As filed with the Securities and Exchange Commission on September 26, 1997
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. 15 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 16
(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)
X on October 1, 1997 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(i)
on (Date) pursuant to paragraph (a)(i)
75 days after filing pursuant to paragraph (a)(ii)
on (Date) pursuant to paragraph (a)(ii) of Rule 485
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, 1997 was
filed on August 27, 1997.
<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
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.
<PAGE>
PROSPECTUS STRATUS FUND, INC.
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, 1997
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.
1
<PAGE>
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 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.
2
<PAGE>
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."
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 Advisor 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%
</TABLE>
3
<PAGE>
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.
<TABLE>
<CAPTION>
Intermediate Government Capital
Government Securities Growth Appreciation International
Bond Portfolio Portfolio Portfolio Portfolio Portfolio
- ---------------------------- ---------------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Management Fees .65% .50% .50% 1.40% 1.15%
Administration Fees .25% .25% .25% .25% .25%
Other Expenses .27% .11% .12% 1.44% .23%
---- --- --- ---- ----
Total Portfolio
Operating Expenses 1.17% .86% .87% 2.09% 1.63%
==== === === ==== ====
</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, 1996
until June 30, 1997 was .37%. The Administrator is entitled to receive an annual
fee equal to .25% of the Fund's average daily net assets under the terms of its
administrative services agreement with the Fund. From July 1, 1995 to October
21, 1995 and February 1, 1996 to June 30, 1997 the Administrator agreed to waive
a portion of its annual fee. The Administrator has terminated its fee waiver and
the expense information for the Portfolios has been restated as if no fee
reduction was in effect for the entire 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>
Example
You would pay these expenses (which includes sales charges) on a $1,000
investment assuming (1) 5% annual return and (2) redemption at the end of each
time period.
<TABLE>
<CAPTION>
Intermediate Government Capital
Government Bond Securities Growth Appreciation International
PERIOD Portfolio Portfolio Portfolio Portfolio Portfolio
- --------------- ----------------- ---------------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1 year $ 40 $ 46 $ 47 $ 49 $54
3 years $ 61 $ 61 $ 61 $68 $85
5 years $ 84 $ 76 $ 77 $88 $118
10 years $149 $123 $124 $146 $211
</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
each Portfolio outstanding throughout the periods and other information as
indicated. The financial highlights have been audited by Deloitte & Touche LLP,
independent certified public accountants, for the years ended June 30, 1997 and
1996 and by other independent auditors for the preceding periods presented,
whose reports thereon were unqualified. This information should be read in
conjunction with the Fund's financial statements and the notes thereto. The
Fund's financial statements for the year ended June 30, 1997 along with the
report of Deloitte & Touche LLP, appear in the Fund's 1997 Annual Report to
shareholders. Further information about the performance of the Portfolios is
also contained in the Fund's Annual Report to shareholders and is available upon
request and without charge by calling (800) 279-7437.
5
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Years Ended June 30, 1997, 1996, 1995, 1994, 1993, and 1992 and for
the period from May 15, 1991 (commencement of operations) to
June 30, 1991
1997 1996 1995 1994 1993 1992 1991
---------- ------ -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period $10.47 10.56 10.29 10.84 10.72 10.02 10.00
Income (loss) from investment
operations:
Net investment income 0.54 0.52 0.50 0.47 0.38 0.94 0.07
Net realized and unrealized
gain (loss) on investments 0.02 (0.09) 0.27 (0.55) 0.34 0.70 (0.05)
---- ----- ----- ----- ----- ----- -----
Total income (loss) from
investment operations 0.56 0.43 0.77 (0.08) 0.72 1.64 0.02
---- ----- ----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (0.55) (0.52) (0.50) (0.47) (0.38) (0.94) -
Distributions from capital gains - - - - (0.22) - -
------ ----- ----- ----- ----- ----- -------
Total distributions (0.55) (0.52) (0.50) (0.47) (0.60) (0.94) -
------ ----- ----- ----- ----- ----- -------
End of period $10.48 (a)10.47 10.56 10.29 10.84 10.72 10.02
====== ====== ====== ====== ===== ===== =======
Total return 5.6%(a) 4.1% 7.9% (0.8%) 8.9% 11.4% 1.6%(b)
====== ====== ====== ====== ===== ===== =======
Ratios/Supplemental data:
Net assets, end of period (000's) $4,606 7,225 5,518 7,775 6,748 4,681 2,230
Ratio of expenses to average
net assets 1.02% 1.03% 1.11% 1.05% 1.12% 1.04% 1.46%(c)
Ratio of net income to average
net assets 5.14% 4.95% 4.84% 4.41% 4.58% 5.31% 7.41%(c)
Portfolio turnover rate 26.88% 4.05% 27.67% 21.02% 32.39% 205.89% -
(a) Excludes maximum sales load of 3%
(b) Total return is not annualized.
(c) Annualized for those periods less than twelve months in duration.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GOVERNMENT SECURITIES PORTFOLIO
Years ended June 30, 1997, 1996 and 1995 and the period from
October 8, 1993 (commencement of operations) to June 30, 1994
1997 1996 1995 1994
---------- ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C>
Beginning of period $9.64 9.77 9.40 10.00
Income (loss) from investment operations:
Net investment income 0.51 0.49 0.45 0.27
Net realized and unrealized gain (loss)
on investments 0.08 (0.13) 0.37 (0.60)
---- ---- ---- -----
Total income (loss) from
investment operations 0.59 0.36 0.82 (0.33)
---- ---- ----- -----
Less distributions from net investment income (0.51) (0.49) (0.45) (0.27)
----- ---- ----- -----
End of period $9.72(a) 9.64 9.77 9.40
=========== =========== ========== ==========
Total return 6.3%(a) 3.7% 9.0% (3.4%)(b)
=========== =========== ========== ==========
Ratios/Supplemental data:
Net assets, end of period (000's) $26,534 23,043 13,885 12,478
Ratio of expenses to average net assets 0.71% 0.69% 0.80% 0.74% (c)
Ratio of net income to average net assets 5.21% 5.04% 4.82% 3.89% (c)
Portfolio turnover rate 27.20% 40.61% 33.88% 17.36%
(a) Excludes maximum sales load of 3%.
(b) Total return is not annualized.
(c) Annualized for those periods less than twelve months in duration.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GROWTH PORTFOLIO
Years ended June 30, 1997, 1996 and 1995 and the period from
October 8, 1993 (commencement of operations) to June 30, 1994
1997 1996 1995 1994
---------------- ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C>
Beginning of period $13.67 11.47 9.84 10.00
Income from investment operations:
Net investment income 0.22 0.23 0.22 0.19
Net realized and unrealized gain (loss)
on investments 3.99 2.36 1.72 (0.16)
---- ---- ----- -----
Total income from
investment operations 4.21 2.59 1.94 0.03
---- ---- ----- -----
Less distributions:
Dividends from net investment income (0.22) (0.22) (0.22) (0.19)
Distributions from capital gains (0.59) (0.17) (0.09) -
---- ---- ----- -----
Total distributions (0.81) (0.39) (0.31) (0.19)
---- ---- ----- -----
End of period $17.07 (a) 13.67 11.47 9.84
========== =========== ========== ==========
Total return 32.6 (a) 22.6% 20.3% (.03%)(b)
========== =========== ========== ==========
Ratios/Supplemental data:
Net assets, end of period (000's) $46,189 24,628 12,813 12,892
Ratio of expenses to average net assets 0.72% 0.71% 0.82% 0.76% (c)
Ratio of net income to average net assets 1.46% 1.78% 2.14% 2.38% (c)
Portfolio turnover rate 88.53% 92.72% 19.89% 10.05%
Average Commission Rate (d) $0.0948 N/A N/A N/A
(a) Excludes maximum sales load of 4%.
(b) Total return is not annualized.
(c) Annualized for those periods less than twelve months in duration.
(d) Computed by dividing the total amount of commissions paid by the
total number of shares purchased and sold during the period
for which there was a commission charged.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CAPITAL APPRECIATION PORTFOLIO
Years Ended June 30, 1997, 1996, 1995 and 1994 and for the period
from January 4, 1993 (commencement of operations) to June 30, 1993
1997 1996 1995 1994 1993
--------------- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of period $13.19 11.23 8.95 9.40 10.00
Income (loss) from investment
operations:
Net investment loss 0.18 (0.19) (0.15) (0.12) (0.04)
Net realized and unrealized
gain (loss) on investments 1.48 2.88 2.62 (0.33) (0.56)
---- ---- ----- ----- ------
Total Income (loss) from
investment operations 1.66 2.69 2.47 (0.45) (0.60)
---- ---- ----- ----- ------
Less distributions from
net investment income (0.12) - - - -
Less distributions from capital gains (0.48) (0.73) (0.19) - -
------ ---- ----- ----- ------
End of period $14.25(a) 13.19 11.23 8.95 9.40
========= ========== ========== ========== ==========
Total return 13.8%(a) 26.0% 28.6% (4.8%) (6.0%)(b)
========= ========== ========== ========== ==========
Ratios/Supplemental data:
Net assets, end of period $6,733 2,474 749 654 583
Ratio of expenses to average net assets 1.24% 2.84% 2.69% 2.13% 2.41% (c)
Ratio of net loss to average net assets 0.18% (1.54%) (1.59%) (1.27%) (1.04%)(c)
Portfolio turnover rate 129.15% 179.06% 214.47% 9.09% 4.42%
Average Commission Rate (d) $0.0689 N/A N/A N/A N/A
(a) Excludes maximum sales load of 4%.
(b) Total return is not annualized.
(c) Annualized for those periods less than twelve months in duration.
(d) Computed by dividing the total amount of commissions paid by the
total number of shares purchased and sold during the period
for which there was a commission charged.
</TABLE>
9
<PAGE>
FINANCIAL HIGHLIGHTS
INTERNATIONAL PORTFOLIO
Period from October 1, 1996
(commencement of operations) to June 30, 1997
1997
NET ASSET VALUE: --------
Beginning of period: $10.00
-----
Income from investment operations:
Net investment income 0.15
Net realized and unrealized gain
on investments 1.22
-----
Total income from
investment operations 1.37
-----
Less distributions from net investment income: (0.15)
------
End of period $11.22(a)
=====
TOTAL RETURN 18.2%(a)
=====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $10,431
Ratio of expenses to average net assets 1.48%(b)
Ratio of net loss to average net assets 1.89%(b)
Portfolio turnover rate 33.77%
Average Commission Rate (c) $0.0809
(a) Excludes maximum sales load of 4%.
(b) Annualized for those periods less than twelve months in duration.
(c) Computed by dividing the total amount of commissions paid by the
total number of shares purchased and sold during the period for
which there was a commission charged.
10
<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.
11
<PAGE>
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:
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.
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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.
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.
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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, 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
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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.
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.
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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 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
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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 World Equity Benchmark Shares, that invest in shares of a foreign country in
an attempt to track an index for securities of that 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 make 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 organization, such as S&P or Moody's, or, if unrated,
determined by the Sub-Adviser to be of equivalent credit quality.
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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
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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.
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
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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.
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;
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(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 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 322% for the Fund's fiscal year ended
June 30, 1997. 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.
22
<PAGE>
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 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.
23
<PAGE>
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
fiscal year ended June 30, 1997, the Fund paid the Adviser $17,500, which
represented a fee equivalent to .37% of average annual net assets. This basic
fee is higher than that paid by most other investment companies.
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
24
<PAGE>
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.
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(Hons), and James Clunie,
BSc(Hons) are responsible for the day-to-day management of the International
Portfolio investments.
Mr. Scullion 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, Mr.
Scullion became the Director in charge of country allocation for Murray
Johnstone International (MJI). Mr. Scullion is MJI's Chief Investment Officer
and a Director of Murray Johnstone Limited.
Mr. Preston 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 join 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.
25
<PAGE>
Mr. Clunie 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 manger. 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. Starting in 1993, he undertook
two years of marketing and client servicing in the United States. He then moved
to the role of portfolio manger, country allocation team, and is based in MJI's
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 .25% of the average daily net assets of each
Portfolio. The Administrator has entered 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.
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,
26
<PAGE>
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. 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.
The Company may also advertise performance that includes results from periods
during which the initial assets of the Portfolios were held in a predecessor
collective investment trusts managed by the Adviser. 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
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<PAGE>
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 plus the
applicable sales charge 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 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.
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<PAGE>
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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<PAGE>
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").
<TABLE>
<CAPTION>
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
- -------------------------------------- ----------------- ------------------ -------------------
<S> <C> <C> <C>
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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<PAGE>
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.
</TABLE>
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.
32
<PAGE>
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:
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.
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<PAGE>
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.
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
34
<PAGE>
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 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.
35
<PAGE>
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.
As of June 30, 1997, 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
36
<PAGE>
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.
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.
37
<PAGE>
TABLE OF CONTENTS
Introduction............................ 1
Expenses................................ 3
Financial Highlights.................... 5
Investment Objective
and Policies............................ 11
Intermediate Government Bond........ 11
Government Securities............... 11
Growth.............................. 12
Capital Appreciation................ 14
International....................... 15
Risk Factors............................ 18
Special Investment Methods.............. 19
Management.............................. 23
Purchases of Shares..................... 28
Redemption of Shares.................... 33
Valuation of Shares..................... 34
Dividends and Taxes..................... 35
General Information..................... 36
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY STRATUS
FUND, INC. OR SMITH HAYES FINANCIAL SERVICES CORPORATION. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
<PAGE>
STRATUS FUND, INC.
INTERMEDIATE GOVERNMENT
BOND PORTFOLIO
GOVERNMENT SECURITIES
PORTFOLIO
GROWTH PORTFOLIO
CAPITAL APPRECIATION
PORTFOLIO
INTERNATIONAL PORTFOLIO
PROSPECTUS
INVESTMENT ADVISER
UNION BANK AND TRUST COMPANY
ADMINISTRATOR,
TRANSFER AGENT AND
DIVIDEND PAYING AGENT
LANCASTER ADMINISTRATIVE
SERVICES, INC.
DISTRIBUTOR
SMITH HAYES FINANCIAL
SERVICES CORPORATION
CUSTODIAN
UNION BANK AND TRUST COMPANY
LINCOLN, NEBRASKA
OCTOBER 1, 1997
<PAGE>
APPLICATION
STRATUS FUND, Inc. Date ___________________ 200 Centre Terrace, 1225 L Street,
Lincoln, NE 68508 Account #____________________ In accordance with the terms and
conditions set forth in this form, the current prospectus, and my instructions
below, I wish to establish a Shareholder Account in the designated Portfolio(s)
as follows:
O Intermediate Government Bond Portfolio % or $
O Government Securities Portfolio % or $
O Growth Portfolio % or $
O Capital Appreciation Portfolio % or $
O International Portfolio % or $
ACCOUNT REGISTRATION (Please Print)
NOTE: In the case of two or more co-owners, the account will be registered "
Joint Tenants with Right of Survivorship" and NOT as "Tenants-in-common" unless
otherwise specified.
O Individual
______________________________________________________ O Jt. WROS
Name of Shareholder O Corporation
O Trust
__________________________________________________________ O Other______________
Name of Co-Owner (if any)
- -------------------------------------------------------------------------------
Street Address City State Zip Code
_________________________ Citizen of____ U.S.______ Other(specify)_________
Social Security or T.I.N. #
- --------------------------------------- -------------------------------------
(Area Code) Home Telephone (Area Code) Business Telephone
DIVIDEND AND INVESTMENT OPTION (One box must be checked)
O Reinvest all dividends and capital gains distributions. O Reinvest capital
gain distributions only. O Receive all dividends and capital gain distributions
in cash.
SYSTEMATIC WITHDRAWAL PLAN
Mail a check for $___________________ prior to the last day of each
O Month O Quarter O Year
First check to be mailed__________________(specify month)
SHAREHOLDER AUTHORIZATION AND CERTIFICATION
I authorize any instructions contained herein and certify under penalties of
perjury:(Strike number 2 if not true) 1. that the social security or other
taxpayer identification number is correct; 2. that I am not subject to
withholding either because of a failure to report all interest or dividends or
I was subject to withholding and the Internal Revenue Service has notified me
that I am no longer subject to withholding.
O Exempt from backup withholding
O Non-exempt from backup withholding
X______________________________________ X_______________________________________
Signature of Shareholder/or Authorized Signature of Co-Owner (if any)
Officer, if corporation
FOR DEALER ONLY (We hereby authorize Stratus Fund, Inc. as our agent in
connection with transactions under this authorization form. We guarantee the
shareholder's signature.)
____________________________________ ______________________________ __________
Dealer Name (Please Print) Signature of Registered Representative
- -------------------------------------- -----------------------------------------
Home Office Address Address of Office Serving Account
- -------------------------------------- -----------------------------------------
City State Zip Code City State Zip Code
- -------------------------------------- -----------------------------------------
Authorized Signature of Dealer Branch No. Reg. Rep. No. Reg. Rep.
Last Name
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
STRATUS FUND, INC.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
GROWTH PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERNATIONAL PORTFOLIO
October 1, 1997
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, 1997, 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.......................................................... 2
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS............................. 2
Intermediate Government Bond Portfolio............................... 2
Government Securities Portfolio...................................... 2
Growth Portfolio..................................................... 2
Capital Appreciation Portfolio....................................... 3
International Portfolio.............................................. 3
Portfolio Turnover................................................... 3
All Portfolios....................................................... 3
DIRECTORS AND EXECUTIVE OFFICERS............................................. 5
INVESTMENT ADVISORY AND OTHER SERVICES....................................... 6
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS............................. 10
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
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. The
International Portfolio commenced business operations on October 1, 1996.
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
2
<PAGE>
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 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
<PAGE>
(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;
(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.
4
<PAGE>
<TABLE>
<CAPTION>
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:
Name, Age, Position with Fund and Address Principal Occupation Last Five Years
- ------------------------------------------------------- -----------------------------------------------------
<S> <C>
*Thomas C. Smith (52) Chairman, CONLEY SMITH Inc., Lincoln, Nebraska;
Chief Financial Officer & Treasurer; Vice President, Lancaster Administrative Services,
200 Centre Terrace, 1225 "L" Street Inc., 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, Concorde Management and
Development, Inc., Lincoln, Nebraska.
*Michael S. Dunlap (33) Executive Vice President and Director Union
President 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 (62) President, Food 4 Less, Inc., a retail
Director grocery chain, and owner, Schrier-Lawson
11128 John Galt Blvd. Motor Center.
Omaha, Nebraska 68137
R. Paul Hoff (62) Physician and CEO of Seward Clinic,
Director P.C., Seward, Nebraska.
311 Jackson
Seward, Nebraska 68434
Edson L. Bridges III (39) Director, Bridges Investment Fund, Inc.,
Director a registered open end management investment
8401 W. Dodge Road, #256 company, February, 1991 to present; Vice
Omaha, Nebraska 68114 President and Director of Bridges Investment
Counsel Inc., a registered investment adviser.
Jon Gross (28) Trust Investment Officer, Union Bank and Trust
Vice President Company, Lincoln, Nebraska, since 1991 and an employee
3643 South 48th Street of Union Bank and Trust Company since 1988.
Lincoln, Nebraska 68506
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
*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.
5
<PAGE>
The following table represents the compensation amounts received for
services as a director of the Funds for the year ended June 30, 1997:
Compensation Table
Pension or
Aggregate Retirement Benefits Total 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
Michael S. Dunlap, $0 $0 $0
Director, President
& Secretary
Stan Schrier, Director $4,000 $0 $4,000
R. Paul Hoff, Director $4,000 $0 $4,000
Edson L. Bridges III, $4,000 $0 $4,000
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 23, 1997. 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.
6
<PAGE>
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 23,
1997. 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 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 became effective 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").
7
<PAGE>
(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%).
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
8
<PAGE>
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% of the
first $10 million and .60% above that amount 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 office facilities,
bookkeeping and shareholder recordkeeping services, share transfer services and
dividend disbursing services. Under the Administration Agreement, the
Administrator receives an administration fee, computed separately for each
Portfolio and paid monthly, at an annual rate of .25% of the daily average net
assets of each Portfolio. From July 1, 1995 to October 31, 1995, and from
February 1, 1996, to June 30, 1997 the Administrator waived .15% of that fee.
The Administrator revoked its fee waiver effective July 1, 1997. For the years
ended June 30, 1995, 1996 and 1997 (and the period October 1, 1996 to June 30,
1997 for the International Portfolio) the Fund paid to Advisor and the
Administrator the following amounts for advisory and administrative services as
indicated:
Advisory Fees Administration
Fees
Intermediate Government
Bond Portfolio
1997 $38,269 $14,719
1996 $42,967 $16,555
1995 $40,101 $ 6,169
Capital Appreciation
Portfolio
1997 $17,500 $11,855
1996 $18,902 $ 3,032
1995 $ 2,370 $ 672
Growth Portfolio
1997 $160,343 $80,173
1996 $ 93,310 $46,667
1995 $ 59,230 $11,846
Government Securities
Portfolio
1997 $122,584 $61,292
1996 $ 94,612 $47,314
1995 $ 64,587 $12,917
International Portfolio
1997 $64,660 $14,057
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.
9
<PAGE>
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 received $8,086 during the Fund's fiscal year ended
June 30, 1997, and paid out 100% of this amount as commissions and dealer
allowances.
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 monthly at the annual rates of eleven
(11) basis points for the market value of securities up to $10 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.
10
<PAGE>
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.
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.
During the fiscal years ended June 30, 1997, 1996 and 1995, the Fund
incurred $208,138, $91,900 and $41,468 in brokerage commissions. A portion of
those commissions was paid to the Fund's Distributor, allocated among the
Portfolios as follows:
1997 1996 1995
---- ---- ----
Intermediate Government Bond Portfolio $0 $ 450 $3,250
Government Securities Portfolio 0 0 2,300
Growth Portfolio 0 980 7,629
Capital Appreciation Portfolio 50,410 6,370 21,020
International Portfolio 0 0 0
-------- -------- ----------
$50,410 $7,800 $34,199
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<PAGE>
The Distributor was paid 82% and 8% of the aggregate brokerage
commissions incurred in the fiscal years ended June 30, 1995, and 1996 and 24%
in 1997. The remaining brokerage commissions were paid to twelve other
unaffiliated broker dealers. Of the aggregate dollar amount of transactions
involving payment of commissions, 29% were effected through the Distributor in
the fiscal year ended June 30, 1997. It is the Company's intent that brokerage
transactions executed through SMITH HAYES will be effected pursuant to the
Company'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.
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 ofSeptember 9, 1997, 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. 495,166.676 100%
Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
Cook Family Foods 33,818.556 6.83%
Profit Sharing Plan
200 South 2nd Street
Lincoln, NE 68508
MD Investments 28,487.375 5.75%
c/o Mike Dunlap
P.O. Box 6155
Lincoln, NE 68506
Union Bank and Trust 26,831.819 5.42%
Company
Profit Sharing & 401(k) Plan
4732 Calvert
Lincoln, NE 68506
Growth UBATCO & Co. 2,776,195.745 99.75%
Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
Union Bank & Trust Company 147,192.026 5.29%
Profit Sharing Plan & 401K Plan
4732 Calvert Street
Lincoln, NE 68506
12
<PAGE>
Growth Portfolio Name & Address Shares % Ownership
Linweld 401K/PSP 152,822.673 5.49%
1225 "L" Street, Street. 600
Lincoln, NE 68508
Intermediate Government UBATCO & Co. 440,081.626 99.07%
Bond Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
Benes Service Company 61,262.319 13.79%
Profit Sharing Plan
Valparaiso, NE 68605
Intermediate Government Madonna Rehabilitation Hospital 34,995.001 7.88%
Bond Portfolio Agency Account
5401 South
Lincoln, NE 68506
Cook Family Foods 76,796.204 7.80%
Profit Sharing Plan
200 South 2nd Street
Lincoln, NE 68508
Oak Creek Valley Bank 30,723.547 6.92%
Profit Sharing Plan
108 W. Second Street
Valparaiso, NE 60868
Womens Clinic 28,114.487 6.33%
Profit Sharing Plan
220 Lyncrest Drive
Lincoln, NE 68510
Government Securities UBATCO & Co. 2,721,164.145 100%
Portfolio 4732 Calvert Street
Lincoln, NE 68506
International UBATCO & Co. 984,214.108 100%
Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
Linweld 401K/PSP 95,997.791 9.75%
1225 "L" Street, Street. 600
Lincoln, NE 68508
Crete/Sunflower 121,483.484 12.34%
Profit Sharing Plan
P.O. Box 81228
Lincoln, NE 68528
13
<PAGE>
On September 9, 1997, the Directors and officers of the Fund as a group
beneficially owned 35,664.702 shares or 1.31%, 51,760.459 shares or 1.86%,
39,753.519 shares or 8.03%, 12,390.468 shares or 1.26% and 1,008.065 shares or
.14%, respectively, of the Government Securities Portfolio, Growth Portfolio,
Capital Appreciation Portfolio and the International Portfolio. Directors and
officers owned 1.88% 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.
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
14
<PAGE>
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 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.
15
<PAGE>
The yields of the Intermediate Government Bond Portfolio and Government
Securities Portfolio for the 30-day period ended June 30, 1997 were 4.73% and
5.25% respectively.
The average annual total returns of the Portfolios for the one year,
five years and inception to date ended June 30, 1997 are as follows:
One Year Five Years Inception to Date
Intermediate Government Bond Portfolio 5.6% 5.2% 6.0%
Capital Appreciation Portfolio 11.7% -- 11.4%
Growth Portfolio 32.6% -- 19.7%
Government Securities Portfolio 6.3% -- 4.1%
International Portfolio -- -- 13.6%
FINANCIAL STATEMENTS
The Fund hereby incorporates by reference the information in the Fund's
Annual Report dated June 30, 1997, filed with the Securities and Exchange
Commission on August 27, 1997 and the Fund's Semi-Annual Report dated December
31, 1996 filed with the Commission on February 26, 1997. Both Reports 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.
16
<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.
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
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.
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.
<PAGE>
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, Capital Appreciation Portfolio and Internat-
ional Portfolio:
Financial Highlights
(2) Incorporated by reference in Part B for the Intermediate
Government Bond Portfolio, Government Securities
Portfolio, Growth Portfolio Capital Appreciation
Portfolio and International 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 Annual Report dated June 30, 1997.
Independent Auditors' Report; Statement of Assets
and Liabilities, June 30, 1997; Statement of
Operations, Year ended June 30, 1997; Statements of
Changes in Net Assets, Years ended June 30, 1997
and 1996; Notes to Financial Statements; Schedule
of Investments in Securities; and Financial
Highlights all included in the Fund's Annual
Financial Report dated June 30, 1997.
(b) Exhibits
Exhibit No. Description
---------- ------------
1. (a) Articles of Incorporation of New Horizon
Fund, Inc., dated October 26, 1990, were
filed electronically as an Exhibit to
Post-Effective Amendment No. 11 on October
25, 1995, and are hereby incorporated by
reference.
(b) Articles of Amendment to the Articles of
Incorporation of the New Horizon Fund, Inc.,
changing the name of the corporation to Apex
Fund, Inc., dated as of November 7, 1990,
were filed electronically as an Exhibit to
Post-Effective Amendment No. 11 on October
25, 1995, and are hereby incorporated by
reference.
(c) Articles of Amendment to the Articles of
Incorporation of Apex Fund, Inc., changing
the name of the corporation to Stratus Fund,
Inc., dated as of January 15, 1991, were
filed electronically as an Exhibit to Post-
Effective Amendment No. 11 on October 25,
1995, and are hereby incorporated by
reference.
(d) Articles of Amendment to the Articles of
Incorporation of Stratus Fund, Inc., dated
April 28, 1994, were filed electronically as
an Exhibit to Post-Effective Amendment No.
11 on October 25, 1995, and are hereby
incorporated by reference.
2. Bylaws of Stratus Fund, Inc., as amended, dated as
of January 15, 1991, were filed electronically as
an Exhibit to Post-Effective Amendment No. 11 on
October 25, 1995, and are hereby incorporated by
reference.
5. (a) Amended Transfer Agent and Administrative
Services Agreement between Stratus Fund,
Inc., and Lancaster Administrative Services,
Inc., dated July 1, 1995, was filed
electronically as an Exhibit to Post-
Effective Amendment No. 11 on October 25,
1990,and is hereby incorporated by reference.
(b) Investment Advisory Agreement between Apex
Fund and Union Bank & Trust Company, dated
May 12, 1991, was filed electronically as an
Exhibit to Post-Effective Amendment No. 11
on October 25, 1995, and is hereby
incorporated by reference.
(c) Investment Advisory Agreement between
Stratus Fund, Inc., and Union Bank and
Trust Company for the Capital Appreciation
Portfolio dated October 30, 1992, was filed
electronically as an Exhibit to
Post-Effective Amendment No. 11 on October
25, 1995, and is hereby incorporated by
reference.
(d) Investment Advisory Agreement between
Stratus Fund, Inc., and Union Bank &
Trust Company for the Union Equity/Income
Portfolio and Union Government Securities
Portfolio dated April 28, 1993, was filed
electronically as an Exhibit to Post-
Effective Amendment No. 11 on October 25,
1995, and is hereby incorporated by
reference.
(e) Investment Advisory Agreement between
Stratus Fund, Inc., and Union Bank & Trust
Company for the International Portfolio
dated as of July 15, 1996, was filed
electronically as an Exhibit to Post-
Effective Amendment No. 13 on September 27,
1996, and is hereby incorporated by
reference.
(f) Sub-Advisory Agreement between Union Bank
and Trust Company and Murray Johnstone
International Limited dated as of July 15,
1996, was filed electronically as an
Exhibit to Post-Effective Amendment No. 13
on September 27, 1996, and is hereby
incorporated by reference.
6. Underwriting and Distribution Agreement between
Apex Fund Inc., and Smith Hayes Financial Services
Corporation dated May 12, 1991 was filed
electronically as an Exhibit to Post-Effective
Amendment No. 11 on October 25, 1995 and is hereby
incorporated by reference.
8. Custodian Agreement between Stratus Fund, Inc., and
Union Bank and Trust Company, Lincoln, Nebraska,
dated May 1, 1994, was filed electronically as an
Exhibit to Post-Effective Amendment No. 11 on
October 25, 1995 and is hereby incorporated by
reference.
10. (a) Opinion and Consent of Messrs. Cline,
Williams, Wright, Johnson & Oldfather
dated May 10, 1991 were filed electronically
as an Exhibit to Post-Effective Amendment
No. 11 on October 25, 1995, and are hereby
incorporated by reference.
(b) Opinion and Consent of Messrs. Cline,
Williams, Wright, Johnson & Oldfather with
Respect to the Capital Appreciation
Portfolio dated October 30, 1992 were filed
as an Exhibit to Post-Effective Amendment
No. 11 on October 25, 1995 and are hereby
incorporated by reference.
(c) Opinion and Consent of Messrs. Cline,
Williams, Wright, Johnson & Oldfather with
Respect to the Union Equity/Income Portfolio
and Union Government Bond Portfolio dated
May 26, 1993 were filed as an Exhibit to
Post-Effective Amendment No. 11 on October
25, 1995, and are hereby incorporated by
reference.
(d) Opinion of Ballard Spahr Andrews and
Ingersoll with respect to the International
Portfolio dated July 17, 1996 was filed
electronically as an Exhibit to
Post-Effective Amendment No. 12 on July 17,
1996 and is hereby incorporated by
reference.
11. (a) Consent of Ballard Spahr Andrews & Ingersoll
dated September 26, 1997, is filed herewith
electronically.
(b) Consent of Deloitte & Touche LLP dated
September 25, 1997, is filed herewith
electronically.
13. Revised Subscription Agreement of Initial
Stockholder dated May 3, 1991, was filed
electronically as an Exhibit to Post-Effective
Amendment No. 11 on October 25, 1995, and is hereby
incorporated by reference.
16. Schedules of Performance Computation for periods
ended June 30, 1997 are filed herewith
electronically.
17. Financial Data Schedules for the period ended
June 30, 1997 are filed herewith electronically.
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
------------
Growth Portfolio 7 as of June 30, 1997
Government Securities Portfolio 2 as of June 30, 1997
Capital Appreciation Portfolio 3 as of June 30, 1997
Intermediate Government Bond Portfolio 4 as of June 30, 1997
International Portfolio 3 as of June 30, 1997
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 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
and Officer Adviser Business 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
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 Financial Services Corporation, the
Registrant's principal underwriter, also serves as the principal underwriter for
SMITH HAYES Trust, Inc.
(b)
Positions and Positions and
Name and Principal Offices with Offices with
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 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Lincoln, State of
Nebraska, on the 26th day of September, 1997.
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 September 26, 1997:
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
/s/ R. Paul Hoff
R. Paul Hoff
Director
/s/ Stan Schrier
Stan Schrier
Director
/s/ Edson L. Bridges, III
Edson L. Bridges, III
Director
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. 15 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. 16 under the Investment
Company Act of 1940.
/s/ Ballard Spahr Andrews & Ingersoll
Ballard Spahr Andrews & Ingersoll
September 26, 1997
Exhibit 11.(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporated by reference in this Post-Effective
Amendment No. 15 to Registration Statement No. 33-37928 of Stratus Fund, Inc.
filed on Form N-1A of our report dated July 25, 1997 appearing in the Annual
Report dated June 30, 1997, and to the reference to us under the headings
"Auditors" and "Financial Highlights" in the Prospectus and "Auditors" in the
Statement of Additional Information, which is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
September 25, 1997
EXHIBIT 16
SCHEDULE OF COMPUTATION OF PERFORMANCE QUOTATIONS
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
The Total Return information shown in the Statement of Additional
Information for the Intermediate Government Bond Portfolio was calculated as
follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = Ended redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The Ended redeemable value assumes a complete redemption at the end of
the period.
Total Return for the Period Ended June 30, 1997:
P = $1,000 (initial value)
n = 1 year
ERV = $1,024 (Ended redeemable value)
Solve for T:
$1,000 (1 + T)1 = 1,024
T = .0557 or 5.57% annualized
Total Return for the 5 Year Period Ending June 30, 1997:
P = $1,000 (initial value)
n = 5 years
ERV = $1,252 (ending redeemable value)
Solve for T:
$1,000 (1 + T)5 = 1,252
T = .0524 or 5.24% annualized
Total Return from Inception (May 15, 1991) to June 30, 1997:
P = $1,000 (initial value)
n = 6.1315 years (2238 days)
ERV = $1,386 (Ended redeemable value)
Solve for T:
$1,000 (1 + T)6.1315 = 1,386
T = .0599 or 5.99% annualized
<PAGE>
The yield quotation for the Intermediate Government Bond Portfolio
described in the Statement of Additional Information was calculated according to
the following formula for the 30 day period Ended June 30, 1997.
YIELD = 2[( a = 1)6 - 1]
cd
a = dividends and interest earned during period net
for accrued expenses (net of reimbursements) or $18,469
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
or 438,028.641
d = the maximum offering price per share on the last day of
the period or $10.80
The yield for the thirty (30) day period was 4.73%.
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO
The Total Return information shown in the Statement of Additional
Information for the Government Securities Portfolio was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = Ended redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The Ended redeemable value assumes a complete redemption at the end of
the period.
Total Return for the Period Ended June 30, 1997:
P = $1,000 (initial value)
n = 1 year
ERV = $1,031 (Ended redeemable value)
Solve for T:
$1,000 (1 + T)1 = 1,031
T = .0626 or 6.26% annualized
Total Return from Inception (October 8, 1993) to June 30, 1997:
P = $1,000 (initial value)
n = 3.7288 years (1361 days)
ERV = $1,125 (Ended redeemable value)
Solve for T:
$1,000 (1 + T) 3.7288 = 1,125
T = .0406 or 4.06% annualized
The yield quotation for the Government Securities Portfolio described in
the Statement of Additional Information was calculated according to the
following formula for the 30 day period Ended June 30, 1997.
YIELD = 2[( a = 1)6 - 1]
cd
a = dividends and interest earned during period net
for accrued expenses (net of reimbursements) or $117,738
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
or 2,714,232.275
d = the maximum offering price per share on the last day of
the period or $10.02
The yield for the thirty (30) day period was 5.25%
<PAGE>
GROWTH PORTFOLIO
The Total Return information shown in the Statement of Additional
Information for the Growth Portfolio was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = Ended redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The Ended redeemable value assumes a complete redemption at the end of
the period.
Total Return for the Period Ended June 30, 1997
P = $1,000 (initial value)
n = 1 year
ERV = $1,273 (Ended redeemable value)
Solve for T:
$1,000 (1 + T)1 = 1,273
T = .3264 or 32.64% annualized
Total Return from Inception (October 8, 1993) to June 30, 1997:
P = $1,000 (initial value)
n = 3.7288 years (1361 days)
ERV = $1,879 (Ended redeemable value)
Solve for T:
$1,000 (1 + T) 3.7288 = 1,879
T = .1973 or 19.73% annualized
<PAGE>
CAPITAL APPRECIATION PORTFOLIO
The Total Return information shown in the Statement of Additional
Information for the Capital Appreciation Portfolio was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = Ended redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The Ended redeemable value assumes a complete redemption at the end of
the period.
Total Return for the Period Ended June 30, 1997:
P = $1,000 (initial value)
n = 1 year
ERV = $1,072 (Ended redeemable value)
Solve for T:
$1,000 (1 + T)1 = 1,072
T = .1171 or 11.71% annualized
Total Return from Inception (January 4, 1993) to June 30, 1997:
P = $1,000 (initial value)
n = 4.4877 years (1638 days)
ERV = $1,556 (Ended redeemable value)
Solve for T:
$1,000 (1 + T) 4.4877 = 1,556
T = .1136 or 11.36% annualized
<PAGE>
INTERNATIONAL PORTFOLIO
The Total Return information shown in the Statement of Additional
Information for the Internation Portfolio was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The ending redeemable value assumes a complete redemption at the end of
the period.
Total Return for Inception (October 1, 1996) to June 30, 1997.
P = $1,000 (initial value)
n = .7452 years (272 days)
ERV = $1,056 (ending redeemable value)
Solve for T:
$1,000 (1 + T) .7452 = 1,056
T = .1359 or 13.59% annualized
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000870156
<NAME> STRATUS FUND, INC.
<SERIES>
<NUMBER> 2
<NAME> INTERMEDIATE GOVERNMENT BOND PORTFOLIO
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