the redemption and is limited to the amount of the redemption
proceeds. Although redemptions and repurchases of shares are taxable events, a
reinvestment within such 30-day period in the same fund is considered a "wash
sale" and results in the inability to recognize currently all or a portion of a
loss realized on the original redemption for federal income tax purposes. The
shareholder must notify the Distributor at the time the trade is placed that the
transaction is a reinvestment.
Sales Charge Waivers.
No sales charge is imposed on shares of the Portfolios (i) issued in
plans of reorganization, such as mergers, asset acquisitions and exchange
offers, to which the Fund is a party, (ii) sold to Union Bank and Trust Company
acting in its capacity as trustee for trust, employee benefit and managed agency
accounts in which external account fees are charged for services rendered.
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<PAGE>
Exchange Privileges
Once payment for shares has been received (i.e., an account has been
established), a shareholder may exchange some or all of such shares for shares
of other Portfolios of the Fund.
Exchanges are made at net asset value plus any applicable sales charge.
No additional sales charge will be imposed in connection with an exchange of
shares of a Portfolio for shares of another Portfolio if such exchange occurs
more than 6 months after the purchase of the Portfolio shares disposed of in the
exchange. If, within 6 months of their acquisition, shares of a Portfolio are
exchanged for shares of one of another Portfolio with a higher sales charge, the
customer will pay the difference between the sales charges in connection with
the exchange. No refund of a sales charge will be made if shares of a Portfolio
are exchanged for shares of another Portfolio that imposes a lower sales charge.
If a shareholder buys shares of a Portfolio and receives a sales charge
waiver, the shareholder will be deemed to have paid the sales charge for
purposes of this exchange privilege. In calculating any sales charge payable on
an exchange, the Fund will assume that the first shares exchanged are those on
which a sales charge has already been paid. Sales charge waivers may also be
available under certain circumstances, as described in this Prospectus. The Fund
reserves the right to change the terms and conditions of the exchange privilege
discussed herein, or to terminate the exchange privilege, upon sixty days'
notice.
Shareholders should contact the Distributor for instructions on how to
exchange shares. Exchanges will be made only after receipt by the Distributor of
proper instructions in writing or by telephone (an "Exchange Request") for an
established account. If an Exchange Request in good order is received by the
Distributor by 4:00 p.m. Eastern time on any Business Day, the exchange will
ordinarily be effective on that day. Any shareholder who wishes to make an
exchange must have received a current prospectus of the Portfolio into which the
exchange is being made before the exchange will be effected.
Each exchange between the Portfolio and another Portfolio actually
represents the sale of shares of one portfolio and the purchase of shares in the
other, which may produce a gain or loss for tax purposes. In order to protect
the Portfolio's performance and its shareholders, the Fund discourages frequent
exchange activity in response to short-term market fluctuations. The Fund
reserves the right to modify or withdraw the exchange privilege or to suspend
the offering of shares in any class without notice to shareholders if, in the
Adviser's judgment, the Portfolio would be unable to invest effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. The Fund also reserves the right to reject
any specific purchase order, including certain purchases by exchange.
REDEMPTION OF SHARES
Redemption Procedure
Shares of the Portfolios, in any amount, may be redeemed at any time at
their current net asset value next determined after a request in good order is
received by SMITH HAYES. To redeem shares of the Portfolios, an investor must
make a redemption request through a SMITH HAYES investment executive or other
broker-dealer. If the redemption request is made to a broker-dealer other than
SMITH HAYES, such broker-dealer will wire a redemption request to SMITH HAYES
immediately following the receipt of such a request. A redemption request will
be considered to be in "good order" if made in writing and accompanied by the
following:
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<PAGE>
1. a letter of instruction or stock assignment specifying the number or
dollar value of shares to be redeemed, signed by all the owners of the shares in
the exact names in which they appear on the account, or by an authorized officer
of a corporate shareholder indicating the capacity in which such officer is
signing;
2. a guarantee of the signature of each owner by an eligible institution
which is a participant in the Securities Transfer Agent Medallion Program which
includes many U.S. commercial banks and members of recognized securities
exchanges; and
3. other supporting legal documents, if required by applicable law, in the
case of estates, trusts, guardianships, custodianships, corporations and pension
and profit-sharing plans.
Payment of Redemption Proceeds
Normally, the Fund will make payment for all shares redeemed within
five business days, but in no event will payment be made more than seven days
after receipt by SMITH HAYES of a redemption request in good order. However,
payment may be postponed or the right of redemption suspended for more than
seven days under unusual circumstances, such as when trading is not taking place
on the New York Stock Exchange. Payment of redemption proceeds may also be
delayed until the check used to purchase the shares to be redeemed has cleared
the banking system, which may take up to 15 days from the purchase date. A
shareholder may request that the Fund transmit redemption proceeds by Federal
Funds bank wire to a bank account designated on the shareholder's account
application form, provided such bank wire redemptions are in the amounts of $500
or more and all requisite account information is provided to the Fund.
Involuntary Redemption
The Fund reserves the right to redeem a shareholder's account at any
time the net asset value of the account falls below $500 as the result of a
redemption or transfer request. Shareholders will be notified in writing that
the value of their account is less than $500 and will be allowed 30 days to make
additional investments before the redemption is processed.
Automatic Withdrawal Plan
Investors who own shares of the Fund with a value of $5,000 or more may
elect to redeem a portion of their shares on a regular periodic (monthly,
quarterly or annual) basis. The minimum withdrawal amount is $100. Payment may
be made to the shareholder, a predesignated bank account, or to another payee.
Under this plan, sufficient shares are redeemed form the shareholder's account
in time to send a check in the amount requested on or about the first day of a
month. Redemptions under the automatic withdrawal plan will reduce and may
ultimately exhaust the value of the designated account. Taxable gains or losses
may be realized when shares are redeemed under the automatic withdrawal plan.
Purchasing additional shares concurrently with automatic withdrawals is
likely to be disadvantageous to the shareholder because to tax liabilities.
Consequently, the Portfolio will not normally accept additional purchase
payments in single amounts of less than $5,000 from a shareholder who has this
plan in effect. Any charges to operate an automatic withdrawal plan will be
assessed against the shareholder's account when each withdrawal is effected.
Investor's must notify their account representative to establish an
automatic withdrawal plan. Forms must be properly completed and received at
least 30 days before the first payment date. An automatic withdrawal plan may be
terminated at any time, by written notice from the shareholder.
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<PAGE>
VALUATION OF SHARES
The Portfolios determine their net asset value on each day the New York
Stock Exchange (the "Exchange") is open for business, provided that the net
asset value need not be determined for a Portfolio on days when no Portfolio
shares are tendered for redemption and no order for Portfolio shares is
received. The calculation is made as of the close of business of the Exchange
(currently 4:00 p.m., Eastern time) after the Portfolios have declared any
applicable dividends.
The net asset value per share for each of the Portfolios is determined
by dividing the value of the securities owned by the Portfolio plus any cash and
other assets (including interest accrued and dividends declared but not
collected) less all liabilities by the number of Portfolio shares outstanding.
For the purposes of determining the aggregate net assets of the Portfolios, cash
and receivables will be valued at their face amounts. Interest will be recorded
as accrued and dividends will be recorded on the ex-dividend date. Securities
traded on a national securities exchange or on the Nasdaq Stock Market are
valued at the last reported sale price that day. Securities traded on a national
securities exchange or on the Nasdaq Stock Market for which there were no sales
on that day and securities traded on other over-the-counter markets for which
market quotations are readily available are valued at the mean between the bid
and the asked prices. Portfolio securities underlying actively traded options
will be valued at their market price as determined above. The current market
value of any exchange-traded option held by a Portfolio is its last sales price
on the exchange prior to the time when assets are valued unless the bid price is
higher or the asked price is lower, in which event such bid or asked price is
used. Lacking any sales that day, the options will be valued at the mean between
the current closing bid and asked prices. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
in good faith by the Board of Directors. With the approval of the Board of
Directors, the Portfolios may utilize a pricing service, bank, or broker-dealer
experienced in such matters to perform any of the above-described functions.
DIVIDENDS AND TAXES
Dividends
All net investment income dividends and net realized capital gains
distributions with respect to the shares of any Portfolio will be payable in
additional shares of such Portfolio (which will be issued at the net asset value
next determined following the record date) unless the shareholder notifies his
or her SMITH HAYES investment executive or other broker-dealer of an election to
receive cash. The taxable status of income dividends and/or net capital gains
distributions is not affected by whether they are reinvested or paid in cash.
Each of the Portfolios will pay dividends from net investment income to
its shareholders at least annually or as may be required to remain a regulated
investment company under the Internal Revenue Code (the "Code") and distribute
net realized capital gains, if any, to its shareholders on an annual basis.
Taxes
The Portfolios will each be treated as separate entities for federal
income tax purposes. The Fund intends to qualify the Portfolios as "regulated
investment companies" as defined in the Code. Provided certain distribution
requirements are met, the Portfolios will not be subject to federal income tax
on their net investment income and net capital gains that they distribute to
their shareholders.
Shareholders subject to federal income taxation will receive taxable
dividend income or capital gains, as the case may be, from distributions,
whether paid in cash or received in the form of additional
29
<PAGE>
shares. Promptly after the end of each calendar year, each shareholder will
receive a statement of the federal income tax status of all dividends and
distributions paid during the year.
Shareholders of the Intermediate Government Bond and the Government
Securities Portfolios may be able to exclude a portion of the dividends received
from taxable income as exempt interest income under various state income tax
rules. Shareholders should consult their tax advisers as to the extent and
availability of these exclusions.
The Fund is subject to the backup withholding provisions of the Code
and is required to withhold income tax from dividends and redemptions paid to a
shareholder, if such shareholder fails to furnish the Fund with a taxpayer
identification number or under certain other circumstances. Accordingly,
shareholders are urged to complete and return Form W-9 when requested to do so
by the Fund.
This discussion is only a summary and relates solely to federal tax
matters. Dividends may also be subject to state and local taxation. Shareholders
are urged to consult with their personal tax advisers.
GENERAL INFORMATION
Capital Stock
The Fund is authorized to issue a total of one billion shares of common
stock, with a par value of $.001 per share. Of these shares, the Board of
Directors has authorized the issuance of shares in series designated
Intermediate Government Bond Portfolio, Government Securities Portfolio, Growth
Portfolio, Capital Appreciation Portfolio and International Portfolio shares.
Shares of the series designated Equity Income Portfolio are referred to herein
as "Growth Portfolio" shares. The Board of Directors designated 10 million
shares to each of the Portfolios. The Board of Directors is empowered under the
Fund's Articles of Incorporation to issue other series of the Fund's common
stock without shareholder approval or to designate additional authorized but
unissued shares for issuance by one or more existing Portfolios.
All shares, when issued, will be fully paid and nonassessable and will
be redeemable and freely transferable. All shares have equal voting rights. They
can be issued as full or fractional shares. A fractional share has pro rata the
same rights and privileges as a full share. The shares possess no preemptive or
conversion rights.
Voting Rights
Each share of the Portfolios has one vote (with proportionate voting
for fractional shares) irrespective of the relative net asset value of the
Fund's shares. On some issues, such as the election of directors, all shares of
the Fund, irrespective of series, vote together as one series. Cumulative voting
is not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will be
unable to elect any directors.
On an issue affecting only one Portfolio, the shares of the Portfolio
vote as a separate series. Examples of such issues would be proposals to change
the Investment Advisory Agreement or change a fundamental investment restriction
pertaining to only one Portfolio. In voting on the Investment Advisory Agreement
or proposals affecting only one Portfolio, approval of such an agreement or
proposal by the shareholders of one Portfolio would make that agreement
effective as to that Portfolio whether or not the agreement or proposal had been
approved by the shareholders of the Fund's other Portfolios.
30
<PAGE>
As of June 30, 1996, the Adviser held of record but not beneficially, a
substantial majority of the outstanding shares of each of the Portfolios and
therefore may be deemed to control each of the Portfolios within the meaning of
the 1940 Act.
Shareholders Meetings
The Fund does not intend to hold annual or periodically scheduled
regular meetings of shareholders unless it is required to do so. Minnesota
corporation law requires only that the Board of Directors convene shareholder
meetings when it deems appropriate. However, Minnesota law provides that if a
regular meeting of shareholders has not been held during the immediately
preceding 15 months, a shareholder or shareholders holding 3% or more of the
voting shares of the Fund may demand a regular meeting of shareholders by
written notice given to the chief executive officer or chief financial officer
of the Fund. Within 30 days after receipt of the demand, the Board of Directors
shall cause a regular meeting of shareholders to be called, which meeting shall
be held no later than 90 days after receipt of the demand, all at the expense of
the Fund.
In addition, the 1940 Act requires a shareholder vote for all
amendments to fundamental investment policies and restrictions, for all
investment advisory contracts and amendments thereto, and for approval and all
amendments to Rule 12b-1 distribution plans. Finally, the Fund's Articles of
Incorporation provide that shareholders also have the right to remove Directors
upon two-thirds vote of the outstanding shares and may call a meeting to remove
a Director upon the application of 10% or more of the outstanding shares. The
Fund is obligated to facilitate shareholder communications in this situation if
certain conditions are met.
Allocation of Income and Expenses
The assets received by the Fund for the issue or sale of shares of the
Portfolios, and all income, earnings, profits, and proceeds thereof, subject
only to the rights of creditors, are allocated to the Portfolios, and constitute
the underlying assets of the Portfolios. The underlying assets of the Portfolios
are required to be segregated on the books of account, and are to be charged
with the expenses of the Portfolios and with a share of the general expenses of
the Fund. Any general expenses of the Fund not readily identifiable as belonging
to a particular series are allocated among all series based upon the relative
net assets of each series at the time such expenses were accrued.
Transfer Agent, Dividend Disbursing Agent and Custodian
Union Bank and Trust Company, Lincoln, Nebraska, serves as Custodian
for the Fund's portfolio securities and cash. The Administrator acts as Transfer
Agent and Dividend Disbursing Agent. In its capacity as Transfer Agent and
Dividend Disbursing Agent, the Administrator performs many of the clerical and
administrative functions for the Portfolios.
Reports to Shareholders
The Fund will issue semi-annual reports which will include a list of
securities of the Portfolio owned by the Fund and financial statements, which in
the case of the annual report, will be examined and reported upon by the Fund's
independent auditor.
31
<PAGE>
Counsel
Ballard Spahr Andrews & Ingersoll serves as counsel to the Fund.
Auditors
The Fund's auditors are Deloitte & Touche, LLP, Lincoln, Nebraska,
independent certified public accountants.
32
<PAGE>
STRATUS FUND, INC.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
GROWTH PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERNATIONAL PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
October 1, 1996
This Statement of Additional Information is not a prospectus.
This Statement of Additional Information relates to the combined Prospectus for
the Intermediate Government Bond Portfolio, Government Securities Portfolio,
Growth Portfolio Capital Appreciation Portfolio and International Portfolio of
STRATUS FUND, Inc. (the "Fund") dated October 1, 1996, and should be read in
conjunction therewith. A copy of the Prospectus may be obtained from the Fund at
200 Centre Terrace, 1225 "L" Street, Lincoln, Nebraska, 68508.
Table of Contents
Page
GENERAL INFORMATION................................................... 3
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS...................... 3
Intermediate Government Bond Portfolio....................... 3
Government Securities Portfolio.............................. 3
Growth Portfolio............................................. 3
Capital Appreciation Portfolio............................... 4
International Portfolio...................................... 4
Portfolio Turnover........................................... 4
All Portfolios............................................... 4
DIRECTORS AND EXECUTIVE OFFICERS...................................... 5
INVESTMENT ADVISORY AND OTHER SERVICES................................ 7
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS...................... 11
CAPITAL STOCK AND CONTROL............................................. 12
NET ASSET VALUE AND PUBLIC OFFERING PRICE............................. 14
REDEMPTION............................................................ 14
TAX STATUS............................................................ 14
CALCULATIONS OF PERFORMANCE DATA...................................... 15
FINANCIAL STATEMENTS.................................................. 16
AUDITORS ............................................................. 16
APPENDIX A - Ratings of Corporate Obligations.........................A-1
<PAGE>
GENERAL INFORMATION
The shares of STRATUS FUND, Inc. (the "Fund") are currently offered in
series, with each series representing a separate investment portfolio with its
own investment objectives and policies. This Statement of Additional Information
relates to the series of shares designated Intermediate Government Bond
Portfolio, Government Securities Portfolio, Growth Portfolio, Capital
Appreciation Portfolio and International Portfolio (the "Portfolios"). The Fund
was originally incorporated under the name NEW HORIZON FUND, INC. on October 29,
1990 and changed its name to APEX FUND, Inc. on November 9, 1990. The name was
changed to STRATUS FUND, INC. on January 23, 1991. The Union Government
Securities Portfolio and Union Equity Income Portfolio changed their names to
Government Securities Portfolio and Equity Income Portfolio effective April 30,
1994. The Equity Income Portfolio was renamed the Growth Portfolio as of
February 15, 1996. The Growth/Income Portfolio of the Fund was merged into the
Equity Income Portfolio on the same date and ceased separate existence.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The following discussions provides certain information
concerning the investment objectives and policies of the Portfolios, along with
a description of certain restrictions applicable to the investment programs of
the Portfolios. See the Prospectus for further information concerning the
investment policies of the Portfolios.
Intermediate Government Bond Portfolio
The investment objective of the Intermediate Government Bond Portfolio
is to provide current income, some or all of which is exempt from state income
tax, consistent with the preservation of capital. In order to achieve this
objective, at least 80% of the assets of the Portfolio will be invested, at the
time of purchase, in securities issued or guaranteed by the United States
Government, its agencies or its instrumentalities. The Portfolio will maintain
an average dollar weighted maturity of between three and ten years on debt
securities it owns.
Government Securities Portfolio
The investment objective of the Government Securities Portfolio is to
provide current income consistent with the preservation of capital. In order to
achieve this objective, at least 80% of the total assets of the Portfolio will
be invested, at the time of purchase, in securities issued or guaranteed by the
United States Government, its agencies or its instrumentalities. The Portfolio
may invest the remainder of its assets in: (1) Domestic marketable debt
obligations, rated at time of purchase within the three highest debt rating
categories established by Moody's Investors Service, Inc. (Moody's) or Standard
and Poor's Corporation ("Standard and Poor's); (2) Obligations of commercial
banks, including repurchase agreements; or (3) Money Market investments, as
fully described in the Prospectus.
Growth Portfolio
The Growth Portfolio has an investment objective of capital
appreciation and income. Ordinarily, the Growth Portfolio will be principally
invested in common stocks and other equity-related securities, such as
convertible bonds and preferred stock. Investments in convertible bonds and
preferred stock will only be made in securities which are rated in the top three
classifications by Moody's or S&P. (see "Appendix A" hereto for a description of
these ratings).
In addition to common and preferred stocks, the Growth Portfolio may
invest in other securities having equity features because they are convertible
into, or represent the right to purchase, common stock. Convertible bonds and
debentures are corporate debt instruments, frequently unsecured and subordinated
to senior corporate debt, which may be converted into common stock at a
specified price. Such securities may trade at a premium over their face amount
when the price of the underlying common stock exceeds the conversion price, but
otherwise will normally trade at prices reflecting current interest rate trends.
The Growth Portfolio may purchase securities of other investment companies,
subject to the limitations discussed under "Investment Objectives, Policies and
Restrictions - All Portfolios." The Growth Portfolio does not intend to purchase
any such securities involving the payment of a front-end sales load, but may
purchase shares of investment companies specializing
2
<PAGE>
in securities in which the Growth Portfolio has a particular interest or shares
of closed-end investment companies which frequently trade at a discount from
their net asset value.
Capital Appreciation Portfolio
The Investment Objective of the Capital Appreciation Portfolio is
capital appreciation. The Portfolio will seek to achieve this objective by
investing in a diversified portfolio of common stocks and securities convertible
into common stocks. The Investment Adviser intends to invest principally in
companies which it believes will have earnings growth above the market averages
with an emphasis toward companies whose growth the Investment Adviser believes
has not been fully reflected in the market price of such companies' shares.
While the Portfolio may assume from time to time temporary defensive positions
and invest in U.S. Government debt securities, repurchase agreements and money
market instruments, the Portfolio will maintain at least 65% of its total assets
in common stocks or in securities convertible into common stock at all times.
International Portfolio
The investment objective of the International Portfolio is high total
return consistent with reasonable risk by investing in a diversified portfolio
of securities of companies located in countries other than the United States.
Under normal circumstances, the International Portfolio will invest at least 65%
of its total assets in common stocks of established foreign companies believed
by the Portfolio's sub-adviser to have potential for capital growth, income, or
both.
Portfolio Turnover
The portfolio turnover rate for each of the Portfolios is calculated by
dividing the lesser of a Portfolio's purchases or sales of securities for the
year by the monthly average value of the securities. The calculation excludes
all securities whose remaining maturities at the time of acquisition were one
year or less. The portfolio turnover rate may vary greatly from year to year as
well as within a particular year, and may also be affected by cash requirements
for redemption of shares. Portfolio turnover will not be a limiting factor in
making investment decisions.
All Portfolios
The Fund has adopted a number of investment policies and restrictions
for all the Portfolios, some of which can be changed by the Board of Directors.
Others may be changed only by the holders of a majority of the outstanding
shares of each Portfolio and include the following:
Without shareholder approval, each of the Portfolios may not:
(1) purchase any securities other than those described under
"Investment Objectives and Policies" in the Prospectus for
each Portfolio (except that this limitation shall not apply to
the International Portfolio):
(2) invest more than 5% as to 75% of its total assets, except that
the Intermediate Government Bond Portfolio may not invest more
than 5% as to 100% of its total assets, taken at market value
at the time of a particular purchase, in the securities of any
one issuer, other than in U.S. Government securities;
(3) invest more than 5% of its total assets, taken at market value
at the time of a particular purchase, in securities of issuers
with operating records, including any predecessors, of less
than three years;
(4) acquire more than 10%, at the time of a particular purchase,
of the outstanding voting securities of any one issuer;
(5) invest in companies for the purpose of exercising control or
influencing management;
3
<PAGE>
(6) purchase securities of other investment companies, except in
connection with a merger, acquisition, consolidation or
reorganization or by purchase in the open market where no
profit to the sponsor or dealer results from the purchase
other than customary brokerage commissions or pursuant
to the provisions of the Investment Company Act of 1940 which
restricts purchases to not more than 3%of the stock of another
investment company or purchases of stock of other investment
companies equal to more than 5% of the respective Portfolio's
assets in the case of a single investment company and 10% of
such assets in the case of all investment companies in the
aggregate;
(7) purchase or sell real estate, commodities or commodity
contracts, futures contracts or interests in oil, gas or other
mineral exploration or development programs;
(8) purchase securities on margin or make short sales;
(9) underwrite securities of other issuers;
(10) purchase or write puts, and calls, or engage in straddles, and
spreads or any combination thereof other than as described
under "Special Investment Methods" in the Prospectus;
(11) make loans to other persons other than by purchasing part of
an issue of debt obligations; a Portfolio may, however, invest
up to 10% of its total assets, taken at market value at time
of purchase, in repurchase agreements maturing in not more
than seven days;
(12) borrow money, except to meet extraordinary or emergency needs
for funds, and then only from banks in amounts not exceeding
10% of its total assets, nor purchase securities at any time
borrowings exceed 5% of its total assets;
(13) mortgage, pledge, hypothecate, or in any manner transfer, as
security for indebtedness, any securities owned by the
respective Portfolio except as may be necessary in connection
with borrowings as described in (12) above and then securities
mortgaged, hypotheticated or pledged may not exceed 5% of the
respective Portfolio's total assets taken at market value;
(14) invest in securities with legal or contractual restrictions on
resale (except for repurchase agreements as described in (11)
above); and
(15) purchase or hold securities of any issuer if 5% of the
securities of such issuer are owned by the Adviser or by
directors and officers of the Fund or the Adviser owning
individually more than 1/2 of 1% of its securities.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five
years of the directors and executive officers of the Fund are given below:
4
<PAGE>
Name, Position with Fund and Address Principal Occupation Last Five Years
- --------------------------------- -----------------------------------------
*Thomas C. Smith, Chief Financial Chairman, CONLEY SMITH Inc.;Vice President,
Officer & Treasurer; Lancaster Administrative Services, Inc.,
200 Centre Terrace, 1225 "L" Street Lincoln, Nebraska; Chairman and President,
Lincoln, Nebraska 68501 SMITH HAYES Financial Services Corporation
Lincoln, Nebraska; Chairman and President,
Consolidated Investment Corporation,
Lincoln, Nebraska; Vice President and
Director, Consolidated Realty Corporation,
Lincoln, Nebraska.
*Michael S. Dunlap, President Executive Vice President and Director Union
and Secretary Bank and Trust Company, Lincoln, Nebraska;
4732 Calvert Street Director, Lancaster County Bank, Waverly,
Lincoln, Nebraska 68506 Nebraska; and Unipac Service Corporation.
Stan Schrier, Director President, Food 4 Less, Inc., a retail
11128 John Galt Blvd. grocery chain, and owner, Schrier-Lawson
Omaha, Nebraska 68137 Motor Center.
R. Paul Hoff, Director Physician and CEO of Seward Clinic,
311 Jackson P.C., Seward, Nebraska.
Seward, Nebraska 68434
Edson L. Bridges III, Director Director, Bridges Investment Fund, Inc.,
8401 W. Dodge Road, #256 a registered open end management investment
Omaha, Nebraska 68114 company, February, 1991 to present; Vice
President and Director of Bridges
Investment Counsel Inc.,
a registered investment adviser.
Jon Gross, President Trust Officer, Union Bank and Trust
3643 South 48th Street Company, Lincoln, Nebraska, since 1991
Lincoln, Nebraska 68506 and an employee of Union Bank and Trust
Company since 1988.
*Interested directors of the Fund by virtue of their affiliation with
Lancaster Administrative Services, Inc., SMITH HAYES Financial Services
Corporation and Union Bank and Trust Company as defined under the Investment
Company Act of 1940.
The addresses of the directors and officers of the Fund are that of the
Fund unless otherwise indicated.
The following table represents the compensation amounts received for
services as a director of the Funds for the year ended June 30, 1995:
Compensation Table
Pension or Total
Aggregate Retirement Benefits Compensation
Compensation Accrued as Part From the Fund
Name and Position From Fund of the Fund Expenses Paid to
Directors
- ----------------- ------------ -------------------- ------------
Thomas C. Smith, Director $0 $0 $0
Chief Financial Officer
& Treasurer
5
<PAGE>
Michael S. Dunlap, $0 $0 $0
Director, President
& Secretary
Stan Schrier, Director $2,000 $0 $2,000
R. Paul Hoff, Director $2,000 $0 $2,000
Edson L. Bridges III, $2,000 $0 $2,000
Director
INVESTMENT ADVISORY AND OTHER SERVICES
General
Lancaster Administrative Services, Inc. ("LAS") acts as the
administrator ("Administrator") for the Fund and SMITH HAYES Financial Services
Corporation ("SMITH HAYES") acts as the Fund's distributor ("Distributor").
Union Bank and Trust Company, ("Union"), 4732 Calvert Street, Lincoln, NE 68506
acts as the investment adviser (the "Adviser") to the Portfolios and as the
Fund's Custodian (the "Custodian"). The Adviser acts as such pursuant to written
agreements periodically approved by the directors or the shareholders of the
Fund. Murray Johnstone International Limited ("MJI") serves as sub-adviser (the
"Sub- Adviser") for the International Portfolio pursuant to the terms of a
Sub-Advisory Agreement between the Adviser and Sub- Adviser. The Sub-Adviser's
address is 11 West Nile Street, Glasgow G1 2PX United Kingdom. SMITH HAYES acts
as the Fund's distributor pursuant to an Underwriting Agreement under which
SMITH HAYES agrees to publicly distribute the Fund's shares continuously. SMITH
HAYES has a related agreement with Union pursuant to which SMITH HAYES maintains
an office and sales personnel on Union premises to facilitate Fund distribution
as well as provide Union customers access to other brokerage services. The
Underwriting Agreement is reviewed annually by the Board of Directors and was
last approved on July 20, 1995. LAS and SMITH HAYES address is 200 Centre
Terrace, 1225 "L" Street, Lincoln, Nebraska, 68508.
Control of the Adviser, the Sub-Adviser and the Distributor
SMITH HAYES and the Administrator are wholly owned subsidiaries of
Consolidated Investment Corporation, a Nebraska corporation, which is engaged
through its subsidiaries in various aspects of the financial services industry.
Thomas C. Smith is the control person of Consolidated Investment Corporation.
Union is controlled by and is a subsidiary of Farmers and Merchants Investments,
Inc., a Nebraska bank holding company. Farmers and Merchants Investment, Inc. is
controlled by the Dunlap family of which Michael S. Dunlap is a member. The
Sub-Adviser is a wholly-owned subsidiary of United Asset Management Corporation.
Investment Advisory Agreement, Sub-Advisory Agreement and Administration
Agreement
LAS acts as Administrator to the Fund under a Transfer Agent and
Administrative Services Agreement (the "Administration Agreement"). Union acts
as the Adviser to the Portfolios, under Investment Advisory Agreements (the
"Advisory Agreements"). MJI acts as Sub-Adviser to the International Portfolio
pursuant to a Sub-Advisory Agreement with the Adviser (the "Sub-Advisory
Agreement"). The Advisory Agreements and Administration Agreement are approved
annually by the Board of Directors (including a majority of the directors who
are not parties to the Advisory or Administration Agreement, or interested
persons of any such parties (other than as directors of the Fund)). The Advisory
Agreement and Administration Agreements for the Intermediate Government Bond
Portfolio, Government Securities Portfolio, Growth Portfolio and Capital
Appreciation Portfolio were last approved by the Board of Directors on July 20,
1995. Unless sooner terminated, the Advisory Agreements and Administration
Agreement shall continue in effect for more than two years after their
execution, only so long as such continuance is specifically approved at least
annually by either the Board of Directors or by a vote of a majority of the
outstanding voting securities of the Portfolios, provided that in either event
such continuance is also approved by a vote of a
6
<PAGE>
majority of the directors who are not parties to such agreement, or interested
persons of such parties, cast in person at a meeting called for the purpose of
voting on such approval.
The Advisory Agreement for the International Portfolio and the
Sub-Advisory Agreement shall take effect on October 1, 1996, and shall continue
in effect for a period of two years from its effective date. Thereafter, the
Advisory Agreement for the International Portfolio and the Sub-Advisory
Agreement shall continue in effect only so long as such continuance is
specifically approved at least annually by the Board of Directors of the Fund or
by the votes of the majority of the outstanding voting securities of the
International Portfolio, and by the vote of a majority of the directors of the
Fund who are not parties to the Advisory Agreement or Sub-Advisory Agreement or
interested persons of the Fund, the Adviser or the Sub-Adviser.
The Advisory Agreements, Sub-Advisory Agreement and Administration
Agreement terminate automatically in the event of their assignment. In addition,
the Advisory Agreements, the Sub-Adviser Agreement and Administration Agreement
are terminable at any time, without penalty, by the Board of Directors of the
Fund or, with respect to the Advisory Agreements and Sub-Advisory Agreement, by
vote of a majority of the Trust's outstanding voting securities, on not more
than 60 days' written notice to the Adviser or Sub-Adviser as the case may be,
and by the Adviser, Sub-Adviser or Administrator, as the case may be, on 60
days' written notice to the Fund. The Administration Agreement is terminable by
the vote of a majority of all outstanding voting securities of the Fund.
Pursuant to the Advisory Agreements, the Intermediate Government Bond
Portfolio pays Union a monthly advisory fee equal on an annual basis to .65% of
the Intermediate Government Bond Portfolio's daily average net assets. The
Government Securities Portfolio and Growth Portfolio pay Union a monthly
advisory fee equal on an annual basis to .50% of their daily average net assets.
The Capital Appreciation Portfolio pays Union a monthly advisory fee calculated
at the annual rate of 1.4% of the daily net asset value of the Portfolio. In
addition this fee is subject to an incentive adjustment commencing January 4,
1994, calculated monthly, depending upon the performance of the Portfolio
relative to the Standard and Poor's 500 Index (the "Index"), on the basis of
1/12 of the results during the last 12 months (a moving average method). The
incentive adjustment, if any, is added to or subtracted from the monthly basic
management fee, and is payable after the close of each month on the basis of the
latest 12 months' experience. The incentive adjustment is accrued as incurred
for the purpose of calculating the redemption price and offering price per
share. The incentive adjustment for the Portfolio is calculated each month as
follows:
(1) The sum of the net asset value of a share of the Portfolio at
the end of the last 12 month period, plus the value per share
during such period, of all cash distributions made and capital
gain taxes paid or payable on undistributed realized long-term
capital gains (treated as reinvested shares of the Portfolio
on the record date of such distribution or the date on which
provision for such taxes is made, as the case may be) is
compared to the net asset value per share of the Portfolio at
the beginning of the period and the differences expressed as a
percentage (the "Portfolio's Percentage Change").
(2) The Portfolio's Percentage Change is compared to the
percentage change in the Index, which change is determined by
adding the level of the index at the end of the period, in
accordance with Securities and Exchange Commission guidelines,
the value of cash distributions on securities which comprise
the Index, treating the value of such distributions as
reinvested in the Index based on a monthly value supplied by
Standard and Poor's and comparing such adjusted level with the
level of the Index at the beginning of the period.
(3) The Portfolio's Percentage Change is then compared to the
change in Index for the period and the incentive adjustment as
set forth in the following table is multiplied by the net
asset value of the Portfolio averaged daily over the 12 month
period and divided by twelve. The incentive adjustment may not
in any case exceed 1/12 of 1.40% of the average net asset
value for the 12 month period (equivalent on an annual basis
to 1.40%).
7
<PAGE>
Performance
Relative to Adviser Total
S&P 500 Index Fee
U -7.00% and less 0.00% Minimum Mgt Fee
N -6.50% 0.10%
D -6.00% 0.20%
E -5.50% 0.30%
R -5.00% 0.40%
-4.50% 0.50%
P -4.00% 0.60%
E -3.50% 0.70%
R -3.00% 0.80%
F -2.50% 0.90%
O -2.00% 1.00%
R -1.50% 1.10%
M -1.00% 1.20%
-0.50% 1.30%
Basic Mgt Fee -0.00% 1.40%
0.50% 1.50%
O 1.00% 1.60%
V 1.50% 1.70%
E 2.00% 1.80%
R 2.50% 1.90%
3.00% 2.00%
P 3.50% 2.10%
E 4.00% 2.20%
R 4.50% 2.30%
F 5.00% 2.40%
O 5.50% 2.50%
R 6.00% 2.60%
M 6.50% 2.70%
+7.00% and Greater 2.80% Maximum Mgt Fee
Pursuant to the Advisory Agreement the International Portfolio pay the
Advisor a fee in an amount equal to 1.15% per annum of the Portfolio's daily
average net assets. The Adviser pays the Sub-Adviser a fee equal to .65% per
annum of the International Portfolio's daily average net assets pursuant to the
Sub-Advisory Agreement.
Pursuant to the Administration Agreement, the Administrator provides,
or contracts with others to provide, the Fund all necessary bookkeeping and
shareholder recordkeeping services, share transfer services, and custodial
services. Under the Administration Agreement, the Administrator receives an
administration fee, computed separately for each Portfolio and paid monthly, at
an annual rate of .10% of the daily average net assets of each Portfolio. Prior
to February 1, 1996, the Administrator was entitled to receive a fee in an
amount per annum equal to .25% of the daily average net assets of the
Portfolios, but the Administrator waived .15% of that fee from time-to-time. For
the years ended June 30, 1993, 1994 and 1995, the Fund paid to Advisor and the
Administrator the following amounts for advisory and administrative services as
indicated:
8
<PAGE>
Advisory Fees Administration Fees
Intermediate Government
Bond Portfolio
1995 $40,101 $ 6,169
1994 $51,830 $ 7,974
1993 $33,993 $ 5,092
Capital Appreciation
Portfolio
1995 $ 2,370 $ 672
1994 $ 5,886 $ 729
1993 $ 3,104 $ 222
Growth Portfolio
1995 $59,230 $11,846
1994 $43,945 $ 8,805
Government Securities
Portfolio
1995 $64,587 $12,917
1994 $44,959 $ 8,992
Under the Advisory Agreements, the Adviser provides the Portfolios with
advice and assistance in the selection and disposition of that Portfolios'
investments. Under the Sub-Advisory Agreement, the Sub-Adviser provides
assistance in management of the assets of the International Portfolio. All
investment decisions are subject to review by the Board of Directors of the
Fund. The Adviser is obligated to pay the salaries and fees of any affiliates of
the Adviser serving as officers or directors of the Fund.
The laws of certain States require that if a mutual fund's expenses
(including advisory fees but excluding interest, taxes, brokerage commissions
and extraordinary expenses) exceed certain percentages of average net assets,
the Fund must be reimbursed for such excess expenses. Based upon the fee
structure for the Portfolios, the Fund should not be subject to such
reimbursement provisions.
Distributor
The Distributor provides underwriting services to the Fund pursuant to
the terms of an Underwriting and Distribution Agreement dated May 21, 1991 (the
"Underwriting Agreement"). Pursuant to the Underwriting Agreement, the
Distributor is obligated to offer shares of the Portfolios for sale on a
continuous basis at all time when such shares are available for sale. In return
for services provided under the Underwriting Agreement, the Distributor is
entitled to receive the sales load charged in connection with the sale of any
Portfolio shares and to be reimbursed for expenses incurred in providing such
services. The Distributor has not received any commission in connection with the
sale of Portfolio shares during the last three years.
Custodian
The Fund's Custodian is Union. Under the Custodian Agreement Union
holds all cash and securities of the Fund's various Portfolios through its trust
department and effects transactions in the Fund's securities and cash only upon
written instruction from the Fund's authorized persons. Union receives fees from
the Intermediate Government Bond Portfolio and the Capital Appreciation
Portfolio for acting as Custodian based upon the market value of the Fund's
securities which are calculated and billed quarterly at the annual rates of
eleven (11) basis points for the market value of securities up to $10
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<PAGE>
million, six (6) basis points for the next $10 million and two and one half
(2.5) basis points over $20 million. Additionally, Union is paid an annual fee
of $100 per account and transaction charges of $12 for each transaction in the
Fund's securities or accounts. However, the Government Securities Portfolio, the
Growth Portfolio and the International Portfolio pay no Custodian fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
The Adviser is responsible for decisions to buy and sell securities for
the Portfolios, the selection of broker-dealers to effect the transactions and
the negotiation of brokerage commissions, if any. The Adviser has delegated
those responsibilities for the International Portfolio to the Sub-Adviser under
the Sub-Advisory Agreement. In placing orders for securities transactions, the
primary criterion for the selection of a broker-dealer is the ability of the
broker-dealer, in the opinion of the Adviser or Sub-Adviser, to secure prompt
execution of the transactions on favorable terms, including the reasonableness
of the commission (if any) and considering the state of the market at the time.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research and/or services to the Adviser or
Sub-Adviser. Such research or services include advice, both directly and in
writing, as to the value of securities; the advisability of investing in,
purchasing or selling securities; and the availability of securities, or
purchasers or sellers of securities; as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. This allows the Adviser or Sub-Adviser to
supplement their own investment research activities and enables the Adviser or
Sub-Adviser to obtain the views and information of individuals and research
staffs of many different securities firms prior to making investment decisions
for the Portfolios. To the extent portfolio transactions are effected with
broker-dealers who furnish research services, the Adviser or Sub-Adviser
receives benefits, not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Portfolio from these transactions.
The Adviser and Sub-Adviser believe that most research services obtained
generally benefit several or all of the accounts which they manage, as opposed
to solely benefiting one specific managed fund or account. Normally, research
services obtained through managed funds or accounts investing in common stocks
would primarily benefit the managed funds or accounts which invest in common
stock; similarly, services obtained from transactions in fixed-income securities
would normally be of greater benefit to the managed funds or accounts which
invest in debt securities.
The Adviser and Sub-Adviser do not maintain any "formula" which must be
followed in connection with the placement of transactions. However, from time to
time, the Adviser or Sub-Adviser may elect to use certain brokers to execute
transactions in order to encourage them to provide it with research services
which the Adviser or Sub-Adviser anticipates will be useful to it. The Adviser
will authorize the Fund to pay an amount of commission for effecting a
securities transaction for a Portfolio in excess of the amount of commission
another broker-dealer would have charged only if the Adviser or Sub-Adviser
determines, in good faith, that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either that particular transaction or the
Adviser's or Sub-Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion.
Portfolio transactions may be effected through the Distributor, as
discussed in the Prospectus under "Management- Portfolio Brokerage." In
determining the commissions to be paid to the Distributor, it is the policy of
the Fund that such commissions, will, in the judgment of the Adviser, subject to
review by the Board of Directors, be both (a) at least as favorable as those
which would be charged by other qualified brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time, and (b) at least as
favorable as commissions contemporaneously charged by the Distributor on
comparable transactions for its most favored comparable unaffiliated customers.
While the Fund does not deem it practicable and in the best interest of the Fund
to solicit competitive bids for commission rates on each transaction,
consideration will regularly be given to posted commission rates as well as to
other information concerning the level of commissions charged on comparable
transactions by other qualified brokers.
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<PAGE>
All transactions will be effected pursuant to the Fund's Guidelines
Regarding Payment of Brokerage Commissions to Affiliated Persons adopted by the
Board of Directors including a majority of the noninterested directors pursuant
to Rule 17(e)-1 under the Investment Company Act of 1940.
In certain instances, there may be securities which are suitable for
the Fund as well as for that of one or more of the advisory clients of the
Adviser or Sub-Adviser. Investment decisions for the Fund and for such advisory
clients are made by the Adviser or Sub-Adviser with a view to achieving the
investment objectives. It may develop that a particular security is bought or
sold for only one client of the Adviser or Sub-Adviser even though it might be
held by, or bought or sold for, other clients. Likewise, a particular security
may be bought for one or more clients of the Adviser or Sub-Adviser when one or
more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients of
the Adviser or Sub-Adviser are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser or Sub-Adviser, as the case may be, to be equitable to
each (and may result, in the case of purchases, in allocation of that security
only to some of those clients and the purchase of another security for other
clients regarded by the Adviser or Sub-Adviser, as the case may be, as a
satisfactory substitute). It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security as far as the
Fund involved is concerned. At the same time, however, it is believed that the
ability of the Fund to participate in volume transactions will sometimes produce
better execution prices.
For the periods ended June 30, 1995, 1994 and 1993, the Fund paid
$41,468, $5,586 and $5,460 in brokerage commissions, some of which was paid to
the Fund's Distributor, allocated among the Portfolios as follows:
1995 1994 1993
------- ------ -----
Intermediate Government Bond $ 3,250 $ 25 $ 0
Portfolio
Government Securities Portfolio 2,300 600 0
Growth Portfolio 7,629 3,410 0
Capital Appreciation Portfolio 21,020 1,551 5,460
------ ------ ------
$34,199 $ 5,586 $ 5,460
The remaining brokerage commissions were paid to eight unaffiliated
broker/dealers.
CAPITAL STOCK AND CONTROL
A complete description of the rights and characteristics of the Fund's
capital stock is included in the Prospectus. UBATCO & Co. as nominee of Union,
owned of record, without voting rights the number and percentage of the
outstanding shares of the Portfolios as of June 30, 1996 as set forth below:
The following table also provides the name and address of any person
who owned beneficially 5% or more of the outstanding shares of each Portfolio as
of the same date.
Portfolio Name & Address Shares % Ownership
Capital Appreciation UBATCO & Co. 187,549.542 100%
Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
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<PAGE>
MD Investments 27,549.643 14.69%
c/o Mike Dunlap
P.O. Box 6155
Lincoln, NE 68506
Union Bank and Trust 14,947.684 7.97%
Company
Profit Sharing & 401(k) Plan
4732 Calvert
Lincoln, NE 68506
Unipac Service Corporation 19,196.359 10.24%
3015 S. Parker Road
Aurora, CO 80014
Growth UBATCO & Co. 1,795,658.914 99.63%
Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
Union Bank & Trust Co. 290,523.692 16.12%
Profit Sharing Plan & 401K Plan
4732 Calvert Street
Lincoln, NE 68506
Crete/Sunflower 401K 105,234.383 5.84%
P.O. Box 81228
Lincoln, NE 68528
Linweld 401K/PSP 195,599.410 10.85%
1225 "L" Street, Street. 600
Lincoln, NE 68508
Lenco Company 103,690.955 5.75%
Profit Sharing Plan & 401(k) Plan
10240 Deer Park Rd.
Waverly, NE 68462
Intermediate Government UBATCO & Co. 685,959.271 99.44%
Bond Portfolio 4732 Calvert Street
Lincoln, NE 68506
Unipac Service Corp. 35,208.492 5.10%
3015 S. Parker Road
Aurora, CO 80014
Benes Service Company 57,674.463 8.36%
Profit Sharing Plan
Valparaiso, NE 68605
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<PAGE>
Government Securities UBATCO & Co. 2,389,775.013 100%
Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
Union Bank & Trust Co. 217,342.734 9.09%
Profit Sharing Plan & 401K Plan
4732 Calvert Street
Lincoln, NE 68506
Crete/Sunflower 401K 139,988.934 5.86%
P.O. Box 81228
Lincoln, NE 68528
On June 30, 1996, the Directors and officers of the Fund as a group
beneficially owned 12,743.794 shares or 1.85%, 33,204.499 shares or 1.39%,
22,180.930 shares or 1.23% and 5,895.991 shares or 3.14%, respectively, of the
Intermediate Government Bond Portfolio, Government Securities Portfolio, Growth
Portfolio and the Capital Appreciation Portfolio. Directors and officers owned
1.81% of the shares outstanding in all Portfolios.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the Fund's
shares is summarized in the Prospectus in the text following the heading
"Purchase of Shares--Public Offering Price" and "Valuation of Shares." The net
asset value of the Fund's shares is determined each day that the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days when no shares are tendered for redemption and no order for shares is
received.
REDEMPTION
Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on said exchange is restricted, (c) when an
emergency exists, as a result of which disposal by the Portfolios of securities
owned by them is not reasonably practicable, or it is not reasonably practicable
for the Portfolios fairly to determine the value of their net assets, or (d)
during any other period when the Securities and Exchange Commission, by order,
so permits, provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions prescribed in (b)
or (c) exist.
TAX STATUS
The Fund has qualified and intends to continue to qualify its
Portfolios as "regulated investment companies" under Subchapter M of the
Internal Revenue Code of 1986, as amended, so as to be relieved of federal
income tax on its capital gains and net investment income distributed to
shareholders. To qualify as a regulated investment company, a Portfolio must,
among other things, receive at least 90% of its gross income each year from
dividends, interest, gains from the sale or other disposition of securities and
certain other types of income including, with certain exceptions, income from
options and futures contracts. However, gains from the sale or other disposition
of stock or securities held for less than three months must constitute less than
30% of each Portfolio's gross income. This restriction may limit the extent to
which a Portfolio may effect sales of securities held for less than three months
or transactions in futures contracts and options even when the Adviser otherwise
would deem such transaction to be in the best interest of a Portfolio. The Code
also requires a regulated investment company to diversify its holdings. The
Internal Revenue Service has not made its position clear regarding the treatment
of futures contracts and options for purposes of the diversification test, and
the extent to which a Portfolio could buy or sell futures contracts and options
may be limited by this requirement.
`
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The Code requires that all regulated investment companies pay a
nondeductible 4% excise tax to the extent the regulated investment company does
not distribute 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined, in general, on an October 31 year end.
The required distributions are based only on the taxable income of a regulated
investment company.
Ordinarily, distributions and redemption proceeds earned by a Portfolio
shareholder are not subject to withholding of federal income tax. However, if a
shareholder fails to furnish a tax identification number or social security
number, or certify under penalties of perjury that such number is correct, the
Fund may be required to withhold federal income tax ("backup withholding") from
all dividend, capital gain and redemption payments to such shareholder.
Dividends and capital gain distributions may also be subject to backup
withholding if a shareholder fails to certify under penalties of perjury that
such shareholder is not subject to backup withholding due to the underreporting
of certain income. These certifications are contained in the purchase
application enclosed with the Prospectus.
CALCULATIONS OF PERFORMANCE DATA
From time to time the Fund may quote the yield for the Portfolios in
advertisements or in reports and other communications to shareholders. For this
purpose, yield is calculated by dividing a Portfolio's net investment income per
share for the base period which is 30 days or one month, by the Portfolio's
maximum offering purchase price on the last day of the period and annualizing
the result. The Portfolio's net investment income changes in response to
fluctuations in interest rates and in the expenses of the Portfolio.
Consequently, any given quotation should not be considered as representative of
what the Portfolio's yield may be for any specified period in the future.
Yield information may be useful in reviewing a Portfolio's performance
and for providing a basis for comparison with other investment alternatives.
However, a Portfolio's yield will fluctuate, unlike other investments which pay
a fixed yield for a stated period of time. Current yield should be considered
together with fluctuations in the Portfolio's net asset value over the period
for which yield has been calculated, which, when combined, will indicate a
Portfolio's total return to shareholders for that period. Other investment
companies may calculate yields on a different basis. In addition, investors
should give consideration to the quality and maturity of the portfolio
securities of the respective investment companies when comparing investment
alternatives.
Investors should recognize that in periods of declining interest rates
a bond portfolio's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates, such portfolio's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a bond Portfolio from the continuous sale of its shares will likely
be invested in instruments producing lower yields than the balance of such
portfolio's holdings, thereby reducing the current yield of such Portfolio. In
periods of rising interest rates, the opposite can be expected to occur.
The Fund may also quote the indices of bond prices and yields prepared
by Shearson Lehman Hutton Inc. and Salomon Brothers Inc., leading broker-dealer
firms. These indices are not managed for any investment goal. Their composition
may, however, be changed from time to time.
The Intermediate Government Bond Portfolio may quote the yield or total
return on Ginnie Maes, Fannie Maes, Freddie Macs, corporate bonds and Treasury
bonds and notes, either as compared to each other or as compared to the
Portfolio's performance. In considering such yields or total returns, investors
should recognize that the performance of securities in which the Portfolio may
invest does not reflect the Portfolio's performance, and does not take into
account either the effects of portfolio management or of management fees or
other expenses; and that the issuers of such securities guarantee that interest
will be paid when due and that principal will be fully repaid if the securities
are held to maturity, while there are no such guarantees with respect to shares
of the Portfolio. Investors should also be aware that the mortgage underlying
mortgage-related securities may be prepaid at any time. Prepayment is
particularly likely in the event of an interest rate decline, as the holders of
the underlying mortgages seek to pay off high-rate mortgages or renegotiate them
at potentially lower current rates. Because the underlying mortgages are more
likely to be prepaid at their par value when interest rates decline, the value
of certain high-yielding mortgage-related securities may have less potential for
capital appreciation than conventional debt securities (such as
14
<PAGE>
U. S. Treasury bonds and notes) in such markets. At the same time, such
mortgage-related securities may have less potential for capital appreciation
when interest rates rise.
In connection with the quotations of yields in advertisements described
above, the Fund may also provide average annual total returns from the date of
inception for one, five and ten-year periods if applicable. Total return is a
calculation which equates an initial amount invested to the ending redeemable
value at a specified time. It assumes the reinvestment of all dividends and
capital gains distributions. Average total return will be the average of the
total returns for each year in the period. The Portfolios may also provide a
total return figure for the most recent calendar quarter prior to the
publication of the advertisement.
The yields of the Intermediate Government Bond Portfolio and Government
Securities Portfolio for the 30-day period ended June 30, 1995 were 5.06% and
5.00% respectively.
The average annual total returns of the Portfolios for one year and
inception to date ended June 30, 1995 are as follows:
Year Inception to Date
Intermediate Government Bond Portfolio 7.9% 6.6%
Capital Appreciation Portfolio 28.6% 5.8%
Growth Portfolio 20.3% 11.3%
Government Securities Portfolio 9.0% 3.0%
FINANCIAL STATEMENTS
The Fund hereby incorporates by reference the information in the Fund's
Annual Financial Report dated June 30, 1995, filed with the Securities and
Exchange Commission on August 29, 1995, and the Fund's Semi-Annual Report dated
December 31, 1995 filed with the Securities and Exchange Commission on February
22, 1996, which are available upon request to the Fund without charge.
AUDITORS
The Board of Directors, including all disinterested directors,
unanimously approved the appointment of Deloitte & Touche, LLP, 1040 NBC Center,
Lincoln, Nebraska 68508 as the Fund's accountants.
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<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS,
COMMERCIAL PAPER, AND PREFERRED STOCK
Ratings of Corporate Obligations
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. Such bonds may be in
default or there may be present elements of danger with respect to principal and
interest.
Ca: Bonds rated Ca represent obligations which are speculative in
a high degree.Such bonds are often in default or have other marked shortcomings.
Those securities in the A and Baa groups which Moody's believes possess
the strongest investment attributes are designated by the symbols A-1 and Baa-1.
Other A and Baa securities comprise the balance of their respective groups.
These rankings (1) designate the securities which offer the maximum in security
within their quality groups, (2) designate securities which can be bought for
possible upgrading in quality, and (3) additionally afford the investor an
opportunity to gauge more precisely the relative attractiveness of offerings in
the marketplace.
Standard & Poor's Corporation
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
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<PAGE>
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in a small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Although they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories. Bonds rated
BBB are regarded as having speculation characteristics.
BB--B--CCC-CC: Bonds rated BB, B, CCC, and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation among such bonds and CC the highest
degree of speculation. Although such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
Ratings of Preferred Stock
Standard & Poor's Corporation
Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment--capacity and willingness of
the issuer to meet the timely payment of preferred
stock dividends and any applicable sinking fund
requirements in accordance with the terms of the
obligation.
2. Nature of and provisions of the issue.
3. Relative position of the issue in the event of
bankruptcy, reorganization, or other arrangements
affecting creditors' rights.
AAA: This is the highest rating that may be assigned
by Standard & Poor's to a preferred stock issue and indicates
an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated AA also qualifies
as a high-quality fixed income security. The capacity to pay
preferred stock obligations is very strong, although not as
overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to
pay the preferred stock obligations, although it is somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by
an adequate capacity to pay the preferred stock obligations.
Whereas it normally exhibits adequate protection parameters,
adverse
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<PAGE>
economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the A
category.
BB, B, CCC: Preferred stock rated BB, B, and CCC are
regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and
CCC the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures
to adverse conditions.
CC: The rating CC is reserved for a preferred
stock issue in arrears on dividends or sinking fund payments
but that is currently paying.
C: A preferred stock rated C is a nonpaying
issue.
D: A preferred stock rated D is a nonpaying
issue with the issuer in default on debt instruments.
NR indicates that no rating has been requested, that
there is insufficient information on which to base a rating,
or that S & P does not rate a particular type of obligation as
a matter of policy.
Plus (+) or Minus (-) To provide more detailed
indications of preferred stock quality, the ratings from AA to
CCC may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
Moody's Investors Service, Inc.
aaa: An issue which is rated aaa is considered to be
a top-quality preferred stock. This rating indicates good
asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
aa: An issue which is rated aa is considered a
high-grade preferred stock. This rating indicates that there
is reasonable assurance that earnings and asset protection
will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated a is considered to be an
upper-medium grade preferred stock. While risks are judged to
be somewhat greater than in the aaa and aa classifications,
earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
baa: An issue which is rated baa is considered to be
medium grade, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
ba: An issue which is rated ba is considered to have
speculative elements and its future cannot be considered well
assured. Earnings and asset protection may be very moderate
and not well safeguarded during adverse periods. Uncertainty
of position characterizes preferred stocks in this class.
b: An issue which is rated b generally lacks
the characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue
over any long period of time may be small.
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caa: An issue which is rated caa is likely to be
in arrears on dividend payments. This rating designation does
not purport to indicate the future status of payments.
ca: An issue which is rated ca is speculative in
a high degree and is likely to be in arrears on dividends
with little likelihood of eventual payment.
c: This is the lowest rated class of preferred
or preference stock. Issues so rated can be regarded as
having extremely poor prospects of ever attaining any real
investment standing.
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Included in prospectus for the Intermediate Government Bond
Portfolio, Government Securities Portfolio, Growth Portfolio
and Capital Appreciation Portfolio:
Financial Highlights
(2) Incorporated by reference in Part B for the Intermediate
Government Bond Portfolio, Government Securities Portfolio,
Growth Portfolio and Capital Appreciation Portfolio:
Schedule of Investments; Statement of Assets
and Liabilities; Statement of Operations;
Statement of Changes in Net Assets;
Financial Highlights; Notes to Financial
Statements; all included in the Registrant's
Semi-Annual Report dated December 31, 1995.
Independent Auditor's Report; Statement of
Assets and Liabilities, June 30, 1995;
Statement of Operations, Year ended June 30,
1995; Statements of Changes in Net Assets,
Years ended June 30, 1995 and 1994; Notes to
Financial Statements; Schedule of
Investments in Securities; and Financial
Highlights all included in the Fund's Annual
Financial Report dated June 30, 1995.
(b) Exhibits
Exhibit No. Description
*1. (a) Articles of Incorporation
(b) Articles of Amendment to the Articles of
Incorporation
(c) Articles of Amendment to the Articles of
Incorporation
(d) Articles of Amendment to the Articles of
Incorporation
*2. Bylaws as amended
5. *(a) Transfer Agent and Administrative Services
Agreement
*(b) Investment Advisory Agreement with Union
Bank & Trust
Company
*(c) Investment Advisory Agreement with Union
Bank and Trust Company for the Capital
Appreciation Portfolio
<PAGE>
*(d) Investment Advisory Agreement with Union
Bank & Trust Company for the Union
Equity/Income Portfolio and Union
Government Securities Portfolio.
(e) Form of Investment Advisory Agreement with
Union Bank & Trust Company for the
International Portfolio.
(f) Form of Sub-Advisory Agreement between Union
Bank and Trust Company and Murray Johnstone
International Limited.
*6. Underwriting Agreement
*8. Amended Custodian Agreement
10. *(a) Opinion and Consent of Messrs. Cline,
Williams, Wright, Johnson & Oldfather
*(b) Opinion and Consent of Messrs. Cline,
Williams, Wright, Johnson & Oldfather with
Respect to the Capital Appreciation Portfolio
*(c) Opinion and Consent of Messrs. Cline,
Williams, Wright, Johnson & Oldfather with
Respect to the Union Equity/Income Portfolio
and Union Government Bond Portfolio
(d) Opinion of Ballard Spahr Andrews and
Ingersoll with respect to the International
Portfolio.
11. (a) Consent of Ballard Spahr Andrews & Ingersoll
(b) Consent of KPMG Peat Marwick LLP
*13. Revised Subscription Agreement of Initial Stockholder
*16. Schedules of Performance Computation
17. Financial Data Schedules
* All filed in Post Effective Amendment No. 11 on October 25, 1995 and
incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
N/A
Item 26. Number of Holders of Securities
Title of Class Number of Record Holders
Common Stock
Equity/Income Portfolio 6 as of June 30, 1996
Government Securities Portfolio 2 as of June 30, 1996
Capital Appreciation Portfolio 2 as of June 30, 1996
2
<PAGE>
Intermediate Government Bond Portfolio 4 as of June 30, 1996
Item 27. Indemnification
Section 302A.521 of the Minnesota Business Corporation Act requires
indemnification of officers and directors of the Registrant under circumstances
set forth therein. Reference is made to Article X of the Articles of
Incorporation (Exhibit 1), Article XIII of the Bylaws of Registrant (Exhibit 2
hereto), to Section 10 of the Underwriting Agreement (Exhibit 6) and to Section
8 of the Transfer Agent and Administrative Services Agreement (Exhibit 5a) for
additional indemnification provisions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, 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 by the Registrant is against public policy as expressed in
the Act and, therefore, may be unenforceable. In the event that a claim for such
indemnification (except insofar as it provides for the payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person and the Securities
and Exchange Commission is still of the same opinion, 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 of whether
or not such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Union Bank and Trust Company
Union Bank and Trust Company is a state bank chartered in the state of
Nebraska and is engaged in the general banking business with trust powers. All
Directors and officers of Union Bank and Trust Company are principally engaged
in Banking unless otherwise indicated.
Name of Director Positions with Other Substantial Business
and Officer Adviser Past Two Years
Jay L. Dunlap Director and CEO Banking
Phylis Acklie Director Vice President, Corporate
Secretary and Director,
Crete Carrier Corporation,
Lincoln, Nebraska
Gerry Dunlap Director Banking
3
<PAGE>
Michael S. Dunlap Director and Executive Banking
Vice President
Angie Muhleisen Director and Executive Banking
Vice President
Tonn Osterguard Director Banking
Edwin C. Perry Director Attorney
R. David Wilcox Senior Vice President - Banking
Trust Department
William C. Eastwood Senior Vice President - Banking
Trust Department
Ken Backemeyer Senior Vice President - Banking
Trust Department
Ross Wilcox Director and President Banking
Robert Robart Senior Vice President Banking
Keith May Executive Vice President Banking
Thomas D. Potter Director President and Chief
Operating Officer,
Lincoln Mutual Life
Insurance Company,
Lincoln, Nebraska
Neil S. Tyner Director Chairman, Director
and Chief Operating
Officer, Ameritas
Life Insurance
Company
The address is the address of the Adviser unless otherwise indicated, which is
contained under "Management" in the Prospectus.
Item 29. Principal Underwriters
(a) SMITH HAYES Trust, Inc.
(b)
Positions and Positions and
Name and Principal Offices with Offices with
4
<PAGE>
Business Address Underwriter Registrant
- ----------------- ------------- ----------
Thomas C. Smith Chairman and Treasurer
200 Centre Terrace President
1225 "L" Street
Lincoln, NE 68508
(c) Not applicable.
Item 30. Location of Accounts and Records
All required accounts, books and records will be maintained by Thomas
C. Smith, 200 Centre Terrace, 1225 "L" Street, P.O. Box 83000, Lincoln, Nebraska
68508 and Michael S.
Dunlap, 4732 Calvert Street, Lincoln, Nebraska 68506
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
The Fund hereby undertakes to file a post-effective amendment using
financial statements for the International Portfolio (which need not be
certified), within four to six month form the effective date of this
Post-Effective Amendment.
The Fund hereby undertakes to furnish to each person to whom a
prospectus is delivered with a copy of the Fund's latest annual report to
shareholders, upon request and without charge.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lincoln, State of Nebraska, on the
17th day of July, 1996.
STRATUS FUND, INC.
By /s/ Michael S. Dunlap _
Michael S. Dunlap, President
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities indicated on July 17, 1996:
Signatures
/s/ Michael S. Dunlap
Michael S. Dunlap
President,
Chief Executive Officer,
Secretary and Director
/s/ Thomas C. Smith
Thomas C. Smith
Chief Financial Officer,
Treasurer and Director
R. Paul Hoff
Director
/s/ Stan Schrier
Stan Schrier
Director
/s/ Edson L. Bridges, III
Edson L. Bridges, III
Director
7
<PAGE>
EXHIBIT INDEX
STRATUS FUND, INC.
Exhibit Number Exhibit
5(e) Form of Investment Advisory Agreement
between Registrant and Union Bank and
Trust Company for the International
Portfolio
5(f) Form of Sub-Advisory Agreement between
Union Bank and Trust Company and Murray
Johnstone International Limited relating
to the International Portfolio
10(d) Opinion of Ballard Spahr Andrews &
Ingersoll with respect to the
International Portfolio
11(a) Consent of Ballard Spahr Andrews &
Ingersoll
11(b) Consent of KPMG Peat Marwick LLP
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT (the "Agreement"), made this ____ day of , 1996, by and
between STRATUS FUND, INC., a Minnesota corporation (the "Fund") and Union Bank
& Trust Company, a Nebraska state bank (the "Investment Adviser"):
WITNESSETH:
WHEREAS, the Fund is engaged in business as a management investment
company and has registered as such under the Investment Company Act of 1940, as
amended (the "Act"); and
WHEREAS, the Fund desires to appoint the Investment Adviser to render
investment advisory services to the Fund in the manner and on the terms and
conditions hereinafter set forth; and
WHEREAS, the Investment Adviser desires to be appointed to perform
services on said terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained; the Fund and the Investment Adviser agree as follows:
1. APPOINTMENT AND DUTIES OF INVESTMENT ADVISER
The Fund hereby appoints the Investment Adviser to act as
investment adviser to the International Portfolio (the "Portfolio") of the Fund
and, subject to the supervision of the Board of Directors of the Fund to,
supervise the investment activities of the Portfolio as hereinafter set forth;
to obtain and evaluate such information and advice relating to the economy,
securities markets and securities as it deems necessary or useful to discharge
its duties hereunder; to continuously manage the assets of the Portfolio in a
manner consistent with the investment objective and policies of the Portfolio as
set forth in the most current registration statement of the Fund; to determine
the securities to be purchased, sold or otherwise disposed of by the Portfolio
and the timing of such purchases, sales and dispositions; to take such further
action, including the placing of purchase and sale orders on behalf of the Fund,
as it shall deem necessary or appropriate; and to furnish to or place at the
disposal of the Fund such information, evaluations, analyses and opinions
formulated or obtained by it in the discharge of its duties as the Fund may,
from time to time, reasonably request.
It is agreed that the Investment Adviser may enter into
subinvestment advisory agreements with one or more persons registered under the
Investment Advisers Act of 1940 to assist the Investment Adviser, at its
expense, in performing its duties and responsibilities
<PAGE>
hereunder, including, but no limited to, the placing of purchase and sell
orders on behalf of the Fund.
2. EXPENSES OF INVESTMENT ADVISER
The Investment Adviser shall, at its own expense, maintain
such staff and employ or retain such personnel and consult with such other
persons as it shall from time to time determine to be necessary or useful to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of the Investment Adviser
shall be deemed to include persons employed or otherwise retained by the
Investment Adviser to furnish statistical and other factual data, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Investment Adviser may deem appropriate. The Investment Adviser shall
maintain records as may be required under the Act and the Investment Advisers
Act of 1940 and such records shall be made available to the Fund upon request.
3. EXPENSES AND DUTIES OF FUND
Unless otherwise expressly agreed to by the Investment
Adviser, the Fund assumes and shall pay or cause to be paid all other expenses
of the Fund, including, without limitation: (a) the costs of shareholder
reports; (b) any fees pursuant to any investment advisory agreement and any
management agreement with the Fund; (c) fees pursuant to any plan of
distribution that the Fund may adopt; (d) the charges and expenses of any
registrar, custodian, sub-custodian or depository appointed by the Fund for the
safekeeping of its cash, portfolio securities and other property, as well as any
stock transfer or dividend agent appointed by the Fund; (e) brokers' commissions
chargeable to the Fund in connection with portfolio securities transactions to
which the Fund is a party; (f) all taxes and fees payable by the Fund to
federal, state or other governmental agencies or pursuant to any foreign laws;
(g) the cost and expense of engraving or printing of certificates representing
shares of the Fund; (h) all costs and expenses in connection with the
registration and maintenance of registration of the Fund and its shares with the
Securities and Exchange Commission and various states and other jurisdictions or
pursuant to any foreign laws (including filing fees and legal fees) and the
expense of printing and distributing prospectuses and supplements; (i) all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing of proxy statements and reports to shareholders; (j) the fees and travel
expenses of Directors or members of any advisory board or committee who are not
employees of the Investment Adviser; (k) all expenses incident to the payment of
any dividend, distribution, withdrawal or redemption whether in shares or in
cash; (l) charges and expenses of any outside service used for pricing of the
Funds shares; (m) ordinary charges and expenses of legal counsel, including
counsel to the Directors of the Fund who are not interested persons (as defined
in the Act) of the Fund or the Investment Adviser, and of independent
accountants, in
2
<PAGE>
connection with any matter relating to the Fund; (n) membership dues of industry
associations; (o) interest payable on Fund borrowings; (p) postage; (q)
insurance premiums on property or personnel (including Officers and Directors)
of the Fund which inure to its benefit; (r) extraordinary legal, accounting, and
other expenses (including but not limited to legal claims and liabilities and
litigation costs and any indemnification related thereto); and (s) all other
costs of the Fund's operation.
The Fund will, from time to time, furnish or otherwise make
available to the Investment Adviser such financial reports, proxy statements and
other information relating to the business and affairs of the Fund as the
Investment Adviser may reasonably require in order to discharge its duties and
obligations hereunder or to comply with any applicable law and regulations.
4. FEES OF INVESTMENT ADVISER
For the services to be rendered, the facilities furnished, and
the obligations assumed by the Investment Adviser, the Fund, shall pay to the
Investment Adviser, commencing with the effective date of the first public
offering of shares of the Fund, a monthly investment advisory fee, computed
separately for the Portfolio, at the annual rate set forth on Exhibit l attached
hereto and incorporated by reference herein. The compensation for the period
from the effective date hereof to the next succeeding last day of the month
shall be prorated according to the proportion which such period bears to the
full month ending on such date and provided further that, upon any termination
of this Agreement before the end of the month, such compensation for the period
from the end of the last month ending prior to such termination to the date of
termination, shall be prorated according to the proportion which such period
bears to a full month, and shall be payable upon the date of termination. For
the purpose of the Investment Adviser's compensation, the value of the
Portfolio's net assets shall be computed in the manner specified in its Bylaws
in connection with the determination of the net asset value of shares. Payment
of the Investment Adviser's compensation for the preceding month shall be made
as promptly as possible after the last day of such month.
5. BEST EFFORTS
The Investment Adviser will use its best efforts in the
supervision and management of the investment advisory activities of the
Portfolio but in the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of its obligations hereunder, the Investment Adviser shall
not be liable to the Fund or any of its investors for any error of judgment or
mistake of law or fact, for any act or omission by the Investment Adviser or for
any losses sustained by the Fund or investors.
3
<PAGE>
6. INDEPENDENT CONTRACTOR
The Investment Adviser shall, for all purposes herein, be an
independent contractor and shall have no authority to act for or represent the
Fund in its investment commitments unless otherwise provided.
Nothing contained in this Agreement shall prevent the
Investment Adviser or any affiliated person of the Investment Adviser from
acting as investment adviser or manager for any other person, firm, corporation
or other entity and shall not in any way bind or restrict the Investment Adviser
or any such affiliated person from buying, selling or trading any securities or
commodities for their own accounts or for the account of others for whom they
may be acting. Nothing in this Agreement shall limit or restrict the right of
any Director, Officer or employee of the Investment Adviser to engage in any
other business or to devote his time and attention in part to the management or
other aspects of any other business whether of a similar or dissimilar nature.
7. EFFECTIVE PERIOD AND TERMINATION OF THIS
AGREEMENT
This Agreement shall become effective as of the close of
business on the date the Fund's Registration Statement for the Portfolio becomes
effective with the Securities and Exchange Commission (the "Effective Date") and
shall continue in effect unless sooner terminated as herein provided until
____________, 1998 and thereafter only if approved at least annually: (a) by the
Board of Directors of the Fund; or (b) by the vote of a majority of the
outstanding shares of the Portfolio of the Fund, as defined in the Act, and, in
addition, (c) by the vote of a majority of the Directors of the Fund who are not
parties hereto nor interested persons of any party, as required by the Act;
provided, that the first such approval by Directors under (a) or (c) shall take
place within ninety (90) days prior to ___________, 1998 and each subsequent,
annual approval shall take place within ninety (90) days prior to ___________ in
each year thereafter, and each approval if made by the vote of shareholders of
the Fund shall be made at a meeting held prior to June 30 in any fiscal year,
and each such approval whether under (a) and (c) or under (b) and (c) shall be
effective to continue such Agreement for a period ending June 30 of the next
succeeding year.
This Agreement may be terminated at any time, without payment
of any penalty, by the Board of Directors of the Fund, or by a vote of a
majority of the outstanding voting securities of the Portfolio within the
meaning of the Act, in either case upon not less than sixty (60) days' written
notice to Investment Adviser, and it may be terminated by Investment Adviser
upon sixty (60) days' written notice to the Fund. This Agreement shall
automatically terminate in the event of its assignment, within the meaning of
the Act, unless such automatic termination shall be prevented by an exemptive
order of the Securities and Exchange Commission.
4
<PAGE>
8. AMENDMENT OF AGREEMENT
This Agreement may be amended from time to time by agreement
of the parties provided that such amendment shall be approved both by the vote
of a majority of Directors of the Fund, including a majority of Directors who
are not parties to this Agreement or interested persons of any such party to
this Agreement (other than as Directors of the Fund) cast in person at a meeting
called for that purpose, and by the holders of a majority of the outstanding
voting securities of the Fund.
This Agreement may be amended by agreement of the parties
without the vote or consent of the shareholders of the Fund to supply any
omission, to cure, correct or supplement any ambiguous, defective or
inconsistent provision hereof, or if they deem it necessary to conform this
Agreement to the requirements of applicable federal laws or regulations, but
neither the Fund nor the Investment Adviser shall be liable for failing to do
so.
9. INTERESTED PERSONS
It is understood that Directors, Officers, agents and shareholders of
the Fund are or may be interested in the Investment Adviser (or any successor
thereof) as Directors, Officers, agents, shareholders, or otherwise; that
Directors, Officers, agents and shareholders of the Investment Adviser are or
may be interested in the Fund as Directors, Officers, agents, shareholders or
otherwise; that the Investment Adviser (or any such successor) is or may be
interested in the Fund as shareholder or otherwise.
10. DEFINITIONS
For the purpose of this Agreement, the terms "vote of a
majority of the outstanding voting securities", "assignments", "affiliated
person", and "interested person" shall have the respective meanings specified in
the Investment Company Act of 1940, as amended; provided, however, that wherever
in this Agreement it is provided that this Agreement may be amended or
terminated by or with the consent of shareholders, such action shall only be
effective with respect to those Portfolios of the Fund the shareholders of which
have taken the requisite action.
11. APPLICABLE LAW
This Agreement shall be construed in accordance with the laws
of the State of Nebraska and the applicable provisions of the Act and the
Investment Advisers Act of 1940, as amended.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed, accepted
and delivered this Agreement on the day and year first above written in Lincoln,
Nebraska.
(SEAL) STRATUS FUND, INC.
Attest:
___________________________ By __________________________
Secretary Chairman
UNION BANK AND TRUST COMPANY
Attest:
___________________________ By___________________________
Secretary President
6
<PAGE>
EXHIBIT I
Fees
International Portfolio 1.15%
SUB-ADVISORY AGREEMENT
Agreement, dated as of July 15, 1996, by and between Union
Bank and Trust Company (the "Adviser"), a bank and trust company organized under
the laws of the State of Nebraska, and Murray Johnstone International Limited, a
foreign corporation organized under the laws of Scotland (the "Sub-Adviser").
WHEREAS, STRATUS FUND, Inc. (the "Company"), on behalf of its
International Portfolio, a separately managed series of the Company (the
"Fund"), has appointed the Adviser as the Fund's investment adviser pursuant to
an Investment Advisory Agreement dated as of July 15, 1996, as amended (the
"Advisory Agreement"); and
WHEREAS, pursuant to the terms of the Advisory Agreement, the
Adviser desires to appoint the Sub-Adviser as its sub-adviser for the Fund, and
the Sub-Adviser is willing to act in such capacity upon the terms set forth
herein; and
WHEREAS, pursuant to the terms of the Advisory Agreement, the
Company has approved the appointment of the Sub-Adviser as the sub-adviser for
the Fund.
NOW, THEREFORE, in consideration of the mutual agreements
herein made, the Adviser and the Sub-Adviser agree as follows:
1. The Adviser hereby employs the Sub-Adviser to serve as
sub-adviser for, and to manage the investment of the assets of, the Fund as set
forth herein. The Sub-Adviser hereby accepts such employment and agrees, for the
compensation herein provided, to assume all obligations herein set forth and to
bear all expenses of its performance of such obligations (but no other
expenses). The Sub-Adviser shall not be required to pay expenses of the Fund,
including, but not limited to (a) brokerage and commission expenses; (b)
federal, state, local and foreign taxes, including issue and transfer taxes
incurred by or levied on the Fund; (c) interest charges on borrowings; (d) the
Fund's organizational and offering expenses, whether or not advanced by the
Adviser; (e) the cost of other personnel providing services to the Fund; (f)
fees and expenses of registering or otherwise qualifying the shares of the Fund
under applicable state securities laws; (g) expenses of printing and
distributing reports to shareholders; (h) costs of shareholders' meetings and
proxy solicitation; (i) charges and expenses of the Fund's custodian and
registrar, transfer agent and dividend disbursing agent; (j) compensation of the
Company's officers, directors and employees that are not Affiliated Persons or
Interested Persons (as defined in Section 2(a)(19) of the Investment Company Act
of
<PAGE>
1940, as amended (the "1940 Act") and the rules, regulations and releases
relating thereto) of the Adviser; (k) legal and auditing expenses; (l) costs of
certificates representing common shares of the Fund; (m) costs of stationery and
supplies; (n) insurance expenses; (o) association membership dues; (p) the fees
and expenses of registering the Fund and its shares with the Securities and
Exchange Commission; (q) travel expenses of officers and employees of the
Sub-Adviser to the extent such expenses relate to the attendance of such persons
at meetings at the request of the Board of Directors of the Company; and (r) all
other charges and costs of the Fund's operation unless otherwise explicitly
provided herein. The Sub-Adviser shall for all purposes herein be deemed to be
an independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise) have no authority to act for or on behalf of the
Fund in any way or otherwise be deemed an agent of the Fund.
2. The Sub-Adviser shall direct the Company's investments in
accordance with applicable law and the investment objective, policies and
restrictions set forth in the Fund's then-effective Registration Statement under
the Securities Act of 1933, as amended, including the Prospectus and Statement
of Additional Information of the Fund contained therein, subject to the
supervision of the Company, its officers and directors, and the Adviser and in
accordance with the investment objectives, policies and restrictions from time
to time prescribed by the Board of Directors of the Company and communicated by
the Adviser to the Sub-Adviser and subject to such further limitations as the
Adviser may from time to time imposed by written notice to the Sub-Adviser.
3. The Sub-Adviser shall formulate and implement a continuing
program for managing the investment of the Fund's assets, and shall amend and
update such program from time to time as financial and other economic conditions
warrant. The Sub-Adviser shall make all determinations with respect to managing
the investment of the Fund's assets and shall take such steps as may be
necessary to implement the same, including the placement of purchase and sale
orders on behalf of the Fund.
4. The Sub-Adviser shall furnish such reports to the Adviser
as the Adviser may reasonably request for the Adviser's use in discharging its
obligations under the Advisory Agreement, including any report required pursuant
to Rule 17f-5 under the 1940 Act, which reports may be distributed by the
Adviser to the Company's Board of Directors at periodic meetings of the Board of
Directors and at such other times as may be reasonably requested by the Board of
Directors. Copies of all such reports shall be furnished to the Adviser for
examination and review within a reasonable time prior to the presentation of
such reports to the Company's Board of Directors.
2
<PAGE>
5. The Sub-Adviser shall select the brokers and dealers that
will execute the purchases and sales of securities for the Fund and markets on
or in which such transactions will be executed and shall place, in the name of
the Fund or its nominee, all such orders.
(a) When placing such orders, the Sub-Adviser shall use its
best efforts to obtain the best available price and most favorable and efficient
execution for the Fund. Where best price and execution may be obtained from more
than one broker or dealer, the Sub-Adviser may, in its discretion, purchase and
sell securities through brokers or dealers who provide research, statistical and
other information to the Sub-Adviser. It is understood that such services may be
used by the Sub-Adviser for all of its investment advisory accounts and
accordingly, not all such services may be used by the Sub-Adviser in connection
with the Fund.
It is understood that certain other clients of the Sub-
Adviser may have investment objectives and policies similar to those of the
Fund, and that the Sub-Adviser may, from time to time, make recommendations that
result in the purchase or sale of a particular security by its other clients
simultaneously with the Fund. If transactions on behalf of more than one client
during the same period increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price or
quantity. In such event, the Sub- Adviser shall allocate advisory
recommendations and the placing of orders in a manner that is deemed equitable
by the Sub-Adviser to the accounts involved, including the Fund. When two or
more of the clients of the Sub-Adviser (including the Fund) are purchasing or
selling the same security on a given day from the same broker or dealer, such
transactions may be averaged as to price.
(b) The Sub-Adviser agrees that it will not purchase or sell
securities for the Fund in any transaction in which it, the Adviser or any
"affiliated person" of the Company, the Adviser or Sub-Adviser or any affiliated
person of such "affiliated person" is acting as principal; provided however,
that the Sub-Adviser may effect transactions pursuant to Rule 17a-7 under the
1940 Act in compliance with the Fund's then- effective policies concerning such
transactions.
The Adviser shall provide the Sub-Adviser, upon request, with
a list of all known "affiliated persons" of the Company, the Adviser, and any
affiliated persons of such "affiliated persons" or any affiliated person of any
principal underwriter to the Company. The Adviser agrees to update such list as
necessary.
3
<PAGE>
(c) The Sub-Adviser agrees that it will not execute any
portfolio transactions for the Fund with a broker or dealer or futures
commission-merchant which is an "affiliated person" of the Company, the Adviser
or the Sub-Adviser or an "affiliated person" of such an "affiliated person"
without the prior written consent of the Adviser. In effecting any such
transactions with the prior written consent of the Adviser, the Sub-Adviser
shall comply with Section 17(e)(1) of the 1940 Act, other applicable provisions
of the 1940 Act, if any, the then-effective Registration Statement of the Fund
under the Securities Act of 1933, as amended, and the Fund's then-effective
policies concerning such transactions.
(d) The Sub-Adviser shall promptly communicate to the Adviser
and, if requested by the Adviser, to the Company's Board of Directors, such
information relating to portfolio transactions as the Adviser may reasonably
request. The parties understand that the Fund shall bear all brokerage
commissions in connection with the purchases and sales of portfolio securities
for the Fund and all ordinary and reasonable transaction costs in connection
with purchases of such securities in private placements and subsequent sales
thereof.
6. The Sub-Adviser may (as its cost except as contemplated by
paragraph 5 of this Agreement) employ, retain or otherwise avail itself of the
services and facilities of persons and entities within its own organization or
any other organization for the purpose of providing the Sub-Adviser, the Adviser
or the Fund with such information, advice or assistance, including but not
limited to advice regarding economic factors and trends and advice as to
transactions in specific securities, as the Sub-Adviser may deem necessary,
appropriate or convenient for the discharge of its obligations hereunder or
otherwise helpful to the Adviser or the Fund, or in the discharge of the
Sub-Adviser's overall responsibilities with respect to the other accounts for
which it serves as investment manager or investment adviser.
7. The Sub-Adviser shall cooperate with and make available to
the Adviser, the Fund and any agents engaged by the Fund, the Sub-Adviser's
expertise relating to matters affecting the Fund.
8. For the services to be rendered under this Agreement, and
the facilities to be furnished for each fiscal year of the Fund, the Adviser
shall pay to the Sub-Adviser a management fee at the following annual rates,
based upon the average daily net assets of the Fund during the year: first $10
million - 0.65%; amount over $10 million - 0.60% This fee will be computed based
on net assets at the beginning of each day and will be paid to the Sub-Adviser
monthly on or before the
4
<PAGE>
fifteenth day of the month next succeeding the month for which the fee is paid.
The fee shall be prorated for any fraction of a fiscal year at the commencement
and termination of this Agreement.
9. The Sub-Adviser represents, warrants and agrees that:
(a) The Sub-Adviser is registered as an "investment
adviser" under the Investment Advisers Act of 1940" ("Advisers Act")
and is currently in compliance and shall at all times continue to
comply with the requirements imposed upon it by the Advisers Act and
other applicable laws and regulations. The Sub-Adviser agrees to (i)
supply the Adviser with such documents as the Adviser may reasonably
request to document compliance with such laws and regulations and (ii)
immediately notify the Adviser of the occurrence of any event which
would disqualify the Sub-Adviser from serving as an investment adviser
of an investment company pursuant to any applicable law or regulation.
(b) The Sub-Adviser will maintain, keep current and
preserve on behalf of the Company all records required or permitted by
the 1940 Act in the manner provided by such Act. The Sub-Adviser agrees
that copies of such records are the property of the Company, and will
be surrendered to the Company promptly upon request.
(c) The Sub-Adviser will complete such reports
concerning purchases or sales of securities on behalf of the
Sub-Adviser as the Adviser may from time to time require to document
compliance with the 1940 Act, the Advisers Act, the Internal Revenue
Code, applicable state securities laws and other applicable laws and
regulations or regulatory and taxing authorities in countries other
than the United States.
(d) After filing with the Securities and Exchange
Commission any amendment to its Form ADV, the Sub-Adviser will promptly
furnish a copy of such amendment to the Adviser. The Adviser will
provide the Sub-Adviser, upon request, with a copy of the Adviser's
Form ADV and any amendments thereto.
(e) The Sub-Adviser will immediately notify the
Adviser of the occurrence of any event which would disqualify the
Sub-Adviser from serving as an investment adviser of an investment
company pursuant to Section 9 of the 1940 Act or any other applicable
statute or regulation.
5
<PAGE>
(f) The Sub-Adviser has reviewed the Registration
Statement of the Company filed with the Securities and Exchange
Commission, and with respect to the disclosure about the Sub-Adviser
and the Fund or information relating, directly or indirectly, to the
Sub-Adviser or the Fund which was made in reliance upon and in
conformity with written information provided by the Sub-Adviser to the
Company specifically for use therein or, if written information was not
provided, which the Sub-Adviser had the opportunity to review prior to
the filing with the Securities and Exchange Commission, such
Registration Statement contains, as of its date, no untrue statement of
a material fact and does not omit any statement of a material fact
which was required to be stated therein or necessary to make the
statements contained therein not misleading.
(g) The terms of this Agreement are enforceable and
valid under all applicable laws, rules and regulations and the
Sub-Adviser's performance of its obligations under this Agreement do
not and will not in any manner violate or conflict with any applicable
law, rule or regulation, including, but not limited to, the Advisers
Act.
10. The Adviser represents, warrants and agrees that:
(a) It has been duly authorized by the Board of
Directors of the Company to delegate to the Sub-Adviser the provisions
of the services contemplated hereby.
(b) The Adviser and the Company are currently in
compliance and shall at all times continue to comply with the
requirements imposed upon the Adviser and the Company by applicable law
and regulations.
11. This Agreement shall become effective as of the effective
date of the Fund's Registration Statement under the Securities Act of 1933, as
amended. Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding voting securities or shares of the Fund
shall mean the vote of 67% or more of such shares if the holders of more than
50% of such shares are present in person or by proxy or the vote of more than
50% of such shares, whichever is less.
Unless sooner terminated as hereinafter provided, this
Agreement shall continue in effect for a period of two years from the date of
its execution, and thereafter shall continue in effect only so long as such
continuance is specifically approved at least annually (a) by the Board of
Directors of the Company or by the vote of a majority of the outstanding voting
securities of the Fund, and (b) by the vote of a majority of the directors who
are not parties to this Agreement or Interested Persons of the
6
<PAGE>
Adviser, the Sub-Adviser or the Company, cast in person at a meeting called for
the purpose of voting on such approval.
This Agreement may be terminated at any time without the
payment of any penalty (a) by the vote of the Board of Directors of the Company
or by the vote of the holders of a majority of the outstanding voting securities
of the Fund, upon 60 days' written notice to the Adviser and the Sub-Adviser, or
(b) by the Adviser, upon 60 days' written notice to the Sub-Adviser; or (c) by
the Sub-Adviser, upon 60 days' written notice to the Adviser. This Agreement
shall automatically terminate in the event of its assignment as defined in the
1940 Act and the rules thereunder, provided, however, such automatic termination
shall be prevented in a particular case by an order of exemption from the
Securities and Exchange Commission or a no-action letter of the staff of the
Commission to the effect that such assignment does not require termination as a
statutory or regulatory matter. This Agreement shall automatically terminate
upon completion of the dissolution, liquidation or winding up of the Fund.
12. No amendment to or modification of this Agreement
shall be effective unless and until approved by the vote of a
majority of the outstanding shares of the Fund.
13. This Agreement shall be binding upon, and inure to
the benefit of, the Adviser and the Sub-Adviser, and their
respective successors.
14. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
15. To the extent that state law is not preempted by the
provisions of any law of the United States heretofore or hereafter enacted, as
the same may be amended from time to time, this Agreement shall be administered,
construed and enforced according to the law of the State of Nebraska.
16. The Sub-Adviser agrees to indemnify the Adviser and hold
it harmless against any and all losses, expenses, costs (including reasonable
attorneys' fees), claims and liabilities which it may suffer or incur arising
out of breach of any representation, warranty or agreement made by the
Sub-Adviser in this Agreement.
17. The Adviser hereby agrees to indemnify the Sub-Adviser
and hold it harmless against any and all losses, expenses, costs (including
reasonable attorneys' fees) claims and liabilities which it may suffer or incur
arising out of breach of any representation or warranty made by the Adviser in
this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by duly authorized officers.
UNION BANK AND TRUST COMPANY
By:-------------------------------
Name:--------------------------
Title: ------------------------
MURRAY JOHNSTONE INTERNATIONAL
LIMITED
By:-------------------------------
Name:--------------------------
Title:-------------------------
8
LAW OFFICES
BALLARD SPAHR ANDREWS & INGERSOLL Philadelphia, PA
1225 17TH STREET, SUITE 2300 Baltimore, MD
DENVER, COLORADO 80202-5596 Camden,NJ
(303) 292-2400 Salt Lake City, UT
FAX (303)296-3956 Washington, DC
THOMAS H. DUNCAN
DIRECT DIAL 303-299-7321
July 17, 1996
STRATUS FUND, Inc.
200 Centre Terrace
1225 "L" Street
Lincoln, Nebraska 68508
Re: Shares of STRATUS FUND, Inc.
DESIGNATED THE INTERNATIONAL PORTFOLIO SHARES
Gentlemen:
We have acted as counsel to STRATUS FUND, Inc., a Minnesota
corporation (the "Company"), in connection with the proposed authorization and
issuance (the "Issuance") of shares of the Company designated the International
Portfolio Shares (the "Shares").
In connection with our giving this opinion, we have examined a
copy of the Articles of Incorporation of the Company, as amended, and originals
or copies, certified or otherwise identified to our satisfaction, of such other
documents, records and other instruments as we have deemed necessary or
advisable for purposes of this opinion. As to various questions of fact material
to our opinion, we have relied upon information provided by officers of the
Company.
The opinion expressed below is based on the assumption that a
Registration Statement on Form N-1A with respect to the Shares will have been
filed by the Company with the Securities and Exchange Commission and will have
become effective before the Issuance occurs and that the consideration described
in the prospectus for the Shares shall have been paid.
Based on the foregoing, we are of the opinion that the Shares
when issued by the Company will be legally issued, fully paid and nonassessable.
<PAGE>
STRATUS FUND, Inc.
July 17, 1996
Page 2
We consent to the filing of this opinion as Exhibit 10 to the
Company's Registration Statement on Form N-1A and to the references to this firm
in such Registration Statement.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
Exhibit (11)(a)
CONSENT
We hereby consent to the use of our name under the
caption "Counsel" in the Prospectus contained in Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A of
STRATUS FUND, Inc. (Registration No. 33-37928) filed under the
Securities Act of 1933 and Amendment No. 14 under the Investment
Company Act of 1940.
/s/ Ballard Spahr Andrews & Ingersoll
Ballard Spahr Andrews & Ingersoll
July 17, 1996
<PAGE>
KPMG PEAT MARWICK
TWO CENTRAL PARK PLAZA
OMAHA, NE 68102
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
STRATUS FUND, INC.
We consent to the use of our report dated July 21, 1995 incorporated herein
by reference and to the reference to our firm under the captions "Financial
Highlights" in this post-effective amendment #12 of Form N-1(a) Registration
Statement of Stratus Fund, Inc.
KPMG PEAT MARWICK LLP
Omaha, Nebraska
July 17, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Pursuant to Item 601 ((c) (2) (i) of Regulations S-K and S-B.
</LEGEND>
<CIK> 0000922379
<NAME> KPM FUNDS, INC.
<SERIES>
<NUMBER> 2
<NAME> KPM FIXED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 6087654
<INVESTMENTS-AT-VALUE> 6232120
<RECEIVABLES> 122249
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6354369
<PAYABLE-FOR-SECURITIES> 469613
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16830
<TOTAL-LIABILITIES> 486443
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5727259
<SHARES-COMMON-STOCK> 560664
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 457
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3342
<ACCUM-APPREC-OR-DEPREC> 144466
<NET-ASSETS> 5867926
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 187549
<OTHER-INCOME> 8315
<EXPENSES-NET> 34356
<NET-INVESTMENT-INCOME> 153193
<REALIZED-GAINS-CURRENT> (2799)
<APPREC-INCREASE-CURRENT> 144466
<NET-CHANGE-FROM-OPS> 294860
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 153650
<DISTRIBUTIONS-OF-GAINS> 543
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 588206
<NUMBER-OF-SHARES-REDEEMED> (41536)
<SHARES-REINVESTED> 13993
<NET-CHANGE-IN-ASSETS> 560664
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16101
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 42671
<AVERAGE-NET-ASSETS> 2740388
<PER-SHARE-NAV-BEGIN> 10.
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .47
<PER-SHARE-DIVIDEND> (.57)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.47
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Pursuant to Item 601 (c) (2) (i) of Regulations S-K and S-B.
</LEGEND>
<CIK> 0000922379
<NAME> KPM FUNDS, INC.
<SERIES>
<NUMBER> 2
<NAME> FIXED INCOME
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 6683638
<INVESTMENTS-AT-VALUE> 6983542
<RECEIVABLES> 126594
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7110136
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7410
<TOTAL-LIABILITIES> 7410
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6801763
<SHARES-COMMON-STOCK> 663447
<SHARES-COMMON-PRIOR> 1280007
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 474
<ACCUMULATED-NET-GAINS> 1533
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 299904
<NET-ASSETS> 7102726
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 247081
<OTHER-INCOME> 0
<EXPENSES-NET> 43425
<NET-INVESTMENT-INCOME> 203656
<REALIZED-GAINS-CURRENT> 18301
<APPREC-INCREASE-CURRENT> 155438
<NET-CHANGE-FROM-OPS> 377395
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 203673
<DISTRIBUTIONS-OF-GAINS> 13425
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 181178
<NUMBER-OF-SHARES-REDEEMED> (97462)
<SHARES-REINVESTED> 19067
<NET-CHANGE-IN-ASSETS> 102783
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 457
<OVERDIST-NET-GAINS-PRIOR> 3342
<GROSS-ADVISORY-FEES> 20489
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 43425
<AVERAGE-NET-ASSETS> 6901451
<PER-SHARE-NAV-BEGIN> 10.47
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> .26
<PER-SHARE-DIVIDEND> (.32)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.71
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Pursuant to Item 601 (c) (2) (i) of Regulations S-K and S-B.
</LEGEND>
<CIK> 0000870156
<NAME> STRATUS FUND, INC.
<SERIES>
<NUMBER> 3
<NAME> CAPITAL APPRECIATION PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 577332
<INVESTMENTS-AT-VALUE> 748522
<RECEIVABLES> 1342
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 749864
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1276
<TOTAL-LIABILITIES> 1276
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 649850
<SHARES-COMMON-STOCK> 66648
<SHARES-COMMON-PRIOR> 73035
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 22234
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 50218
<ACCUM-APPREC-OR-DEPREC> 171190
<NET-ASSETS> 748588
<DIVIDEND-INCOME> 5857
<INTEREST-INCOME> 1537
<OTHER-INCOME> 0
<EXPENSES-NET> 18054
<NET-INVESTMENT-INCOME> (10660)
<REALIZED-GAINS-CURRENT> (13631)
<APPREC-INCREASE-CURRENT> 198191
<NET-CHANGE-FROM-OPS> 173900
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 15412
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 412
<NUMBER-OF-SHARES-REDEEMED> (8525)
<SHARES-REINVESTED> 1726
<NET-CHANGE-IN-ASSETS> (6388)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 11574
<OVERDIST-NET-GAINS-PRIOR> 21176
<GROSS-ADVISORY-FEES> 2373
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18054
<AVERAGE-NET-ASSETS> 672242
<PER-SHARE-NAV-BEGIN> 8.95
<PER-SHARE-NII> (.15)
<PER-SHARE-GAIN-APPREC> 2.62
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.19)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.23
<EXPENSE-RATIO> 2.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Pursuant to Item 601 (c)(2) (i) of Regulations S-K and S-B.
</LEGEND>
<CIK> 0000870156
<NAME> STRATUS FUNDS, INC.
<SERIES>
<NUMBER> 3
<NAME> CAPITAL APPRECIATION PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 934403
<INVESTMENTS-AT-VALUE> 1049699
<RECEIVABLES> 6263
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1055962
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<OVERDISTRIBUTION-GAINS> 0
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<DIVIDEND-INCOME> 2555
<INTEREST-INCOME> 2883
<OTHER-INCOME> 0
<EXPENSES-NET> 13095
<NET-INVESTMENT-INCOME> (7657)
<REALIZED-GAINS-CURRENT> 148014
<APPREC-INCREASE-CURRENT> (55894)
<NET-CHANGE-FROM-OPS> 84463
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 72180
<DISTRIBUTIONS-OTHER> 0
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<SHARES-REINVESTED> 4926
<NET-CHANGE-IN-ASSETS> 24602
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 22234
<OVERDIST-NET-GAINS-PRIOR> 50218
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<GROSS-EXPENSE> 13095
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<PER-SHARE-NAV-END> 11.55
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Pursuant to Item 601 (c) (2) (i) if Regulations S-K and S-B.
</LEGEND>
<CIK> 0000870156
<NAME> STRATUS FUNDS, INC.
<SERIES>
<NUMBER> 4
<NAME> GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 15625113
<INVESTMENTS-AT-VALUE> 18545722
<RECEIVABLES> 110104
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18655826
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<TOTAL-LIABILITIES> 12816
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15534531
<SHARES-COMMON-STOCK> 1470364
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<DIVIDEND-INCOME> 172307
<INTEREST-INCOME> 30864
<OTHER-INCOME> 0
<EXPENSES-NET> 53627
<NET-INVESTMENT-INCOME> 149544
<REALIZED-GAINS-CURRENT> 548370
<APPREC-INCREASE-CURRENT> 1169276
<NET-CHANGE-FROM-OPS> 1867190
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 149291
<DISTRIBUTIONS-OF-GAINS> 242886
<DISTRIBUTIONS-OTHER> 0
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<NUMBER-OF-SHARES-REDEEMED> (53428)
<SHARES-REINVESTED> 29168
<NET-CHANGE-IN-ASSETS> 353210
<ACCUMULATED-NII-PRIOR> 6194
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 124061
<GROSS-ADVISORY-FEES> 38155
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 53627
<AVERAGE-NET-ASSETS> 15149922
<PER-SHARE-NAV-BEGIN> 11.47
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> 1.38
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<PER-SHARE-NAV-END> 12.68
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Pursuant to Item 601 ((c) (2) (i) of Regulations S-K and S-B.
</LEGEND>
<CIK> 0000870156
<NAME> STRATUS FUND, INC.
<SERIES>
<NUMBER> 3
<NAME> GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 11041821
<INVESTMENTS-AT-VALUE> 12793154
<RECEIVABLES> 32553
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12825707
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12355
<TOTAL-LIABILITIES> 12355
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11179886
<SHARES-COMMON-STOCK> 1117155
<SHARES-COMMON-PRIOR> 1309666
<ACCUMULATED-NII-CURRENT> 6194
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 124061
<ACCUM-APPREC-OR-DEPREC> 1751333
<NET-ASSETS> 12813352
<DIVIDEND-INCOME> 340818
<INTEREST-INCOME> 9619
<OTHER-INCOME> 0
<EXPENSES-NET> 96586
<NET-INVESTMENT-INCOME> 253851
<REALIZED-GAINS-CURRENT> (17840)
<APPREC-INCREASE-CURRENT> 1965572
<NET-CHANGE-FROM-OPS> 2201583
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 250201
<DISTRIBUTIONS-OF-GAINS> 118377
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 193257
<NUMBER-OF-SHARES-REDEEMED> (420127)
<SHARES-REINVESTED> 34358
<NET-CHANGE-IN-ASSETS> (192512)
<ACCUMULATED-NII-PRIOR> 2543
<ACCUMULATED-GAINS-PRIOR> 12157
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 59231
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 96586
<AVERAGE-NET-ASSETS> 11844008
<PER-SHARE-NAV-BEGIN> 9.84
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> 1.72
<PER-SHARE-DIVIDEND> (.22)
<PER-SHARE-DISTRIBUTIONS> (.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.47
<EXPENSE-RATIO> .82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Pursuant to Item 601 (c) (2) (i) of Regulations S-K and S-B.
</LEGEND>
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Pursuant to Item 601 (c) (2) (i) of Regulations S-K and S-B.
</LEGEND>
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<NAME> STRATUS FUND, INC.
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<NAME> GOVERMENT SECURITIES PORTFOLIO
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