CAPITAL APPRECIATION PORTFOLIO
INTERMEDIATE GOVERNMENT BOARD PORTFOLIO
Portfolios of
STRATUS FUND, INC.
P.O. Box 82535
Lincoln, Nebraska 68501-2535
May 1, 2000
Dear Shareholder:
Enclosed is a combined proxy statement and prospectus seeking your approval
of a proposed combination of Capital Appreciation Portfolio with Growth
Portfolio and a proposed combination of Intermediate Government Bond Portfolio
with Government Securities Portfolio.
The combinations have been proposed because Capital Appreciation Portfolio
and Intermediate Government Bond Portfolio (the "Acquired Portfolios") have not
been successful in attracting new investors and are not expected to experience
significant growth in assets. Growth Portfolio and Government Securities
Portfolio (the "Acquiring Portfolios") are substantially larger than the
Acquired Portfolios. The investment objective and strategies of each Acquired
Portfolio are similar to the investment objective and strategies of the
Acquiring Portfolio with which it will combine, although there are some
differences. Union Bank and Trust Company serves as the investment adviser to
the Acquired Portfolios and the Acquiring Portfolios. The Acquiring Portfolios
have lower operating expense ratios than the Acquired Portfolios. Growth
Portfolio has a better performance history than Capital Appreciation Portfolio,
and the performance of Government Securities Portfolio has been comparable to
that of Intermediate Government Bond Portfolio. The accompanying document
describes the proposed transactions and compares the investment policies,
operating expenses and performance histories of the Acquired Portfolios and
Acquiring Portfolios.
Shareholders of Capital Appreciation Portfolio and Intermediate Government
Bond Portfolio are being asked to approve a Plan of Reclassification that will
govern the reorganization of the Acquired Portfolios into the Acquiring
Portfolios. After careful consideration, the Board of Directors of Stratus Fund
has unanimously approved the proposals and recommends that you read the enclosed
materials carefully and then vote FOR the proposals.
Your vote is important. Please take a moment now to sign and return your
proxy cards in the enclosed postage paid return envelope.
Sincerely,
/s/ Michael S. Dunlap
Michael S. Dunlap
Chairman
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CAPITAL APPRECIATION PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIOS OF
STRATUS FUND, INC.
P.O. BOX 82535
LINCOLN, NEBRASKA 68501-2535
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 25, 2000
TO THE SHAREHOLDERS OF CAPITAL APPRECIATION PORTFOLIO AND INTERMEDIATE
GOVERNMENT BOND PORTFOLIO:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Capital
Appreciation Portfolio and Intermediate Government Bond Portfolio (the "Acquired
Portfolios"), investment portfolios of Stratus Fund, Inc. ("Stratus Fund"), will
be held at 6801 S. 27th, Lincoln, Nebraska, on May 25, 2000, at 3:00 p.m., local
time, for the following purposes:
1. To approve a Plan of Reclassification (the "Plan") that provides
for the combination of Capital Appreciation Portfolio with Growth
Portfolio and the combination of Intermediate Government Bond
Portfolio with Government Securities Portfolio (the
"Reorganizations"). The Reorganizations will be effected through
an amendment to the articles of incorporation of Stratus Fund.
Pursuant to the Plan,
o the shares of the Acquired Portfolios will be reclassified
as shares of the Acquiring Portfolios and Stratus Fund will
issue Retail Class A shares of the Acquiring Portfolio to
the Acquired Portfolio's Retail Class A shareholders and
Institutional Class shares of the Acquiring Portfolio to the
Acquired Portfolio's Institutional Class shareholders.
o all of the assets of an Acquired Portfolio will be
transferred to the Acquiring Portfolio with which it will
combine, and
o the Acquiring Portfolio will assume all of the liabilities
of the Acquired Portfolio.
The value of each Acquired Portfolio shareholder's account with
the Acquiring Portfolio immediately after the Reorganization will
be the same as the value of such shareholder's account with the
Acquired Portfolio immediately prior to the Reorganization. The
Reorganizations have been structured as tax-free transactions. No
initial sales charge will be imposed in connection with the
Reorganizations.
2. To transact any other business, not currently contemplated, that
may properly come before the Special Meeting, in the discretion
of the proxies or their substitutes.
Shareholders of record as of the close of business on April 26,
2000, are entitled to notice of, and to vote at, the Special Meeting or any
adjournment thereof.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY, WHICH IS BEING SOLICITED BY THE MANAGEMENT OF
STRATUS FUND. YOUR VOTE IS IMPORTANT FOR THE PURPOSE OF ENSURING A QUORUM AT THE
SPECIAL MEETING. PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY
THE SUBSEQUENT EXECUTION AND SUBMISSION OF A REVISED PROXY, BY GIVING WRITTEN
NOTICE OF REVOCATION TO STRATUS FUND, INC. AT ANY TIME BEFORE THE PROXY IS
EXERCISED OR BY VOTING IN PERSON AT THE SPECIAL MEETING.
MICHAEL S. DUNLAP
PRESIDENT AND SECRETARY
May 1, 2000
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CAPITAL APPRECIATION PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GROWTH PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
PORTFOLIOS OF
STRATUS FUND, INC.
P.O. BOX 82535
LINCOLN, NEBRASKA 68501-2535
(402) 476-3000
COMBINED PROXY STATEMENT AND PROSPECTUS
Dated: May 1, 2000
This document is being furnished in connection with a special meeting of
shareholders of CAPITAL APPRECIATION PORTFOLIO and INTERMEDIATE GOVERNMENT BOND
PORTFOLIO (the "Acquired Portfolios"), investment portfolios of Stratus Fund,
Inc. ("Stratus Fund"), a Minnesota corporation, to be held on May 25, 2000 (the
"Special Meeting"). At the Special Meeting, the shareholders of the Acquired
Portfolios are being asked to consider and approve a Plan of Reclassification
(the "Plan") which provides for the combination of CAPITAL APPRECIATION
PORTFOLIO with GROWTH PORTFOLIO, and the combination of INTERMEDIATE GOVERNMENT
BOND PORTFOLIO with GOVERNMENT SECURITIES PORTFOLIO (the "Reorganizations"). The
Board of Directors of Stratus Fund has unanimously approved the Plan and the
Reorganizations as being in the best interest of the shareholders of each of the
Acquired Portfolios.
Pursuant to the Plan, and the amendment of the Articles of Incorporation of
Stratus Fund described in the Plan, the shares of the Acquired Portfolios will
be reclassified as shares of the Acquiring Portfolios and Stratus Fund will
issue Retail Class A shares of the Acquiring Portfolio to the Acquired
Portfolio's Retail Class A shareholders and Institutional Class shares of the
Acquiring Portfolio to the Acquired Portfolio's Institutional Class
shareholders. All of the assets of an Acquired Portfolio will be transferred to
the Acquiring Portfolio with which it will combine, the Acquiring Portfolio will
assume all of the liabilities of the Acquired Portfolio. The value of each
Acquired Portfolio shareholder's account with the Acquiring Portfolio
immediately after a Reorganization will be the same as the value of such
shareholder's account with the Acquired Portfolio immediately prior to the
Reorganization. The Reorganizations have been structured as tax-free
transactions. No initial sales charge will be imposed in connection with the
Reorganizations.
Each of the Acquiring Portfolios and the Acquired Portfolios is a series
portfolio of Stratus Fund, an open- end, series management investment company.
The investment objective and strategies of each Acquiring Portfolio are similar
to those of the Acquired Portfolio with which it will combine.
GROWTH PORTFOLIO seeks capital appreciation and income. CAPITAL
APPRECIATION PORTFOLIO seeks capital appreciation.
GOVERNMENT SECURITIES PORTFOLIO seeks to provide a high total return
consistent with the preservation of capital. INTERMEDIATE GOVERNMENT BOND
PORTFOLIO seeks current income, some or all of which is exempt from state income
tax, consistent with the preservation of capital.
This Combined Proxy Statement and Prospectus ("Proxy Statement/Prospectus")
sets forth the information that a shareholder of the Acquired Portfolios should
know before voting on the Plan. It should be read and retained for future
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The current Prospectuses of Stratus Fund, each dated November 1, 1999 (the
"Prospectuses"), together with the related Statement of Additional Information
also dated November 1, 1999, and the Semi-Annual Reports of Stratus Fund dated
December 31, 1999 are on file with the Securities and Exchange Commission (the
"SEC") and are incorporated by reference herein. A copy of the Prospectus for
the Retail Class A shares of Stratus Fund is attached as Appendix II to this
Proxy Statement/Prospectus. Such documents are available without charge by
writing to Stratus Fund, Inc., P.O. Box 82535, Lincoln, Nebraska 68501-2535 or
by calling (402) 476-3000. The SEC maintains a Web site at http://www.sec.gov
that contains the prospectuses and statements of additional information
described above, material incorporated by reference, and other information about
Stratus Fund.
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TABLE OF CONTENTS
Page
INTRODUCTION...................................................................1
SYNOPSIS.......................................................................2
The Reorganizations....................................................2
Reasons for the Reorganizations........................................2
Comparison of the Acquiring Portfolios and the Acquired Portfolios.....3
RISK FACTORS...................................................................7
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES.............................9
Investment Objectives of Growth Portfolio and
Capital Appreciation Portfolio..................................9
Investment Objectives of Government Securities Portfolio and
Intermediate Government Bond Portfolio.........................11
Other Differences in Investment Policies and Restrictions............12
Portfolio Management..................................................13
Management Discussion and Analysis of Performance.....................13
FINANCIAL HIGHLIGHTS..........................................................13
Growth Portfolio......................................................13
Government Securities Portfolio.......................................16
ADDITIONAL INFORMATION ABOUT THE PLAN.........................................19
Terms of the Reorganizations..........................................19
The Reorganizations...................................................19
Board Considerations..................................................20
Other Terms...........................................................22
Federal Tax Consequences..............................................22
Accounting Treatment..................................................25
OWNERSHIP OF THE ACQUIRING PORTFOLIOS AND THE
ACQUIRED PORTFOLIOS SHARES............................................25
Significant Holders...................................................25
Ownership of Officers and Directors/Trustees..........................26
CAPITALIZATION................................................................26
LEGAL MATTERS.................................................................28
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.................28
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ADDITIONAL INFORMATION ABOUT THE ACQUIRING PORTFOLIOS AND
THE ACQUIRED PORTFOLIOS...............................................28
APPENDIX I .............................................Plan of Reclassification
APPENDIX II...........Prospectus for Retail Class A Shares of the Acquired Funds
APPENDIX III......................Discussion and Analysis for the Acquired Funds
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INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Stratus Fund from the
shareholders of the Acquired Portfolios for use at the special meeting of
shareholders to be held at 6801 S. 27th, Lincoln, Nebraska, on May 25, 2000, at
3:00 p.m., local time (such meeting and any adjournments thereof are referred to
as the "Special Meeting").
All properly executed and unrevoked proxies received in time for the
Special Meeting will be voted in accordance with the instructions contained
therein. If no instructions are given, shares represented by proxies will be
voted FOR the proposal to approve the Plan and in accordance with management's
recommendation on other matters. The presence in person or by proxy of ten
percent of the outstanding shares of an Acquired Portfolio at the Special
Meeting will constitute a quorum ("Quorum"). Approval of the Plan by an Acquired
Portfolio requires the affirmative vote of a majority of the shares cast by
shareholders of that Acquired Portfolio. The Plan may be approved by one of the
Acquired Portfolios and the Reorganization of that Acquired Portfolio may be
completed even though the Plan is not approved by shareholders of the other
Acquired Portfolio. Abstentions and broker non-votes will be counted as shares
present at the Special Meeting for quorum purposes, but will not be considered
votes cast at the Special Meeting. Broker non-votes arise from a proxy returned
by a broker holding shares for a customer which indicates that the broker has
not been authorized by the customer to vote on a proposal. Any person giving a
proxy has the power to revoke it at any time prior to its exercise by executing
a superseding proxy or by submitting a notice of revocation to the Secretary of
Stratus Fund. In addition, although mere attendance at the Special Meeting will
not revoke a proxy, a shareholder present at the Special Meeting may withdraw
his proxy and vote in person. Shareholders may also transact any other business
not currently contemplated that may properly come before the Special Meeting in
the discretion of the proxies or their substitutes.
Shareholders of record as of the close of business on April 26, 2000 (the
"Record Date"), are entitled to vote at the Special Meeting. On the Record Date,
there were 12,910.797 Retail Class A shares and 369,621.730 Institutional Class
shares of CAPITAL APPRECIATION PORTFOLIO outstanding, and 1,388.237 Retail Class
A shares and 181,563.075 Institutional Class shares of INTERMEDIATE GOVERNMENT
BOND PORTFOLIO outstanding. Each share is entitled to one vote for each full
share held, and a fractional vote for a fractional share held.
Stratus Fund expects to solicit proxies principally by mail, but may also
solicit proxies by telephone, facsimile, telegraph or personal interview.
Stratus Fund's officers will not receive any additional or special compensation
for any such solicitation. Each of the Acquired Portfolios will bear its own
costs and expenses incurred in connection with the Reorganizations. The total
cost of solicitation of proxies in connection with the Reorganizations is
expected to be approximately $25,000.
Stratus Fund intends to mail this Proxy Statement/Prospectus and the
accompanying proxy on or about May 1, 2000.
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SYNOPSIS
THE REORGANIZATIONS
The Reorganizations will result in the combination of CAPITAL APPRECIATION
PORTFOLIO with GROWTH PORTFOLIO and the combination of INTERMEDIATE GOVERNMENT
BOND PORTFOLIO with GOVERNMENT SECURITIES PORTFOLIO. The Acquired Portfolios and
the Acquiring Portfolios are portfolios of Stratus Fund, a Minnesota
corporation.
If shareholders of an Acquired Portfolio approve the Plan and other closing
conditions are satisfied, the Articles of Incorporation of Stratus Fund will be
amended to reclassify the shares of the Acquired Portfolios as shares of the
Acquiring Portfolios and Stratus Fund will issue Retail Class A shares of the
Acquiring Portfolio to the Acquired Portfolio's Retail Class A shareholders and
Institutional Class shares of the Acquiring Portfolio to the Acquired
Portfolio's Institutional Class shareholders. All of the assets of that Acquired
Portfolio will be transferred to the Acquiring Portfolio with which it will
combine, the Acquiring Portfolio will assume all of the liabilities of the
Acquired Portfolio. The shares of an Acquiring Portfolio issued in a
Reorganization will have an aggregate net asset value equal to the value of the
Acquired Portfolio's net assets transferred to the Acquiring Portfolio.
Shareholders will not pay any initial sales charge for shares of the Acquiring
Portfolios received in connection with the Reorganizations. The value of each
shareholder's account with an Acquiring Portfolio immediately after a
Reorganization will be the same as the value of such shareholder's account with
the Acquired Portfolio immediately prior to the Reorganization. A copy of the
Plan is attached as Appendix I to this Proxy Statement/ Prospectus. See
"Additional Information About the Plan" below.
The Acquired Portfolios will receive an opinion of Ballard Spahr Andrews &
Ingersoll, LLP, to the effect that the Reorganizations will constitute tax-free
reorganizations for Federal income tax purposes. Thus, shareholders will not
have to pay Federal income taxes as a result of the Reorganizations. See
"Additional Information About the Plan - Federal Tax Consequences" below.
The Board of Directors of Stratus Fund, including the independent
Directors, has determined that the Reorganizations are in the best interests of
all of the portfolios and their shareholders and that the interests of the
shareholders of each portfolio will not be diluted as a result of the
Reorganizations.
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REASONS FOR THE REORGANIZATIONS
The Reorganizations are being proposed because the Acquired Portfolios have
not generally been perceived by investors as attractive investment alternatives.
As a result, the Acquired Portfolios' investment adviser, Union Bank and Trust
Company (the "Adviser"), does not anticipate that there will be any significant
future growth in the assets of the Acquired Portfolios. The Acquiring Portfolios
have larger asset bases and lower expense ratios. Growth Portfolio has a better
performance history than Capital Appreciation Portfolio, and the performance of
Government Securities Portfolio has been comparable to that of Intermediate
Government Bond Portfolio, although the Acquired Funds and the Acquiring Funds
have slightly different investment objectives, as described below. See
"Additional Information About the Plan" below for further discussion of the
factors considered by the Board of Directors in approving the Reorganizations.
COMPARISON OF THE ACQUIRING PORTFOLIOS AND THE ACQUIRED PORTFOLIOS
INVESTMENT OBJECTIVE AND STRATEGIES
GROWTH PORTFOLIO seeks to provide capital appreciation and income. CAPITAL
APPRECIATION PORTFOLIO seeks capital appreciation. Because the investment
objective of GROWTH PORTFOLIO includes providing income, a majority of the
securities purchased for GROWTH PORTFOLIO pay dividends. Current income is not a
consideration for the Adviser when selecting stocks for CAPITAL APPRECIATION
PORTFOLIO. CAPITAL APPRECIATION PORTFOLIO invests primarily in small to mid-size
companies having market capitalization of $5 billion or less. GROWTH PORTFOLIO
holds securities of medium and large capitalization companies.
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GOVERNMENT SECURITIES PORTFOLIO seeks to provide a high total return
consistent with the preservation of capital. INTERMEDIATE GOVERNMENT BOND
PORTFOLIO seeks current income, some or all of which is exempt from state income
tax, consistent with the preservation of capital. Although they have slightly
different investment objectives, both GOVERNMENT SECURITIES PORTFOLIO and
INTERMEDIATE GOVERNMENT BOND PORTFOLIO invest primarily in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and they
both seek to maintain an average dollar weighted maturity of between three and
ten years. GOVERNMENT SECURITIES PORTFOLIO also invests a portion of its assets
in investment grade debt obligations of other issuers, and the Adviser can
consider the potential for appreciation in value when selecting securities for
the GOVERNMENT SECURITIES PORTFOLIO to provide a high total return.
For further information on the investment objectives and policies of the
funds, see "Comparison of Investment Objectives and Strategies" below.
INVESTMENT ADVISORY SERVICES
Union Bank and Trust Company (the "Adviser") serves as investment
adviser to the Acquired Portfolios and the Acquiring Portfolios.
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PERFORMANCE
Average annual total returns for the periods indicated for each of the
Acquiring Portfolios and the Acquired Portfolios, including sales charges, are
shown below. Past performance cannot guarantee comparable future results.
<TABLE>
<CAPTION>
Growth Portfolio Capital Appreciation Portfolio
Retail Institutional Retail Institutional
Class A Shares Class Shares Class A Shares Class Shares
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
1 Year Ended December 31, 1999 22.04% 22.41% 3.97% 4.34%
3 Years Ended December 31, 1999 N/A 23.3% N/A 2.90%
5 Years Ended December 31, 1999 N/A 24.36% N/A 13.07%
Since inception 22.71% 19.80% 2.67% 7.83%
Government Securities Intermediate Government Bond
Portfolio Portfolio
Retail Institutional Retail Institutional
Class A Shares Class Shares Class A Shares Class Shares
-------------- ------------ -------------- ------------
1 Year Ended December 31, 1999 1.49% 1.77% 1.74% 2.03%
3 Years Ended December 31, 1999 N/A 5.10% N/A 4.70%
5 Years Ended December 31, 1999 N/A 6.33% N/A 5.89%
Since inception 3.43% 4.46% 3.49% 5.60%
</TABLE>
EXPENSES
A comparison of annual operating expenses as a percentage of net assets
("Expense Ratio") for the Retail Class A and Institutional Class shares of the
Acquiring Portfolios for their fiscal year ended June 30, 1999 and for the
Retail Class A and Institutional Class shares of the Acquired Portfolios for
their fiscal year ended June 30, 1999 are shown below. Expense Ratios are shown
net of any voluntary fee waivers and expense reimbursements.
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<TABLE>
<CAPTION>
GROWTH PORTFOLIO AND CAPITAL APPRECIATION PORTFOLIO
CAPITAL APPRECIATION GROWTH PORTFOLIO
GROWTH PORTFOLIO PORTFOLIO PRO FORMA ESTIMATED
-------------------------------------------------------------------
Retail Class A Institutional Retail Class Institutional Retail Class A Institutional
Shares Class Shares Shares Class Shares Shares Class Shares
------ ------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed
on purchase of shares (as a
percentage of offering price) 4.5% none 4.5% none 4.5% none
Deferred Sales Load (as a percentage
original purchase price or redemption
procees, as applicable) none none none none none none
ANNUAL OPERATING EXPENSES (AS A %
OF NET ASSETS)
Management fees................... .75% .75% 1.40%(2) 1.40%(2) .75% .75%
Rule 12b-1 distribution plan payments .50% none .50% none .50% none
All other expenses................ .30% .30% .55% .55% .32% .32%
Total portfolio operating expenses (1) 1.55% 1.05% 2.45% 1.95% 1.57% 1.07%
(1) Total actual annual operating expenses for the Retail Class A shares of
GROWTH and CAPITAL APPRECIATION for the most recent fiscal year were
less than the amount shown above because the portfolios are currently
paying only a portion of the total 12b-1 fee authorized for payment to
the Distributor. With the reduced payments to the Distributor, GROWTH'S
actual total operating expenses for its Retail Class A shares were 1.35%
and CAPITAL APPRECIATION'S actual total operating expenses for its
Retail Class A shares were 1.45%.
(2) CAPITAL APPRECIATION is obligated to pay the Adviser a basic investment
advisory fee of 1.40% of the portfolio's average annual net assets, but
that fee is adjusted upward or downward based on the portfolio's
performance relative to the Russell 2000 Stock Index on a 12-month
average. The fee could be as high as 2.40% of the portfolio's average
annual net assets or as low as 0.40%. The management fees for CAPITAL
APPRECIATION have been restated to reflect the basic fee of 1.40%
without adjustment.
</TABLE>
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<TABLE>
<CAPTION>
GOVERNMENT SECURITIES PORTFOLIO AND INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT
INTERMEDIATE GOVERNMENT BOND SECURITIES PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO PORTFOLIO PRO FORMA ESTIMATED
------------------------------- --------- -------------------
Retail Class A Institutional Retail Class Institutional Retail Class A Institutional
Shares Class Shares Shares Class Shares Shares Class Shares
------ ------------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed
on purchase of shares (as a
percentage of offering price) 3.0% none 3.0% none 3.0% none
Deferred Sales Load (as a percentage
of original purchase price or
redemption proceeds, as applicable) none none none none none none
ANNUAL OPERATING EXPENSES
(AS A % OF NET ASSETS)
Management fees................... .50% .50% .65% .65% .50% .50%
Rule 12b-1 distribution plan payments .50% none .50% none .50% none
All other expenses................ .30% .30% .51% .51% .31% .31%
Total portfolio operating
expenses(1)....................... 1.30% .80% 1.66% 1.16% 1.31% .81%
(1) Total actual annual operating expenses for the Retail Class A shares of
GOVERNMENT SECURITIES and INTERMEDIATE GOVERNMENT BOND for the most
recent fiscal year were less than the amount shown above because the
portfolios are currently paying only a portion of the total 12b-1 fee
authorized for payment to the Distributor. With the reduced payments to
the Distributor, GOVERNMENT SECURITIES' actual total operating expenses
for its Retail Class A shares were 1.10% and INTERMEDIATE GOVERNMENT
BOND'S actual total operating expenses for its Retail Class A shares
were 1.46%.
</TABLE>
SALES CHARGES
No sales charges are applicable to shares of the Acquiring Portfolios
received in connection with the Reorganizations.
The GROWTH PORTFOLIO Retail Class A shares, which will be issued to the
CAPITAL APPRECIATION PORTFOLIO Retail Class A shareholders pursuant to the Plan,
are sold at net asset value plus an initial sales charge of 4.5% for purchases
of less than $50,000, 3.5% for purchases of $50,000 but less than $100,000, 2.5%
for purchases of $100,000 but less than $250,000 and 0% for purchases of
$250,000 or more. The GROWTH PORTFOLIO Institutional Class shares are offered at
net asset value, without an initial sales charge.
The GOVERNMENT SECURITIES Retail Class A shares, which will be issued to
the INTERMEDIATE GOVERNMENT BOND Retail Class A shareholders pursuant to the
Plan, are sold at net asset value plus an initial sales charge of 3.0% for
purchases of less than $50,000, 2.5% for purchases at $50,000 but less than
$100,000, 1.5% for purchases of $100,000 but less than $250,000 and 0% for
purchases of $250,000 or more. The GOVERNMENT SECURITIES PORTFOLIO Institutional
Class shares are offered at net asset value, without an initial sales charge.
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The Retail Class A shares of CAPITAL APPRECIATION PORTFOLIO are sold at net
asset value plus an initial sales charge of 4.5% for purchases of less than
$50,000, 3.5% for purchases of $50,000 but less than $100,000, 2.5% for
purchases of $100,000 but less than $250,000 and 0% for purchases of $250,000 or
more. The CAPITAL APPRECIATION PORTFOLIO Institutional Class shares are offered
at net asset value without an initial sales charge.
The INTERMEDIATE GOVERNMENT BOND PORTFOLIO Retail Class A shares are sold
at net asset value plus an initial sales charge of 3.0% for purchases of less
than $50,000, 2.5% for purchases of $50,000 but less than $100,000, 1.5% for
purchases of $100,000 but less than $250,000 and 0% for purchases of $250,000 or
more. The INTERMEDIATE GOVERNMENT BOND PORTFOLIO Institutional Class shares are
offered at net asset value, without an initial sales charge.
The Acquired Portfolios and the Acquiring Portfolios are authorized to pay
a fee in the amount of 0.50% per annum of average daily net assets of their
Retail Class A shares to SMITH HAYES for distribution services. SMITH HAYES
currently waives a portion of that distribution fee and collects only 0.30% of
the average daily net assets of the Acquired Portfolios and the Acquiring
Portfolios. The Acquired Portfolios Institutional Class shares do not pay
distribution fees.
DISTRIBUTION; PURCHASE, EXCHANGE AND REDEMPTION
Shares of the Acquiring Portfolios and the Acquired Portfolios are both
distributed by SMITH HAYES. Purchase and redemption procedures are the same for
the Acquiring Portfolios and the Acquired Portfolios. Shares of the Acquiring
Portfolios and the Acquired Portfolios may be exchanged for shares of other
portfolios of Stratus Fund of the same class.
RISK FACTORS
The Acquiring Portfolios and the Acquired Portfolios are subject to the
risk that the price of their shares will change daily based on changes in
interest rates and market conditions, and in response to other economic,
political or financial developments. A portfolio's reaction to these
developments will be affected by the types and maturities of the securities in
which the portfolio invests, the financial condition, industry and economic
sector, and geographic location of an issuer, as well as the portfolio's level
of investment in the securities of that issuer.
The majority of the securities held by GROWTH PORTFOLIO pay dividends, and
GROWTH PORTFOLIO invests in equity securities issued by companies having medium
and large market capitalizations. CAPITAL APPRECIATION PORTFOLIO invests in
companies having medium or small market capitalizations of $5 billion or less,
and payment of dividends is not a consideration for selection of securities for
CAPITAL APPRECIATION PORTFOLIO. Generally, the prices of securities issued by
companies having smaller market capitalizations that do not pay current
dividends tend to be more volatile. Accordingly, the value of GROWTH PORTFOLIO'S
shares may be less volatile than those of CAPITAL APPRECIATION. However, GROWTH
PORTFOLIO'S focus on dividend paying
8
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companies having larger market capitalizations may not produce the same level of
capital appreciation that would be realized through an investment in CAPITAL
APPRECIATION PORTFOLIO.
GOVERNMENT SECURITIES PORTFOLIO and INTERMEDIATE GOVERNMENT BOND PORTFOLIO
both invest primarily in securities issued by the U.S. Government, and its
agencies and instrumentalities, and they both seek to maintain an average dollar
weighted maturity of between three and ten years. GOVERNMENT SECURITIES
PORTFOLIO also invests in investment grade securities of other issuers, and the
Adviser considers the potential for appreciation in value when selecting
securities for GOVERNMENT SECURITIES PORTFOLIO. However, the value of debt
securities selected because of a potential for appreciation, and the value of
securities of issuers other than the U.S. Government and its agencies and
instrumentalities, may be more volatile than the securities held by INTERMEDIATE
GOVERNMENT BOND PORTFOLIO.
The principal risks of ownership of shares of GROWTH PORTFOLIO and
GOVERNMENT SECURITIES PORTFOLIO are described below.
GROWTH PORTFOLIO is a diversified portfolio that invests primarily in
common stocks. The prices of equity securities change in response to many
factors including:
o STOCK MARKET VOLATILITY - Stock markets are volatile and can
decline significantly in response to adverse issuer, political,
regulatory, market or economic developments. In the short term,
equity prices can fluctuate dramatically in response to these
factors. Political or economic developments can affect a single
issuer, issuers within an industry or economic sector or
geographic region, or the market as a whole.
o ISSUER-SPECIFIC RISK - Changes in the financial condition of an
issuer, changes in specific economic or political conditions that
affect a particular type of issuer, and changes in general
economic or political conditions can affect the value of an
issuer's securities. The value of securities of smaller, less
well-known companies can be more volatile than that of larger
companies.
o GROWTH INVESTING - GROWTH PORTFOLIO invests in growth stocks.
Growth stocks can react differently to issuer, political, market
and economic developments than the market as a whole and other
types of stocks. Growth stocks tend to be more expensive relative
to their earnings or assets compared to other types of stocks. As
a result, growth stocks tend to be more sensitive to changes in
their earnings and more volatile than other types of stocks.
GOVERNMENT SECURITIES invests primarily in securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and other highly
rated, marketable debt obligations. The price of debt securities changes in
response to many factors including:
o INTEREST RATE CHANGES - Debt securities have varying levels of
sensitivity to changes in interest rates. Generally, the price of
a debt security falls when interest
9
<PAGE>
rates rise and vice-versa. Securities with longer maturities tend
to be more sensitive to interest rate changes and are generally
more volatile, so the average maturity or duration of these
securities affects risk.
o PREPAYMENT RISK - Many types of debt securities are subject to
prepayment risk. Prepayment occurs when the issuer of a security
can repay principal prior to the security's maturity. During
periods of falling interest rates, the issuer may repay debt
obligations with high interest rates prior to maturity. This may
cause the portfolio's average weighted maturity to fluctuate, and
may require the portfolio to invest the resulting proceeds at
lower interest rates. As a result, the portfolio may experience a
decline in income and lose the opportunity for additional price
appreciation associated with falling interest rates.
o CREDIT RISK - Credit risk is the risk that an issuer will be
unable to make timely payments of either principal or interest.
If this occurs, the portfolio's return could be lower.
o U.S. GOVERNMENT SECURITIES - Although U.S. Government securities
are considered to be among the safest investments, they are not
guaranteed against price movements due to changing interest
rates. Obligations issued or guaranteed by some U.S. Government
agencies are backed by the U.S. Treasury, while others are backed
solely by the ability of the agency to borrow from the U.S.
Treasury or by the agency's own resources.
o ISSUER-SPECIFIC RISK. The value of an individual issuer's
security can be more volatile than the market as a whole and can
perform differently than the market as a whole. Debt obligations
rated within the lowest of the four highest debt ratings have
speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weaker capacity
of the issuers to make principal and interest payments than would
be the case with higher rated securities.
o INCOME RISK. Falling interest rates will cause the portfolio's
income to decline.
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES
INVESTMENT OBJECTIVES OF GROWTH PORTFOLIO AND CAPITAL APPRECIATION PORTFOLIO
INVESTMENT OBJECTIVES
The investment objective of GROWTH PORTFOLIO is to provide capital
appreciation and income.
CAPITAL APPRECIATION PORTFOLIO seeks to provide capital appreciation.
10
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES OF GROWTH PORTFOLIO
To achieve its investment objective, GROWTH PORTFOLIO invests at least 65%
of its total assets in a diversified portfolio of common stocks. The remaining
assets (up to 35% of the portfolio) may be invested in U.S. Government
securities and money market instruments.
GROWTH PORTFOLIO invests principally in medium and large capitalization
companies having a market capitalization greater than $1 billion. GROWTH
PORTFOLIO seeks to identify and invest in companies whose earnings 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 company's shares. The Adviser also seeks to invest in
securities it believes will out perform the Standard and Poor's Equity Index on
a risk adjusted basis. To provide current income, the Adviser may select
securities for the portfolio issued by companies that have a history of paying
regular dividends.
When selecting securities for GROWTH PORTFOLIO, the Adviser relies on a
company-by-company analysis and a broader analysis of industry or economic
sector trends and takes into consideration 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 the
Adviser identifies a possible investment, a number of valuation measures are
applied to determine the relative attractiveness of each company and select
those companies whose shares are most attractively priced.
The Adviser has engaged in active trading of securities held by GROWTH
PORTFOLIO. The portfolio's turnover rate for its last fiscal year was 194%.
Frequent trading of portfolio securities increases the expenses of the portfolio
as a consequence of trading costs and can result in distributions of gains to
shareholders that are subject to tax.
PRINCIPAL INVESTMENT STRATEGIES OF CAPITAL APPRECIATION PORTFOLIO
To achieve its objective, the CAPITAL APPRECIATION PORTFOLIO invests at
least 65% of its assets in a diversified portfolio of common stocks. The Adviser
invests 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
company's shares. CAPITAL APPRECIATION PORTFOLIO invests principally in medium
and small capitalization companies having market capitalization of $5 billion or
less.
The Adviser selects securities for investment based upon considerations
such as the quality of a company's management, the existence of a leading or
dominant position in a major product line market and the soundness of a
company's financial position. As companies are identified as possible
investments, the Adviser applies a number of valuation techniques to determine
the relative attractiveness of each company. Based upon these factors, the
Adviser attempts to select those companies whose shares, in its estimation, are
most attractively priced.
11
<PAGE>
The Adviser has engaged in active trading of securities held by CAPITAL
APPRECIATION PORTFOLIO. The portfolio's turnover rate for its last fiscal year
was 109%. Frequent trading of portfolio securities increases the expenses of the
portfolio as a consequence of trading costs and can result in distributions of
gains to shareholders that are subject to tax.
INVESTMENT OBJECTIVES OF GOVERNMENT SECURITIES PORTFOLIO AND INTERMEDIATE
GOVERNMENT BOND PORTFOLIO
INVESTMENT OBJECTIVES
The investment objective of GOVERNMENT SECURITIES PORTFOLIO is to
provide a high total return consistent with the preservation of capital.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO seeks current income, some or all of
which is exempt from state income tax, consistent with the preservation of
capital.
PRINCIPAL INVESTMENT STRATEGIES OF GOVERNMENT SECURITIES PORTFOLIO
To achieve its objective, GOVERNMENT SECURITIES PORTFOLIO invests at least
80% of its total assets in securities issued or guaranteed by the U. S.
Government, its agencies or its instrumentalities. The portfolio will invest its
remaining assets in the following securities:
o Domestic issues of marketable debt obligations that are rated at
time of purchase within the four highest debt rating categories
established by Moody's or S&P or are determined to by the Adviser
to be of a comparable quality at the time of purchase.
o Obligations of commercial banks, including negotiable
certificates of deposit and banker's acceptances.
o Repurchase agreements on securities issued or guaranteed by the
U.S. Government.
o Money market instruments.
To achieve its objective of current income, GOVERNMENT SECURITIES PORTFOLIO
normally purchases securities with a view to holding them rather than selling
them to achieve short-term trading profits. However, the portfolio may sell any
security at any time without regard to the length of time it has been held if
the Adviser believes general economic, industry or securities market conditions
warrant selling the security. In selecting debt securities for the portfolio
that are not government securities, the Adviser utilizes 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. These issuers generally will have a debt to capital ratio of less
than 60% and have market capitalization in excess of $500,000,000.
12
<PAGE>
The Adviser expects that annual Portfolio turnover rate will normally not
exceed 100%. GOVERNMENT SECURITIES PORTFOLIO is not a money market fund and 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
ten years.
PRINCIPAL INVESTMENT STRATEGIES OF INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO invests at least 80% of its assets
in securities issued or guaranteed by the U.S. Government, its agencies or its
instrumentalities. The portfolio may also invest in money market instruments.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO maintains an average dollar weighted
maturity between 3 and 10 years with respect to all of its debt securities.
To achieve its objective of current income, INTERMEDIATE GOVERNMENT BOND
PORTFOLIO normally purchases securities with a view to holding them rather than
selling them to achieve short-term trading profits. However, the portfolio may
sell any security at any time if the Adviser believes general economic, industry
or securities market conditions warrant selling the security.
INTERMEDIATE GOVERNMENT BOND 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 Adviser expects that annual portfolio turnover
rate will normally not exceed 100%.
OTHER DIFFERENCES IN INVESTMENT POLICIES AND RESTRICTIONS
GOVERNMENT SECURITIES PORTFOLIO may enter into repurchase agreements for
U.S. Government Securities. Intermediate Government Bond Portfolio does not
invest in repurchase agreements. A repurchase agreement involves the purchase of
U.S. Government Securities with the condition that after a stated period of time
(usually seven days or less) the original seller will buy back the same
securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the portfolio will seek
to sell the collateral, which action could involve costs or delays. In such
case, the portfolio's ability to dispose of the collateral to recover its
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, the portfolio would
suffer a loss.
In addition, GOVERNMENT SECURITIES PORTFOLIO'S fundamental investment
restriction with respect to portfolio diversification is less restrictive than
that of INTERMEDIATE GOVERNMENT BOND PORTFOLIO. GOVERNMENT SECURITIES PORTFOLIO
is restricted with respect to 75% of the value of its total assets and
INTERMEDIATE GOVERNMENT BOND PORTFOLIO is restricted with respect to
13
<PAGE>
100% of its total assets, from investing more than 5% of the market value of its
total assets, in the securities of any one issuer, other than obligations of or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
except that each portfolio may purchase securities of other investment companies
to the extent permitted by applicable law or exemptive order.
PORTFOLIO MANAGEMENT
William S. Eastwood and Jon C. Gross are responsible for the day-to-day
management of the Acquiring Portfolios and the Acquired Portfolios. Mr. Eastwood
has been affiliated with Union Bank and Trust Company and the management of
Stratus Fund since March of 1995. Prior to joining Union Bank, 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. Mr. Gross is currently a Vice President/Portfolio
Manager and has been affiliated with Union Bank since 1988. Mr. Gross has been
actively involved in the management of Stratus Fund since 1991. Mr. Gross holds
the Chartered Financial Analyst (CFA) professional designation.
MANAGEMENT DISCUSSION AND ANALYSIS OF PERFORMANCE
A discussion of the performance of the Acquiring Portfolios and the
Acquired Portfolios for the fiscal year ended June 30, 1999, is set forth in
Appendix III to this Proxy Statement/Prospectus.
FINANCIAL HIGHLIGHTS
GROWTH PORTFOLIO
Shown below are financial highlights for an Institutional Class share of
GROWTH PORTFOLIO outstanding during the six months ended December 31, 1999 and
during each of the years in the five year period ended June 30, 1999, and for a
Retail Class A share of GROWTH PORTFOLIO outstanding during the six months ended
December 31, 1999 and during the one year period ended June 30, 1999 and the
period January 7, 1998 (commencement of class) through June 30, 1998. This
information (other than the information for the six months ended December 31,
1999) has been audited by Stratus Fund's independent accountants whose
unqualified reports on the financial statements of GROWTH PORTFOLIO are included
in its annual report to shareholders for the fiscal year ended June 30, 1999.
GROWTH PORTFOLIO's semi-annual report to shareholders dated December 31, 1999,
and its annual report to shareholders dated June 30, 1999, are available without
charge upon request made to Stratus Fund at the address or telephone number
appearing on the cover page of this Proxy Statement/Prospectus.
14
<PAGE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO - INSTITUTIONAL CLASS SHARES
Six months ended December 31, 1999 and years ended
June 30, 1999, 1998, 1997, 1996 and 1995
SIX MONTHS
ENDED
Net asset value: DECEMBER 31, 1999 1999 1998 1997 1996 1995
----------------- ---- ---- ---- ---- ----
Beginning of period: $19.51 $18.53 $17.07 $13.67 $11.47 $9.84
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Income from investment operations:
Net investment income 0.00 0.06 0.11 0.22 0.23 0.22
Net realized and unrealized gain (loss)
on investments 1.77 2.53 3.45 3.99 2.36 1.72
---- ---- ---- ---- ---- ----
Total income from
investment operations 1.77 2.59 3.56 4.21 2.59 1.94
---- ---- ---- ---- ---- ----
Less distributions:
Dividends from net investment 0.00 (0.06) (0.11) (0.22) (0.22) (0.22)
income
Distributions from capital gains (2.75) (1.55) (1.99) (0.59) (0.17) (0.09)
------ ------ ------ ------ ------ ------
Total distributions (2.75) (1.61) (2.10) (0.81) (0.39) (0.31)
------ ------ ------ ------ ------ ------
End of period $18.53 $19.51 $18.53 $17.07 $13.67 $11.47
====== ====== ====== ====== ====== ======
TOTAL RETURN 21.28% 16.3% 22.3% 32.6% 22.6% 20.3%
------ ===== ===== ===== ===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $67,833,437 $65,011 $63,097 $46,189 $24,628 $12,813
Ratio of expense to average net assets 1.10%(a) 1.05% 0.76% 0.72% 0.71% 0.82%
Ratio of net income to average net assets (0.05%)(a) 0.31% 0.18% 1.46% 1.78% 2.14%
Portfolio turnover rate 64.53% 194.23% 137.03% 88.53% 92.72% 19.89%
(A) ANNUALIZED FOR THOSE PERIODS LESS THAN TWELVE MONTHS IN DURATION.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO - RETAIL CLASS A SHARES
Six months ended December 31, 1999 and year ended June 30, 1999
and for the period from January 7, 1998
(commencement of class shares) to June 30, 1998
SIX MONTHS PERIOD
ENDED ENDED
DECEMBER 31, JUNE 30,
1999 1999 1998
---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C>
Beginning of period $19.51 $18.52 $15.86
------ ------ ------
Income from investment operations:
Net investment income (0.03) - 0.04
Net realized and unrealized loss on 1.77 2.47 2.66
---- ----- -----
investments
Total income from 1.74 2.47 2.70
---- ---- ----
investment operations
Less distributions:
Dividends from net investment income - - (0.04)
Distributions from capital gains (2.76) (1.48) -
------ ------ -------
Total distributions (2.76) (1.48) (0.04)
------ ------ ------
End of period $18.49 (a) $19.51 (a) $18.52 (a)
====== ====== ======
TOTAL RETURN 20.90% 16.09% (a) 16.89% (a)(b)
====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $1,507,130 $1,292,742 $784,176
Ratio of expenses to average net assets 1.40%(c) 1.35% 1.50%(c)
Ratio of net income to average net assets (0.35)(c) 0.01% 0.13%(c)
Portfolio turnover rate 64.53% 194.23% 137.03%
(a) Excludes maximum sales load of 4.5%.
(b) Total return is not annualized, as it may not be representative of the total
return for the year
(c) Annualized for those periods less than twelve months in duration.
</TABLE>
16
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO
Shown below are financial highlights for an Institutional Class share of
GOVERNMENT SECURITIES PORTFOLIO outstanding during the six months ended December
31, 1999 and during each of the years in the five year period ended June 30,
1999, and for a Retail Class A share of GOVERNMENT SECURITIES PORTFOLIO
outstanding during the six months ended December 31, 1999 and during the one
year period ended June 30, 1999, and the period January 13, 1998 (commencement
of class) through June 30, 1998. This information (other than the information
for the six months ended December 31, 1999) has been audited by Stratus Fund
independent accountants whose unqualified reports on the financial statements of
GOVERNMENT SECURITIES PORTFOLIO are included in its annual report to
shareholders for the fiscal year ended June 30, 1999. GOVERNMENT SECURITIES
PORTFOLIO'S semi-annual report to shareholders dated December 31, 1999, and the
annual report to shareholders dated June 30, 1999, are available without charge
upon request made to Stratus fund at the address or telephone number appearing
on the cover page of this Proxy Statement/Prospectus.
17
<PAGE>
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES PORTFOLIO - INSTITUTIONAL CLASS SHARES
Six month period ended December 31, 1999 and years
ended June 30, 1999, 1998, 1997, 1996 and 1995
SIX MONTHS
ENDED
DECEMBER 31,
NET ASSET VALUE: 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Beginning of period: $9.79 $9.88 $9.72 $9.64 $9.77 $9.40
----- ----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income 0.26 0.51 0.51 0.51 0.49 0.45
Net realized and unrealized gain
(loss) on investments (0.13) (0.09) 0.16 0.08 (0.13) 0.37
------ ------ ---- ---- ------ ----
Total income from
investment operations 0.13 0.42 0.67 0.59 0.36 0.82
---- ---- ---- ---- ---- ----
Less distributions from net investment
income (0.26) (0.51) (0.51) (0.51) (0.49) (0.45)
------ ------ ------ ------ ------ ------
End of period $9.66 $9.79 $9.88 $9.72 $9.64 $ 9.77
===== ===== ===== ===== ===== ======
TOTAL RETURN 2.61% 4.3% 7.0% 6.3% 3.7% 9.0%
===== ==== ==== ==== ==== ====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $31,452 $29,321 $30,368 $26,534 $23,043 $13,885
Ratio of expense to average net assets 0.84%(a)
0.80% 0.82% 0.71% 0.69% 0.80%
Ratio of net income to average net assets 5.23%(a)
5.13% 5.17% 5.21% 5.04% 4.82%
Portfolio turnover rate 8.89% 18.66% 2.07% 27.20% 40.61% 33.88%
(a) Annualized for those periods less than twelve months in duration.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES PORTFOLIO - RETAIL CLASS A SHARES
Six months ended December 31, 1999 and year ended
June 30, 1999 and for the period from January 13, 1998
(commencement of class shares) to June 30, 1998
SIX MONTHS PERIOD
ENDED ENDED
DECEMBER 31, JUNE 30,
1999 1999 1998
---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C>
Beginning of period $9.79 $9.89 $9.97
----- ----- -----
Income from investment operations:
Net investment income 0.24 0.48 0.25
Net realized and unrealized loss on (0.13) (0.09) (0.08)
------ ------ ------
investments
Total income from investment 0.11 0.39 0.17
---- ---- ----
operations
Less distributions:
Dividends from net investment income (0.24) (0.49) (0.25)
------ ------ ------
Distributions from capital gains - - -
------- ------- -------
Total distributions (0.24) (0.49) (0.25)
------ ------ ------
End of period $9.66 (a) $9.79 $9.89
===== ===== =====
TOTAL RETURN 2.33% (a)(b) 3.96% (a) 1.58% (a)(b)
===== ===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $210,027 $167,494 $139,164
Ratio of expenses to average net assets 1.14% (c) 1.10% 1.21% (c)
Ratio of net income to average net assets 4.93% (c) 4.83% 5.49% (c)
Portfolio turnover rate 8.89% 18.66% 2.07%
(a) Excludes maximum sales load of 4.5%.
(b) Total return is not annualized, as it may not be representative of the total
return for the year
(c) Annualized for those periods less than twelve months in duration.
</TABLE>
19
<PAGE>
ADDITIONAL INFORMATION ABOUT THE PLAN
TERMS OF THE REORGANIZATIONS
The terms and conditions under which the Reorganizations may be consummated
are set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan, a copy of which is attached as Appendix I to this Proxy
Statement/Prospectus.
THE REORGANIZATIONS
The Plan provides for an amendment to the Articles of Incorporation of
Stratus Fund providing that each issued and outstanding share of the Acquired
Portfolios will be reclassified and change into a share of the respective
Acquiring Portfolio with which it will combine. Consummation of each
Reorganization (the "Closing") is expected to occur on May 26, 2000, at 5:00
p.m. Central Time (the "Effective Time") on the basis of values calculated as of
the close of regular trading on the NYSE on that business day.
At the Effective Time, all of the assets of CAPITAL APPRECIATION PORTFOLIO
shall be credited by the Custodian to the account of GROWTH PORTFOLIO in
exchange for the assumption by GROWTH PORTFOLIO of all of the liabilities of any
kind of CAPITAL APPRECIATION PORTFOLIO and delivery by Stratus Fund directly to
(i) the CAPITAL APPRECIATION Retail Class A shareholders of a number of GROWTH
PORTFOLIO Retail Class A shares (including, if applicable, fractional shares
rounded to the nearest thousandth) and to (ii) the CAPITAL APPRECIATION
PORTFOLIO Institutional Class shareholders of a number of GROWTH PORTFOLIO
Institutional Class shares (including, if applicable, fractional shares rounded
to the nearest thousandth) having an aggregate net asset value equal to the net
value of the assets of CAPITAL APPRECIATION PORTFOLIO so transferred, assigned
and delivered.
At the Effective Time, all of the assets of INTERMEDIATE GOVERNMENT BOND
PORTFOLIO shall be credited by the Custodian to the account of GOVERNMENT
SECURITIES PORTFOLIO in exchange for the assumption by GOVERNMENT SECURITIES
PORTFOLIO of all of the liabilities of any kind of INTERMEDIATE GOVERNMENT BOND
PORTFOLIO and delivery by Stratus Fund directly to (i) the INTERMEDIATE
GOVERNMENT BOND PORTFOLIO Retail Class A shareholders of a number of GOVERNMENT
SECURITIES PORTFOLIO Retail Class A shares (including, if applicable, fractional
shares rounded to the nearest thousandth), and to (ii) the INTERMEDIATE
GOVERNMENT BOND PORTFOLIO Institutional Class shareholders of a number of
GOVERNMENT SECURITIES PORTFOLIO Institutional Class shares (including, if
applicable, fractional shares rounded to the nearest thousandth) having an
aggregate net asset value equal to the net value of the assets of INTERMEDIATE
GOVERNMENT BOND PORTFOLIO so transferred, assigned and delivered.
Consummation of the Reorganization of CAPITAL APPRECIATION PORTFOLIO is not
conditioned upon consummation of the Reorganization of INTERMEDIATE GOVERNMENT
BOND PORTFOLIO, and consummation of the Reorganization of INTERMEDIATE
GOVERNMENT BOND PORTFOLIO is not conditioned upon consummation of the
Reorganization of CAPITAL APPRECIATION PORTFOLIO.
20
<PAGE>
BOARD CONSIDERATIONS
The Board of Directors of Stratus Fund has determined that the
Reorganizations of the Acquired Portfolios are in the best interests of the
shareholders of each of the Acquired Portfolios, and recommended approval of the
Plan by the shareholders of the Acquired Portfolios at the Special Meeting. A
summary of the information that was presented to, and considered by, the Board
of Directors in making their determination is provided below.
At a meeting of the Board of Directors held on March 21, 2000, the Adviser
proposed that the Board of Directors approve the Reorganizations of the Acquired
Portfolios into the Acquiring Portfolios. The Directors received from the
Adviser written materials that contained information concerning the Acquired
Portfolios and the Acquiring Portfolios, including comparative total return and
fee and expense information and a comparison of the investment objectives of the
Acquired Portfolios and the Acquiring Portfolios.
In considering the Reorganizations, the Board of Directors noted that
CAPITAL APPRECIATION PORTFOLIO and GROWTH PORTFOLIO have similar investment
objectives and strategies, as do INTERMEDIATE GOVERNMENT BOND PORTFOLIO and
GOVERNMENT SECURITIES PORTFOLIO. The Board of Directors also noted that the
expense ratios of the Acquired Portfolios are higher than the expense ratios of
the Acquiring Portfolios, as shown below.
<TABLE>
<CAPTION>
COMPARATIVE OPERATING EXPENSES AT JUNE 30, 1999
Growth Portfolio Capital Appreciation Portfolio
---------------- ------------------------------
Retail Class A Institutional Retail Class A Institutional
Shares Class Shares Shares Class Shares
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Total Expense Ratio 1.55% 1.05% 2.45% 1.95%
Government Securities Portfolio Intermediate Government Bond
Portfolio
Retail Class A Institutional Retail Class A Institutional
Shares Class Shares Shares Class Shares
------ ------------ ------ ------------
Total Expense Ratio 1.30% .80% 1.66% 1.16%
</TABLE>
The Board of Directors also considered the performance of the Acquired
Portfolios in relation to the performance of the Acquiring Portfolios. The Board
noted that GROWTH PORTFOLIO has provided a higher return to its shareholders
than CAPITAL APPRECIATION PORTFOLIO has, and that INTERMEDIATE GOVERNMENT BOND
PORTFOLIO has provided its shareholders with a return comparable to the return
provided by GOVERNMENT SECURITIES PORTFOLIO.
21
<PAGE>
The Adviser also noted that CAPITAL APPRECIATION PORTFOLIO had about $6
million in assets, compared with $69 million in assets for GROWTH PORTFOLIO and
that it does not anticipate that there will be any significant growth in the
assets of Capital Appreciation Portfolio. The Adviser further indicated that
GROWTH PORTFOLIO'S superior historic performance and lower expense ratios make
GROWTH PORTFOLIO a potentially better investment for shareholders than CAPITAL
APPRECIATION PORTFOLIO. The Reorganization of CAPITAL APPRECIATION PORTFOLIO
into GROWTH PORTFOLIO would benefit shareholders by lowering the expense ratios
for shareholders of CAPITAL APPRECIATION PORTFOLIO without imposing any tax
consequences. The Board discussed these matters and agreed that the impact of
the Reorganization of CAPITAL APPRECIATION PORTFOLIO into GROWTH PORTFOLIO on
shareholders was favorable in general. The Adviser noted that the expenses
incurred by CAPITAL APPRECIATION PORTFOLIO in connection with the Reorganization
would be offset by lower management fees and total expenses after the
Reorganization.
The Adviser reported that INTERMEDIATE GOVERNMENT BOND PORTFOLIO'S assets
totaled about $2 million, compared with $32 million for GOVERNMENT SECURITIES
PORTFOLIO, and that it does not anticipate that there will be any significant
growth in the assets of INTERMEDIATE GOVERNMENT BOND PORTFOLIO. The Adviser
indicated that GOVERNMENT SECURITIES PORTFOLIO'S performance was generally
comparable to that of INTERMEDIATE GOVERNMENT BOND PORTFOLIO and that GOVERNMENT
SECURITIES PORTFOLIO had generally lower expense ratios. The Adviser explained
that the Reorganization would result in lost revenues for Union Bank, since the
Adviser would receive lower management fees on the assets presently held by
INTERMEDIATE GOVERNMENT BOND. The Board agreed that the impact of the
Reorganization of INTERMEDIATE GOVERNMENT BOND PORTFOLIO on shareholders was
favorable in general. The Adviser noted that the expenses incurred by
INTERMEDIATE GOVERNMENT BOND PORTFOLIO in connection with the Reorganization
would be offset by lower management fees and expenses after the Reorganization.
In addition, the Board of Directors noted that no initial sales or other
charges would be imposed on any of the shares of the Acquiring Portfolios issued
to the shareholders of the Acquired Portfolios in connection with the
Reorganizations. At the meeting, the Adviser also provided the Board of
Directors with written materials concerning the structure of the proposed
Reorganizations and the Federal tax consequences of the Reorganizations. The
Board of Directors noted that the Acquired Portfolios would be provided with an
opinion of counsel that the Reorganizations would be tax-free as to each
Acquired Portfolio and its shareholders.
Based on the foregoing, and their evaluation of the information presented
to them, the Board of Directors determined that the Reorganizations will not
dilute the interests of the shareholders of either of the Acquired Portfolios
and are in the best interest of the Shareholders of each of the Acquired
Portfolios. Therefore, the Board of Directors recommended the approval of the
Reorganizations by the shareholders of each Acquired Portfolio.
22
<PAGE>
OTHER TERMS
The Plan may be amended by Stratus Fund without shareholder approval. If
any amendment is made to the Plan which effects a material change to the Plan
and the Reorganizations, such change will be submitted to the affected
shareholders for their approval.
The Plan contains provisions that are customary in matters such as the
Reorganizations. Under the Plan, the Acquired Portfolios and Acquiring
Portfolios are subject to various conditions, including the following: (a) the
assets of the Acquired Portfolio to be acquired by the Acquiring Portfolio with
which it will be combined shall constitute at least 90% of the fair market value
of the net assets and at least 70% of the fair market value of the gross assets
held by each of the Acquired Portfolios immediately prior to the
Reorganizations; (b) Stratus Fund's Registration Statement on Form N-14 under
the Securities Act of 1933 (the "1933 Act") shall have been filed with the SEC
and such Registration Statement shall have become effective, and no stop-order
suspending the effectiveness of the Registration Statement shall have been
issued, and no proceeding for that purpose shall have been initiated or
threatened by the SEC (and not withdrawn or terminated); (c) the shareholders of
the Acquired Portfolio shall have approved the Plan, and (d) Stratus Fund shall
have received an opinion from Ballard Spahr Andrews & Ingersoll, LLP, that the
Reorganizations will not result in the recognition of gain or loss for Federal
income tax purposes for the Acquired Portfolio, the Acquiring Portfolio or their
shareholders.
The Acquired Portfolios and the Acquiring Portfolios will each bear their
own expenses in connection with the Reorganizations.
The Plan may be terminated and the Reorganizations may be abandoned by
Stratus Fund at any time in the event that the Acquired Portfolios shareholders
do not approve the Plan or if the Board of Directors determines that proceeding
with the Reorganizations would be inadvisable.
FEDERAL TAX CONSEQUENCES
The following is a general summary of the material Federal income tax
consequences of the Reorganizations and is based upon the current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the existing
Treasury regulations thereunder, current administrative rulings of the Internal
Revenue Service ("IRS") and judicial decisions, all of which are subject to
change. The principal Federal income tax consequences that are expected to
result from the Reorganizations, under currently applicable law, are as follows:
o the Reorganizations will each qualify as a "reorganization"
within the meaning of Section 368(a) of the Code;
o no gain or loss will be recognized by each Acquired Portfolio
upon the transfer of its assets to an Acquiring Portfolio in
exchange for shares of the Acquiring Portfolio and the Acquiring
Portfolio's assumption of the Acquired Portfolio's liabilities;
23
<PAGE>
o no gain or loss will be recognized by any shareholder of an
Acquired Portfolio upon the exchange of shares of an Acquired
Portfolio solely for shares of an Acquiring Portfolio;
o the tax basis of the shares of an Acquiring Portfolio to be
received by a shareholder of an Acquired Portfolio will be the
same as the tax basis of the shares of the Acquired Portfolio
surrendered in exchange therefor;
o the holding period of the shares of an Acquiring Portfolio to be
received by a shareholder of an Acquired Portfolio will include
the holding period for which such shareholder held the shares of
the Acquired Portfolio exchanged therefor, provided that such
shares of the Acquired Portfolio are capital assets in the hands
of such shareholder as of the Closing;
o no gain or loss will be recognized by an Acquiring Portfolio on
the receipt of assets of an Acquired Portfolio in exchange for
shares of the Acquiring Portfolio and the Acquiring Portfolio's
assumption of the Acquired Portfolio's liabilities;
o the tax basis of the assets of each Acquired Portfolio in the
hands of an Acquiring Portfolio will be the same as the tax basis
of such assets in the hands of the Acquired Portfolio immediately
prior to the Reorganization; and
o the holding period of the assets of an Acquired Portfolio to be
received by each Acquiring Portfolio will include the holding
period of such assets in the hands of the Acquired Portfolio
immediately prior to the Reorganization.
As a condition to Closing, Ballard Spahr Andrews & Ingersoll, LLP will
render an opinion to Stratus Fund as to the foregoing Federal income tax
consequences of the Reorganizations, which opinion will be conditioned upon the
accuracy, as of the date of Closing, of certain representations of Stratus Fund
upon which Ballard Spahr Andrews & Ingersoll, LLP will rely in rendering its
opinion, which representations include, but are not limited to, the following
(taking into account for purposes thereof any events that are part of the plan
of reorganization):
o there is no plan or intention by the shareholders of the Acquired
Portfolios to redeem a number of shares of the Acquiring
Portfolios received in the Reorganizations that would reduce an
Acquired Portfolio shareholders' ownership of Acquiring Portfolio
shares to a number of shares having a value, as of the Closing
Date, of less than 50% of the value of all of the formerly
outstanding shares of the respective Acquired Portfolio as of the
Closing Date;
o following the Reorganizations, each Acquiring Portfolio will
continue the historic business of the respective Acquired
Portfolio (for this purpose "historic business" shall mean the
business most recently conducted by each Acquired Portfolio which
was not entered into in connection with the Reorganizations) or
use a
24
<PAGE>
significant portion of such Acquired Portfolio's historic
business assets in its business;
o at the direction of the Acquired Portfolios, the Acquiring
Portfolios will issue directly to each Acquired Portfolio's
shareholders pro rata the shares of the Acquiring Portfolio that
each respective Acquired Portfolio constructively receives in the
Reorganization and each Acquired Portfolio will distribute its
other properties (if any) to its shareholders on, or as promptly
as practicable after, the Closing;
o the Acquiring Portfolios have no plan or intention to reacquire
any of their shares issued in the Reorganizations, except to the
extent that the Acquiring Portfolios are required by the
Investment Company Act of 1940 (the "1940 Act") to redeem any of
their shares presented for redemption;
o the Acquiring Portfolios do not plan or intend to sell or
otherwise dispose of any of the assets of the Acquired Portfolios
acquired in the Reorganizations, except for dispositions made in
the ordinary course of their business or dispositions necessary
to maintain their status as a "regulated investment company"
("RIC") under the Code;
o the Acquiring Portfolios, the Acquired Portfolios and the
shareholders of the Acquired Portfolios will pay their respective
expenses, if any, incurred in connection with the
Reorganizations;
o each Acquiring Portfolio will acquire at least 90 percent of the
fair market value of the net assets, and at least 70% of the fair
market value of the gross assets, held by each respective
Acquired Portfolio immediately before the Reorganizations,
including for this purpose any amounts used by each Acquired
Portfolio to pay its reorganization expenses and all redemptions
and distributions made by the Acquired Portfolio immediately
before the Reorganizations (other than redemptions pursuant to a
demand of a shareholder in the ordinary course of the Acquired
Portfolio's business as an open-end diversified management
investment company under the 1940 Act and regular, normal
dividends not in excess of the requirements of Section 852 of the
Code); and
o the Acquiring Portfolios and the Acquired Portfolios have each
elected to be taxed as a RIC under Section 851 of the Code and
will each have qualified for the special Federal tax treatment
afforded RICs under the Code for all taxable periods (including
the last short taxable period of the Acquired Portfolios ending
on the Closing and the taxable year of the Acquiring Portfolios
that includes the Closing).
THE FOREGOING DESCRIPTION OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE
REORGANIZATIONS IS MADE WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES
OF ANY
25
<PAGE>
SHAREHOLDER OF THE ACQUIRED PORTFOLIOS. THE ACQUIRED PORTFOLIOS SHAREHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE SPECIFIC CONSEQUENCES TO THEM
OF THE REORGANIZATIONS, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The Reorganizations will be accounted for on a tax-free combined basis.
Accordingly, the book cost basis to the Acquiring Portfolios of the assets of
the Acquired Portfolios will be the same as the book cost basis of such assets
to the Acquired Portfolios.
OWNERSHIP OF THE ACQUIRING PORTFOLIOS AND THE
ACQUIRED PORTFOLIOS SHARES
SIGNIFICANT HOLDERS
Listed below is the name, address and percent ownership of each person who
as of April 26, 2000, to the knowledge of AIF, owned beneficially 5% or more of
any class of the outstanding shares of the Acquired Portfolios:
CAPITAL APPRECIATION PORTFOLIO
PERCENT
NUMBER OF SHARES BENEFICIAL
NAME AND ADDRESS OWNED OWNERSHIP
- ---------------- ----- ---------
Union Bank PSP/401(K) 52,717.246 13.78%
6801 S. 27th Street
Lincoln, NE 68512
UNIPAC 401(K) 22,677.602 5.93%
3015 South Parker Road
Aurora, CO 80014
Acklie Maintenance System PSP 21,486.307 5.62%
P.O. Box 81228
Lincoln, NE 68501
26
<PAGE>
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PERCENT
NUMBER OF SHARES BENEFICIAL
NAME AND ADDRESS OWNED OWNERSHIP
- ---------------- ----- ---------
Madonna Rehab Hospital Agency 39,708.545 21.7%
5401 South Street
Lincoln, NE 68506
Edward Kubicek IMA 13,468.189 7.36%
1400 Firstier Bank Bldg.
Lincoln, NE 68508
Ed Perry 11,930.821 6.52%
6355 Eastshore Drive
Lincoln, NE 68516
Listed below is the name, address and percent ownership of each person who
as of April 26, 2000, to the knowledge of AIMF, owned beneficially 5% or more of
the outstanding shares of the Acquiring Portfolios:
GROWTH PORTFOLIO PERCENT
NUMBER OF SHARES BENEFICIAL
NAME AND ADDRESS OWNED OWNERSHIP
- ---------------- ---------------- ---------
Linweld, Inc. PSP/401(K) 230,211.809 6.12%
1225 L Street, Suite 600
Lincoln, NE 68508
Union Bank PSP/401(K) 215,478.185 5.73%
6801 S. 27th Street
Lincoln, NE 68512
27
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO
PERCENT
NUMBER OF SHARES BENEFICIAL
NAME AND ADDRESS OWNED OWNERSHIP
- ---------------- --------------- ---------
Union Bank PSP/401(K) 310,687.144 9.45%
6801 S. 27th Street
Lincoln, NE 68512
Linweld, Inc. PSP/401(K) 202,029.742 6.15%
1225 L Street, Suite 600
Lincoln, NE 68508
Crete 401(K) 176,602.441 5.37%
P.O. Box 81228
Lincoln, NE 68501
OWNERSHIP OF OFFICERS AND DIRECTORS/TRUSTEES
To the best of the knowledge of Stratus Fund, the beneficial ownership of
shares of the Acquiring Portfolios by officers and directors of Stratus Fund as
a group constituted less than 1% of the outstanding shares of each such fund as
of April 26, 2000.
CAPITALIZATION
The following table sets forth as of December 31, 1999, (i) the
capitalization of the Acquiring Portfolios' Retail Class A shares and the
Acquiring Portfolios Institutional Class shares, and (ii) the capitalization of
the Acquired Portfolios' Retail Class A and Institutional Class shares. The
table also shows the capitalization of the Acquiring Portfolios' Retail Class A
and Institutional Class Shares on a combined pro forma basis after the
Reorganizations.
28
<PAGE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO AND CAPITAL APPRECIATION PORTFOLIO
PRO FORMA
CAPITAL APPRECIATION GROWTH PORTFOLIO
GROWTH PORTFOLIO PORTFOLIO RETAIL CLASS A SHARES
RETAIL CLASS A SHARES RETAIL CLASS A SHARES AS ADJUSTED
--------------------- --------------------- -----------
<S> <C> <C> <C>
Net Assets $1,507,130 $192,457 $1,699,587
Shares Outstanding 81,490 13,873 91,919
Net Asset Value Per $18.49 $13.87 $18.49
Share
PRO FORMA
GROWTH PORTFOLIO CAPITAL APPRECIATION GROWTH PORTFOLIO
INSTITUTIONAL PORTFOLIO INSTITUTIONAL INSTITUTIONAL CLASS
CLASS SHARES CLASS SHARES SHARES AS ADJUSTED
------------ ------------ ------------------
Net Assets $67,833,437 $5,910,952 $73,744,389
Shares Outstanding 3,660,223 424,020 3,979,730
Net Asset Value Per
Share $18.53 $13.94 $18.53
GOVERNMENT SECURITIES PORTFOLIO AND INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PRO FORMA
INTERMEDIATE GOVERNMENT SECURITIES
GOVERNMENT SECURITIES GOVERNMENT BOND PORTFOLIO
PORTFOLIO PORTFOLIO RETAIL RETAIL CLASS A
RETAIL CLASS A SHARES CLASS A SHARES SHARES AS ADJUSTED
--------------------- -------------- ------------------
Net Assets $210,027 $14,316 $224,343
Shares Outstanding 21,741 1,378 23,244
Net Asset Value Per $9.66 $10.39 $9.66
Share
PRO FORMA
GOVERNMENT SECURITIES
GOVERNMENT SECURITIES INTERMEDIATE PORTFOLIO
PORTFOLIO GOVERNMENT BOND INSTITUTIONAL
INSTITUTIONAL PORTFOLIO INSTITUTIONAL CLASS SHARES
CLASS SHARES CLASS SHARES AS ADJUSTED
------------ ------------ -----------
Net Assets $31,451,572 $2,225,025 $33,676,597
Shares Outstanding 3,254,961 214,113 3,486,190
Net Asset Value Per
Share $9.66 $10.39 $9.66
</TABLE>
LEGAL MATTERS
Certain legal matters concerning Stratus Fund and its participation in the
Reorganizations, the issuance of shares of the Acquiring Portfolios in
connection with the Reorganizations and the tax consequences of the
Reorganizations will be passed upon by Ballard Spahr Andrews & Ingersoll, LLP,
1735 Market Street, 51st Floor, Philadelphia, PA 19103-7599.
INFORMATION FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
This Proxy Statement/Prospectus and the related Statement of Additional
Information do not contain all the information set forth in the registration
statements and the exhibits relating thereto and annual and semi-annual reports
which Stratus Fund has filed with the SEC pursuant to the requirements of the
1933 Act and the 1940 Act, to which reference is hereby made. The SEC file
number for Stratus Fund's registration statement containing the Prospectus and
Statement of Additional Information relating to the Acquired Portfolios is
Registration No. 811-6259. Such Prospectus and Statement of Additional
Information are incorporated herein by reference.
Stratus Fund is subject to the informational requirements of the 1940 Act
and in accordance therewith files reports and other information with the SEC.
Reports, proxy statements, registration statements and other information filed
by Stratus Fund (including the Registration Statement of Stratus Fund relating
to the Acquiring Portfolios on Form N-14 of which this Proxy
Statement/Prospectus is a part and which is hereby incorporated by reference)
may be inspected without charge and copied at the public reference facilities
maintained by the SEC at Room 1014, Judiciary Plaza, 450 Fifth Street, NW,
Washington, DC 20549, and at the following regional offices of the SEC: 7 World
Trade Center, New York, New York 10048; and 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, DC
20549, at the prescribed rates. The SEC maintains a Web site at
http://www.sec.gov that contains information regarding AIMF, AIF and other
registrants that file electronically with the SEC.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING PORTFOLIOS AND
THE ACQUIRED PORTFOLIOS
For more information with respect to Stratus Fund and the Acquiring
Portfolios and Acquired Portfolios concerning the following topics, please refer
to the Acquiring Portfolios and Acquired Portfolios Prospectuses as indicated:
(i) see "Introduction and Fund Summary," for further information regarding
Stratus Fund and the Acquiring Portfolios and Acquired Portfolios; (ii) see
"Introduction and Fund Summary," "More Information about Investment Objectives
and Strategies," "More Information About Risk," "Each Portfolios Other
Investments," and "Fund Management" for further information regarding management
of the Acquiring Portfolios and the
29
<PAGE>
Acquired Portfolios; (iii) see "Introduction and Fund Summary,"
"Shareholder Information," "Fund Distribution," "Dividends and Capital Gain
Distributions," and "Tax Consequences" for further information regarding the
capital stock of the Acquiring Portfolios and the Acquired Portfolios; and (iv)
see "Shareholder Information," and "Fund Distribution" for further information
regarding the purchase, redemption and repurchase of Acquiring Portfolios
shares.
30
<PAGE>
APPENDIX I
PLAN OF RECLASSIFICATION
for
CAPITAL APPRECIATION PORTFOLIO AND
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Investment Portfolios of
Stratus Fund, Inc.
This Plan of Reclassification provides for the reclassification of the
shares of Capital Appreciation Portfolio ("Capital Appreciation") and
Intermediate Government Bond Portfolio ("Intermediate Government Bond"),
investment portfolios of Stratus Fund, Inc. ("Stratus Fund"), as shares of
Growth Portfolio ("Growth") and Government Securities Portfolio ("Government
Securities"), also investment portfolios of Stratus Fund.
WHEREAS, Stratus Fund is a Minnesota corporation and a registered
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, Capital Appreciation, Growth, Intermediate Government Bond and
Government Securities are each investment portfolios of Stratus Fund
representing separate series of shares of the capital stock of Stratus Fund;
WHEREAS, the Board of Directors of Stratus Fund has determined that it
would be in the best interests of the Capital Appreciation and Intermediate
Government Bond shareholders to reorganize Capital Appreciation and Intermediate
Government Bond by reclassifying the shares of Capital Appreciation and
Intermediate Government Bond as Growth shares and Government Securities shares,
respectively, pursuant to an amendment to the Articles of Incorporation of
Stratus Fund, all in the manner described below.
NOW, THEREFORE, Capital Appreciation and Intermediate Government Bond
shall be reorganized into Growth and Government Securities, respectively, on the
following terms and conditions.
1. PLAN OF REORGANIZATION.
(a) RECLASSIFICATION OF SHARES. At the Effective Time described in
Section 3 below:
(i) all of the issued and outstanding Retail Class A
shares of Capital Appreciation shall be reclassified and changed
into and become Retail Class A shares of Growth based upon their
respective net asset values, and thereafter shall have the
attributes of Retail Class A shares of Growth;
(ii) all of the issued and outstanding Institutional
Class shares of Capital Appreciation shall be reclassified and
changed into and become
3/20/00
1
<PAGE>
Institutional Class shares of Growth based upon their respective
net asset values, and thereafter shall have the attributes of
Institutional Class shares of Growth;
(iii) all of the issued and outstanding Retail Class A
shares of Intermediate Government Bond shall be reclassified and
changed into and become Retail Class A shares of Government
Securities based upon their respective net asset values, and
thereafter shall have the attributes of Retail Class A shares of
Government Securities; and
(iv) all of the issued and outstanding Institutional Class
shares of Intermediate Government Bond shall be reclassified and
changed into and become Institutional Class shares of Government
Securities based upon their respective net asset values, and
thereafter shall have the attributes of Institutional Class
shares of Government Securities.
All authorized but unissued shares of Capital Appreciation and
Intermediate Government Bond shall be reclassified as authorized
shares of Stratus Fund without further designation or
classification. The stock transfer books of Capital Appreciation
and Intermediate Government Bond will be permanently closed at
the Effective Time and only requests for the redemption of shares
of Capital Appreciation and Intermediate Government Bond received
in proper form prior to the close of trading on the New York
Stock Exchange on the date of the Effective Time shall be
accepted. Thereafter, redemption requests received by Capital
Appreciation and Intermediate Government Bond shall be deemed to
be redemption requests for the Growth and Government Securities
shares into which such Capital Appreciation and Intermediate
Government Bond shares were reclassified under this Plan of
Reclassification.
(b) ATTRIBUTION OF ASSETS AND LIABILITIES. At the Effective
Time described in Section 3 below:
(i) the proportionate undivided interest in the net assets
of Capital Appreciation attributable to its Retail Class A shares
shall become a part of the proportionate undivided interest in
the net assets of Growth attributable to its Retail Class A
shares, and the expenses, costs, charges and reserves allocated
to the Retail Class A shares of Capital Appreciation immediately
prior to the Effective Time shall become expenses, costs, charges
and reserves of Retail Class A shares of Growth;
(ii) the proportionate undivided interest in the net
assets of Capital Appreciation attributable to its Institutional
Class shares shall become a part of the proportionate undivided
interest in the net assets of Growth attributable to its
Institutional Class shares, and the expenses, costs, charges and
reserves allocated to the Institutional Class shares of Capital
Appreciation immediately prior to the
3/20/00
2
<PAGE>
Effective Time shall become expenses, costs, charges and reserves
of Institutional Class shares of Growth;
(iii) the proportionate undivided interest in the net
assets of Intermediate Government Bond attributable to its Retail
Class A shares shall become a part of the proportionate undivided
interest in the net assets of Government Securities attributable
its Retail Class A shares, and the expenses, costs, charges and
reserves allocated to the Retail Class A shares of Intermediate
Government Bond immediately prior to the Effective Time shall
become expenses, costs, charges and reserves of Retail Class A
shares of Government Securities; and
(iv) the proportionate undivided interest in the net
assets of Intermediate Government Bond attributable to its
Institutional Class shares shall become a part of the
proportionate undivided interest in the net assets of Government
Securities attributable to its Institutional Class shares, and
the expenses, costs, charges and reserves allocated to the
Institutional Class shares of Intermediate Government Bond
immediately prior to the Effective Time shall become expenses,
costs, charges and reserves of Institutional Class shares of
Government Securities.
Stratus Fund shall instruct its custodian to reflect in the custodian's
records for Growth and Government Securities the attribution of the
assets of Capital Appreciation and Intermediate Government Bond,
respectively, in the manner described above. Additionally, the books and
records of Capital Appreciation and Intermediate Government Bond will
become the books and records of Growth and Government Securities,
respectively, upon reclassification of the Capital Appreciation and
Intermediate Government Bond shares.
(c) SHAREHOLDER ACCOUNTS. At the Effective Time described in
Section 3 below:
(i) each shareholder of record of Retail Class A shares of
Capital Appreciation will receive that number of Retail Class A
shares of Growth having an aggregate net asset value equal to the
aggregate net asset value of the Retail Class A shares of Capital
Appreciation held by such shareholder immediately prior to the
Effective Time;
(ii) each shareholder of record of Institutional Class
shares of Capital Appreciation will receive that number of
Institutional Class shares of Growth having an aggregate net
asset value equal to the aggregate net asset value of the
Institutional Class shares of Capital Appreciation held by such
shareholder immediately prior to the Effective Time;
3/20/00
3
<PAGE>
(iii) each shareholder of record of Retail Class A shares
of Intermediate Government Bond will receive a number of Retail
Class A shares of Government Securities having an aggregate net
asset value equal to the aggregate net asset value of the Retail
Class A shares of Intermediate Government Bond held by such
shareholder immediately prior to the Effective Time; and
(iv) each shareholder of record of Institutional Class
shares of Intermediate Government Bond will receive a number of
Institutional Class shares of Government Securities having an
aggregate net asset value equal to the aggregate net asset value
of the Institutional Class shares of Intermediate Government Bond
held by such shareholder immediately prior to the Effective Time.
Stratus Fund's transfer agent will establish an open account on the records of
Growth and Government Securities in the name of each shareholder of Capital
Appreciation and Intermediate Government Bond to which will be credited the
respective number of shares of Growth and Government Securities due such
shareholder. Fractional shares of Growth and Government Securities will be
carried to the third decimal place. Certificates representing shares of Growth
and Government Securities will not be issued. The net asset value of the shares
of Capital Appreciation and Growth and Intermediate Government Bond and
Government Securities will be determined at the Effective Time in accordance
with the policies and procedures of Stratus Fund.
2. AMENDMENT TO ARTICLES. Stratus Fund shall effect the reclassification
of Capital Appreciation and Intermediate Government Bond by amending its
Articles of Incorporation to provide for the reclassification of Retail Class A
and Institutional Class shares of Capital Appreciation and Intermediate
Government Bond as Retail Class A and Institutional Class shares of Growth and
Government Securities, respectively, based upon their respective net asset
values in the manner provided in paragraph 1.
3. EFFECTIVE TIME OF THE RECLASSIFICATION. The reclassification of
Capital Appreciation contemplated by this Plan of Reclassification shall occur
on May 26, 2000 at 5:00 p.m. Eastern Time, or such later date and time as the
officers of Stratus Fund shall determine (the "Effective Time").
4. APPROVAL OF SHAREHOLDERS. A meeting of the holders of Capital
Appreciation shares and Intermediate Government Bond shares shall be duly called
and constituted for the purpose of acting upon this Plan of Reclassification and
the transactions contemplated herein, including approval of the amendment to the
Articles of Incorporation of Stratus Fund described above. Approval by such
shareholders of this Plan of Reclassification shall authorize Stratus Fund to
take the actions required to effect the Plan of Reclassification.
5. CONDITIONS PRECEDENT. Stratus Fund will consummate the Plan of
Reclassification only after satisfaction of each of the following conditions:
3/20/00
4
<PAGE>
(a) The amendment to the Articles of Incorporation of Stratus
Fund described in paragraph 2 shall have been filed with the Minnesota Secretary
of State specifying the Effective Time as the effective date thereof.
(b) All consents, approvals, permits and authorizations required
to be obtained from governmental authorities, including the Securities and
Exchange Commission and state securities commissions, to permit the parties to
carry out the transactions contemplated by this Plan of Recapitalization shall
have been received.
(c) This Plan of Reclassification, the amendment to the Articles
of Incorporation and related corporate matters shall have been approved by the
shareholders of Capital Appreciation and Intermediate Government Bond at a
special meeting by the affirmative vote of a majority of the total number of
votes entitled to be cast.
(d) The assets of Capital Appreciation to be acquired by Growth
shall constitute at least 90% of the fair market value of the net assets and at
least 70% of the fair market value of the gross assets held by Capital
Appreciation immediately prior to the reclassification and the assets of
Intermediate Government Bond to be acquired by Government Securities shall
constitute at least 90% of the fair market value of the net assets and at least
70% of the fair market value of the gross assets held by Intermediate Government
Bond immediately prior to the reclassification. For purposes of this paragraph
5(d), assets used by Capital Appreciation or Intermediate Government Bond to pay
the expenses incurred by them in connection with this Plan of Reclassification
and to effect all shareholder redemptions and distributions (other than regular,
normal dividends and regular, normal redemptions pursuant to the 1940 Act, and
not in excess of the requirements of Section 852 of the Code, occurring in the
ordinary course of Capital Appreciation's or Intermediate Government Bond's
business as a series of an open-end management investment company) after the
date of this Plan of Reclassification shall be included as assets of Capital
Appreciation or Intermediate Government Bond, as the case may be, held
immediately prior to the reclassification.
(e) The dividend or dividends described in the last sentence of
paragraph 6(a) shall have been declared.
(f) Stratus Fund shall have received an opinion of Ballard Spahr
Andrews & Ingersoll, LLP ("BSA&I") to the effect that consummation of the
transactions contemplated by this Plan of Reclassification will constitute a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code (the "Code"), and that the shareholders of Capital Appreciation or
Intermediate Government Bond will recognize no gain or loss to the extent that
they receive shares of Growth or Government Securities in exchange for their
shares of Capital Appreciation and Intermediate Government Bond in accordance
with this Plan of Reclassification. In rendering such opinion, BSA&I may request
and rely upon representations contained in certificates of officers of Stratus
Fund and others, and the officers of Stratus Fund shall use their best efforts
to make available such truthful certificates.
3/20/00
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(g) Stratus Fund shall have received an opinion of BSA&I, dated
as of the Effective Time, addressed to and in form and substance satisfactory to
Stratus Fund, to the effect that this Plan of Reclassification has been duly
authorized and approved by all requisite action of Stratus Fund and the holders
of the shares of Capital Appreciation and Intermediate Government Bond.
At any time prior to the Effective Time, any of the foregoing conditions
may be waived by Stratus Fund if, in the judgment of its Board of Directors,
such waiver will not have a material adverse effect on the benefits intended
under this Plan of Reclassification for the Capital Appreciation and
Intermediate Government Bond shareholders.
6. CAPITAL APPRECIATION TAX MATTERS.
(a) Capital Appreciation and Intermediate Government Bond have
each elected to be a regulated investment company under Subchapter M of the
Code. Capital Appreciation and Intermediate Government Bond have qualified as
such for each taxable year since inception and that has ended prior to the
Effective Time and will have satisfied the requirements of Part I of Subchapter
M of the Code to maintain such qualification for the period beginning on the
first day of their respective current taxable years and ending at the Effective
Time. Capital Appreciation and Intermediate Government Bond have no earnings and
profits accumulated in any taxable year in which the provisions of Subchapter M
of the Code did not apply to them. In order to (i) insure continued
qualification of Capital Appreciation and Intermediate Government Bond as
"regulated investment companies" for tax purposes and (ii) eliminate any tax
liability of Capital Appreciation and Intermediate Government Bond arising by
reason of undistributed investment company taxable income or net capital gain,
Capital Appreciation and Intermediate Government Bond will declare on or prior
to the Effective Time to the shareholders of Capital Appreciation and
Intermediate Government Bond, respectively, a dividend or dividends that,
together with all previous such dividends, shall have the effect of distributing
(A) all of Capital Appreciation's and Intermediate Government Bond's investment
company taxable income (determined without regard to any deductions for
dividends paid) for the taxable year ended December 31, 1999 and for the short
taxable year beginning on January 1, 2000 and ending at the Effective Time and
(B) all of Capital Appreciation's and Intermediate Government Bond's net capital
gain recognized in their respective taxable years ended December 31, 1999 and in
such short taxable year (after reduction for any capital loss carryover).
(b) Capital Appreciation and Intermediate Government Bond have
timely filed all tax returns required to be filed by them and all taxes with
respect thereto have been paid. No deficiencies for any taxes have been
proposed, assessed or asserted in writing by any taxing authority against
Capital Appreciation or Intermediate Government Bond, and no deficiency has been
proposed, assessed or asserted, in writing, where such deficiency would
reasonably be expected, individually or in the aggregate, to have a material
adverse effect on the condition, financial or otherwise, property, assets or
prospects of Capital Appreciation or Intermediate Government Bond.
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(c) The respective fiscal years of Capital Appreciation and
Intermediate Government Bond have not been changed for tax purposes since the
date on which they commenced operations.
7. GROWTH AND GOVERNMENT SECURITIES TAX MATTERS.
(a) Growth and Government Securities have each elected to be
treated as a regulated investment companies under Subchapter M of the Code and
have each qualified as such for each taxable year since inception that has ended
prior to the Effective Time and will satisfy the requirements of Part I of
Subchapter M of the Code to maintain such qualification for their current
taxable years. Growth and Government Securities have no earnings or profits
accumulated in any taxable year in which the provisions of Subchapter M of the
Code did not apply to them.
(b) Growth and Government Securities have timely filed all
returns required to be filed by them and all taxes with respect thereto have
been paid. No deficiencies for any taxes have been proposed, assessed or
asserted in writing by any taxing authority against Growth or Government
Securities, and no deficiency has been proposed, assessed or asserted, in
writing, where such deficiency would reasonably be expected, individually or in
the aggregate, to have a material adverse effect on the condition, financial or
otherwise, property, assets or prospects of Growth or Government Securities.
(c) The respective fiscal years of Growth and Government
Securities have not been changed for tax purposes since the date on which they
commenced operations.
8. TRANSACTIONS INDEPENDENT. Consummation of the reclassification of
Capital Appreciation under this Plan of Reclassification is not conditioned upon
consummation of the reclassification of Intermediate Government Bond under this
Plan of Reclassification, and consummation of the reclassification of
Intermediate Government Bond is not conditioned upon consummation of the
reclassification of Capital Appreciation. Accordingly, the occurrence or
non-occurrence of an event that would result in any of the conditions precedent
to the Reclassification of Capital Appreciation not being satisfied will not
affect consummation of the reclassification of Intermediate Government Bond
(assuming that all of the conditions precedent to such reclassification had been
satisfied), and the occurrence or non-occurrence of an event that would result
in any of the conditions precedent to the reclassification of Intermediate
Government Bond not being satisfied will not affect consummation of the
reclassification of Capital Appreciation (assuming that all of the conditions
precedent to such reclassification had been satisfied).
9. TERMINATION. Stratus Fund may terminate this Plan of Reclassification
with the approval of its Board of Directors at any time prior to the Effective
Time, notwithstanding approval thereof by Capital Appreciation or Intermediate
Government Bond shareholders if, in the judgment of the Board, proceeding with
the Plan of Reclassification would be inadvisable. In
3/20/00
7
<PAGE>
addition, the Board may terminate this Plan of Reclassification with respect to
either Capital Appreciation or Intermediate Government Bond individually,
without terminating the Plan of Reclassification with respect to the other
portfolio.
10. FURTHER ASSURANCES. Stratus Fund shall take such further action as
may be necessary or desirable and proper to consummate the transactions
contemplated hereby.
11. EXPENSES. Capital Appreciation, Intermediate Government Bond, Growth
and Government Securities shall each bear any expenses it incurs in connection
with this Plan of Reclassification and the transactions contemplated hereby.
This Plan of Reclassification was approved and adopted by the Board of
Directors of Stratus Fund on the 21st day of March, 2000.
3/20/00
8
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APPENDIX II
STRATUS FUND, INC.
RETAIL CLASS A SHARES
PROSPECTUS
NOVEMBER 1, 1999
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
GROWTH PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERNATIONAL PORTFOLIO
INVESTMENT ADVISER
Union Bank and Trust Company
INVESTMENT SUB-ADVISER FOR THE
INTERNATIONAL PORTFOLIO
Murray Johnstone International, Inc.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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TABLE OF CONTENTS
Introduction and Fund Summary.................................................3
More Information About Investment Objectives and Strategies..................20
More Information About Risk..................................................25
Each Portfolio's Other Investments...........................................28
Shareholder Information......................................................29
Fund Distribution............................................................33
Dividends and Capital Gains Distributions....................................35
Tax Consequences.............................................................36
Fund Management..............................................................36
Financial Highlights.........................................................38
2
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INTRODUCTION AND FUND SUMMARY
INTRODUCTION
Stratus Fund, Inc. is a mutual fund that offers shares in separate
investment portfolios. Each Portfolio operates as a separate mutual fund. A
mutual fund pools shareholders' money and, using professional investment
managers, invests the money in securities. The value of your investment in a
Portfolio is based on the market value of the securities the Portfolio holds.
Each Portfolio has its own investment goal and strategies for reaching
that goal. This prospectus gives you important information about the Portfolios
that you should know before investing. Please read this prospectus and keep it
for future reference.
An investment in a Portfolio is not a deposit in Union Bank and Trust
Company and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency and involves investment risk,
including potential loss of principal.
FUND SUMMARY
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
INVESTMENT OBJECTIVE
The Intermediate Government Bond Portfolio seeks current income, some or all of
which is exempt from state income tax, consistent with the preservation of
capital.
PRINCIPAL INVESTMENT STRATEGIES
The Adviser's principal investment strategies include:
o Investing primarily in securities issued or guaranteed by the U.S.
Government, its agencies or its instrumentalities.
o Normally maintaining an average dollar weighted maturity of between
three and ten years.
PRINCIPAL INVESTMENT RISKS
The Intermediate Government Bond Portfolio is subject to the following principal
investment risks any one of which could cause you to lose money:
o INTEREST RATE CHANGES. Interest rate increases can cause the price of
a debt security to decrease.
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o PREPAYMENT RISK. If during periods of falling interest rates an issuer
of a debt security held by the Portfolio repays a higher yielding bond
before its maturity date, the Portfolio will reinvest these
unanticipated proceeds at lower rates. As a result the Portfolio would
experience a decline in income and lose the opportunity for additional
price appreciation associated with falling interest rates.
o U.S. GOVERNMENT SECURITIES RISK. Obligations issued or guaranteed by
some U.S. Government agencies are backed by the U.S. Treasury, while
others are backed solely by the ability of the agency to borrow from
the U.S. Treasury or by the agency's own resources.
o ISSUER-SPECIFIC RISK. The value of an individual issuer's security can
be more volatile than the market as a whole and can perform
differently than the market as a whole.
o INCOME RISK. Falling interest rates will cause the portfolio's income
to decline.
o CREDIT RISK. If the issuer of a debt security fails to pay interest or
principal in a timely manner, the Portfolio's return will be lower.
When you sell your shares of the Portfolio, they could be worth less than what
you paid for them.
PERFORMANCE
The following information provides some indication of the risks of investing in
the Intermediate Government Bond Portfolio by showing changes in the Portfolio's
performance from year to year and comparing the Portfolio's performance to the
performance of a broad based market index over various periods of time. Returns
are based on past results and are not necessarily an indication of future
performance.
Retail Class A shares of the Intermediate Government Bond Portfolio were first
sold to the public in January, 1998. Since that time, the Portfolio's highest
return for a quarter was 2.9% (quarter ending September 30, 1998) and the lowest
return for a quarter was 0.20% (quarter ending June 30, 1999).
The year-to-date return as of September 30, 1999 for Intermediate Government
Bond Portfolio was 1.20%.
FEES AND EXPENSES
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Intermediate Government Bond Portfolio:
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SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases (as a % of the offering price) 3%
Maximum Deferred Sales Charge None
Maximum Sales Charge
(Load) Imposed on Reinvested
Dividends and other Distributions None
Redemption Fee None
Exchange fee None
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)*
Management Fees .65%
Distribution 12b-1 Fees .50%
Other Expenses .51%
----
Total Portfolio Operating Expenses 1.66%
=====
* The Portfolio's total actual annual operating expenses for the most recent
fiscal year were less than the amount shown above because the Portfolio is
currently paying only a portion of the total 12b-1 fee authorized for
payment by the Portfolio to the Distributor. Although the Portfolio may
increase the payments to the Distributor to the amount shown above at any
time, such an increase is not expected during the Portfolio's current
fiscal year. With the reduced payments to the Distributor, the Portfolio's
actual total operating expenses were 1.46%.
5
<PAGE>
EXAMPLE
The following example is intended to help you compare the cost of an investment
in the Intermediate Government Bond Portfolio with the cost of investing in
other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year 3 Years 5 Years 10 Years
$166 $515 $887 $1,933
6
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO
INVESTMENT OBJECTIVE
The Government Securities Portfolio seeks a high total return consistent with
the preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Adviser's principal investment strategies include:
o Investing primarily in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
o Investing the remainder of its assets in marketable debt obligations
rated within the four highest debt ratings, obligations of commercial
banks, repurchase agreements and money market instruments.
o Selecting securities that will provide a high total return consistent
with the Portfolio's investment objective taking into consideration
both current income and the potential for appreciation of value.
o Normally maintaining an average dollar weighted maturity of between
three and ten years.
PRINCIPAL INVESTMENT RISKS
The Government Securities Portfolio is subject to the following principal
investment risks any one of which could cause you to lose money:
o INTEREST RATE CHANGES. Interest rate increases can cause the price of
a debt security to decrease.
o PREPAYMENT RISK. If during periods of falling interest rates an issuer
of a debt security held by the Portfolio repays a higher yielding bond
before its maturity date, the Portfolio will reinvest these
unanticipated proceeds at lower rates. As a result the Portfolio would
experience a decline in income and lose the opportunity for additional
price appreciation associated with falling interest rates.
o ISSUER-SPECIFIC RISK. The value of an individual issuer's security can
be more volatile than the market as a whole and can perform
differently than the market as a whole. Debt obligations rated within
the lowest of the four highest debt ratings have speculative
characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weaker capacity of the
issuer to make principal and interest payments than would be the case
with higher rated securities. If after acquisition by the Portfolio, a
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<PAGE>
change in the credit quality of a debt security causes the security to
fall below investment grade, the investment adviser will consider
selling the security if the sale will not have an adverse effect on the
portfolio.
o CREDIT RISK. If the issuer of a debt security fails to pay interest or
principal in a timely manner, the Portfolio's return will be lower.
o INCOME RISK. Falling interest rates will cause the Portfolio's income
to decline.
When you sell shares of the Portfolio, they could be worth less than what you
paid for them.
PERFORMANCE
The following information provides some indication of the risk of investing in
the Government Securities Portfolio by showing changes in the Portfolio's
performance from year to year and comparing the Portfolio's performance to the
performance of a broad based market index over various periods of time. Returns
are based on past results and are not an indication of future performance.
Retail Class A shares of the Government Securities Portfolio were first sold to
the public in January, 1998. Since that time, the Portfolio's highest return for
a quarter was 3.29% (quarter ending September 30, 1998) and the lowest return
for a quarter was 0.20% (quarter ending June 30, 1999).
The year-to-date return as of September 30, 1999 for Government Securities
Portfolio was 1.15%.
FEES AND EXPENSES
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Government Securities Portfolio:
8
<PAGE>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases (as a % of the offering price) 3%
Maximum Deferred Sales Charge None
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends and other Distributions None
Redemption Fee None
Exchange fee None
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)*
Management Fees .50%
Distribution 12b-1 Fees .50%
Other Expenses .30%
----
Total Portfolio Operating Expenses 1.30%
=====
* The Portfolio's total actual annual operating expenses for the most recent
fiscal year were less than the amount shown above because the Portfolio is
currently paying only a portion of the total 12b-1 fee authorized for
payment by the Portfolio to the Distributor. Although the Portfolio may
increase the payments to the Distributor to the amount shown above at any
time, such an increase is not expected during the Portfolio's current
fiscal year. With the reduced payments to the Distributor, the Portfolio's
actual total operating expenses were 1.10%.
9
<PAGE>
EXAMPLE
The following example is intended to help you compare the cost of an investment
in the Government Securities Portfolio with the cost of investing in other
mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year 3 Years 5 Years 10 Years
$130 $405 $700 $1,539
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GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
The Growth Portfolio seeks capital appreciation and income.
PRINCIPAL INVESTMENT STRATEGIES
The Adviser's principal investment strategies include:
o Investing primarily in a diversified portfolio of common stocks.
o Selecting equity securities, the majority of which pay dividends.
o Investing in medium and large capitalization companies.
o Investing in companies the Adviser believes will have earnings that grow
faster than inflation and faster than the economy in general and whose
securities are attractively priced. The Adviser's strategies may involve
active trading in the Portfolio's securities and may result in a higher
Portfolio turnover rate.
PRINCIPAL INVESTMENT RISKS
The Growth Portfolio is subject to the following principal investment risks any
one of which could cause you to lose money:
o STOCK MARKET VOLATILITY. Stock markets are volatile and can decline
significantly in response to adverse issuer, political, regulatory,
market or economic developments. Different parts of the market can
react differently to these developments.
o ISSUER-SPECIFIC RISKS. The value of an individual issuer's security
can be more volatile than the market as a whole and can perform
differently than the market as a whole.
o GROWTH INVESTING. Growth stocks can perform differently than the
market as a whole and other types of stocks and can be more volatile
than other types of stocks.
When you sell your shares of the Portfolio, they could be worth less than what
you paid for them.
PERFORMANCE
The following information provides some indication of the risks of investing in
the Growth Portfolio by showing changes in the Portfolio's performance from year
to year and comparing the Portfolio's performance to the performance of a broad
based market index over various
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periods of time. Returns are based on past results and are not an indication of
future performance.
Retail Class A shares of the Growth Portfolio were first sold to the public in
January, 1998. Since that time, the Portfolio's highest return for a quarter was
19.17% (quarter ending December 31, 1998) and the lowest return for a quarter
was -11.77% (quarter ending September 30, 1998).
The year-to-date return as of September 30, 1999 for Growth Portfolio was 2.66%
FEE TABLE
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Growth Portfolio:
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases (as a % of the offering price) 4.5%
Maximum Deferred Sale Charge None
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends and other Distributions None
Redemption Fee None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)*
Management Fees .75%
Distribution 12b-1 Fees .50%
Other Expenses .30%
----
Total Portfolio Operating Expenses 1.55%
=====
* The Portfolio's total actual annual operating expenses for the most recent
fiscal year were less than the amount shown above because the Portfolio is
currently paying only a portion of the total 12b-1 fee authorized for
payment by the Portfolio to the Distributor. Although the Portfolio may
increase the payments to the Distributor to the amount shown above at any
time, such an increase is not expected during the Portfolio's current
fiscal year. With the
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<PAGE>
reduced payments to the Distributor, the Portfolio's actual total operating
expenses were 1.35%.
EXAMPLE
The following example is intended to help you compare the cost of an investment
in the Growth Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year 3 Years 5 Years 10 Years
$155 $481 $830 $1,814
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<PAGE>
CAPITAL APPRECIATION PORTFOLIO
INVESTMENT OBJECTIVE
The Capital Appreciation Portfolio seeks capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Adviser's principal investment strategies include:
o Investing primarily in common stocks.
o Investing in small to mid-size companies having a market capitalization
of $5 billion or less that the Adviser believes will have higher
earnings growth potential than that of the general market and have
attractive stock prices in relation to their growth potential. The
Adviser's strategy may involve active trading in the Portfolio's
securities and may result in a higher Portfolio turnover rate.
PRINCIPAL INVESTMENT RISKS
The Capital Appreciation Portfolio is subject to the following principal
investment risks any one of which could cause you to lose money:
o STOCK MARKET VOLATILITY. Stock markets are volatile and can decline
significantly in response to adverse issuer, political, regulatory
market, or economic developments. Different parts of the market can
react differently to these developments.
o ISSUER-SPECIFIC RISKS. The value of an individual issuer's security
can be more volatile than the market as a whole and can perform
differently than the market as a whole.
o GROWTH INVESTING. Growth stocks can perform differently than the
market as a whole and other types of stocks and can be more volatile
than other types of stocks.
When you sell your shares of the Portfolio, they could be worth less than what
you paid for them.
PERFORMANCE
The following information provides some indication of the risks of investing in
the Capital Appreciation Portfolio by showing changes in the Portfolio's
performance from year to year and comparing the Portfolio's performance to the
performance of a broad based market index over various periods of time. Returns
are based on past results and are not an indication of future performance.
14
<PAGE>
Retail Class A shares of the Capital Appreciation Portfolio were first sold to
the public in January, 1998. Since that time, the Portfolio's highest return for
a quarter was 17.53% (quarter ending December 31, 1998) and the lowest return
for a quarter was -20.85% (quarter ending September 30, 1998).
The year-to-date return as of September 30, 1999 for Capital Appreciation
Portfolio was -8.40%.
FEE TABLE
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Capital Appreciation Portfolio:
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases (as a % of
the offering price) 4.5%
Maximum Deferred Sales Charge None
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends and other Distributions None
Redemption Fee None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)*
Management Fees 1.40%
Distribution 12b-1 Fees .50%
Other Expenses .55%
----
Total Portfolio Operating Expenses 2.45%
=====
* The Portfolio's total actual annual operating expenses for the most recent
fiscal year were less than the amount shown above because the Portfolio is
currently paying only a portion of the total 12b-1 fee authorized for
payment by the Portfolio to the Distributor. Although the Portfolio may
increase the payments to the Distributor to the amount shown above at any
time, such an increase is not expected during the Portfolio's current
fiscal year. With the
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reduced payments to the Distributor, the Portfolio's actual total operating
expenses were 1.41%.
The Capital Appreciation Portfolio is obligated to pay the Adviser a basic
investment advisory fee of 1.40% of the Portfolio's average annual net assets,
but that fee is adjusted upward or downward based on the Portfolio's performance
relative to the Russell 2000 Stock Index on a 12 month average. The fee could be
as high as 2.40% of the Portfolio's average annual net assets or low as 0.40%.
The management fees for the Capital Appreciation Portfolio have been restated to
reflect the basic fee of 1.40% without adjustment.
EXAMPLE
The following example is intended to help you compare the cost of an investment
in the Capital Appreciation Portfolio with the cost of investing in other mutual
funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year 3 Years 5 Years 10 Years
$245 $754 $1,289 $2,751
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INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE
The International Portfolio seeks a high total return consistent with reasonable
risk.
PRINCIPAL INVESTMENT STRATEGIES
The Sub-Adviser's principal investment strategies include:
o Investing primarily in common stocks of established foreign companies
that it believes have potential for capital growth, income or both.
o Investing the remainder of its assets in investment grade debt
securities.
o Maintaining a globally diversified portfolio of equity and debt
securities that will include investments in equity and debt securities
of companies located in developing countries. In determining the
appropriate distribution of investments among various countries and
geographic regions, the Sub-Adviser will consider a variety of factors
including prospects for economic growth, expected levels of inflation,
government policies and currency relationships.
PRINCIPAL INVESTMENT RISKS
The International Portfolio is subject to the following risks any of which could
cause you to lose money:
o STOCK MARKET VOLATILITY. Stock markets are volatile and can decline
significantly in response to adverse issues, political, regulatory
market, or economic developments.
o ISSUER-SPECIFIC RISKS. The value of an individual issuer's security
can be more volatile than the market as a whole and can perform
differently than the market as a whole.
o FOREIGN COUNTRY RISK. Foreign markets can be more volatile than the
U.S. market due to increased risks from adverse issuer, political,
regulatory, market or economic developments.
o EMERGING MARKET RISK. The Portfolio may invest up to 30% of its assets
in securities issued by foreign companies located in developing
countries in various regions of the world. Investing in developing
countries involves risk of high inflation, high sensitivity to
commodity prices and government ownership of the biggest industries in
that country. Generally, investing in developing countries involves a
higher probability of occurrence of the risks of investing in foreign
securities.
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o CURRENCY RISK. The value of the Portfolio will be affected by changes
in currency exchange rates. A rise in the value of the U.S. Dollar
against a foreign currency will cause the U.S. Dollar value of a
foreign security to decrease.
When you sell your shares of the Portfolio, they could be worth less than what
you paid for them.
PERFORMANCE
The following information provides some indication of the risks of investing in
the International Portfolio by showing changes in the International Portfolio's
performance from year to year and comparing the Portfolio's performance of a
broad based market index over various periods of time. Returns are based on past
results and are not an indication of future performance.
Retail Class A shares of the International Portfolio were first sold to the
public in January, 1998. Since that time, the Portfolio's highest return for a
quarter was 16.30% (quarter ending December 31, 1998) and the lowest return for
a quarter was -12.02% (quarter ending September 30, 1998).
The year-to-date return as of September 30, 1999 for International Portfolio was
3.83%.
FEE TABLE
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the International Portfolio:
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a % of the offering price) 4.5%
Maximum Deferred Sales Charge None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends and other Distributions None
Redemption Fee None
Exchange fee None
ANNUAL PORTFOLIO OPERATING EXPENSES
(expenses that are deducted from Portfolio assets)*
Management Fees 1.15%
Distribution 12b-1 Fees .50%
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Other Expenses .38%
Total Portfolio Operating Expenses 2.03%
* The Portfolio's total actual annual operating expenses for the most recent
fiscal year were less than the amount shown above because the Portfolio is
currently paying only a portion of the total 12b-1 fee authorized for
payment by the Portfolio to the Distributor. Although the Portfolio may
increase the payments to the Distributor to the amount shown above at any
time, such an increase is not expected during the Portfolio's current
fiscal year. With the reduced payments to the Distributor, the Portfolio's
actual total operating expenses were 1.83%.
EXAMPLE
The following example is intended to help you compare the cost of an investment
in the International Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year 3 Years 5 Years 10 Years
$203 $627 $1,077 $2,324
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MORE INFORMATION ABOUT INVESTMENT OBJECTIVES AND STRATEGIES
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.
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio will invest at least 80% of its assets in securities
issued or guaranteed by the U.S. Government, its agencies or its
instrumentalities. The Portfolio may also invest in money market instruments.
The Portfolio maintains an average dollar weighted maturity between 3
and 10 years with respect to all of its debt securities.
To achieve its objective of current income, the Portfolio normally
purchases securities with a view to holding them rather than selling them to
achieve short-term trading profits. However, the Portfolio may sell any security
at any time if the Adviser believes general economic, industry or securities
market conditions warrant selling the security.
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 Adviser expects that annual portfolio turnover rate will normally
not exceed 100%.
FUNDAMENTAL INVESTMENT POLICIES
The investment objective of the Intermediate Government Bond Portfolio
is a fundamental policy that may not be changed without shareholder approval.
GOVERNMENT SECURITIES PORTFOLIO
INVESTMENT OBJECTIVE
The investment objective of the Government Securities Portfolio is to
provide a high total return consistent with the preservation of capital.
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IMPLEMENTATION OF INVESTMENT OBJECTIVE
To achieve its objective, the Government Securities Portfolio will
invest at least 80% of its total assets in securities issued or guaranteed by
the U. S. Government, its agencies or its instrumentalities. The Portfolio will
invest its remaining assets in the following securities:
o Domestic issues of marketable debt obligations that are rated at
time of purchase within the four highest debt rating categories
established by Moody's or S&P or are determined to by the Adviser
to be of a comparable quality or the time of purchase.
o Obligations of commercial banks, including negotiable
certificates of deposit and banker's acceptances.
o Repurchase agreements on securities issued or guaranteed by the
U.S. Government.
o Money market instruments.
To achieve its objective of current income, the Portfolio normally
purchases securities with a view to holding them rather than selling them to
achieve short-term trading profits. However, the Portfolio may sell any security
at any time without regard to the length of time it has been held if the Adviser
believes general economic, industry or securities market conditions warrant
selling the security. In selecting debt securities for the Portfolio that are
not government securities, 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. These issuers generally will have a debt to capital ratio of less
than 60% and have market capitalization in excess of $500,000,000.
The Adviser expects that annual Portfolio turnover rate will normally
not exceed 100%.
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 ten years.
FUNDAMENTAL INVESTMENT POLICIES
The investment objective of the Government Securities Portfolio is a
fundamental policy that may not be changed without shareholder approval.
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GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
The investment objective of the Growth Portfolio is capital appreciation
and income.
PRINCIPAL INVESTMENT STRATEGIES
To achieve its investment objective, the Growth Portfolio will invest at
least 65% of its total assets in a diversified portfolio of common stocks. The
remaining assets (up to 35% of the Portfolio) may be invested in U.S. Government
securities and money market instruments.
The Growth Portfolio invests principally in medium and large
capitalization companies having a market capitalization greater than $1 billion.
The Growth Portfolio seeks to identify and invest in companies whose earnings
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 company's shares. The Adviser also seeks to
invest in securities it believes will out perform the Standard and Poor's Equity
Index on a risk adjusted basis. To provide current income, the Adviser may
select securities for the Portfolio issued by companies that have a history of
paying regular dividends.
When selecting securities for the Growth Portfolio, the Adviser relies
on a company-by-company analysis and a broader analysis of industry or economic
sector trends and takes into consideration 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 the
Adviser identifies a possible investment, a number of valuation measures are
applied to determine the relative attractiveness of each company and select
those companies whose shares are most attractively priced.
The Adviser has engaged in active trading of securities held by the
Growth Portfolio. The Portfolio's turnover rate for its last fiscal year was
194%. Frequent trading of portfolio securities increases the expenses of the
Portfolio as a consequence of trading costs and can result in distributions of
gains to shareholders that are subject to tax.
FUNDAMENTAL INVESTMENT POLICIES
The investment objective of the Growth Portfolio is a fundamental policy
that may not be changed without shareholder approval
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CAPITAL APPRECIATION PORTFOLIO
INVESTMENT OBJECTIVE
The Investment objective of the Capital Appreciation Portfolio is
capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
To achieve its objective, the Capital Appreciation Portfolio will invest
at least 65% of its assets in a diversified portfolio of common stocks. The
Adviser invests 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
company's shares. The Capital Appreciation Portfolio invests principally in
medium and small capitalization companies having market capitalization of $5
billion or less.
The Adviser selects securities for investment based upon considerations
such as the quality of a company's management, the existence of a leading or
dominant position in a major product line market and the soundness of a
company's financial position. As companies are identified as possible
investments, the Adviser applies 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 Adviser has engaged in active trading of securities held by the
Capital Appreciation Portfolio. The Portfolio's turnover rate for its last
fiscal year was 109%. Frequent trading of portfolio securities increases the
expenses of the Portfolio as a consequence of trading costs and can result in
distributions of gains to shareholders that are subject to tax.
FUNDAMENTAL INVESTMENT POLICIES
The investment objective of the Capital Appreciation Portfolio is a
fundamental policy that may not be changed without shareholder approval.
INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE
The investment objective of the International Portfolio is high total
return consistent with reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES
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 Sub-Adviser to have potential for capital growth, income or
both. The International Portfolio currently
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purchases securities of foreign issuers only if they are traded on U.S.
registered exchanges, over-the-counter markets or in the form of American
Depository Receipts ("ADRs"). The Portfolio also purchases other securities
representing underlying securities of foreign issuers including securities, such
as World Equity Benchmark Shares, of issuers 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 purchase securities in foreign
markets.
The Portfolio will make investments in various countries. Under normal
circumstances, the Portfolio will invest at least 65% of its total assets in the
securities of issuers in no less than three countries. The Portfolio may, from
time to time, invest more than 25% of its assets in any major industrial or
developed country which in the view of the Sub-Adviser poses no unique
investment risk. To determine the appropriate distribution of investments among
various countries and geographic regions, the Sub-Adviser ordinarily will
consider the following factors:
o prospects of relative economic growth among foreign countries;
o expected levels of inflation;
o relative price levels of the various capital markets;
o government policies influencing business conditions;
o the outlook for currency relationships; and
o the range of individual investment opportunities available to
the global investor.
The Portfolio may invest up to 30% of its assets in companies located 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. The Sub- Adviser considers a country to be a
developing country if it is not included in the Morgan Stanley Capital
International World Index.
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. Bonds purchased for the Portfolio will generally be rated AAA or
Aaa by S&P or Moody's, respectively, or be of equivalent credit quality as
determined by the Sub-Adviser. Five percent (5%) of Portfolio assets may be
invested in debt securities rated lower than AAA or Aaa, but in no event lower
than BBB or Baa, or, 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.
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If a change in credit quality after acquisition by the Portfolio causes
the bond not to 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.
FUNDAMENTAL INVESTMENT POLICIES
The investment objective of the International Portfolio is a fundamental
policy that may not be changed without shareholder approval.
MORE INFORMATION ABOUT RISK
Many factors affect a Portfolio's performance. The price of a
Portfolio's share will change daily based on changes in interest rates and
market conditions and in response to other economic, political or financial
developments. A Portfolio's reaction to these developments will be affected by
the types and maturities of the securities in which the Portfolio invests, the
financial condition, industry and economic sector, and geographic location of an
issuer, as well as the Portfolio's level of investment in the securities of that
issuer. When you sell your shares of a Portfolio, they could be worth less than
what you paid for them. In addition, the following factors may significantly
affect the Portfolio's performances.
INTEREST RATE CHANGES
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
Debt securities have varying levels of sensitivity to changes in
interest rates. Generally, the price of a debt security can fall when interest
rates rise and vice-versa. Securities with longer maturities tend to be more
sensitive to interest rate changes and are generally more volatile, so the
average maturity or duration of these securities affects risk.
PREPAYMENT RISK
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
Many types of debt securities are subject to prepayment risk. Prepayment
occurs when the issuer of a security can repay principal prior to the security's
maturity. During periods of falling interest rates, the issuer may repay debt
obligations with high interest rates prior to maturity. This may cause
Portfolio's average weighted maturity to fluctuate, and may require a Portfolio
to invest the resulting proceeds at lower interest rates.
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CREDIT RISK
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
Credit risk is the risk that an issuer will be unable to make timely
payments of either principal or interest. If this occurs, the Portfolios' return
could be lower.
U.S. GOVERNMENT SECURITIES RISK
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
Although U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued or guaranteed by some U.S.
Government agencies are backed by the U.S. Treasury, while others are backed
solely by the ability of the agency to borrow from the U.S. Treasury or by the
agency's own resources.
STOCK MARKET VOLATILITY
GROWTH PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERNATIONAL PORTFOLIO
Stock markets are volatile and can decline significantly in response to
adverse issuer, political, regulatory, market or economic developments. In the
short term, equity prices can fluctuate dramatically in response to these
factors. Political or economic developments can affect a single issuer, issuers
within an industry or economic sector or geographic region, or the market as a
whole.
ISSUER-SPECIFIC RISK
ALL PORTFOLIOS
Changes in the financial condition of an issuer, changes in specific
economic or political conditions that affect a particular type of issuer, and
changes in general economic or political conditions can affect the value of an
issuer's securities. The value of securities of smaller, less well-known
companies can be more volatile than that of larger companies.
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GROWTH INVESTING
GROWTH PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
Growth stocks can react differently to issuer, political, market and
economic developments than the market as a whole and other types of stocks.
Growth stocks tend to be more expensive relative to their earnings or assets
compared to other types of stocks. As a result, growth stocks tend to be more
sensitive to changes in their earnings and more volatile than other types of
stocks.
FOREIGN ISSUER RISKS
INTERNATIONAL PORTFOLIO
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 are 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 United States
issuers. 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. 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. Investment in the securities of issuers in
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.
Investing in developing countries involves a higher probability of occurrence of
the risks of investing in foreign securities in general, including less
27
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financial information available, relatively illiquid markets, and the
possibility of adverse government action.
PORTFOLIO TURNOVER RATE RISK
CAPITAL APPRECIATION PORTFOLIO
GROWTH PORTFOLIO
A higher portfolio turnover rate results in increased brokerage and
other costs and ran results in shareholders receiving distributions of capital
gains that are subject to taxation.
YEAR 2000 RISK
ALL PORTFOLIOS
The Portfolios depend on smooth functioning of computer systems in
almost every aspect of their business. Like other mutual funds, businesses and
individuals around the world, the Portfolios could be adversely affected if the
computer systems used by their service providers do not properly process dates
on or after January 1, 2000, and distinguish between the year 2000 and the year
1900. The Portfolios have asked their service providers whether they expect to
have their computer systems adjusted for the year 2000 transition, and have
received assurances from each service provider that they are devoting
significant resources to prevent material adverse consequences to the
Portfolios. Nevertheless, the Portfolios and their Shareholders may experience
losses if these assurances prove to be incorrect or as a result of year 2000
computer difficulties experienced by issuers of portfolio securities or third
parties, such as custodians, banks, broker-dealers or others with which the
Portfolios do business.
EACH PORTFOLIO'S OTHER INVESTMENTS
In addition to the investments and strategies described in this
prospectus, each Portfolio also may invest in other securities, use other
strategies and engage in other securities and engage in other investment
practices. These investments and strategies are described in our Statement of
Additional Information. Of course, the Portfolio cannot guarantee that any
Portfolio will achieve its investment goal.
The investments and strategies described in this prospectus are those
used under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, each Portfolio may invest up to
100% of its assets in fixed income securities, money market instruments and
other securities that would not ordinarily be consistent with the Portfolio's
objectives. The Portfolios may not achieve their investment objectives while
pursuing these defensive strategies.
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SHAREHOLDER INFORMATION
BUYING SHARES
SMITH HAYES Financial Services Corporation ("SMITH HAYES") acts as the
principal distributor of the Fund's shares. You may purchase a share at an
offering price that is the sum of the net asset value of the share next
determined after your purchase order is placed plus the applicable sales charge.
You may purchase shares from registered representatives of Smith Hayes and from
other broker-dealers who have sales agreements with Smith Hayes.
You may purchase shares of each Portfolio on days on which the New York
Stock Exchange is open for business. You must place your orders with the
Distributor prior to 4:00 p.m. Eastern time on any business day for the order to
be accepted on that business day. You may purchase shares by completing the
Purchase Application included in this Prospectus and submitting it with a check
payable to:
STRATUS FUND, Inc.
6801 S. 27th
PO Box 82535
Lincoln, Nebraska 68501-2535
For subsequent purchases, the name of your account and your account
number should be included with any purchase order to properly identify your
account. You may also pay for shares by bank wire. To do so, you must direct
your bank to wire immediately available funds directly to the Custodian as
indicated below:
1. Telephone the Fund (402) 476-3000 and furnish your name, your account
number and your telephone number as well as the amount being wired and the name
of the wiring bank. If you are opening a new account we will request additional
account information and will provide you with an account number.
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. Your bank
must furnish the full name of your account and the account number.
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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. If the shares you are purchasing by bank wire transfer represent an
initial purchase, complete a Purchase Application and mail it to the Fund. 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.
You will receive written confirmation of your 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.
MINIMUM INVESTMENTS
Except as provided under the Automatic Investment Plan, we require a
minimum initial aggregate investment of $1,000, unless waived by the
Distributor.
AUTOMATIC INVESTMENT PLAN
Under an automatic investment plan, money is withdrawn each month from
your predesignated bank account for investment in a Portfolio. The minimum
investment is $50 per Portfolio. By investing the same dollar amount each month,
you will purchase more shares when a Portfolio's net asset value is low and
fewer shares when the net asset value is high. While periodic investing can help
build significant savings over time, it does not assure a profit or protect
against loss in a declining market.
You must notify your account representative to establish an automatic
investment plan, and your bank must be a member of the Automated Clearing House.
You may revoke the plan at any time, but it may take up to 15 days from the date
we receive a written revocation notice to terminate the plan. Any purchases of
shares made during the period shall be considered authorized. If an automatic
withdrawal cannot be made from your predesignated bank account to provide funds
for automatic share purchases, your plan will be terminated.
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SELLING SHARES
You may redeem shares of the Portfolios, in any amount, at any time at
their net asset value next determined after your sale order is placed. To redeem
shares of the Portfolios, you may make a redemption request through your Smith
Hayes investment executive or other broker-dealer. A redemption request may be
made in writing if 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. In no event will the Fund make payment more than seven days after
receipt of a redemption request. 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. The
Fund may also delay payment of redemption proceeds 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. You may request that the Fund
transmit redemption proceeds by Federal Funds bank wire to a bank account
designated on your account application form, provided the bank wire redemptions
are in the amounts of $500 or more and you have provided all requisite account
information to the Fund.
INVOLUNTARY REDEMPTION
The Fund reserves the right to redeem the shares in your account at any
time if the net asset value of your account falls below $500 as the result of a
redemption or transfer request. You will be notified in writing that the value
of your account is less than $500 and you will be allowed 30 days to make
additional investments before the redemption is processed.
AUTOMATIC WITHDRAWAL PLAN
If you own shares of the Fund with a value of $5,000 or more, you may
elect to redeem a portion of your shares on a regular periodic (monthly,
quarterly or annual) basis. The minimum withdrawal amount is $100. Payment may
be made to you, a predesignated bank account, or to another payee. Under this
plan, sufficient shares are redeemed from your account in time to send
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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 your designated account. You may realize taxable gains or
losses where you redeem shares under the automatic withdrawal plan.
Purchasing additional shares concurrently with automatic withdrawals is
likely to be disadvantageous to you because of tax liabilities. Consequently,
the Portfolio will not normally accept additional purchase payments in single
amounts of less than $5,000 if you have this plan in effect. Any charges to
operate an automatic withdrawal plan will be assessed against your account when
each withdrawal is effected.
You must notify your account representative to establish an automatic
withdrawal plan. Forms must be properly completed and received at least 30 days
before the first payment date. You may terminate automatic withdrawal plan at
any time, by written notice.
EXCHANGING SHARES
Once payment for shares has been received (i.e., an account has been
established), you may exchange some or all of your shares for Retail Class A
shares of other Portfolios of the Fund.
Exchanges are made at net asset value next determined after receipt of
the exchange order 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 the 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, you exchange shares of a Portfolio for shares of
one of another Portfolio with a higher sales charge, you 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 you buy shares of a Portfolio and receive a sales charge waiver, you
will be deemed to have paid the sales charge for purposes of this exchange
privilege. In calculating any sales charge payable on an exchange, we 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, or to terminate the
exchange privilege, upon sixty days' notice.
You should contact the Distributor for instructions on how to exchange
shares. Exchanges will be made only after the Distributor receives proper
instructions in writing or by telephone for an established account. If the
Distributor receives an exchange request in good order by 4:00 p.m. Eastern time
on any business day, the exchange will ordinarily be effective on that day. To
make an exchange you must have received a current prospectus of the Portfolio
into which the exchange is being made before the exchange will be effected.
Each exchange of the shares of a Portfolio for the shares of another
Portfolio is actually a sale of shares of one Portfolio and a purchase of shares
in the other, which may produce a gain or loss
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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 you 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.
VALUING SHARES
A Portfolio's net asset value per share (NAV) is the value of a single
Portfolio share. The Portfolios generally determine their NAV on each day the
New York Stock Exchange is open for business. The New York Stock Exchange is
closed on all National Holidays and Good Friday. The calculation is made as of
the close of business of the New York Stock Exchange (currently 4:00 p.m.,
Eastern time) after the Portfolios have declared any applicable dividends.
Because the International Portfolio may invest in securities that are primarily
listed on foreign exchanges, the value of the International Portfolio's shares
may change on days when you will not be able to purchase or redeem shares.
The NAV for each of the Portfolios is determined by dividing the value
of the securities owned by the Portfolio plus any cash and other assets less all
liabilities by the number of Portfolio shares outstanding.
Net Asset Value = TOTAL ASSETS - LIABILITIES
-------------------------------------
Number of Shares Outstanding
For the purposes of determining the aggregate net assets of the
Portfolios, cash and receivables are valued at their face amounts. Interest is
recorded as accrued and dividends are 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. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
in good faith by the Board of Directors. With the approval of the Board of
Directors, the Portfolios may utilize a pricing service, bank, or broker-dealer
experienced in such matters to perform any of the above-described functions.
FUND DISTRIBUTION
SALES CHARGES
Your purchase of shares of the Portfolios is subject to a sales charge which
varies depending on the size of your purchase. The following table shows the
regular sales charges on Portfolio shares to a single purchaser.
33
<PAGE>
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
Sales Charge as Sales Charge as
a percent of a Percentage of
Amount of Purchase Offering Price Net Amount Invested
- --------------------------------------------------------------------------------
less than $50,000 3% 3.1%
$50,000 but less than $100,000 2.5% 2.6%
$100,000 but less than $250,000 1.5% 1.5%
$250,000 and over 0% 0%
- --------------------------------------- -------------------- ------------------
GROWTH PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERNATIONAL PORTFOLIO
Sales Charge as Sales Charge as
a percent of a Percentage of
Amount of Purchase Offering Price Net Amount Invested
- --------------------------------------------------------------------------------
less than $50,000 4.5% 4.7%
$50,000 but less than $100,000 3.5% 3.6%
$100,000 but less than $250,000 2.5% 2.6%
$250,000 and over 0% 0%
- --------------------------------------- -------------------- ------------------
REDUCTION OF SALES CHARGE: RIGHT OF ACCUMULATION.
In calculating the sales charge rates applicable to current purchases of
shares of the Portfolio you are 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 you notify the Distributor in writing
at the time of purchase of your prior purchase of Portfolio shares.
REINSTATEMENT PRIVILEGE
If you have redeemed shares of the Portfolio you have a one-time right
to reinvest the redemption proceeds in shares of the Portfolio at NAV as of the
time of reinvestment. 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. You must notify the Distributor at
the time your trade is placed that the transaction is a reinvestment.
34
<PAGE>
SALES CHARGE WAIVERS.
No sales charge is imposed on shares of the Portfolios
o issued in plans of reorganization, such as mergers, asset
acquisitions and exchange offers, to which the Fund is a party,
o 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.
RULE 12B-1 FEES
The Fund has adopted a distribution plan for the Retail Class A shares
of the Portfolios in accordance with the provisions of Rule 12b-1 under the
Investment Company Act that allows the Fund to pay distribution fees for the
sale and distribution of its shares.
The distribution plan provides for payment to the Distributor of a total
fee calculated and payable monthly, at the annual rate of up to 0.50% of the
value of the average daily net assets of such class. All of this fee may be
payable as a distribution fee.
Because these fees are paid out of the Fund's assets on an ongoing
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Portfolio distributes its income as follows:
Intermediate Government Bond Portfolio - declared and paid monthly
Government Securities Portfolio - declared and paid monthly
Growth Portfolio - declared and paid annually
Capital Appreciation Portfolio - declared and paid annually
International Portfolio - declared and paid annually
If you own Portfolio shares as of the record date of the distribution,
you will be entitled to receive the distribution. Each Portfolio makes
distributions of capital gains, if any, at least annually.
You will receive dividends and distributions in the form of additional
Portfolio shares unless you elect to receive payment in cash. To receive payment
in cash, you must notify your Smith Hayes investment executive or other
broker-dealer of your election. The taxable status of income
35
<PAGE>
dividends and/or net capital gains distributions is not affected by whether they
are reinvested or paid in cash.
TAX CONSEQUENCES
The Portfolios will each be treated as separate entities for federal
income tax purposes. The Fund has operated the Portfolios in a manner that
qualifies them as "regulated investment companies" as defined in the Internal
Revenue 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 Internal
Revenue 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. You are
urged to consult with your personal tax advisers.
FUND MANAGEMENT
INVESTMENT ADVISER AND SUB-ADVISER
Union Bank and Trust Company, 6801 S. 27th, P.O. Box 82535, Lincoln,
Nebraska 68501 serves as investment adviser to the Fund. Union Bank has been
managing the Fund since 1991 and as of June 30, 1999, had approximately $2
billion in assets under management. Union Bank has engaged Murray Johnstone
International, Inc., 11 West Nile Street, Glasgow G12PX United Kingdom, a
corporation organized under the laws of Scotland, to act as Sub-Adviser to the
International Portfolio.
36
<PAGE>
The Portfolios pay Union Bank monthly fees for investment advisory
services. For the fiscal year ended June 30, 1999, Union Bank received advisory
fees, expressed as a percentage of daily average net assets, of:
Intermediate Government Bond Portfolio .65%
Government Securities Portfolio .50%
Growth Portfolio .75%
Capital Appreciation Portfolio .56%
International Portfolio 1.15%
Murray Johnstone International, Inc. received from Union Bank a sub-advisory
fee, expressed as a percentage of daily average net assets, of .65%.
PORTFOLIO MANAGERS
INTERMEDIATE GOVERNMENT BOND PORTFOLIO, GOVERNMENT SECURITIES PORTFOLIO, GROWTH
PORTFOLIO, CAPITAL APPRECIATION PORTFOLIO
William S. Eastwood has been affiliated with Union Bank and Trust
Company and the management of the Fund since March of 1995. Prior to joining
Union Bank, Mr. Eastwood was statewide manager of trust investments for a
regional bank. Mr. Eastwood was responsible for the management of equity and
fixed become 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 Vice President/Portfolio Manager and has
been affiliated with Union Bank since 1988. Mr. Gross has been actively involved
in the management of the Fund since 1991. Mr. Gross holds the Chartered
Financial Analyst (CFA) professional designation.
INTERNATIONAL PORTFOLIO
James Clunie, BS (Hons), AIIMR, CFA is an investment manager for
international and global equity portfolios for clients in several countries, and
also manages Murray Johnstone's "SCOTS" active/passive portfolios. Mr. Clunie
maintains and develops Murray Johnstone's proprietary "Twenty Questions
Analysis," a numerical system for ranking countries in terms of investment
attractiveness. Mr. Clunie is a member of the Group Strategy team, which is
responsible for producing asset allocation guidelines for all Murray Johnstone
portfolios, and is head of the country allocation team for international
portfolios. Mr. Clunie is qualified as an Associate of the Institute of
Investment Management and Research (U.K. investment qualification) and as a
Chartered Financial Analyst (CFA). Mr. Clunie graduated with Honours in
Mathematics and Statistics from the University of Edinburgh, Scotland. He joined
Murray Johnstone in 1989, and has worked in various analytical and
business-development roles with the company, prior to his current position.
Andrew V. Preston, BA (Hons) graduated from Melbourne University where
he studied Economics and Oriental Studies, including Chinese and Japanese
languages. This was followed by post-graduate work at Ritsumeikan University in
Kyoto, Japan, prior to joining the Australian Department of Foreign Affairs. Mr.
Preston joined Murray Johnstone in January 1985 and has managed portfolios in
the United Kingdom, United States and Japanese markets. In 1992, Mr. Preston
joined Murray Johnstone International as a portfolio manager and a member of the
37
<PAGE>
Country Allocation Team. Mr. Preston was appointed a Director of MJI in January
1993. Mr. Preseton has specialized in Socially Responsible Investments since
1992 and was appointed Head of SRI in Murray Johnstone in 1996.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
Portfolio's financial performance for the period of the Portfolio's operations.
Certain information reflects financial results for a single Portfolio share. The
total returns in the tables represent the rate that an investor would have
earned (or lost) on an investment in the Portfolio (assuming reinvestment of all
dividends and distributions). This information has been audited by Deloitte &
Touche LLP, independent certified public accountants, whose report, along with
the Portfolio's financial statements, are included in the annual report, which
is available upon request.
38
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
INTERMEDIATE GOVERNMENT BOND PORTFOLIO - RETAIL CLASS SHARES
Year ended June 30, 1999 and for the period from January 27,
1998 (commencement of class shares) to June 30, 1998
Period
Ended
June 30,
1999 1998
NET ASSET VALUE: ------ --------
<S> <C> <C>
Beginning of period $10.59 $10.63
------ ------
Income from investment operations:
Net investment income 0.47 0.29
Net realized and unrealized loss on investments (0.09) (0.04)
------ ------
Total income from investment operations 0.38 0.25
Less distributions:
Dividends from net investment income (0.47) 0.29
Distributions from capital gains - -
Total distributions (0.97) 0.29
------ ------
End of period $10.50 (a) $10.59 (a)
====== ======
TOTAL RETURN 3.73% (a) 1.69% (a)(b)
===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $13,408 $29,240
Ratio of expenses to average net assets 1.46% 1.63% (c)
Ratio of net income to average net assets 4.45% 5.18%
Portfolio turnover rate - -
(a) Excludes maximum sales load of 3%.
(b) Total return is not annualized, as it may not be representative of the total
return for the year.
(c) Annualized for those periods less than twelve months in duration.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GOVERNMENT SECURITIES PORTFOLIO - RETAIL CLASS SHARES
Year ended June 30, 1999 and for the period from January 13,
1998 (commencement of class shares) to June 30, 1998
Period
Ended
June 30,
1999 1998
NET ASSET VALUE: ---- ---------
<S> <C> <C>
Beginning of period $9.89 $9.97
----- -----
Income from investment operations:
Net investment income 0.48 0.25
Net realized and unrealized loss on investments (0.09) (0.08)
------ ------
Total income from investment operations 0.39 0.17
Less distributions:
Dividends from net investment income (0.49) (0.25)
Distributions from capital gains - -
Total distributions (0.49) (0.25)
End of period $9.79 $9.89
===== =====
TOTAL RETURN 3.96% (a) 1.58% (a)(b)
===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $167,494 $139,164
Ratio of expenses to average net assets 1.10% 1.21% (c)
Ratio of net income to average net assets 4.83% 5.49% (c)
Portfolio turnover rate 18.66% 2.07%
(a) Excludes maximum sales load of 3%.
(b) Total return is not annualized, as it may not be representative of the total
return for the year
(c) Annualized for those periods less than twelve months in duration.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GROWTH PORTFOLIO - RETAIL CLASS SHARES
Year Ended June 30, 1999 and for the period from January 7,
1998 (commencement of class shares) to June 30, 1998
1999 Period
---- Ended
June 30,
1998
NET ASSET VALUE: ------=
<S> <C> <C>
Beginning of period $18.52 $15.86
------ ------
Income from investment operations:
Net investment income 0.00 0.04
Net realized and unrealized loss on investments 2.47 2.66
----- -----
Total income from investment operations 2.47 2.70
Less distributions:
Dividends from net investment income - (0.04)
Distributions from capital gains (1.48) -
Total distributions (1.48) (0.04)
End of period $19.51 (a) $18.52 (a)
====== ======
TOTAL RETURN 16.09% (a) 16.89% (a)(b)
====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $1,292,742 $784,176
Ratio of expenses to average net assets 1.35% 1.50% (c)
Ratio of net income to average net assets 0.01% 0.13%
Portfolio turnover rate 194.23% 137.03%
(a) Excludes maximum sales load of 4.5%.
(b) Total return is not annualized, as it may not be representative of the total
return for the year
(c) Annualized for those periods less than twelve months in duration.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CAPITAL APPRECIATION PORTFOLIO - RETAIL CLASS SHARES
Year Ended June 30, 1999 and for the period from January 7,
1998 (commencement of class shares) to June 30, 1998
1999 Period
---- Ended
June 30,
1998
NET ASSET VALUE: ------
<S> <C> <C>
Beginning of period $14.39 $13.21
------ ------
Income from investment operations:
Net investment income (0.10) (0.03)
Net realized and unrealized loss on investments (1.21) 1.21
------ ----
Total income from investment operations (1.31) 1.18
Less distributions:
Dividends from net investment income - -
Distributions from capital gains (0.04) -
Total distributions (0.04) -----
End of period $13.04 (a) $14.39 (a)
====== ======
TOTAL RETURN 9.07% (a) 8.93% (a)(b)
===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $243,894 $220,123
Ratio of expenses to average net assets 1.41% 1.25% (c)
Ratio of net income (loss) to average net assets (0.79%) (0.18%)
Portfolio turnover rate 109.49% 277.31%
(a) Excludes maximum sales load of 4.5%
(b) Total return is not annualized, as it may not be representative of the total
return for the year
(c) Annualized for those periods less than twelve months in duration.
</TABLE>
42
<PAGE>
FINANCIAL HIGHLIGHTS
INTERNATIONAL PORTFOLIO - RETAIL CLASS SHARES
Year Ended June 30, 1999 and for the period from January 7,
1998 (commencement of class shares) to June 30, 1998
Period
Ended
June 30,
1999 1998
NET ASSET VALUE: ----- ------
Beginning of period $11.75 $10.33
------ ------
Income from investment operations:
Net investment income 0.02 0.03
Net realized and unrealized loss on investments 0.09 1.42
---- ----
Total income from investment operations 0.11 1.45
---- ----
Less distributions:
Dividends from net investment income (0.02) (0.03)
Distributions from capital gains (0.22) -
------ -------
Total distributions (0.24) (0.03)
End of period $11.62(a) $11.75(a)
====== ======
TOTAL RETURN 1.07%(a) 13.88%(a)(b)
===== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $172,430 $125,157
Ratio of expenses to average net assets 1.83% 1.94% (c)
Ratio of net income to average net assets 0.19% 0.27%
Portfolio turnover rate 40.00% 52.92%
(a) Excludes maximum sales load of 4.5%.
(b) Total return is not annualized, as it may not be representative of the total
return for the year.
(c) Annualized for those periods less than twelve months in duration.
43
<PAGE>
BACK COVER PAGE
STRATUS FUND
RETAIL CLASS A SHARES
You can obtain more information about each Portfolio without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated November 1, 1999, includes detailed information about the Stratus
Fund Portfolios. The SAI is on file with the SEC and is incorporated by
reference into this prospectus. This means that the SAI, for legal purposes, is
a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list each Portfolio's holdings and contain information from the
Portfolio's managers about strategies, and recent market conditions and trends.
The reports also contain detailed financial information about the Portfolios.
TO OBTAIN MORE INFORMATION:
By Telephone: Call (402) 476-3000
By Mail: Stratus Fund, Inc.
6801 S. 27th
PO Box 82535
Lincoln, Nebraska 68501-2535
You can also obtain the SAI or the Annual and Semi-Annual Reports, as well as
other information about Stratus Fund, from the SEC's website
(HTTP://WWW.SEC.GOV). You may review and copy documents at the SEC Public
Reference Room in Washington, DC (for information call 1-800-SEC- 0330). You may
request documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section,
Washington, DC 20549- 6009. The Stratus Fund's Investment Company Act
registration number is 811-6259.
44
<PAGE>
APPENDIX III
STRATUS FUND DISCUSSION AND ANALYSIS
REPRODUCED BELOW IS A DISCUSSION OF THE PERFORMANCE OF THE
ACQUIRED PORTFOLIOS AND THE ACQUIRING PORTFOLIOS FOR THE YEAR
ENDED JUNE 30, 1999, THAT WAS PREPARED BY ITS OFFICERS AND UNION
BANK AND TRUST COMPANY AND INCLUDED IN ITS ANNUAL REPORT DATED
JUNE 30, 1999.
The economy continues to perform at a very high level with above average
growth and low inflation. Gross Domestic Product has recorded above average
growth with considerable variability from quarter to quarter. 1999's first
quarter GDP rose at a 4.3% pace while second quarter growth slowed to 2.3%.
Responsible for the slowing has been the draw down of inventories built during
the first quarter. Consumer fundamentals remain very strong and the industrial
side of the economy is doing better. International economies are showing signs
of bottoming out particularly those that were hurt by the Asian contagion.
Domestic economic growth could be around the 3% level in the second half of
1999. Planning and fears regarding Y2K could affect economic growth short term.
The positive economic climate has helped the stock market to perform
favorably through the first half of 1999. Big cap stocks performed better during
the first quarter, while leadership broadened during the second quarter with
value stocks, and small cap stocks doing significantly better. International
stocks saw mixed performance. In contrast to last year, Europe lagged while Asia
bounced back from the effects of the Asian contagion.
During the second quarter, the Dow Jones Industrial Index established a
series of new highs as money continued to pour into equity mutual funds. The
high for the first half of 1999 came on May 13th when the DJIA closed at 11,107.
This index stood at 10,970 on June 30, 1999.
The two bond funds, managed by Stratus, performed in line with other bond
funds with the same investment objective as higher interest rates reduced
returns. The Stratus Government Securities Portfolio achieved a total rate of
return of 1.4% this past fiscal year, while the Stratus Intermediate Government
Bond Portfolio appreciated 4.0%. For comparison purposes, the Merrill Lynch U.
S. Treasury Intermediate Term Index returned 2.4% during the recently completed
fiscal year.
The strategy employed by the Intermediate Government Bond Portfolio is to
buy only U.S. Government Obligations or money market instruments that invest
exclusively in U. S. Treasury Obligations. As a normal operating practice, the
Intermediate Government Bond Portfolio invests in a 1-5 year ladder of
maturities.
The strategy for the Government Securities Portfolio is essentially the
same regarding the use of high quality government securities. It differs in that
bonds as long as ten years may be used and the average maturity will generally
be greater. Corporate bonds of trust quality may also be used. Emphasis will be
on a total return as opposed to income generation and the average
Appendix III - page 1
<PAGE>
maturity will vary with existing and anticipated interest rates. The Stratus
Growth fund completed a successful fiscal year which also ended June 30, 1999.
With investors favoring large cap stocks most of the year, the Stratus Growth
Portfolio provided a total return of 16.3% for the fiscal year. The strategy
employed in this fund is to invest primarily in large capitalization stocks with
an emphasis on growth companies. The over weighting in technology helped
performance considerably as technology stocks were in favor most of the year.
Although the Growth fund did not match the performance of the S & P Index, it
did better than the majority of funds in its category. In the Wall Street
Journal's Mutual Funds Report for the second quarter of 1999, the Stratus Growth
fund earned an A ranking for one year performance versus comparable funds. Even
more importantly an A ranking for 3 years and 5 years was earned for the Stratus
Growth Portfolio.
The Capital Appreciation Portfolio, which invests primarily in smaller
capitalization stocks, returned (8.8%) for the year ended June 30, 1999. From
July 1998 to March 1999, smaller stocks continued their relative under
performance as the market remained concentrated on the stocks of larger
companies for much of the fiscal year. In the second quarter of 1999, the market
did begin to broaden its focus to include many secondary issues which would
generally prove beneficial for smaller companies and the Portfolio Fund
performance relative to the Russell 2000, up 1.4% for the year, was also
impacted by the Fund's substantial under weighting in speculative Internet
stocks, which fueled much of the Russell's rise in the first half of 1999. The
return on the S&P Small Cap Index was (2.3%) for the same time period.
Appendix III - page 2
<PAGE>
GROWTH PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIOS OF
STRATUS FUND, INC.
P.O. Box 82535
Lincoln, Nebraska 68501-2535
(402) 476-3000
STATEMENT OF ADDITIONAL INFORMATION
(2000 Special Meeting of Shareholders of Capital Appreciation Portfolio and
Intermediate Government Bond Portfolio)
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Combined Proxy Statement and Prospectus dated
May 1, 2000 of Stratus Fund, Inc. (the "Company") for use in connection with the
Special Meeting of Shareholders of Capital Appreciation Portfolio and
Intermediate Government Bond Portfolio (the "Acquired Funds") to be held on May
25, 2000. Copies of the Combined Proxy Statement and Prospectus may be obtained
at no charge by writing the Company at the address shown above or by calling
(402) 476-3000. Unless otherwise indicated, capitalized terms used herein and
not otherwise defined have the same meanings as are given to them in the
Combined Proxy Statement and Prospectus. A Statement of Additional Information
for the Company dated November 1, 1999, has been filed with the Securities and
Exchange Commission and is attached hereto as Appendix I which is incorporated
herein by this reference.
The date of this Statement of Additional Information is May 1, 2000.
TABLE OF CONTENTS
THE COMPANY.................................................................S-2
DESCRIPTION OF PERMITTED INVESTMENTS........................................S-2
DIRECTORS AND OFFICERS OF THE COMPANY.......................................S-2
ADVISORY AND MANAGEMENT - RELATED SERVICES AGREEMENTS AND PLANS OF
DISTRIBUTION.......................................................S-2
PORTFOLIO TRANSACTIONS......................................................S-2
DESCRIPTION OF SHARES.......................................................S-2
PURCHASE, REDEMPTION, AND PRICING OF SHARES.................................S-2
TAXES.......................................................................S-2
PERFORMANCE DATA............................................................S-3
FINANCIAL INFORMATION.......................................................S-3
Appendix I - Stratus Fund, Inc. Statement of Additional Information
Appendix II - Stratus Fund, Inc. Semiannual Report
Appendix III - Annual Report of Stratus Fund, Inc.
<PAGE>
THE COMPANY
This Statement of Additional Information relates to Stratus Fund, Inc. (the
"Company") and two of its investment portfolios, Growth Portfolio and Government
Securities Portfolio (the "Acquiring Funds"). The Company is registered as an
open-end management investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"). Growth Portfolio and Government Securities
Portfolio are separate series of shares of capital stock of the Company.
DESCRIPTION OF PERMITTED INVESTMENTS
For a discussion of the fundamental and nonfundamental investment policies of
the Acquiring Funds adopted by the Company's Board of Directors, see heading
"Additional Information About the Portfolios' Investment Objectives, Policies
and Risks" in the Company's Statement of Additional Information attached hereto
as Appendix I.
DIRECTORS AND OFFICERS OF THE COMPANY
For a disclosure of the names and a brief occupational biography of each of the
Company's officers and directors identifying those who are interested persons of
the Company as well as stating their aggregate renumeration, see heading
"Directors and Executive Officers" in the Company's Statement of Additional
Information attached hereto as Appendix I.
ADVISORY AND MANAGEMENT - RELATED SERVICES AGREEMENTS AND PLANS OF
DISTRIBUTION
For a discussion of the Company's advisory and management-related services
agreements and plans of distribution, see heading "Investment Advisory and Other
Services," in the Company's Statement of Additional Information attached hereto
as Appendix I.
PORTFOLIO TRANSACTIONS
For a discussion of the Company's brokerage policy, see heading "Portfolio
Transactions and Brokerage Allocations" in the Company's Statement of Additional
Information attached hereto as Appendix I.
DESCRIPTION OF SHARES
For a discussion of the Company's authorized securities and the characteristics
of the Company's shares of capital stock, see heading "Capital Stock" in the
Company's Statement of Additional Information attached hereto as Appendix I.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
For a discussion of the Company's valuation and pricing procedures and a
description of its purchase and redemption procedures, see headings "Investment
Advisory and Other Services - Distributor" and "Redemption of Shares and
Exchanges Between Classes" in the Company's Statement of Additional Information
attached hereto as Appendix I.
TAXES
For a discussion of any tax information relating to ownership of the Company's
shares, see heading "Tax Status" in the Company's Statement of Additional
information attached hereto as Appendix I.
S-2
<PAGE>
PERFORMANCE DATA
For a description and quotation of certain performance data used by the Company,
see heading "Calculations of Performance Data" in the Company's Statement of
Additional Information attached hereto as Appendix I.
FINANCIAL INFORMATION
The audited financial statements of GROWTH PORTFOLIO and GOVERNMENT SECURITIES
PORTFOLIO and the report thereon by Deloitte & Touche LLP, are set forth in the
Company's Annual Report dated June 30, 1999, attached hereto as Appendix III.
The unaudited interim financial statements for GROWTH PORTFOLIO and GOVERNMENT
SECURITIES PORTFOLIO for the six-month period ended December 31, 1999, are set
forth in the Semiannual Report of Stratus Fund, Inc. which is attached hereto as
Appendix II. .
The audited financial statements of CAPITAL APPRECIATION PORTFOLIO and
INTERMEDIATE GOVERNMENT BOND PORTFOLIO and the report thereon by Deloitte &
Touche LLP, are set forth in the Annual Report of Stratus Fund, Inc., dated June
30, 1999, which is incorporated herein by reference and attached hereto as
Appendix III. The unaudited interim financial statements for CAPITAL
APPRECIATION PORTFOLIO and INTERMEDIATE GOVERNMENT BOND PORTFOLIO for the
six-month period ended December 31, 1999, are set forth in the Semiannual Report
of Stratus Fund, Inc., which is attached hereto as Appendix II.
S-3
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<PAGE>
Appendix I
STATEMENT OF ADDITIONAL INFORMATION
STRATUS FUND, INC.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO
GROWTH PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERNATIONAL PORTFOLIO
November 1, 1999
This Statement of Additional Information is not a prospectus.
This Statement of Additional Information relates to the Prospectuses for the
Institutional Class shares and Retail Class A shares of the Intermediate
Government Bond Portfolio, Government Securities Portfolio, Growth Portfolio,
Capital Appreciation Portfolio and International Portfolio of Stratus Fund, Inc.
(the "Fund") dated November 1, 1999. A copy of the Prospectuses may be obtained
from the Fund by written request delivered to P.O. Box 82535 Lincoln, Nebraska,
68501-2535, or by calling (402) 483-9794.
<PAGE>
Table of Contents
PAGE
Introduction...................................................................2
Fund History...................................................................2
Additional Information About The Portfolios'
Investment Objectives, Policies And Risks.....................................2
Special Investment Methods and Related Risks...................................2
Directors and Executive Officers..............................................10
Investment Advisory and Other Services........................................12
Portfolio Transactions and Brokerage Allocations..............................19
Capital Stock.................................................................21
Redemption of Shares and Exchanges Between Classes............................25
Redemption....................................................................25
Calculations of Performance Data..............................................26
Financial Statements..........................................................28
Counsel ......................................................................28
Auditors......................................................................28
APPENDIX A RATINGS OF CORPORATE OBLIGATIONS, COMMERCIAL PAPER,
AND PREFERRED STOCK .......................................A-1
-i-
<PAGE>
Introduction
This Statement of Additional Information is intended to furnish
prospective investors with additional information concerning the investment
portfolios of the Fund (the "Portfolios"). The prospectus is intended to
describe to prospective investors the principal investment strategies of and
principal risks associated with investing in the Portfolios. This statement of
Additional Information expands on the information provided to you in the
Prospectus and contains additional information that does not appear in the
prospectus because it does not involve a principal strategy or risk.
FUND HISTORY
Stratus Fund, Inc. (the "Fund") is a Minnesota corporation operating as
an investment company, commonly called a mutual fund. The Fund has divided the
shares of its capital stock into separate categories that are referred to as
portfolios, each of which is operated as a separate diversified, open-end
management investment company having its own investment objectives and policies.
The Fund initially issued only one class of shares of each portfolio. Pursuant
to its Amended and Restated Articles of Incorporation which became effective on
December 31, 1997, all shares of the portfolios then outstanding were designated
Institutional Class shares and issuance of Retail Class A shares of each
portfolio was authorized. This Statement of Additional Information relates to
the Retail Class A shares and Institutional Class shares of the 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.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS' INVESTMENT
OBJECTIVES, POLICIES AND RISKS
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and the principal investment policies of the
Portfolios are described in the Prospectuses. Further information on the
investment policies and limitations of the Portfolios are described below.
SPECIAL INVESTMENT METHODS AND RELATED RISKS
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.
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<PAGE>
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. 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. 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 U.S. Government 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. A repurchase agreement involves the purchase by a Portfolio of U.S.
Government Securities with the condition that after a stated period of time
(usually seven days or less) the original seller will buy back the same
securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the Portfolio will seek
to sell the collateral, which action could involve costs or delays. In such
case, the Portfolio's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Portfolio would suffer
a loss.
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OPTIONS TRANSACTIONS
The Growth Portfolio, Capital Appreciation Portfolio and International
Portfolio may purchase put options, solely for hedging purposes, in order to
protect portfolio holdings in an underlying security against a substantial
decline in the market value of such holdings ("protective puts"). Such
protection is provided during the life of the put because the Portfolio may sell
the underlying security at the put exercise price, regardless of a decline in
the underlying security's market price. Any loss to the Portfolio is limited to
the premium paid for, and transaction costs paid in connection with, the put
plus the initial excess, if any, of the market price of the underlying security
over the exercise price. However, if the market price of such security
increases, the profit a Portfolio realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount for which the put
is sold.
The Growth Portfolio, Capital Appreciation Portfolio and International
Portfolio may also purchase call options solely for the purpose of hedging
against an increase in prices of securities that the Portfolio ultimately wants
to buy. Such protection is provided during the life of the call option because
the Portfolio may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Portfolio will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
The Growth Portfolio, Capital Appreciation Portfolio and International
Portfolio may only purchase exchange-traded put and call options.
Exchange-traded options are third party contracts with standardized strike
prices and expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while other options may
not.
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
The Growth Portfolio and Capital Appreciation Portfolio may invest in
convertible securities. Convertible securities are securities that may be
exchanged or converted into a predetermined number of the issuer's underlying
common shares at the option of the holder during a specified time period.
Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, or a combination of the features of these
securities. The investment characteristics of convertible securities vary
widely, allowing convertible securities to be employed for different investment
objectives. Convertible securities held by the Growth Portfolio and Capital
Appreciation Portfolio will be treated as common stocks for asset allocation
purposes.
4
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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 can be no 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.
SPECIAL SITUATIONS
The Growth Portfolio and Capital Appreciation Portfolio may periodically
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.
5
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MONEY MARKET INSTRUMENTS
The Government Securities Portfolio, Growth Portfolio and Capital
Appreciation Portfolio may invest in money market instruments which include:
(i) U.S. Treasury Bills;
(ii) U.S. Treasury Notes with maturities of 18 months or less;
(iii) U.S. Government Securities subject to repurchase agreements;
(iv) Obligations of domestic branches of U.S. banks (including
certificates of deposit and bankers' acceptances with maturities of 18 months or
less) which at the date of investment have capital, surplus, and undivided
profits (as of the date of their most recently published financial statements)
in excess of $10,000,000 and obligations of other banks or savings and loan
associations if such obligations are insured by the Federal Deposit Insurance
Corporation ("FDIC");
(v) Commercial paper which at the date of investment is rated A-1 by S&P
or P-1 by Moody's or, if not rated, is issued or guaranteed as to payment of
principal and interest by companies which at the date of investment have an
outstanding debt issue rated AA or better by S&P or Aa or better by Moody's;
(vi) Short-term (maturing in one year or less) corporate obligations
which at the date of investment are rated AA or better by S&P or Aa or better by
Moody's; and
(vii) Shares of no-load money market mutual funds (subject to the
ownership restrictions of the Investment Company Act of 1940). See "Other
Permitted Investments and Related Risks" in this Statement of Additional
Information.
The Growth Portfolio and Capital Appreciation Portfolio invest in money
market instruments only for cash management purposes.
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 Intermediate Government Bond 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.
OTHER PERMITTED INVESTMENTS AND RELATED RISKS
Although the Adviser and Sub-Adviser for the Fund does not currently
intend to do so, each Portfolio may make the following investments.
6
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SECURITIES OF OTHER INVESTMENT COMPANIES. Each Portfolio may invest in
securities issued by other investment companies to the extent permitted by the
Investment Company Act of 1940.
FORWARD FOREIGN CURRENCY CONTRACTS (INTERNATIONAL PORTFOLIO ONLY). A
forward contract involves an obligation to purchase or sell a specific currency
amount at a future date, agreed upon by the parties, at a price set at the time
of the contract. A Portfolio may also enter into a contract to sell, for a fixed
amount of U.S. dollars or other appropriate currency, an amount of foreign
currency having the approximate value of some or all of the Portfolio's
securities denominated in such foreign currency.
At the maturity of a forward contract, a Portfolio may either sell a
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader,
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Portfolio may realize a gain or loss from currency
transactions.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Futures contracts
provide for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and at a
specified price. An option on a futures contract gives the purchaser the right,
in exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. A Portfolio may use
futures contracts and related options for BONA FIDE hedging purposes, to offset
changes in the value of securities held or expected to be acquired, to minimize
fluctuations in foreign currencies, or to gain exposure to a particular market
or instrument. A Portfolio will minimize the risk that it will be unable to
close out a futures contract by only entering into futures contracts which are
traded on national futures exchanges.
Stock index futures are futures contracts for various stock indices that
are traded on registered securities exchanges. A stock index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made.
There are risks associated with these activities, including the
following: (1) the success of a hedging strategy may depend on an ability to
predict movements in the prices of individual securities, fluctuations in
markets and movements in interest rates, (2) there may be an imperfect or no
correlation between the changes in market value of the securities held by a
Portfolio and the prices of futures and options on futures, (3) there may not be
a liquid secondary market for a futures contract or option, (4) trading
restrictions or limitations may be imposed by an exchange, and (5) government
regulations may restrict trading in futures contracts and futures options.
ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be
disposed of within seven business days at approximately the price at which they
are being carried on the Portfolio's books. An illiquid security includes a
demand instrument with a demand notice period exceeding seven days, where there
is no secondary market for such security, and repurchase agreements with
durations (or maturities) over 7 days in length. Not more than 15% of a
Portfolio's total assets may
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be invested in illiquid securities. If as a result of changed circumstances,
more than 15% of a Portfolio's total assets is invested in illiquid securities,
the Adviser will take such action as it deems necessary in such manner as to
avoid adverse consequences to the Portfolio.
SHORT SALES -- Selling securities short involves selling securities the
seller does not own (but has borrowed) in anticipation of a decline in the
market price of such securities. To deliver the securities to the buyer, the
seller must arrange through a broker to borrow the securities and, in so doing,
the seller becomes obligated to replace the securities borrowed at their market
price at the time of replacement. In a short sale, the proceeds the seller
receives from the sale are retained by a broker until the seller replaces the
borrowed securities. The seller may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
A Portfolio may only sell securities short "against the box." A short
sale is "against the box" if, at all times during which the short position is
open, the Portfolio owns at least an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issuer as the securities that are sold short.
A Portfolio may also maintain short positions in forward currency
exchange transactions, which involve the Portfolio's agreeing to exchange
currency that it does not own at that time for another currency at a future date
and specified price in anticipation of a decline in the value of the currency
sold short relative to be currency that the Portfolio has contracted to receive
in the exchange. To ensure that any short position of a Portfolio is not used to
achieve leverage, a Portfolio establishes with its custodian a segregated
account consisting of cash or liquid, high grade debt securities equal to the
fluctuating market value of the currency as to which any short position is being
maintained.
INVESTMENT LIMITATIONS
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) invest in 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) with respect to 75% of the value of the total assets of
the Government Securities Portfolio, Growth Portfolio,
Capital Appreciation Portfolio and International
Portfolio, and with respect to 100% of the value of the
total assets of the Intermediate Government Bond
Portfolio, invest more than 5%
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of the market value of its total assets in the securities
of any one issuer, other than obligations of or
guaranteed by the U.S. Government or any of its agencies
or instrumentalities, except that each Portfolio may
purchase securities of other investment companies to the
extent permitted by applicable law or exemptive order;
(3) purchase the securities of any issuer if such purchase
would cause more than 5% of the voting securities, or
more than 10% of the securities of any class of such
issuer, to be held by the Portfolio, except that a
Portfolio may purchase securities of other investment
companies to the extent permitted by applicable law or
exemptive order;
(4) invest in companies for the purpose of exercising control
or influencing management;
(5) purchase or sell real estate, commodities or interests in
oil, gas or other mineral exploration or development
programs;
(6) make short sales of securities or purchase securities on
margin, except that a Portfolio (a) may obtain such
short-term credit as is necessary for the clearance of
purchases and sales of securities, (b) may make margin
payments in connection with transactions in financial
futures contracts and options thereon, and (c) may make
short sales of securities if at all times when a short
position is open it owns at least an equal amount of such
securities or owns securities comparable to or
exchangeable for at least an equal amount of such
securities;
(7) underwrite securities of other issuers;
(8) purchase or sell commodity contracts, except that a
Portfolio may, as appropriate and consistent with its
investment policies and other investment restrictions,
for hedging purposes, write, purchase or sell options
(including puts, calls and combinations thereof), write
covered call options, enter into futures contracts on
securities, securities indices and currencies, options on
such futures contracts, forward foreign currency exchange
contracts and forward commitments;
(9) 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;
(10) 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,
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nor purchase securities at any time borrowings exceed 5%
of its total assets; or
(11) 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 (10) above and
then securities mortgaged, hypothecated or pledged may
not exceed 5% of the respective Portfolio's total assets
taken at market value.
If a percentage restriction set forth under "Investment Objectives and
Strategies" 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.
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. The portfolio turnover rate for the Capital
Appreciation Portfolio was 109.49% and 194.23% for the Growth Portfolio for the
Fund's fiscal year ended June 30, 1999. 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. Portfolio turnover
will not be a limiting factor in making investment decisions. The portfolio
turnover rate for the Intermediate Government Bond Portfolio, Government
Securities Portfolio and International Portfolio was 0.00%, 18.66% and 40.00%
respectively for the Fund's fiscal year ended June 30, 1999.
DIRECTORS AND EXECUTIVE OFFICERS
The Fund is governed by a Board of Directors which is responsible for
protecting the interests of the Fund's shareholders under Minnesota law. The
Directors meet periodically throughout the year to oversee the Fund's
activities, review its performance, and review the actions of the Adviser.
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The names, addresses and principal occupations during the past five
years of the directors and executive officers of the Fund are given below:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE, ADDRESS POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
<S> <C> <C>
*Thomas C. Smith (54) Chief Financial Officer & Chairman, CONLEY SMITH, Inc., Lincoln, Nebraska;
200 Centre Terrace, Treasurer Vice President, Lancaster Administrative Services, Inc.,
1225 "L" Street Lincoln, Nebraska; Chairman and President,
Lincoln, Nebraska 68501 SMITH HAYES Financial Services Corporation Lincoln,
Nebraska; Chairman and President,
Consolidated Investment Corporation, Lincoln,
Nebraska; Vice President and
Director, Concorde Management and
Development, Inc., Lincoln, Nebraska.
*Michael S. Dunlap (36) Director, President and Executive Vice President and Director Union
4732 Calvert Street Secretary Bank and Trust Company, Lincoln, Nebraska;
Lincoln, Nebraska 68506 Director, Lancaster County Bank, Waverly,
Nebraska; and Unipac Service Corporation; Director,
National Education Loan Network, Inc.
Stan Schrier (64) Director President, Food 4 Less, Inc., a retail
11128 John Galt Blvd. grocery chain, and owner, Schrier-Lawson
Omaha, Nebraska 68137 Motor Center.
R. Paul Hoff (64) Director Physician and CEO of Seward Clinic,
311 Jackson P.C., Seward, Nebraska.
Seward, Nebraska 68434
Edson L. Bridges III (41) Director, Bridges Investment Fund, Inc.,
8401 W. Dodge Road, #256 Director a registered open end management investment
Omaha, Nebraska 68114 company, February, 1991 to present; Vice
President and Director of Bridges Investment
Counsel Inc., a registered investment adviser.
Jon Gross (30) Vice President Vice President, Union Bank and Trust Company,
4732 Calvert Street Lincoln, Nebraska; Trust Investment Officer, Union Bank
Lincoln, Nebraska 68506 and Trust Company, Lincoln, Nebraska, since 1991; Chief
Executive Officer, Lancaster Administration Services.
</TABLE>
*Interested directors of the Fund as defined under the Investment
Company Act of 1940 by virtue of their affiliation with Lancaster Administrative
Services, Inc., SMITH HAYES Financial Services Corporation and Union Bank and
Trust Company.
The following table represents the compensation amounts received for
services as a director of the Funds for the year ended June 30, 1999:
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COMPENSATION TABLE
Pension or
Retirement
Benefits Estimated Total
Accrued Annual Compensation
Aggregate as Part of Benefits From Fund
Name of Person, Compensation Fund Upon Paid to
POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS
-------- --------- -------- ---------- ---------
Thomas C. Smith, $0 $0 $0 $0
Director
Chief Financial
Officer & Treasurer
Michael S. Dunlap, $0 $0 $0 $0
Director, President &
Secretary
Stan Shrier, Director $4,000 $0 $0 $4,000
R. Paul Hoff, Director $4,000 $0 $0 $4,000
Edson L. Bridges III, $4,000 $0 $0 $4,000
Director
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL
Union Bank and Trust Company ("Union Bank"), 6801 S. 27th Street,
Lincoln, NE 68512 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. 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").
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 address is 200 Centre Terrace, 1225 "L" Street,
Lincoln, Nebraska, 68508.
INVESTMENT ADVISORY AGREEMENT AND SUB-ADVISORY AGREEMENT
Union Bank acts as the Adviser to the Portfolios, under Investment Advisory
Agreements (the "Advisory Agreements"). Union Bank is controlled by and is a
subsidiary of Farmers and
12
<PAGE>
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.
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 Advisory
Agreements are approved annually by the Board of Directors (including a majority
of the directors who are not parties to the Advisory Agreements, or interested
persons of any such parties (other than as directors of the Fund)). The Advisory
Portfolios were last approved by the Board of Directors on July 14, 1999.
MJI acts as Sub-Adviser to the International Portfolio pursuant to a
Sub-Advisory Agreement with the Adviser (the "Sub-Advisory Agreement"). The
Sub-Adviser is a wholly-owned subsidiary of United Asset Management Corporation.
The Sub-Advisory Agreement will 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
Sub-Advisory Agreement was last approved by the Board of Directors on July 14,
1999.
The Advisory Agreements and Sub-Advisory Agreement terminate
automatically in the event of their assignment. In addition, the Advisory
Agreements and the Sub-Adviser Agreement are terminable at any time, without
penalty, by the Board of Directors of the Fund or, 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 or
Sub-Adviser, as the case may be, on 60 days' written notice to the Fund.
ADVISORY FEES
Pursuant to the Advisory Agreements, the Intermediate Government Bond
Portfolio pays the Adviser 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 the Adviser a
monthly advisory fee equal on an annual basis to .50% and .75%, respectively, of
their daily average net assets. The Capital Appreciation Portfolio pays the
Adviser 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, calculated monthly, depending upon the performance of the
Portfolio relative to the Russell 2000 Stock 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:
13
<PAGE>
(1) The sum of the net asset value of a share of the Portfolio at the
end of the last 12 month period, plus the value per share during
such period, of all cash distributions made and capital gain
taxes paid or payable on undistributed realized long-term capital
gains (treated as reinvested shares of the Portfolio on the
record date of such distribution or the date on which provision
for such taxes is made, as the case may be) is compared to the
net asset value per share of the Portfolio at the beginning of
the period and the differences expressed as a percentage (the
"Portfolio's Percentage Change").
(2) The Portfolio's Percentage Change is compared to the percentage
change in the Index, which change is determined by adding the
level of the index at the end of the period, in accordance with
Securities and Exchange Commission guidelines, the value of cash
distributions on securities which comprise the Index, treating
the value of such distributions as reinvested in the Index based
on a monthly value supplied by Standard and Poor's and comparing
such adjusted level with the level of the Index at the beginning
of the period.
(3) The Portfolio's Percentage Change is then compared to the change
in Index for the period and the incentive adjustment as set forth
in the following table is multiplied by the net asset value of
the Portfolio averaged daily over the 12 month period and divided
by twelve. The incentive adjustment may not in any case exceed
1/12 of 2.40% of the average net asset value for the 12 month
period (equivalent on an annual basis to 2.40%).
Performance
Relative to Adviser Total
INDEX FEE
----- ----
-5.00% & under 0.40% Minimum Mgt Fee
-4.50% 0.50%
-4.00% 0.60%
-3.50% 0.70%
-3.00% 0.80%
-2.50% 0.90%
-2.00% 1.00%
-1.50% 1.10%
-1.00% 1.20%
-0.50% 1.30%
Basic Mgt Fee 0.00% 1.40%
0.50% 1.50%
1.00% 1.60%
1.50% 1.70%
2.00% 1.80%
2.50% 1.90%
3.00% 2.00%
3.50% 2.10%
4.00% 2.20%
4.50% 2.30%
5.00% 2.40% Maximum Mgt Fee
14
<PAGE>
Pursuant to the Advisory Agreement the International Portfolio pays the
Adviser 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.
For the years ended June 30, 1997, 1998 and 1999 (and the period October
1, 1996 to June 30, 1997 and the years ended June 30, 1998 and 1999 for the
International Portfolio) the Fund paid to Adviser the following amounts for
advisory services:
1999 1998 1997
---- ---- ----
Intermediate Government Bond Portfolio $ 23,320 $ 28,920 $38,269
Government Securities Portfolio 150,186 141,097 122,584
Growth Portfolio 467,752 347,146 160,343
Capital Appreciation Portfolio 39,016 15,676 17,500
International Portfolio 122,831 127,313 64,660
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"). The Underwriting Agreement is reviewed annually by
the Board of Directors and was last approved on July 14, 1999. Smith Hayes is a
wholly owned subsidiary of Consolidated Investment Corporation, a Nebraska
corporation, which is engaged through its subsidiaries in various aspects of the
financial services industry. Thomas C. Smith, a director of the Fund, is the
control person of Consolidated Investment Corporation.
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. In return for services
provided under the Underwriting Agreement, the Distributor is also entitled to
receive compensation for distribution related services under the Fund's
distribution plan described below.
Class A shares of the Portfolios are offered for sale to the public NAV
plus the applicable sales charge. The following chart reflects the total sales
charges paid in connection with the sale of Class A shares of each Portfolio and
the amount retained by the Distributor for the fiscal years ended June 30, 1999,
1998 and 1997 (and the fiscal years ended June 30, 1999 and 1998 and the period
October 1, 1996 to June 30, 1997 for the International Portfolio).
15
<PAGE>
Year Ended Period Ended
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Sales Amount Sales Amount
CHARGE RETAINED CHARGE RETAINED
Intermediate
Government Bond
Portfolio $ 0 $ 0 $ 601.24 $ 84.57
Government Securities
Portfolio 12.06 1.37 2,061.08 413.12
Growth Portfolio 11,870.30 1,844.97 49,468.84 10,954.26
Capital Appreciation
Portfolio 2,404.74 287.56 11,751.81 2,222.65
International Portfolio 1,125.65 132.17 8,381.82 1,736.34
The Distributor may reallow to dealers selling Portfolio shares a
portion of the sales charge collected by the Distributor in connection with
those sales. The table below shows the maximum amounts of such reallowances
expressed as a percentage of the offering price of each Portfolio's Class A
shares.
Reallowance as a
PORTFOLIO PERCENTAGE OF OFFERING PRICE
--------- ----------------------------
Intermediate Government Bond 2.75%
Portfolio
Government Securities Portfolio 2.75%
Growth Portfolio 4.00%
Capital Appreciation Portfolio 4.00%
International Portfolio 4.00%
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.
The Fund has adopted a Distribution Plan for the Retail Class A shares
of each Portfolio (the "Distribution Plan") in accordance with the provisions of
Rule 12b-1 under the 1940 Act which regulates circumstances under which an
investment company may directly or indirectly bear expenses relating to the
distribution of its shares. In this regard, the Board of Directors has
determined that the Distribution Plan is in the best interests of the Retail
Class A shareholders. Continuance of the Distribution Plan must be approved
annually by a majority of the Board of Directors, and by a majority of the
Directors who are not "interested persons" of the Fund as that term is defined
in the Investment Company Act of 1940 and who have no direct or indirect
financial
16
<PAGE>
interest in the operation of the Distribution Plan or in any agreements related
thereto ("Qualified Directors"). The Distribution Plan requires that quarterly
written reports of amounts spent under the Distribution Plan and the purposes of
such expenditures be furnished to and reviewed by the Directors. The
Distribution Plan may not be amended to increase materially the amount which may
be spent thereunder without approval by a majority of the outstanding Retail
Class A shares of the Portfolio affected. All material amendments of the
Distribution Plan will require approval by a majority of the Board of Directors
and of the Qualified Directors.
The Distribution Fee may be used by the Distributor to provide initial
and ongoing sales compensation to its investment executives and to other
broker-dealers in respect of sales of Retail Class A shares of the applicable
Portfolio and to pay for other advertising and promotional expenses in
connection with the distribution of such Retail Class A shares. These
advertising and promotional expenses include, by way of example but not by way
of limitation, costs of printing and mailing prospectuses, statements of
additional information and shareholders reports to prospective investors;
preparation and distribution of sales literature; advertising of any type; an
allocation of overhead and other expenses for the Distributor related to the
distribution of such Retail Class A sharers; and payments to, and expenses of,
officers, employees or representatives of the Distributor, or other
broker-dealers, banks or other financial institutions, and of any other persons
who provide support services in connection with the distribution of such shares,
including travel, entertainment and telephone expenses.
Payments under the Distribution Plan are not tied exclusively to the
expenses for distribution activities actually incurred by the Distributor, so
that such payments may exceed expenses actually incurred by the Distributor. The
Fund's Board of Directors will evaluate the appropriateness of the Distribution
Plan and its payment terms on a continuing basis and in doing so will consider
all relevant factors, including expenses borne by the Distributor and amounts it
receives under the Distribution Plan.
The Fund's Investment Adviser, Administrator and the Distributor may, at
their option and in their sole discretion, make payments from their own
resources to cover cost of additional shareholder servicing and distribution
activities.
For the fiscal year ended June 30, 1999 and the period ended June 30,
1998, the Retail Class A share classes of the Portfolios paid the Distributor
the following amounts:
1999 1998
---- ----
Intermediate Government Bond Portfolio $ 80 $ 28
Government Securities Portfolio 507 113
Growth Portfolio 3,079 505
Capital Appreciation Portfolio 734 162
International Portfolio 464 89
17
<PAGE>
The Distribution Plan adopted by the Retail Class A shareholders of the
Portfolio provides that the Fund will pay the Distributor a fee of up to .50% of
the average daily net assets of a Portfolio's Retail Class A shares which the
Distributor can use to compensate broker-dealer and service providers, including
the Distributor and its affiliates, which provide distribution related services
to Retail Class A shareholders. The Distribution first took effect on January 1,
1998.
ADMINISTRATOR
Lancaster Administrative Services, Inc., has been retained as the Fund's
administrator, transfer agent and dividend paying agent under a Transfer Agent
and Administrative Services Agreement with the Fund. The Administrator provides,
or contracts with others to provide, all necessary office facilities,
bookkeeping and recordkeeping services, dividend disbursing 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 is a wholly-owned
subsidiary of Farmers & Merchants Investments, Inc. and is an affiliate of the
Adviser.
The Portfolios paid the Administrator the following fees pursuant to the
Administration Agreement for the fiscal years ended June 30, 1999, 1998 and 1997
(and the fiscal years ended June 30, 1999 and 1998 and the period October 1,
1996 to June 30, 1997 for the International Portfolio).
1999 1998 1997
---- ---- ----
Intermediate Government Bond Portfolio $ 8,994 $11,159 $14,719
Government Securities Portfolio 75,276 70,529 61,292
Growth Portfolio 155,739 137,584 80,173
Capital Appreciation Portfolio 17,467 21,173 11,855
International Portfolio 26,690 27,751 14,057
The Administrator may enter into Sub-Administration Agreements with
various banks and financial institutions pursuant to which such banks and
financial institutions will provide subaccounting and other shareholder services
to their customers who invest in the Portfolios. These Sub-Administration
Agreements will provide for the payment of a fee of up to .15% 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.
CUSTODIAN
The Fund's Custodian is Union Bank. Under the Custodian Agreement, Union
Bank 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
18
<PAGE>
authorized persons. Union Bank 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 Bank 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 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 benefitting one specific managed fund or account. Normally, research
services obtained through managed funds or accounts investing in common stocks
would primarily benefit the managed funds or accounts which invest in common
stock; similarly, services obtained from transactions in fixed-income securities
would normally be of greater benefit to the managed funds or accounts which
invest in debt securities.
The Adviser and Sub-Adviser do not maintain any "formula" which must be
followed in connection with the placement of transactions. However, from time to
time, the Adviser or Sub- Adviser may elect to use certain brokers to execute
transactions in order to encourage them to provide research services which the
Adviser or Sub-Adviser anticipates will be useful. The Adviser or Sub-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
19
<PAGE>
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. 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, 1999, 1998 and 1997 (and the
fiscal years ended June 30, 1999 and 1998 and the period October 1, 1996 to June
30, 1997 for the International Portfolio), the Fund incurred brokerage
commissions in the following amounts:
20
<PAGE>
1999 1998 1997
---- ---- ----
Intermediate Government Bond Portfolio $ 0.00 $ 0.00 $ 0.00
Government Securities Portfolio 0.00 0.00 0.00
Growth Portfolio 277,935 306,029 165,611
Capital Appreciation Portfolio 26,922 47,137 62,542
International Portfolio 24,376 33,021 40,349
A portion of these commissions was paid to the Fund's Distributor as follows:
1999 1998 1997
---- ---- ----
Intermediate Government Bond Portfolio $ 0.00 $ 0 $ 0
Government Securities Portfolio 0.00 0 0
Growth Portfolio 0.00 0 0
Capital Appreciation Portfolio 26,842.08 60,612 50,410
International Portfolio 0.00 0 0
---------- ------- -------
$26,842.08 $60,612 $50,410
The Distributor was paid 8% of the aggregate brokerage commissions paid
in the fiscal year ended June 30, 1999. The remaining brokerage commissions were
paid to twelve other unaffiliated broker dealers. Of the aggregate dollar amount
of transactions involving payment of commissions, 5.5% were effected through the
Distributor in the fiscal year ended June 30, 1999. 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
CAPITAL STOCK
The Fund is authorized to issue a total of one billion shares of capital
stock, with a par value of $.001 per share. The Fund has divided the shares of
its capital stock into separate categories of common stock designated as the
Intermediate Government Bond Portfolio, Government Securities Portfolio, Growth
Portfolio, Capital Appreciation Portfolio and International Portfolio shares.
The Fund initially issued only one class of shares of each Portfolio. Pursuant
to its Amended and Restated Articles of Incorporation which became effective
December 31, 1997, all shares of the Portfolios then outstanding were designated
Institutional Class shares and issuance of Retail Class
21
<PAGE>
A shares of each Portfolio was authorized. The Fund's Amended and Restated
Articles of Incorporation designate 10 million shares to the Institutional Class
of the Intermediate Government Bond Portfolio, Government Securities Portfolio,
Capital Appreciation Portfolio and Growth Portfolio and 20 million shares to the
Institutional Class of the Growth Portfolio and to the Retail Class A class of
each Portfolio. The Board of Directors is empowered under the Fund's Articles of
Incorporation to issue other Portfolios or classes of shares 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. 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 Portfolio, 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 or only one class of shares of
a Portfolio, the shares of the Portfolio or class 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.
SHAREHOLDERS MEETINGS
The Fund does not intend to hold annual or periodically scheduled
regular meetings of shareholders unless it is required to do so. Minnesota
corporation law requires only that the Board of Directors convene shareholder
meetings when it deems appropriate. However, Minnesota law provides that if a
regular meeting of shareholders has not been held during the immediately
preceding 15 months, a shareholder or shareholders holding 3% or more of the
voting shares of the Fund may demand a regular meeting of shareholders by
written notice given to the chief executive officer or chief financial officer
of the Fund. Within 30 days after receipt of the demand, the Board of Directors
shall cause a regular meeting of shareholders to be called, which meeting shall
be held no later than 90 days after receipt of the demand, all at the expense of
the Fund.
In addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions, for all investment advisory
contracts and amendments thereto, and for approval and all amendments to Rule
12b-1 distribution plans. Finally, the Fund's Articles
22
<PAGE>
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.
PRINCIPAL HOLDERS OF SECURITIES
UBATCO & Co. as nominee of Union, owned of record, without voting rights
the number and percentage of the outstanding shares of the Portfolios as of June
30, 1999, 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. 475,147 99.73%
Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
Union Bank and Trust Company 40,130 8.42%
Profit Sharing & 401(k) Plan
4732 Calvert Street
Lincoln, NE 68506
Growth Portfolio UBATCO & Co. 3,283,095 96.63%
4732 Calvert Street
Lincoln, NE 68506
Including
Union Bank and Trust Company 185,117 5.45%
Profit Sharing & 401(k) Plan
4732 Calvert Street
Lincoln, NE 68506
Linweld 401K/PSP 198.269 5.84%
Portfolio
1225 "L" Street, Suite 600
Lincoln, NE 68508
Intermediate UBATCO & Co. 288,005 98.46%
Government Bond 4732 Calvert Street
Portfolio Lincoln, NE 68506
Including
23
<PAGE>
Portfolio Name & Address Shares % Ownership
--------- --------------- ------ -----------
Madonna Rehabilitation Hospital 38,795 13.25%
Agency Account
5401 South
Lincoln, NE 68506
Oak Creek Valley Bank PSP 34,016 11.63%
108 W. Second Street
Valparaiso, NE 60868
Government UBATCO & CO 3,012,324 100.00%
Securities Portfolio 4732 Calvert Street
Lincoln, NE 68506
Including
Union Bank and Trust Company 193,131 6.41%
Profit Sharing & 401(k) Plan
4732 Calvert Street
Lincoln, NE 68506
Linweld 401K/PSP 192,502 6.39%
1225 "L" Street, Suite 600
Lincoln, NE 68508
Crete Carrier 401(K) Plan 174,651 5.80%
400 NW 56th St.
Lincoln, NE 68528
International Portfolio UBATCO & CO 977,067 99.98%
4732 Calvert Street
Lincoln, NE 68506
Including
Linweld 401K/PSP 136,790 14.00%
1225 "L" Street, Suite 600
Lincoln, NE 68508
Crete/Sunflower 106,214 10.87%
Profit Sharing Plan
P.O. Box 82118
Lincoln, NE 68528
Union Bank and Trust Company 74,479 7.62%
Profit Sharing & 401(k) Plan
4732 Calvert Street
Lincoln, NE 68506
24
<PAGE>
On June 30, 1999, the Directors and officers of the Fund as a group
beneficially owned 39,542 shares or 1.31%, 28,374 shares or .84%, 8,730 shares
or 1.83% and 4,423 shares or .45%, respectively, of the Government Securities
Portfolio, Growth Portfolio, Capital Appreciation Portfolio and the
International Portfolio. Directors and officers owned .99% of the shares
outstanding in all Portfolios.
REDEMPTION OF SHARES AND EXCHANGES BETWEEN CLASSES
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.
EXCHANGES BETWEEN CLASSES
An exchange between Retail Class A shares and the Institutional Class
shares of a Portfolio is generally not permitted. However, exchanges between the
classes will be permitted if a Retail Class A shareholder becomes eligible to
purchase Institutional Class shares. For example, a Retail Class A shareholder
may establish a trust account that is eligible to purchase shares of the
Institutional Class. In this case, an exchange will be permitted between the
Retail Class A class of a Portfolio and the Institutional Class of the same
Portfolio at net asset value, without the imposition of a sales charge, fee or
other charge. An exchange from the Institutional Class of a Portfolio to the
Retail Class A class of that Portfolio will occur automatically when an
Institutional Class shareholder becomes ineligible to invest in the
Institutional Class, at net asset value and without the imposition of a sales
load, fee or other charge. The Fund will provide at least thirty days' notice of
any such exchange. After the exchange, the exchanged shares will be subject to
all fees applicable to the Retail Class A shares. The Fund reserves the right to
require you to complete an application or other documentation in connection with
the exchange.
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
25
<PAGE>
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
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,
26
<PAGE>
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 mortgages 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.
The yields of the Portfolio for the 30-day period ended June 30, 1999
were:
Institutional Retail Class A
Class Shares Shares
Intermediate Government Bond Portfolio 4.86% 4.42%
Government Securities Portfolio 5.32% 4.85%
Growth Portfolio .70% .39%
Capital Appreciation Portfolio -.17% -.43%
International Portfolio 1.00% .67%
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.
27
<PAGE>
The Portfolios may also provide a total return figure for the most recent
calendar quarter prior to the publication of the advertisement.
The average annual total returns of the Retail Class A shares of the
Portfolios for the one year, five years and inception to date ended June 30,
1999 are as follows:
ONE YEAR INCEPTION TO DATE
-------- -----------------
Intermediate Government Bond Portfolio 3.73 3.83
Capital Appreciation Portfolio - 9.07 - .64
Growth Portfolio 16.09 22.96
Government Securities Portfolio 3.96 3.81
International Portfolio 1.07 10.00
The average annual total returns of the Institutional shares of the
Portfolios for the one year, five years and inception to date ended June 30,
1999 are as follows:
ONE YEAR FIVE YEARS INCEPTION TO DATE
-------- ---------- -----------------
Intermediate Government Bond Portfolio 3.96 5.55 5.77
Capital Appreciation Portfolio - 8.79 12.16 7.40
Growth Portfolio 16.34 22.72 19.57
Government Securities Portfolio 4.32 6.05 4.62
International Portfolio 1.40 0.00 7.64
FINANCIAL STATEMENTS
The Fund hereby incorporates by reference the financial statements and
related information contained in the Fund's Annual Report dated June 30, 1999.
The Fund's Annual Report is available upon request to the Fund without charge.
COUNSEL
Ballard Spahr Andrews & Ingersoll, LLP serves as counsel to the Fund.
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.
28
<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.
A-1
<PAGE>
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.
A-2
<PAGE>
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.
A-3
<PAGE>
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.
A-4
<PAGE>
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.
A-5
<PAGE>
Appendix II
STRATUS FUND, INC.
GROWTH
GOVERNMENT SECURITIES
CAPITAL APPRECIATION
INTERMEDIATE GOVERNMENT BOND
INTERNATIONAL
SEMI-ANNUAL REPORT
DECEMBER 31, 1999
<PAGE>
GROWTH INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GROWTH INSTITUTIONAL PORTFOLIO AND THE S&P 500 INDEX
AVG. ANNUAL RETURN 12/31/99 VALUE
- ----------------- ---------------------------
1 YEAR 22.41% GROWTH INSTITUTIONAL $30,831.07
5 YEAR 24.36% S&P 500 $36,315.63
INCEPTION 19.80%
- --------------------------------------------------------------------------------
GROWTH RETAIL PORTFOLIO
GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GROWTH RETAIL PORTFOLIO AND THE S&P 500 INDEX
RETURN * 12/31/99 VALUE
- ----------------- ---------------------------
1 YEAR 22.04% GROWTH RETAIL $14,323.68
5 YEAR - S&P 500 $15,584.65
INCEPTION 22.71%
- --------------------------------------------------------------------------------
Results for the Retail Shares reflect payment of a maximum sales charge of 4.5%
on the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Growth Portfolio Institutional Shares for the period October 8, 1993 (inception)
through December 31, 1999
Growth Portfolio Retail Shares for the period January 7, 1998 (inception)
through December 31, 1999
1
<PAGE>
GOVERNMENT SECURITIES INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GOVERNMENT SECURITIES INSTITUTIONAL PORTFOLIO AND THE
MERRILL LYNCH U.S. TREASURY INTER-TERM INDEX
AVG. ANNUAL RETURN 12/31/99 VALUE
- ------------------ -------------------------------------
1 YEAR 1.77% GOVERNMENT SECURITIES INSTITUTIONAL $13,124.12
5 YEAR 6.33% MERRILL LYNCH U.S. TREASURY
INCEPTION 4.46% INTER-TERM BOND $13,464.74
- --------------------------------------------------------------------------------
GOVERNMENT SECURITIES RETAIL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GOVERNMENT SECURITIES RETAIL PORTFOLIO AND THE
MERRILL LYNCH U.S. TREASURY INTER-TERM INDEX
RETURN * 12/31/99 VALUE
- ------------------ -------------------------------------
1 YEAR 1.49% GOVERNMENT SECURITIES RETAIL $10,364.48
5 YEAR - MERRILL LYNCH U.S. TREASURY
INCEPTION 3.43% INTER-TERM BOND $10,723.63
Results for the Retail Shares reflect payment of a maximum sales charge of
3% on the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Government Securities Portfolio Institutional Shares for the period
October 8, 1993 (inception) through December 31, 1999.
Government Securities Portfolio Retail Shares for the period
January 13, 1998 (inception) through December 31, 1999.
2
<PAGE>
CAPITAL APPRECIATION INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CAPITAL APPRECIATION INSTITUTIONAL PORTFOLIO AND THE RUSSELL 2000
AVG. ANNUAL RETURN 12/31/99 VALUE
- ------------------ ------------------------------------
1 YEAR 4.34%
5 YEAR 13.07% CAPITAL APPRECIATION INSTITUTIONAL $16,934.45
INCEPTION 7.83% RUSSELL 2000 $25,339.22
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION RETAIL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CAPITAL APPRECIATION RETAIL PORTFOLIO AND THE RUSSELL 2000
RETURN * 12/31/99 VALUE
- ------------------ ------------------------------------
1 YEAR 3.97%
5 YEAR CAPITAL APPRECIATION RETAIL $10,061.97
INCEPTION 2.67% RUSSELL 2000 $11,863.08
Results for Retail Shares reflect payment of a maximum sales charge of 4.5%
on the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Capital Appreciation Portfolio Institutional Shares for the period
January 4, 1993 (inception) through December 31, 1999.
Capital Appreciation Portfolio Retail Shares for the period
January 7, 1998 (inception) through December 31, 1999.
3
<PAGE>
INTERMEDIATE GOVERNMENT BOND INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERMEDIATE GOVERNMENT BOND INSTITUTIONAL PORTFOLIO AND THE
MERRILL LYNCH U.S. TREASURY INTER-TERM INDEX
AVG. ANNUAL RETURN 12/31/99 VALUE
- ------------------ ------------------------------------------
1 YEAR 2.03% INTERMEDIATE GOVERNMENT BOND INSTIT. $16,008.97
5 YEAR 5.89% MERRILL LYNCH U.S. TREASURY
INCEPTION 5.60% INTER-TERM BOND $17,286.83
- --------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND RETAIL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERMEDIATE GOVERNMENT BOND RETAIL PORTFOLIO AND THE
MERRILL LYNCH U.S. TREASURY INTER-TERM INDEX
RETURN * 12/31/99 VALUE
- ------------------ ------------------------------------------
1 YEAR 1.74% INTERMEDIATE GOVERNMENT BOND RETAIL $10,362.08
5 YEAR MERRILL LYNCH U.S. TREASURY
INCEPTION 3.49% INTER-TERM BOND $10,723.63
Results for Retail Shares reflect payment of a maximum sales charge of 3% on
the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Intermediate Government Bond Portfolio Institutional Shares for the period
May 15, 1991 (inception) through December 31, 1999.
Intermediate Government Bond Portfolio Retail Shares for the period
January 27, 1998 (inception) through December 31, 1999.
4
<PAGE>
INTERNATIONAL INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL INSTITUTIONAL PORTFOLIO AND THE MORGAN STANLEY INTERNATIONAL
AVG. ANNUAL RETURN 12/31/99 VALUE
- ------------------ ------------------------------------------
1 YEAR 17.38% INTERNATIONAL INSTITUTIONAL PORTFOLIO $13,698.40
5 YEAR - MORGAN STANLEY INTERNATIONAL $15,106.39
INCEPTION 10.17%
- --------------------------------------------------------------------------------
INTERNATIONAL RETAIL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL RETAIL PORTFOLIO AND THE MORGAN STANLEY INTERNATIONAL
RETURN* 12/31/99 VALUE
- ------------------ ------------------------------------------
1 YEAR 17.11% INTERNATIONAL RETAIL PORTFOLIO $12,292.02
5 YEAR MORGAN STANLEY INTERNATIONAL $14,892.70
INCEPTION 13.59%
Results for Retail Shares reflect payment of a maximum sales charge of 4.5%
on the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and
assumes reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
International Portfolio Institutional Shares for the period October 1, 1996
(inception) through December 31, 1999.
International Portfolio Retail Shares for the period January 7, 1998 (inception)
through December 31, 1999.
5
<PAGE>
STRATUS FUND, INC.
Schedule of Investments
December 31, 1999
GROWTH PORTFOLIO
Percent
of Net Market
Shares COMMON STOCK - 97.30% Assets Value
------ --------------------- ------ -----
Aerospace/Defense 2.00%
-----------------
24,000 Honeywell International, Inc. $1,384,500
Broadcasting/Media 1.19%
------------------
15,000 Tribune Company 825,938
Chemicals 1.38%
---------
25,000 Great Lakes Chemical Corp 954,688
Computer Related 10.38%
----------------
7,000 Analog Devices, Inc.* 651,000
9,000 Cisco Systems, Inc.* 964,125
10,000 International Business Machine Corp. 1,080,000
22,000 Microsoft Corp.* 2,568,500
20,000 Parametric Technology, Inc.* 541,250
18,000 Sun Microsystems, Inc.* 1,393,875
---------
7,198,750
Electronics 9.10%
-----------
18,000 Intel Corp. 1,481,625
25,000 JD Edwards & Co.* 746,875
11,000 Phillips Electric 1,485,000
9,000 Solectron Corp.* 856,125
18,000 Texas Instruments, Inc. 1,743,750
---------
6,313,375
Entertainment/Leisure 2.07%
---------------------
30,000 Carnival Corp. Class A 1,434,375
Financial Services 6.71%
------------------
11,000 American Express, Co. 1,828,750
28,000 Citigroup, Inc. 1,555,750
30,000 SLM Holding Corp. 1,267,500
---------
4,652,000
6
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
December 31, 1999
GROWTH PORTFOLIO
Percent
of Net Market
Shares Assets Value
- -------- ------- ------
Forest Products/Paper 1.69%
---------------------
18,000 Kimberly Clark Corp $1,174,500
Industrial Services 2.06%
-------------------
20,000 Ecolab, Inc. 782,500
5,000 Corning, Inc. 644,688
-------
1,427,188
Insurance 4.31%
---------
18,000 American General Corp. 1,365,750
15,000 American International Group 1,621,875
---------
2,987,625
Iron/Steel 1.98%
----------
25,000 Nucor Corp. 1,370,313
Machine/Tools 4.70%
-------------
30,000 Dover Corp 1,361,250
15,000 Applied Materials, Inc.* 1,900,313
---------
3,261,563
Multimedia 0.84%
----------
8,000 Time Warner, Inc. 579,500
Manufacturing 4.31%
-------------
11,000 General Electric Co. 1,702,250
33,000 Tyco International Ltd. 1,282,875
---------
2,985,125
Medical Supplies/Service 3.09%
------------------------
20,000 Baxter International, Inc. 1,256,250
12,000 Cardinal Health, Inc. 574,500
6,000 Visx, Inc. 310,500
-------
2,141,250
7
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
December 31, 1999
GROWTH PORTFOLIO
Percent
of Net Market
Shares Assets Value
- -------- ------- ------
Metals/Mining 2.63%
-------------
22,000 Alcoa, Inc. $1,826,000
Oil Company-Integrated 4.30%
----------------------
37,000 Exxon Corp. 2,980,809
Packaging/Container 2.10%
-------------------
20,000 Avery Dennison 1,457,500
Paper/Related Products 1.13%
----------------------
14,000 International Paper 790,125
Pharmaceutical/Medical 4.37%
----------------------
18,000 Bristol-Myers Squibb, Co. 1,155,375
8,000 Eli Lilly, Co. 532,000
20,000 Merck & Company, Inc. 1,341,250
---------
3,028,625
Retail Store/Apparel 1.59%
--------------------
15,000 Dayton Hudson 1,101,563
Retail Store 6.10%
------------
26,000 Circuit City Stores-Circuit City Group* 1,171,625
16,000 Costo Companies, Inc. 1,460,000
40,000 CVS Corp. 1,597,500
---------
4,229,125
Telecommunications 8.35%
------------------
14,000 GTE Corp. 987,875
22,000 Nortel Networks Corp. 2,222,000
20,000 Vodapone Airtough PLC 990,000
30,000 MCI Worldcom, Inc.* 1,591,875
---------
5,791,750
8
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
December 31, 1999
GROWTH PORTFOLIO
Percent
of Net Market
Shares Assets Value
- -------- ------- ------
Telecommunications Equipment 8.92%
----------------------------
14,000 Nokia Corp. $2,660,000
20,000 Qualcomm, Inc. 3,522,500
---------
6,182,500
Transportation 1.17%
--------------
50,000 Southwest Airlines Co. 809,375
Utilities/Telecommunication 0.83%
---------------------------
7,000 Alltel Corp 578,813
-------
Total investment in securities
(cost $46,584,224) 97.30% $67,466,875
Cash equivalents 3.54% 2,478,798
Other assets, less liabilities (0.84%) (605,106)
------- -----------
NET ASSETS 100.00% $69,340,567
======= ===========
*Indicates nonincome-producing security
9
<PAGE>
STRATUS FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
GOVERNMENT SECURITIES PORTFOLIO
Percent
Principal of Net Market
Amount U.S. Government Securities Assets Value
- ---------- --------------------------------- --------- ----------
$1,000,000 Federal Home Loan Bond 6.90% due 8/23/04 78.42% $989,787
2,000,000 Federal Home Loan Bond 6.055% due 10/15/02 1,969,672
2,000,000 Federal Home Loan Bond 5.80% due 8/24/01 1,976,198
1,000,000 Federal National Mtg. Assn. 6.2% due 6/6/00 1,000,070
2,000,000 Federal National Mtg. Assn. 6.35% due 6/10/05 1,952,790
1,000,000 Federal National Mtg. Assn. 5.10% due 11/29/00 988,791
3,000,000 U.S. Treasury Note 6.50% due 5/31/01 3,013,594
2,000,000 U.S. Treasury Bond 6.625% due 3/31/02 2,014,063
3,000,000 U.S. Treasury Bond 6.375% due 1/15/00 3,000,000
3,000,000 U.S. Treasury Bond 5.75% due 8/15/03 2,941,406
3,000,000 U.S. Treasury Bond 5.75% due 10/31/00 2,993,906
2,000,000 U.S. Treasury Bond 5.50% due 12/31/00 1,988,750
---------
24,829,027
Corporate Bonds 17.02%
---------------
1,000,000 Ford Motor Credit 6.70% due 7/16/04 979,345
1,000,000 Northern Trust Company 6.625% due 10/01/02 980,429
1,500,000 Wachovia 6.7% due 6/21/04 1,478,042
1,000,000 Walmart 6.55% due 8/10/04 984,408
1,000,000 Xerox Europe 5.75% due 5/15/02 965,076
-------
5,387,300
Total investment in securities
(cost $30,438,481) 95.44% $30,216,327
Cash equivalents 3.14% 993,119
Other assets, less liabilities 1.42% 452,153
------- -------
TOTAL NET ASSETS 100.00% $31,661,599
======= ===========
10
<PAGE>
STRATUS FUND
Schedule of Investments
December 31, 1999
CAPITAL APPRECIATION PORTFOLIO
Percent
of Net Market
Shares COMMON STOCK - 93.88% Assets Value
------ --------------------- ------ -----
Aerospace/Defense 1.70%
-----------------
5,000 Primex Technologies, Inc. $103,750
Airlines 2.39%
--------
5,200 SkyWest, Inc. 145,600
Broadcasting/Media 1.19%
------------------
4,000 Ackerley Group, Inc. 72,500
Commercial Services 2.21%
-------------------
10,000 Mail-Well, Inc.* 135,000
Computer Related 30.56%
----------------
1,500 Advent Software* 96,656
4,000 Affiliated Computer, Inc.* 184,000
6,000 Complete Business Solutions, Inc.* 150,750
7,000 Ciber, Inc.* 192,500
9,000 Dianon Systems, Inc.* 123,750
2,600 Micros Systems, Inc.* 192,400
1,300 Mercury Interactive Corp* 140,319
2,500 PSINet, Inc.* 154,375
5,500 Symantec Corp.* 322,438
4,000 Transaction Systems* 112,000
5,000 Veritas DGC, Inc.* 70,000
3,500 Wind River Systems, Inc.* 128,188
-------
1,867,373
Cosmetics/Personal Care 0.98%
-----------------------
5,000 Orthodontic Centers of America, Inc.* 59,688
Electrical Equipment 4.18%
--------------------
6,000 C & D Tech, Inc. 255,000
11
<PAGE>
STRATUS FUND
Schedule of Investments (continued)
December 31, 1999
CAPITAL APPRECIATION PORTFOLIO
Percent
of Net Market
Shares Assets Value
- -------- ------- ------
Electronics 2.55%
-----------
3,500 Technitrol, Inc. $155,750
Educational Services 1.06%
--------------------
5,000 Sylvan Learning Systems* 65,000
Financial Services 8.59%
------------------
4,000 Cullen/Frost Bankers, Inc.* 103,000
6,000 Oriental Financial Group 132,375
1,500 SEI Investments, Co. 178,523
4,000 Southwest Securities Group, Inc.* 109,500
-------
523,398
Food/Berverage/Tobacco 2.47%
----------------------
9,000 U.S. Foodservice* 150,750
Food Processing 1.11%
---------------
5,600 Pilgrims Pride Corp 46,550
3,300 Pilgrims Pride Corp-Class A 21,244
------
67,794
Household Products/Wares 3.22%
------------------------
3,250 Ethan Allen Interiors, Inc. 104,203
6,000 Shaw Industries, Inc.* 92,625
------
196,828
Human Resources 2.43%
---------------
6,000 Interim Services* 148,500
Iron/Steel 1.24%
----------
4,000 Ak Steel Holding Corp. 75,500
12
<PAGE>
STRATUS FUND
Schedule of Investments (continued)
December 31, 1999
CAPITAL APPRECIATION PORTFOLIO
Percent
of Net Market
Shares Assets Value
- -------- ------- ------
Manufacturing 3.90%
-------------
6,000 Ispat International 96,750
3,000 USG Corp. 141,375
-------
238,125
Medical Supplies/Services 2.68%
-------------------------
7,000 Renal Care Group, Inc.* $163,625
Oil Refining & Marketing 1.14%
------------------------
6,000 Tesoro Petroleum Corp* 69,375
Pharmaceutical/Medical 6.16%
----------------------
5,000 Advance Paradigm, Inc.* 107,813
1,400 IDEC Pharmaceuticals Corp* 137,550
3,000 Jones Pharma, Inc. 130,313
-------
375,676
Publishing/Printing 0.71%
-------------------
2,900 Consolidated Graphics* 43,319
Retail Store 11.37%
------------
4,000 Ann Taylor Stores* 137,750
7,000 BJ's Wholesale Club* 255,500
6,200 Zale Corp.* 299,925
-------
693,175
Utilities-Electric 2.04%
------------------
5,500 Empire District Electric Co 124,438
-------
Total investment in securities
(cost $4,520,765) 93.88% $5,730,164
Cash equivalents 6.15% 375,452
Other assets, less liabilities (0.03%) (2,207)
------- -------
NET ASSETS 100.00% $6,103,409
======= ==========
*Indicates nonincome-producing security
13
<PAGE>
STRATUS FUND
Schedule of Investments
December 31, 1999
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Percent
Principal of Net Market
Amount Government Agency Bonds Assets Value
- --------- ------------------------------ ------- -------
$100,000 U.S. Treasury Bill 4.84% due 1/13/00 93.88% $99,840
500,000 U.S. Treasury Bond 6.25% due 1/31/02 499,922
500,000 U.S. Treasury Bond 7.125% due 2/29/00 501,484
500,000 U.S. Treasury Bond 6.125% due 7/31/00 500,859
500,000 U.S. Treasury Bond 6.25% due 10/31/01 500,079
---------
2,102,184
Total investment in securities
(cost $2,101,268) 93.88% $2,102,184
Cash equivalents 4.25% 95,091
Other assets, less liabilities 1.87% 42,066
----- ----------
TOTAL NET ASSETS 100.00% $2,239,341
======= ==========
14
<PAGE>
STRATUS FUND
Schedule of Investments
December 31, 1999
INTERNATIONAL PORTFOLIO
Percent
of Net Market
Shares Common Stock - 98.83% Assets Value
------ --------------------- ------ -----
Auto/Truck/Parts 3.11%
----------------
950 Bridgestone Corp. ADR $208,832
4,300 Hino Motors Ltd ADR* 142,836
-------
351,668
Chemicals 2.67%
---------
4,200 Imperial Chemical 178,763
3,900 Quimica Minera Chili SA ADR 123,094
-------
301,857
Comercial Services 5.05%
------------------
2,600 Secom Limited ADR 571,540
Computer Related 11.32%
----------------
2,000 Equant NV* 224,000
2,000 Fujitsu Limited ADR 455,278
6,100 Sap Ag* 317,581
2,100 TDK Corp 284,156
-------
1,281,015
Diversified Operations 6.43%
----------------------
7,919 Barlow Ltd ADR 56,972
15,600 Vivendi Sp ADR 280,352
20,800 Kawasaki Industries Ltd ADR 110,548
2,000 Telecom Italia ADR 280,000
-------
727,872
Electronics 5.16%
-----------
1,100 Matsushita Electric Industry Co., Ltd ADR 306,900
1,200 Omron Corp ADR 276,684
-------
583,584
15
<PAGE>
STRATUS FUND
Schedule of Investments (Continued)
December 31, 1999
INTERNATIONAL PORTFOLIO
Percent
of Net Market
Shares Assets Value
- -------- ------ -----
Financial Services 21.45%
------------------
6,000 Allied Irish Banks ADR $126,750
2,500 Barclays Plc ADR 287,813
10,485 Banco Frances Del Rio De La Plata S.A. ADR 248,363
4,000 Banque National Paris ADR 367,245
2,800 Deutsche Bank ADR 235,321
8,000 San Paolo IMI Spa 219,000
3,050 National Australia Bank Ltd ADR 232,563
7,000 Societe Generale ADR 324,146
1,500 Sumitomo Bank ADR 205,022
6,000 Uniao De Bancos S.A. 180,750
-------
2,426,973
Holding Company 1.15%
---------------
12,805 South Africa Brewing ADR 130,181
Index Series 1.67%
------------
4,600 Webs-Italy Index Series 115,000
8,000 Webs-Singapore Index Series 73,500
------
188,500
Insurance 5.51%
---------
5,596 Allied Zurich Plc ADR 132,401
2,024 Aegon N.V. ADR 193,292
3,300 Axa Spon ADR* 234,300
5,500 Liberty Life Association of Africa ADR 63,418
------
623,411
Machinery/Equipment 2.12%
-------------------
1,000 Mannesmann Ag Spon ADR 240,052
16
<PAGE>
STRATUS FUND
Schedule of Investments (Continued)
December 31, 1999
INTERNATIONAL PORTFOLIO
Percent
of Net Market
Shares Assets Value
- -------- ------- ------
Manufacturing 1.77%
-------------
14,200 Olympus Opitcal ADR 200,469
Medical Supplies/Services 4.94%
-------------------------
700 Banyu Pharmacuetical Ltd ADR $216,794
2,000 Roche Holdings Ltd ADR* 236,142
1,650 Smithkline Beecham ADR 106,322
-------
559,258
Metals/Mining 1.09%
-------------
5,000 SKF AB Spon ADR 123,750
Oil-Field Services 1.20%
------------------
7,600 Petroleum Geo Services ADR* 135,375
Oil Exploration/Production 1.22%
--------------------------
2,000 Total SA Sponsor ADR 138,500
Oil/Gas Drilling 2.93%
----------------
2,000 Eni Spa ADR 110,250
4,500 Shell Transport & Trading Company ADR 221,625
-------
331,875
Oil Company-Integrated 2.70%
----------------------
11,900 Petrolio Brasileiro ADR 305,211
Pharmaceutical/Medical 2.97%
----------------------
4,600 Novartis AG ADR 335,934
17
<PAGE>
STRATUS FUND
Schedule of Investments (Continued)
December 31, 1999
INTERNATIONAL PORTFOLIO
Percent
of Net Market
Shares Assets Value
- -------- ------- ------
Publishing/Printing 2.15%
-------------------
10,200 Elsevier NV Spon ADR 243,525
Real Estate 3.02%
-----------
24,958 City Developments Ltd ADR 146,062
15,400 Chueng Kong Holdings Ltd ADR 195,632
-------
341,694
Retail Store 3.60%
------------
12,884 Cifra SA ADR $258,222
5,000 Mauri Co. Ltd ADR* 149,089
-------
407,311
Telecommunications 4.14%
------------------
5,900 Cia de Telecommunications de Chile Sa ADR 107,675
3,600 Telecom Corporation of New Zealand 138,600
3,000 Swisscom Spon ADR 121,500
2,000 Vodafone Airtouch Plc Sponsored Adr 99,000
------
466,775
Utlities-Electric 1.46%
-----------------
5,900 Scottishpower Plc ADR 165,200
-------
Total investment in securities (cost $9,587,060) 98.83% $11,181,530
Cash equivalents 1.44% 141,548
Other Assets, less liabilities (0.27%) (8,815)
------- -----------
TOTAL NET ASSETS 100.00% $11,314,263
======= ===========
* Indicates non-income producing security.
18
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statement of Assets and Liabilities
December 31, 1999
(Unaudited)
Government Capital
Growth Securities Appreciation
Assets: Portfolio Portfolio Portfolio
------------- ------------- --------------
<S> <C> <C> <C>
Investments in securities, at market value
(cost $46,584,224, $30,438,481 and $4,520,765) $67,466,875 $30,216,327 $5,730,164
Cash equivalents 2,478,798 993,119 375,452
Accrued interest and dividends receivable 52,283 485,487 3,151
Receivable for securities sold 1,074,538 - -
Receivable for fund shares sold 58,987 46,615 16,225
------- ------- ------
Total assets 71,131,481 31,741,548 6,124,992
=========== =========== =========
Liabilities:
Accrued expenses, including investment
management and distribution expense payable to
adviser, administrator and distributor 58,925 21,821 9,025
Payable for securities purchased 1,599,333 - -
Commissions payable for fund shares sold 134 - 33
Payable for fund shares redeemed 132,522 58,128 12,525
Total liabilities 1,790,914 79,949 21,583
---------- ------- ------
Net assets applicable to outstanding capital stock $69,340,567 $31,661,599 $6,103,409
============ ============ ==========
Net assets are represented by:
Capital stock outstanding $3,742 $3,277 $438
Additional paid-in capital 49,264,985 32,315,250 6,013,146
Accumulated undistributed net investment income(loss) (17,698) 128 (49,095)
Accumulated net realized gain/(loss) on investments (793,111) (434,902) (1,070,479)
Unrealized appreciation (depreciation) 20,882,649 (222,154) 1,209,399
----------- --------- ---------
Total net assets applicable to shares outstanding $69,340,567 $31,661,599 $6,103,409
============ ============ ==========
Shares outstanding and net asset value per share
Institutional Shares of Capital Stock Outstanding 3,660,223 3,254,961 424,020
Net Asset Value per share - Institutional Shares $18.53 $9.66 $13.94
====== ===== ======
Retail Shares of Capital Stock Outstanding 81,490 21,741 13,873
Net Asset Value per share - Retail Shares $18.49 $9.66 $13.87
====== ===== ======
See accompanying notes to financial statements.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statement of Assets and Liabilities
December 31, 1999
(Unaudited)
Intermediate
Government
Bond International
Assets: Portfolio Portfolio
------------- ---------------
<S> <C> <C>
Investments in securities, at market value
(cost $2,101,268 and $9,587,060 respectively) $2,102,184 $11,181,530
Cash equivalents 95,091 141,548
Accrued interest and dividends receivable 44,495 8,878
Receivable for fund shares sold - 8,834
----------- -----------
Total assets $2,241,770 $11,340,790
=========== ===========
Liabilities:
Accrued expenses, including investment
management and distribution expense payable to
adviser, administrator and distributor 2,429 14,123
Payable for commissions on shares sold - 7
Payable for fund shares redeemed - 12,397
------ ------
Total liabilities 2,429 26,527
Net assets applicable to outstanding capital stock $2,239,341 $11,314,263
Net assets are represented by:
Capital stock outstanding, at par $215 $941
Additional paid-in capital 2,343,547 9,575,782
Accumulated undistributed net investment income 25 116
Accumulated net realized gain/(loss) on investments (105,362) 142,955
Unrealized appreciation 916 1,594,469
---- ---------
Total net assets applicable to
shares outstanding $2,239,341 $11,314,263
Shares outstanding and net asset value per share
Institutional Shares of Capital Stock Outstanding 214,113 926,601
Net Asset Value per share - Institutional Shares $10.39 $12.03
====== ======
Retail Shares of Capital Stock Outstanding 1,378 13,918
Net Asset Value per share - Retail Shares $10.39 $12.03
====== ======
See accompanying notes to financial statements.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statement of Operations
Six Months Ended December 31, 1999
(Unaudited)
Intermediate
Government Capital Government
Growth Securities Appreciation Bond International
Portfolio Portfolio Portfolio Portfolio Portfolio
----------- ----------------------- ---------- -----------
Investment income:
<S> <C> <C> <C> <C> <C>
Dividends $227,759 $ - $11,240 $ - $98,504
Interest 114,926 983,563 8,510 77,446 5,342
-------- -------- ------ ------- -----
Total investment income 342,685 983,563 19,750 77,446 103,846
-------- -------- ------- ------- -------
Expenses:
Investment advisory fees 244,366 80,971 13,461 8,280 65,040
Administration Fees 81,410 40,475 7,362 3,186 14,124
Distribution Expenses - Retail Class 2,007 289 323 22 249
Accounting 6,306 5,307 4,513 4,732 4,957
Custodial fees - - 4,941 1,519 -
Securities Pricing 3,593 - 3,446 - 4,541
Other operating expenses 22,887 9,366 367 182 4,413
------- ------ ---- ---- -----
Total expenses 360,569 136,408 34,413 17,921 93,324
-------- -------- ------- ------- ------
Net investment income (loss) ($17,883) $847,155 ($14,663) $59,525 $10,522
========= ========= ========= ======== =======
Realized and unrealized gain (loss) on
investments:
Net realized gain (loss) $1,283,090 $ - ($209,035) $10,310 $511,136
Net unrealized appreciation
(depreciation)
Beginning of period 15,373,853 195,132 628,426 34,475 859,319
End of period 20,882,649 (222,154) 1,209,399 916 1,594,470
----------- --------- ---------- ---- ---------
Net unrealized appreciation
(depreciation) 5,508,796 (417,286) 580,973 (33,559) 735,151
--------- --------- -------- -------- -------
Net realized and unrealized
gain on investments 6,791,886 (417,286) 371,938 (23,249) 1,246,287
---------- --------- -------- -------- ----------
Net increase in net assets
resulting from operations $6,774,003 $429,869 $357,275 $36,276 $1,256,809
========== ======== ========= ======= ==========
See accompanying notes to financial statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statements of Changes in Net Assets
Six Months Ended December 31, 1999 and
the Year Ended June 30, 1999
Government
Growth Securities
Portfolio Portfolio
-------------------------- ------------------------
Period Ended Year Ended Period Ended Year Ended
Dec. 31, 1999 June 30, 1999 Dec. 31, 1999 June 30, 1999
----------- ------------ ----------- -----------
Operations:
<S> <C> <C> <C> <C>
Net investment income ($17,883) $191,951 $847,155 $1,539,461
Net realized gain (loss)
on investm 1,283,090 7,751,958 - 4,501
Unrealized appreciation
(depreciati 5,508,796 1,126,687 (417,286) (241,357)
---------- ------------ ----------- -----------
Net increase in net assets
resulting from operations 6,774,003 9,070,596 429,869 1,302,605
----------- ------------ ----------- -----------
Distributions to shareholders from:
Net investment income
Institutional Class - 192,811 842,429 1,533,764
Retail Class - 201 4,866 8,326
----------- ------------ ----------- -----------
- 193,012 847,296 1,542,090
Net realized gains
Institutional Class 9,343,864 5,324,844 - -
Retail Class 197,369 85,354 - -
----------- ------------ ----------- -----------
9,541,233 5,410,198 - -
----------- ------------ ----------- -----------
Total Distribution 9,541,233 5,603,210 847,296 1,542,090
Capital share transactions:
Proceeds from sales 3,894,107 11,447,294 5,898,945 10,167,190
Payment for redemptions (5,827,767) (17,142,994) (4,060,895) (12,344,733)
Reinvestment of net investment
income and net realized
gain distributions
at net asset value 7,737,525 4,651,155 752,471 1,398,687
----------- ------------ ----------- -----------
Total increase from capital
share transactions 5,803,865 (1,044,545) 2,590,520 (778,856)
----------- ------------ ----------- -----------
Total increase (decrease)
in net assets 3,036,636 2,422,841 2,173,093 (1,018,341)
Net Assets:
Beginning of period 66,303,931 63,881,090 29,488,505 30,506,846
----------- ------------ ----------- -----------
End of period $69,340,567 $66,303,931 $31,661,598 $29,488,505
=========== ============ =========== ===========
See accompanying notes to financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statements of Changes in Net Assets
Six Months Ended December 31, 1999 and
the Year Ended June 30, 1999
Intermediate
Capital Government
Appreciation Bond
Portfolio Portfolio
----------------------- -----------------------
Period Ended Year Ended Period Ended Year Ended
Dec. 31, 1999 June 30, 1999 Dec. 31, 1999 June 30, 1999
------------- ------------ ------------- -----------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) (14,663) ($34,679) $59,525 $170,460
Net realized gain (loss)
on investments (209,035) (860,212) 10,310 205
Unrealized appreciation
(depreciation) 580,973 (85,765) (33,559) (19,797)
---------- ----------- ---------- ----------
Net increase (decrease) in
net assets
resulting from operations 357,275 (980,656) 36,276 150,868
---------- ----------- ---------- ----------
Distributions to shareholders from:
Net investment income
Institutional Class - - 59,193 169,995
Retail Class - - 330 1,170
----------------------- ---------- ----------
- - 59,523 171,165
Net realized gains
Institutional Class - 23,255 - -
Retail Class - 860 - -
---------- ----------- ---------- ----------
- 24,115 - -
---------- ----------- ---------- ----------
Total Distribution - 24,115 59,523 171,165
Capital share transactions:
Proceeds from sales 565,495 2,166,995 8,577 34,934
Payment for redemptions (1,048,959) (4,351,054) (875,024) (1,141,218)
Reinvestment of net investment
income and net realized gain
distributions
at net asset value - 23,641 57,560 160,117
---------- ----------- ---------- ----------
Total increase from capital
share transactions (483,464) (2,160,418) (808,887) (946,167)
---------- ----------- ---------- ----------
Total decrease in net assets (126,189) (3,165,189) (832,135) (966,464)
Net Assets:
Beginning of period 6,229,598 9,394,787 3,071,476 4,037,940
---------- ----------- ---------- ----------
End of period $6,103,409 $6,229,598 $2,239,341 $3,071,476
========== =========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
23
<PAGE>
STRATUS FUND, INC.
Statements of Changes in Net Assets
Six Months Ended December 31, 1999 and
the Year Ended June 30, 1999
International
Portfolio
----------------------------
Period Ended Year Ended
Dec. 31, 1999 June 30, 1999
------------ --------------
Operations:
Net investment income $10,522 $51,643
Net realized gain on investments 511,136 689,531
Unrealized appreciation (depreciation) 735,151 (682,947)
------------ ------------
Net increase in net assets
resulting from operations 1,256,809 58,226
------------ ------------
Distributions to shareholders from:
Net investment income
Institutional Class 10,558 51,751
Retail Class - 237
------------ ------------
10,558 51,988
Net realized gains
Institutional Class 838,671 204,146
Retail Class 12,343 3,025
------------ ------------
851,014 207,171
------------ ------------
Total Distribution 861,572 259,159
Capital share transactions:
Proceeds from sales 860,990 2,843,478
Payment for redemptions (2,042,306) (3,136,480)
Reinvestment of net investment
income and net realized
gain distributions
at net asset value 745,580 249,768
------------ ------------
Total increase from capital
share transactions (435,736) (43,234)
------------ ------------
Total increase (decrease)
in net assets (40,499) (244,167)
Net Assets:
Beginning of period 11,354,762 11,598,929
------------ ------------
End of period $11,314,263 $11,354,762
============ ============
See accompanying notes to financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999 and the
Years Ended June 30, 1999, 1998, 1997, 1996 and 1995
Growth Portfolio- Institutional Class
-------------------------------------
Period Ended
Dec. 31, 1999 1999 1998 1997 1996 1995
----------------- ------ ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $19.51 $18.53 $17.07 $13.67 $11.47 $9.84
------ ------ ------ ------ ------ -----
Income from investment operations:
Net investment income 0.00 0.06 0.11 0.22 0.23 0.22
Net realized and unrealized
gain (loss)
on investments 1.77 2.53 3.45 3.99 2.36 1.72
----- ----- ----- ----- ----- ----
Total income from investment operations 1.77 2.59 3.56 4.21 2.59 1.94
----- ----- ----- ----- ----- ----
Less distributions:
Dividends from net investment income 0.00 (0.06) (0.11) (0.22) (0.22) (0.22)
Distribution from capital gains (2.75) (1.55) (1.99) (0.59) (0.17) (0.09)
------ ------ ------ ------ ------ ------
Total distributions (2.75) (1.61) (2.10) (0.81) (0.39) (0.31)
------ ------ ------ ------ ------ ------
End of period $18.53 $19.51 $18.53 $17.07 (a) $13.67 $11.47
------ ------ ------ ------ ------ ------
21.28% (b) 16.34% 22.29% 32.6% (a) 22.6% 20.3%
------ ------ ------ ----- ----- -----
Net assets, end of period $67,833,437 $65,011,189 $63,096,914 $46,189,099 $24,627,983 $12,813,352
Ratio of expenses to average
net assets 1.10% (b) 1.05% 0.76% 0.72% 0.71% 0.82%
Ratio of net income to average
net assets (0.05%)(b) 0.31% 0.18% 1.46% 1.78% 2.14%
Portfolio turnover rate 64.53% 194.23% 137.03% 88.53% 92.72% 19.89%
Excludes maximum sales load of 4%
Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999, the Year Ended June 30, 1999
and the Period from January 7, 1998 (commencement of class shares) to
June 30, 1998
Growth Portfolio- Retail Class
------------------------------
Period Ended Period Ended
Dec. 31, 1999 1999 June 30, 1998
-------------- ------- -------------
Net asset value:
<S> <C> <C> <C>
Beginning of period $19.51 $18.52 $15.86
------- ------- ------
Income from investment operations:
Net investment income (loss) (0.03) 0.00 0.04
Net realized and unrealized gain
on investments 1.77 2.47 2.66
----- ----- ----
Total income from investment operations 1.74 2.47 2.70
----- ----- ----
Less distributions:
Dividends from net investment income 0.00 0.00 (0.04)
Distribution from capital gains (2.76) (1.48) 0.00
------ ------ ----
Total distributions (2.76) (1.48) (0.04)
------ ------ ------
End of period $18.49 (a) $19.51 (a) $18.52 (a)
------ ------ ------
Total return: 20.90% (a)(c) 16.09% (a) 16.89% (a)(b)
------ ------ ------
Ratios/Supplemental data:
Net assets, end of period $1,507,130 $1,292,742 $784,176
Ratio of expenses to average net assets 1.40% (c) 1.35% 1.50% (c )
Ratio of net income (loss) to
average net assets (0.35%)(c) 0.01% 0.13% (c )
Portfolio turnover rate 64.53% 194.23% 137.03%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the
total return for the year.
(c) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999 and the
Years Ended June 30, 1999, 1998, 1997, 1996, and 1995
Government Securities Portfolio - Institutional Class
------------------------------------------------------
Period Ended
Dec. 31, 1999 1999 1998 1997 1996 1995
--------------- ----- ---- ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $9.79 $9.88 $9.72 $9.64 $9.77 $9.40
----- ----- ----- ----- ----- -----
Income (loss) from investment
operations:
Net investment income 0.26 0.51 0.51 0.51 0.49 0.45
Net realized and unrealized
gain (loss)
on investments (0.13) (0.09) 0.16 0.08 (0.13) 0.37
------ ------ ----- ----- ------ ----
Total income (loss) from investment
operations 0.13 0.42 0.67 0.59 0.36 0.82
---- ----- ----- ----- ----- ----
Less distributions from
net investment income (0.26) (0.51) (0.51) (0.51) (0.49) (0.45)
------ ------ ------ ------ ------ ------
End of period $9.66 $9.79 $9.88 $9.72 (a) $9.64 $9.77
----- ----- ----- ----- ----- -----
Total return: 2.61% (b) 4.33% 7.04% 6.3% (a) 3.7% 9.0%
----- ----- ----- ---- ---- ----
Ratios/Supplemental data:
Net assets, end of period $31,451,572 $29,321,012 $30,367,682 $26,533,869 $23,043,163 $13,885,204
Ratio of expenses to average
net assets 0.84% (b) 0.80% 0.82% 0.71% 0.69% 0.80%
Ratio of net income to average
net assets 5.23% (b) 5.13% 5.17% 5.21% 5.04% 4.82%
Portfolio turnover rate 8.89% 18.66% 2.07% 27.20% 40.61% 33.88%
(a) Excludes maximum sales load of 3%
(c) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999, the Year Ended June 30, 1999 and
the Period from January 13, 1998 (commencement of class shares) to
June 30, 1998
Government Securities- Retail Class
-----------------------------------
Period Ended Period Ended
Dec. 31, 1999 1999 June 1998
------------- ---- ----------
Net asset value:
<S> <C> <C> <C>
Beginning of period $9.79 $9.89 $9.97
------ ------ -----
Income from investment operations:
Net investment income 0.24 0.48 0.25
Net realized and unrealized gain (loss)
on investments (0.13) (0.09) (0.08)
------ ------ ------
Total income from investment operations 0.11 0.39 0.17
----- ----- ----
Less distributions:
Dividends from net investment income (0.24) (0.49) (0.25)
Distribution from capital gains 0.00 0.00 0.00
----- ----- ----
Total distributions (0.24) (0.49) (0.25)
------ ------ ------
End of period $9.66 (a) $9.79 (a) $9.89 (a)
----- ----- -----
Total return: 2.33% (a)(c) 3.96% (a) 1.58% (a)(b)
----- ----- -----
Ratios/Supplemental data:
Net assets, end of period $210,027 $167,494 $139,164
Ratio of expenses to average net assets 1.14% (c ) 1.10% 1.21% (c )
Ratio of net income to average net assets 4.93% (c ) 4.83% 5.49% (c )
Portfolio turnover rate 8.89% 18.66% 2.07%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the
total return for the year.
(c) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999 and the
Years Ended June 30, 1999, 1998, 1997, 1996, and 1995
Capital Appreciation Portfolio-Institutional Class
---------------------------------------------------
Period Ended
Dec. 31, 1999 1999 1998 1997 1996 1995
-------------- ---- ------ ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $13.08 $14.39 $14.25 $13.19 $11.23 $8.95
------ ------ ------ ------ ------ -----
Income (loss) from
investment operations:
Net investment income (loss) (0.02) (0.06) 0.03 0.18 (0.19) (0.15)
Net realized and unrealized
gain (loss)
on investments 0.88 (1.21) 0.86 1.48 2.88 2.62
----- ------ ----- ----- ----- ----
Total income (loss) from investment
operations 0.86 (1.27) 0.89 1.66 2.69 2.47
----- ------ ----- ----- ----- ----
Less distributions from
net investment income 0.00 0.00 (0.03) (0.12) 0.00 0.00
Less distributions from
capital gain 0.00 (0.04) (0.72) (0.48) (0.73) (0.19)
----- ------ ------ ------ ------ ------
Total Distributions 0.00 (0.04) (0.75) (0.60) (0.73) (0.19)
----- ------ ------ ------ ------ ------
End of period $13.94 $13.08 $14.39 $14.25 (a) $13.19 $11.23
------ ------ ------ ------ ------ ------
Total return: 26.65% (b ) (8.79%) 7.47% 11.7% (a) 26.0% 28.6%
------ ------- ----- ----- ----- -----
Ratios/Supplemental data:
Net assets, end of period $5,910,952 $5,985,704 $9,174,664 $6,732,540 $2,474,470 $748,588
Ratio of expenses to average
net assets 1.15% ( b ) 1.11% 0.76% 0.91% 2.84% 2.69%
Ratio of net income to
average net assets (0.49%)( b ) (0.49%) 0.18% 1.31% (1.54%) (1.59%)
Portfolio turnover rate 32.58% 109.49% 277.31% 322.07% 179.06% 214.47%
(a) Excludes maximum sales load of 4%
(b) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999, the Year Ended June 30, 1999 and the
Period from January 7, 1998 (commencement of class shares) to June 30, 1998
Capital Appreciation- Retail Class
-----------------------------------
Period Ended Period Ended
Dec. 31, 1999 1999 June 30, 1998
-------------- ----- -------------
Net asset value:
<S> <C> <C> <C>
Beginning of period $13.04 $14.39 $13.21
------ ------- ------
Income from investment operations:
Net investment income (0.05) (0.10) (0.03)
Net realized and unrealized gain (loss)
on investments 0.88 (1.21) 1.21
----- ------ ----
Total income from investment operations 0.83 (1.31) 1.18
----- ------ ----
Less distributions:
Dividends from net investment income 0.00 0.00 0.00
----- ----- ----
Distribution from capital gains 0.00 (0.04) 0.00
----- ------ ----
Total distributions 0.00 (0.04) 0.00
----- ------ ----
End of period $13.87 (a) $13.04 (a) $14.39 (a)
------ ------ ------
Total return: 26.11% (a)(c)(9.07%)(a) 8.93% (a)(b)
------- -----
Ratios/Supplemental data:
Net assets, end of period $192,457 $243,894 $220,123
Ratio of expenses to average net assets 1.45% (c) 1.41% 1.25% (c)
Ratio of net income (loss) to average net (0.78%)(c) (0.79%) (0.18%)(c)
Portfolio turnover rate 32.58% 109.49% 277.31%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the
total return for the year.
(c) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999 and the
Years Ended June 30, 1999, 1998, 1997, 1996, and 1995
Intermediate Government Bond Portfolio-Institutional Class
----------------------------------------------------------
Period Ended
Dec. 31, 1999 1999 1998 1997 1996 1995
-------------- ---- ------ ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $10.50 $10.60 $10.48 $10.47 $10.56 $10.29
------ ------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment income 0.25 0.51 0.52 0.54 0.52 0.50
Net realized and unrealized
gain (loss)
on investments (0.11) (0.10) 0.12 0.02 (0.09) 0.27
------ ------ ----- ----- ------ ----
Total income (loss) from investment
operations 0.14 0.41 0.64 0.56 0.43 0.77
----- ----- ----- ----- ----- ----
Less distributions:
Dividends from net
investment income (0.25) (0.51) (0.52) (0.55) (0.52) (0.50)
Distributions from
capital gains 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----
Total distributions (0.25) (0.51) (0.52) (0.55) (0.52) (0.50)
End of period $10.39 $10.50 $10.60 $10.48 (a) $10.47 $10.56
------ ------ ------ ------ ------ ------
Total return: 2.79% (b) 3.96% 6.27% 5.6% (a) 4.1% 7.9%
----- ----- ----- ---- ---- ----
Ratios/Supplemental data:
Net assets, end of period $2,225,025 $3,058,068 $4,008,700 $4,605,718 $7,224,506 $5,518,431
Ratio of expenses to
average net 1.41%s(b) 1.16% 1.17% 1.02% 1.03% 1.11%
Ratio of net income to average ne 4.68%e(b) 4.75% 4.93% 5.14% 4.95% 4.84%
Portfolio turnover rate 8.55% 0.00% 0.00% 26.88% 4.05% 27.67%
(a) Excludes maximum sales load of 3%
(b) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999, the Year Ended June, 30 1999 and
the Period from January 27, 1998 (commencement of class shares) to
June 30, 1998
Intermediate Government Bond Portfolio Retail Class
---------------------------------------------------
Period Ended Period Ended
Dec. 31, 1999 1999 June 30, 1998
--------------- ----------- ----------------
Net asset value:
<S> <C> <C> <C>
Beginning of period $10.50 $10.59 $10.63
------- ------- ------
Income from investment operations:
Net investment income 0.25 0.47 0.29
Net realized and unrealized loss
on investments (0.12) (0.09) (0.04)
------ ------ ------
Total income from investment operations 0.13 0.38 0.25
----- ----- -----
Less distributions:
Dividends from net investment income (0.23) (0.47) 0.29
Distribution from capital gains 0.00 0.00 0.00
---- ----- ----
Total distributions (0.24) (0.47) 0.29
------ ------ ----
End of period $10.39 (a) $10.50 (a) $10.59 (a)
------ ------ ------
Total return: 2.53% (a)(c) 3.73% (a) 1.69% (a)(b)
----- ----- -----
Ratios/Supplemental data:
Net assets, end of period $14,316 $13,408 $29,240
Ratio of expenses to average net assets 1.71% (c) 1.46% 1.63% (c )
Ratio of net income to average net assets 4.37% (c) 4.45% 5.18% (c )
Portfolio turnover rate 8.55% 0.00% 0.00%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the
total return for the year.
(c) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999, the Years Ended June 30, 1999 and 1998
and the Period from October 1, 1996 (commencement of class shares) to
June 30, 1997
International Portfolio - Institutional Class
-----------------------------------------------
Period Ended Period Ended
Dec. 31, 1999 1999 1998 June 30, 1997
------------- ------- ------ -------------
Net asset value:
<S> <C> <C> <C> <C>
Beginning of period $11.62 $11.75 $11.22 $10.00
------ ------ ------ ------
Income from investment operations:
Net investment income 0.01 0.05 0.02 0.15
Net realized and unrealized gain
on investments 1.29 0.09 0.64 1.22
----- ----- ----- ----
Total income from investment
operations 1.30 0.14 0.66 1.37
----- ----- ----- ----
Less distributions:
Dividends from net
investment inco (0.01) (0.05) (0.02) (0.15)
Distributions from capital gains (0.88) (0.22) (0.11) 0.00
------ ------ ------ ----
Total Distributions (0.89) (0.27) (0.13) (0.15)
------ ------ ------ ------
End of period $12.03 $11.62 $11.75 $11.22 (a)
------ ------ ------ ------
Total return: 23.6% (b) 1.4% 6.27% 18.20% (a) (b)
----- ---- ----- ------
Ratios/Supplemental data:
Net assets, end of period $11,146,855 $11,182,332 $11,473,772 $10,431,107
Ratio of expenses to average
net assets 1.64% (b) 1.53% 1.65% 1.48% (b)
Ratio of net income to average
net assets 0.19% (b) 0.49% 0.21% 1.89% (b)
Portfolio turnover rate 15.49% 40.00% 52.92% 33.77%
(a) Excludes maximum sales load of 4%
(b) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended December 31, 1999, the Year Ended June 30, 1999 and
the Period from January 7, 1998 (commencement of class shares) to
June 30, 1998
International Portfolio - Retail Class
--------------------------------------
Period Ended Period Ended
Dec. 31, 1999 1999 June 30, 1998
-------------- -------- -------------
Net asset value:
<S> <C> <C> <C>
Beginning of period $11.62 $11.75 $10.33
------- ------- ------
Income from investment operations:
Net investment income (0.01) 0.02 0.03
Net realized and unrealized gain (loss)
on investments 1.29 0.09 1.42
----- ----- ----
Total income from investment operations 1.28 0.11 1.45
----- ----- ----
Less distributions:
Dividends from net investment income 0.00 (0.02) (0.03)
Distribution from capital gains (0.87) (0.22) 0.00
------ ------ ----
Total distributions (0.87) (0.24) (0.03)
------ ------ ------
End of period $12.03 (a) $11.62 (a) $11.75 (a)
------ ------ ------
Total return: 23.43% (a)(c ) 1.07% (a) 13.88% (a)(b)
------ ----- ------
Ratios/Supplemental data:
Net assets, end of period $167,408 $172,430 $125,157
Ratio of expenses to average net assets 1.94% (c ) 1.83% 1.94% (c )
Ratio of net income to average net assets (0.11%)(c ) 0.19% 0.27% (c )
Portfolio turnover rate 15.49% 40.00% 52.92%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the
total return for the year.
(c) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
34
<PAGE>
STRATUS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
Stratus Fund, Inc. (the Fund) is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. The Fund issues its shares in series, each series representing a
distinct portfolio with its own investment objectives and policies. At
December 31, 1999, the following series are presently authorized and have
shares outstanding.
Growth Portfolio Capital Appreciation Portfolio
Government Intermediate Government
Securities Portfolio Bond Portfolio
International Portfolio
Each portfolio has two classes of shares authorized and outstanding:
retail and institutional
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies employed by
the Fund in preparing its financial statements.
USE OF ESTIMATES: In preparing the financial statements in accordance with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and changes in net assets for the period.
Actual results could differ from those estimates.
VALUATION OF INVESTMENTS
Investment securities are carried at market determined using the following
valuation methods:
o Securities traded on a national or regional stock exchange or included
in the NASDAQ National Market System are valued at the last quoted
sales price.
o Securities not listed on an exchange or securities for which the latest
quoted sales price is not readily available and securities traded
over-the-counter but not included in the NASDAQ National Market System
are valued at the mean of the closing bid and asked prices.
o Securities including bonds, restricted securities, or other assets for
which reliable recent market quotations are not readily available are
valued at fair market value as determined in good faith or under the
direction of the Board of Directors. Determination of fair value
involves, among other things, reference to market indices, matrices and
data from independent brokers and pricing services.
35
<PAGE>
STRATUS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All securities are valued in accordance with the above noted policies at
the close of each business day.
The Growth, Capital Appreciation, and International Portfolios are
authorized to purchase exchange-traded put and call options.
At December 31, 1999, the Growth, Capital Appreciation and International
Portfolios had no such exchange traded options nor were any purchased
during the year then ended.
The Portfolios may sell a security it does not own in anticipation of a
decline in the market value of that security (short-sale). When a Portfolio
makes a short-sale, it must borrow the security sold short and deliver it
to the buyer. The proceeds from the short-sale will be retained by the
broker-dealer through which it made the short-sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The
Portfolio may have to pay a fee to borrow the security and may be obligated
to remit any interest received on such borrowed securities. A gain or loss
is recognized upon the termination of the short sale, if the market price
at termination is less than or greater than the proceeds originally
received.
At December 31, 1999, the cost of investment securities is identical for
financial reporting and income tax purposes.
SECURITY TRANSACTIONS
Security transactions are accounted for on the date securities are
purchased or sold (trade date). Dividend income is recognized on the
ex-dividend date and interest income is accrued daily. Amortization of
premium and discount is accrued daily using both the constant yield and the
straight-line methods. Realized investment gains and losses are determined
by specifically identifying the issue sold.
FEDERAL INCOME TAXES
It is the policy of each Portfolio to comply with the requirements of the
Internal Revenue Code (the Code) applicable to regulated investment
companies and to distribute virtually all of the taxable income generated
by the Portfolios to their shareholders within the time period allowed by
the Federal law. Consequently, no liability for Federal income taxes is
required. Internal Revenue Code requirements regarding distributions may
differ from amounts determined under generally accepted accounting
principles. These book/tax differences are either temporary or permanent in
nature. To the extent these differences are permanent, they are
36
<PAGE>
STRATUS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
charged or credited to paid-in-capital or accumulated net realized gain, as
appropriate in the period that the differences arise. Each Portfolio is
treated as a separate entity for tax purposes, and on a calendar basis,
will distribute substantially all of its net investment income and realized
gains, if any, to avoid payment of any Federal excise tax. There will be no
net realized gain distributions until the net realized loss carry forwards
have been offset or expired. The losses will expire in 8 years. Each
Portfolio prepares its tax return on an accrual basis. The Government
Securities, Intermediate Government Bond, and Capital Appreciation
Portfolios have unused capital loss carry forwards of approximately
$378,000, $124,000, and $455,000 respectively, available for federal income
tax purposes at December 31, 1999. The losses begin expiring in 2003 and
2005 for the Government Securities and Intermediate Government Bond
portfolios, respectively.
DISTRIBUTION TO SHAREHOLDERS
Dividends to shareholders are recorded on the ex-dividend date. In
accordance with resolutions enacted by the Board of Directors, the
Government Securities and Intermediate Government Bond Portfolios declare
dividends monthly and the Growth, Capital Appreciation, and International
Portfolios declare dividends semi-annually. The dividends declared become
payable immediately.
CASH EQUIVALENTS
Cash equivalents consist of money market funds which declare dividends
daily. As of December 31, 1999, the average yield on such funds was
approximately 4.50%.
3. FEES, EXPENSES AND RELATED PARTY TRANSACTIONS
The Fund and each of its Portfolios have retained Union Bank & Trust
Company (UBATCO) as their exclusive investment adviser and custodian of the
Fund's assets (hereinafter, the Adviser). The agreement provides that the
Capital Appreciation Portfolio will compensate the Adviser on a performance
based scale, whereby the Portfolio will pay a fee of 1.40% per annum of
daily average net assets. The fee may be increased or decreased by up to
1.00% of the average daily net assets during the latest 12 months (a
rolling average method), depending upon the performance of this Portfolio
relative to the Russell 2000 Index. For the six months ended December 31,
1999, the annualized fee was 0.46%.
37
<PAGE>
STRATUS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
3. FEES, EXPENSES AND RELATED PARTY TRANSACTIONS (CONTINUED)
The remaining Portfolios pay the following advisory fee rates per annum of
their average daily net asset values:
PORTFOLIO ANNUAL FEE RATE
--------- ---------------
Growth .75%
Government Securities .50%
Intermediate Government Bond .65%
International 1.15%
The Fund and each of its Portfolios have retained UBATCO as the custodian
of the Fund's investments. The agreement provides that the portfolios
(except the Growth, Government Securities, and International Portfolios,
which pay no fee), will pay the custodian an annual fee which is calculated
and billed monthly. The fee calculation does not include cash equivalents.
The fee consists of an investment transaction charge of $12 for each
transaction, a fee of $100 per account, plus an additional fee calculated
in accordance with the following table.
Net assets of:
$0 - $10 million 11 basis points
$10 - $20 million 6 basis points
Over $20 million 2.5 basis points
The Fund and each of its Portfolios have retained Lancaster Administrative
Services, Inc. (the Administrator) to act as their transfer agent and
administrator to provide all necessary record keeping and share transfer
services for the Fund. As of July 1, 1999 the Administrator is a related
party to the Fund. The agreement provides that each Portfolio will pay an
administrative fee to the Administrator equal to .25% per annum of average
daily net assets.
The Fund has also retained SMITH HAYES Financial Services Corporation (the
Distributor) to act as the underwriter and distributor of the fund's
shares. Retail shares for the Growth, Capital Appreciation, and
International portfolios include a maximum sales charge of 4.5%. Retail
shares for the Government Securities and Intermediate Government Bond
portfolios include a maximum sales charge of 3.0%. For sales of all
Portfolios of $50,000 or more, the sales charge is reduced. Pursuant to the
shareholder approved distribution plan under Rule 12b-1, Retail shares of
each fund will reimburse the distributor for shareholder-related expenses
incurred in connection with the distribution of the fund's shares, however,
under no circumstances shall such reimbursement exceed .30% per annum of
the fund's average daily net assets. The Distributor received $3,094 and
paid out $2,264 of this amount as commissions and dealer reallowances.
Institutional shares for all portfolios are not charged sales charges or
12b-1 fees.
38
<PAGE>
STRATUS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
3. FEES, EXPENSES AND RELATED PARTY TRANSACTIONS (CONTINUED)
Under the terms of the advisory, custodian, administrative and distribution
agreements outlined above, the Portfolios collectively incurred $412,118;
$6,460; $146,557 and $2,890 for such services. Of the amount paid to the
Distributor, 100% was paid out to Union Bank & Trust Company under a Dealer
Service Agreement.
At December 31, 1999, the following accrued investment advisory and
administrative fees were payable to the Adviser and Administrator.
PAYABLE TO PAYABLE TO PAYABLE
ADVISER ADMINISTRATOR TO DISTRIBUTOR TOTAL
---------- ------------- -------------- -----
Growth Portfolio $42,165 $14,041 $354 $56,560
Government Securities Portfolio 13,571 6,768 50 20,389
Capital Appreciation Portfolio 7,002 1,243 46 8,291
Intermediate Government
Bond Portfolio 1,235 475 4 1,714
International Portfolio 10,777 2330 39 13,146
Under the terms of the advisory agreement, the Adviser may be obligated to
reimburse a Portfolio up to the amount of the Adviser's fee paid to the
Adviser if during any year the expenses of the Portfolio, including the
Adviser's fee, exceed certain limitations. At December 31, 1999, no expense
reimbursement was required.
In addition to the amounts paid by the Portfolios under advisory,
custodian, and administration agreements, the Portfolios used SMITH HAYES
Financial Services Corporation (SMITH HAYES), a company related through
common management, to affect security trades on their behalf. As is
customary in the industry, the investment adviser evaluates the pricing and
ability to execute the transactions in selecting brokers to affect trades.
SMITH HAYES was paid commissions in the amount of $3,900 for their
brokerage services during the six months ended December 31, 1999.
At December 31, 1999, directors, officers and employees of the Fund, the
Adviser and Administrator and their immediate families held the following
in each Portfolio:
SHARES VALUE
------ -----
Growth Portfolio Institutional Class 341,669 $6,331,125
Government Securities Portfolio Institutional Class 302,676 2,923,854
Capital Appreciation Portfolio Institutional Class 56,651 789,722
Intermediate Gov't Bond Portfolio Institutional Class - -
International Portfolio Institutional Class 89,302 1,074,308
39
<PAGE>
STRATUS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
3. FEES, EXPENSES AND RELATED PARTY TRANSACTIONS (CONTINUED)
At December 31, 1999, UBATCO held, in nominee name, the following in each
Portfolio:
SHARES VALUE
------ -----
Growth Portfolio Institutional Class 3,653,206 $67,693,915
Growth Portfolio Retail Class 68,578 1,268,002
Government Securities Portfolio Institutional Class 3,254,961 31,451,572
Government Securities Portfolio Retail Class 20,672 199,696
Capital Appreciation Portfolio Institutional Class 423,564 5,904,485
Capital Appreciation Portfolio Retail Class 13,757 190,809
Intermediate Gov't Bond Portfolio Institutional Class 209,108 2,172,637
Intermediate Gov't Bond Portfolio Retail Class 1,378 14,317
International Portfolio Institutional Class 925,986 11,139,607
International Portfolio Retail Class 13,883 167,016
4. SECURITIES TRANSACTIONS
Purchases of securities and proceeds from sales were as follows for each
Portfolio:
PURCHASES OF PROCEEDS
SECURITIES FROM SALES
------------ ----------
Growth Portfolio $38,798,749 $41,510,278
Government Securities Portfolio 3,994,600 2,200,000
Capital Appreciation Portfolio 1,800,731 2,381,380
Intermediate Government Bond Portfolio 98,792 810,313
International Portfolio 1,717,624 3,279,833
At December 31, 1999, the aggregate gross unrealized appreciation and the
aggregate gross unrealized depreciation of securities in each Portfolio
were as follows:
AGGREGATE GROSS
UNREALIZED
---------------
APPRECIATION DEPRECIATION
------------ ------------
Growth Portfolio $21,811,011 $928,362
Government Securities Portfolio 39,974 262,128
Capital Appreciation Portfolio 1,545,744 336,345
Intermediate Government Bond Portfolio 2,045 1,129
International Portfolio 2,596,072 1,001,602
40
<PAGE>
STRATUS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
5. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue a total of 1 billion shares of common stock
in series with a par value of $.001 per share. The Board of Directors has
authorized twenty million shares to be issued in the Growth Portfolio and
ten million each in the Government Securities Portfolio, Capital
Appreciation Portfolio, Intermediate Government Bond Portfolio, and the
International Portfolio.
Transactions in the capital stock of each Portfolio for the six months
ended December 31, 1999 were as follows:
GROWTH GROWTH
PORTFOLIO PORTFOLIO
INSTITUTIONAL SHARES RETAIL SHARES
-------------------- -------------
Transactions in shares:
Shares sold 197,293.147 12,694.957
Shares redeemed (305,396.191) (8,940.948)
Reinvested dividends 437,857.268 11,481.315
----------- ------------
Net increase/(decrease) 329,754.224 15,235.324
=========== ============
Transactions in dollars:
Dollars sold $3,657,156 $236,951
Dollars redeemed (5,662,252) (165,515)
Reinvested dividends 7,540,157 197,369
---------- --------
Net increase/(decrease) 5,535,061 268,805
========== ========
GOVERNMENT GOVERNMENT
SECURITIES PORTFOLIO SECURITIES PORTFOLIO
INSTITUTIONAL SHARES RETAIL SHARES
-------------------- --------------------
Transactions in shares:
Shares sold 599,182.591 4,428.599
Shares redeemed (416,291.926) (283.780)
Reinvested dividends 76,855.919 485.804
------------ ---------
Net increase/(decrease) 259,746.584 4,630.623
============ =========
Transactions in dollars:
Dollars sold $5,855,751 $43,193
Dollars redeemed (4,058,121) (2,774)
Reinvested dividends 747,746 4,725
------------ -------
Net increase/(decrease) 2,545,376 45,144
============ =======
41
<PAGE>
STRATUS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
5. CAPITAL SHARE TRANSACTIONS (CONTINUED)
CAPITAL APPRECIATION CAPITAL APPRECIATION
PORTFOLIO PORTFOLIO
INSTITUTIONAL SHARES RETAIL SHARES
--------------------- ----------------
Transactions in shares:
Shares sold 42,252.973 1,611.657
Shares redeemed (73,940.579) (6,496.455)
Reinvested dividends 0.000 0.000
------------ ------------
Net increase/(decrease) (31,687.606) (4,844.798)
============ ============
Transactions in dollars:
Dollars sold $ 545,423 $ 20,072
Dollars redeemed (966,044) (82,916)
Reinvested dividends 0 0
------------ ---------
Net increase/(decrease) (420,621) (62,844)
============ =========
INTERMEDIATE GOV'T INTERMEDIATE GOV'T
BOND PORTFOLIO BOND PORTFOLIO
INSTITUTIONAL SHARES RETAIL SHARES
-------------------- -------------
Transactions in shares:
Shares sold 673.786 142.139
Shares redeemed (83,292.986) (72.824)
Reinvested dividends 5,478.765 31.623
------------ ---------
Net increase/(decrease) (77,140.435) 100.938
============ =========
Transactions in dollars:
Dollars sold $ 7,081 $ 1,496
Dollars redeemed (874,258) (766)
Reinvested dividends 57,229 331
Net increase/(decrease) ----------- --------
(809,948) 1,061
=========== ========
INTERNATIONAL INTERNATIONAL
PORTFOLIO PORTFOLIO
INSTITUTIONAL SHARES RETAIL SHARES
-------------------- -------------
Transactions in shares:
Shares sold 74,010.916 531.483
Shares redeemed (175,622.750) (2,390.909)
Reinvested dividends 65,244.948 1,037.405
----------- -----------
Net increase/(decrease) (36,366.886) (822.021)
=========== ===========
Transactions in dollars:
Dollars sold $ 854,832 $ 6,158
Dollars redeemed (2,013,776) (28,530)
Reinvested dividends 733,931 11,650
---------- ----------
Net increase/(decrease) (425,013) (10,722)
========== ==========
42
<PAGE>
Appendix III
STRATUS FUND, INC.
GROWTH
GOVERNMENT SECURITIES
CAPITAL APPRECIATION
INTERMEDIATE GOVERNMENT BOND
INTERNATIONAL
ANNUAL REPORT
JUNE 30, 1999
Stratus Fund, Inc.
Dear Fellow Shareholders:
The economy continues to perform at a very high level with above average growth
and low inflation. Gross Domestic Product has recorded above average growth with
considerable variability from quarter to quarter. 1999's first quarter GDP rose
at a 4.3% pace while second quarter growth slowed to 2.3%. Responsible for the
slowing has been the draw down of inventories built during the first quarter.
Consumer fundamentals remain very strong and the industrial side of the economy
is doing better. International economies are showing signs of bottoming out
particularly those that were hurt by the Asian contagion. Domestic economic
growth could be around the 3% level in the second half of 1999. Planning and
fears regarding Y2K could affect economic growth short term.
The positive economic climate has helped the stock market to perform favorably
through the first half of 1999. Big cap stocks performed better during the first
quarter, while leadership broadened during the second quarter with value stocks,
and small cap stocks doing significantly better. International stocks saw mixed
performance. In contrast to last year, Europe lagged while Asia bounced back
from the effects of the Asian contagion.
During the second quarter, the Dow Jones Industrial Index established a series
of new highs as money continued to pour into equity mutual funds. The high for
the first half of 1999 came on May 13th when the DJIA closed at 11,107. This
index stood at 10,970 on June 30, 1999.
The two bond funds, managed by Stratus, performed in line with other bond funds
with the same investment objective as higher interest rates reduced returns. The
Stratus Government Securities Portfolio achieved a total rate of return of 1.4%
this past fiscal year, while the Stratus Intermediate Government Bond Portfolio
appreciated 4.0%. For comparison purposes, the Merrill Lynch U. S. Treasury
Intermediate Term Index returned 2.4% during the recently completed fiscal year.
The strategy employed by the Intermediate Government Bond Portfolio is to buy
only U. S. Government Obligations or money market instruments that invest
exclusively in U. S. Treasury Obligations. As a normal operating practice, the
Intermediate Government Bond Portfolio invests in a 1-5 year ladder of
maturities.
The strategy for the Government Securities Portfolio is essentially the same
regarding the use of high quality government securities. It differs in that
bonds as long as ten years may be used and the average maturity will generally
be greater. Corporate bonds of trust quality may also be used. Emphasis will be
on a total return as opposed to income generation and the average maturity will
vary with existing and anticipated interest rates.
1
<PAGE>
The Stratus Growth fund completed a successful fiscal year which also ended June
30, 1999. With investors favoring large cap stocks most of the year, the Stratus
Growth Portfolio provided a total return of 16.3% for the fiscal year. The
strategy employed in this fund is to invest primarily in large capitalization
stocks with an emphasis on growth companies. The over weighting in technology
helped performance considerably as technology stocks were in favor most of the
year. Although the Growth fund did not match the performance of the S & P Index,
it did better than the majority of funds in its category. In the Wall Street
Journal's Mutual Funds Report for the second quarter of 1999, the Stratus Growth
fund earned an A ranking for one year performance versus comparable funds. Even
more importantly an A ranking for 3 years and 5 years was earned for the Stratus
Growth Portfolio.
The Capital Appreciation Portfolio, which invests primarily in smaller
capitalization stocks, returned (8.8%) for the year ended June 30, 1999. From
July 1998 to March 1999, smaller stocks continued their relative
underperformance as the market remained concentrated on the stocks of larger
companies for much of the fiscal year. In the second quarter of 1999, the market
did begin to broaden its focus to include many secondary issues which would
generally prove beneficial for smaller companies and the Portfolio. Fund
performance relative to the Russell 2000, up 1.4% for the year, was also
impacted by the Fund's substantial underweighting in speculative Internet
stocks, which fueled much of the Russell's rise in the first half of 1999. The
return on the S&P Small Cap Index was -2.3% for the same time period.
The Stratus International Portfolio, launched October, 1996, ran into head winds
caused by the problems in Asia. During the past year, it has posted gains of
1.4%. The stabilization of the world economy leaves us more optimistic regarding
better returns going forward. This fund is being sub-advised by Murray Johnstone
International head quartered in Glasgow, Scotland.
We value highly your continued relationship with the Stratus Family of Mutual
Funds and the confidence placed in us. We would welcome any questions or
comments you may have.
July 30, 1999
2
<PAGE>
GROWTH INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GROWTH INSTITUTIONAL PORTFOLIO AND THE S&P 500 INDEX
AVG. ANNUAL RETURN 06/30/99 VALUE
- ----------------- ---------------------------
1 YEAR 16.34% GROWTH INSTITUTIONAL $27,840.61
5 YEAR 22.72% S&P 500 $33,712.99
INCEPTION 19.57%
- --------------------------------------------------------------------------------
GROWTH RETAIL PORTFOLIO
GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GROWTH RETAIL PORTFOLIO AND THE S&P 500 INDEX
RETURN * 06/30/99 VALUE
- ----------------- ---------------------------
1 YEAR 16.09% GROWTH RETAIL $12,959.11
5 YEAR S&P 500 $14,467.74
INCEPTION 22.96%
- --------------------------------------------------------------------------------
Results for the Retail Shares reflect payment of a maximum sales charge of 4.5%
on the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Growth Portfolio Institutional Shares for the period October 8, 1993 (inception)
through June 30, 1999
Growth Portfolio Retail Shares for the period January 7, 1998 (inception)
through June 30, 1999
3
<PAGE>
GOVERNMENT SECURITIES INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GOVERNMENT SECURITIES INSTITUTIONAL PORTFOLIO AND THE
MERRILL LYNCH U.S. TREASURY INTER-TERM INDEX
AVG. ANNUAL RETURN 06/30/99 VALUE
- ------------------ -------------------------------------
1 YEAR 4.32% GOVERNMENT SECURITIES INSTITUTIONAL $12,954.76
5 YEAR 6.05% MERRILL LYNCH U.S. TREASURY
INCEPTION 4.62% INTER-TERM BOND $13,299.82
- --------------------------------------------------------------------------------
GOVERNMENT SECURITIES RETAIL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GOVERNMENT SECURITIES RETAIL PORTFOLIO AND THE
MERRILL LYNCH U.S. TREASURY INTER-TERM INDEX
RETURN * 06/30/99 VALUE
- ------------------ -------------------------------------
1 YEAR 3.96% GOVERNMENT SECURITIES RETAIL $10,243.81
5 YEAR MERRILL LYNCH U.S. TREASURY
INCEPTION 3.81% INTER-TERM BOND $10,592.28
Results for the Retail Shares reflect payment of a maximum sales charge of
3% on the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Government Securities Portfolio Institutional Shares for the period
October 8, 1993 (inception) through June 30, 1999.
Government Securities Portfolio Retail Shares for the period
January 13, 1998 (inception) through June 30, 1999.
4
<PAGE>
CAPITAL APPRECIATION INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CAPITAL APPRECIATION INSTITUTIONAL PORTFOLIO AND THE RUSSELL 2000
AVG. ANNUAL RETURN 06/30/99 VALUE
- ------------------ ------------------------------------
1 YEAR -8.79%
5 YEAR 12.16% CAPITAL APPRECIATION INSTITUTIONAL $15,889.71
INCEPTION 7.40% RUSSELL 2000 $22,811.68
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION RETAIL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CAPITAL APPRECIATION RETAIL PORTFOLIO AND THE RUSSELL 2000
RETURN * 06/30/99 VALUE
- ------------------ ------------------------------------
1 YEAR -9.07%
5 YEAR CAPITAL APPRECIATION RETAIL $9,459.85
INCEPTION -.64% RUSSELL 2000 $10,679.77
Results for Retail Shares reflect payment of a maximum sales charge of 4.5%
on the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Capital Appreciation Portfolio Institutional Shares for the period
January 4, 1993 (inception) through June 30, 1999.
Capital Appreciation Portfolio Retail Shares for the period
January 7, 1998 (inception) through June 30, 1999.
5
<PAGE>
INTERMEDIATE GOVERNMENT BOND INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERMEDIATE GOVERNMENT BOND INSTITUTIONAL PORTFOLIO AND THE
MERRILL LYNCH U.S. TREASURY INTER-TERM INDEX
AVG. ANNUAL RETURN 06/30/99 VALUE
- ------------------ ------------------------------------------
1 YEAR 3.96% INTERMEDIATE GOVERNMENT BOND INSTIT. $15,785.38
5 YEAR 5.55% MERRILL LYNCH U.S. TREASURY
INCEPTION 5.77% INTER-TERM BOND $17,075.10
- --------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND RETAIL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERMEDIATE GOVERNMENT BOND RETAIL PORTFOLIO AND THE
MERRILL LYNCH U.S. TREASURY INTER-TERM INDEX
RETURN * 06/30/99 VALUE
- ------------------ ------------------------------------------
1 YEAR 3.73% INTERMEDIATE GOVERNMENT BOND RETAIL $10,232.07
5 YEAR MERRILL LYNCH U.S. TREASURY
INCEPTION 3.83% INTER-TERM BOND $10,592.28
Results for Retail Shares reflect payment of a maximum sales charge of 3% on
the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Intermediate Government Bond Portfolio Institutional Shares for the period
May 15, 1991 (inception) through June 30, 1999.
Intermediate Government Bond Portfolio Retail Shares for the period
January 27, 1998 (inception) through June 30, 1999.
6
<PAGE>
INTERNATIONAL INSTITUTIONAL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL INSTITUTIONAL PORTFOLIO AND THE MORGAN STANLEY INTERNATIONAL
AVG. ANNUAL RETURN 06/30/99 VALUE
- ------------------ ------------------------------------------
1 YEAR 1.40% INTERNATIONAL INSTITUTIONAL PORTFOLIO $12,239.59
5 YEAR MORGAN STANLEY INTERNATIONAL $12,449.63
INCEPTION 7.64%
- --------------------------------------------------------------------------------
INTERNATIONAL RETAIL PORTFOLIO
[GRAPHIC OMITTED]
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL RETAIL PORTFOLIO AND THE MORGAN STANLEY INTERNATIONAL
RETURN* 06/30/99 VALUE
- ------------------ ------------------------------------------
1 YEAR 1.07% INTERNATIONAL RETAIL PORTFOLIO $10,992.70
5 YEAR MORGAN STANLEY INTERNATIONAL $12,273.53
INCEPTION 10.00%
Results for Retail Shares reflect payment of a maximum sales charge of 4.5%
on the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and
assumes reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
International Portfolio Institutional Shares for the period October 1, 1996
(inception) through June 30, 1999.
International Portfolio Retail Shares for the period January 7, 1998 (inception)
through June 30, 1999.
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
Stratus Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the schedule of investments, of Stratus Fund, Inc. (comprising, respectively, of
the Growth, Government Securities, Capital Appreciation, Intermediate Government
Bond, and International Portfolios) as of June 30, 1999, the related statements
of operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the four years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the year
ended June 30, 1995 for the Growth, Government Securities, Capital Appreciation,
and Intermediate Government Bond Portfolios were audited by other auditors whose
report, dated July 21, 1995, expressed an unqualified opinion on such financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting Stratus Fund, Inc. as of June 30,
1999, the results of their operations for the year then ended, the changes in
their net assets for each of the two years in the period then ended, and their
financial highlights for each of the four years in the period then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
July 23, 1999
8
<PAGE>
STRATUS FUND, INC.
Schedule of Investments
June 30, 1999
GROWTH PORTFOLIO
Percent
of Net Market
Shares Common Stock - 95.64% Assets Value
- ------ --------------------- ------ -----
Aerospace/Defense
------------------- 1.90%
20,000 Alliedsignal, Inc. $1,260,000
Building Materials/Construction 0.97%
-------------------------------
10,000 Home Depot, Inc. 644,375
Chemicals 2.95%
---------
20,000 Air Products & Chemicals Inc. 805,000
25,000 Great Lakes Chemical Corp. 1,151,562
---------
1,956,562
Computer Related 9.42%
----------------
7,000 America Online, Inc.* 773,500
14,000 Cisco Systems, Inc.* 903,000
20,000 International Business Machine Corp. 2,585,000
22,000 Microsoft Corp.* 1,984,125
---------
6,245,625
Electronics 5.83%
-----------
25,000 Intel Corp. 1,487,500
9,200 Phillips Electric 928,050
10,000 Texas Instruments, Inc. 1,450,000
---------
3,865,550
Entertainment/Leisure 2.56%
---------------------
35,000 Carnival Corp. Class A 1,697,500
Financial Services 8.21%
------------------
25,000 Bank of America Corp. 1,832,813
18,000 Finova Group, Inc. 947,250
14,000 Bank One Corp. 833,875
40,000 SLM Holding Corp. 1,832,500
---------
5,446,438
9
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
GROWTH PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------- --------- ---------
Food/Beverage/Tobacco 1.11%
---------------------
40,000 International Home Foods, Inc.* $737,500
Industrial Services 1.97%
-------------------
30,000 Ecolab, Inc. 1,308,750
Insurance 5.81%
---------
22,000 American General Corp. 1,658,250
25,000 Allstate Corp. 896,875
20,000 MBIA, Inc. 1,295,000
---------
3,850,125
Machine/Tools 1.06%
-------------
20,000 Dover Corp. 700,000
Manufacturing 4.02%
-------------
11,000 General Electric Co. 1,243,000
15,000 Tyco International Ltd. 1,421,250
---------
2,664,250
Medical Supplies/Service 4.74%
------------------------
21,000 Baxter International, Inc. 1,273,125
18,000 Cardinal Health, Inc. 1,154,250
9,000 Visx, Inc.* 712,687
-------
3,140,062
Metals/Mining 1.87%
-------------
20,000 Alcoa, Inc. 1,237,500
Oil Company- Integrated 4.10%
-----------------------
15,000 Mobil Corp. 1,485,000
16,000 Exxon Corp. 1,234,000
---------
2,719,000
10
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
GROWTH PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------- --------- ---------
Office/Business 3.18%
---------------
19,000 Pitney-Bowes, Inc. $1,220,750
15,000 Xerox Corp. 885,938
-------
2,106,688
Pharmaceutical/Medical 6.52%
----------------------
20,000 Bristol-Myers Squibb, Co. 1,408,750
20,000 Eli Lilly, Co. 1,432,500
20,000 Merck & Company, Inc. 1,480,000
---------
4,321,250
Publishing/Printing 2.48%
-------------------
23,000 Gannett Co., Inc. 1,641,625
Retail Store/Apparel 8.19%
--------------------
17,000 Ross Stores, Inc. 856,375
11,000 Circuit City Stores-Circuit City Group 1,023,000
16,000 Costco Companies, Inc.* 1,281,000
30,000 CVS Corp. 1,533,750
10,000 Tommy Hilfiger Corp.* 735,000
-------
5,429,125
Telecommunications 6.95%
------------------
14,000 Nortel Networks Corp. 1,215,375
20,000 Qwest Communications International, Inc.* 661,250
6,000 Vodaphone Airtouch PLC 1,182,000
18,000 MCI Worldcom, Inc.* 1,552,500
---------
4,611,125
Telecommunications Equipment 5.06%
----------------------------
21,000 Nokia Corp. 1,922,813
10,000 Qualcomm, Inc. 1,435,000
---------
3,357,813
11
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
GROWTH PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------- --------- ---------
Transportation 4.65%
--------------
15,000 Delta Air Lines Inc. $864,375
18,000 FDX Corp.* 976,500
40,000 Southwest Airlines Co. 1,245,000
---------
3,085,875
Utilities-Electric 2.09%
------------------
40,000 MidAmerican Energy Holdings Co.* 1,385,000
---------
Total investment in securities
(cost $48,138,385) 95.64% $63,411,738
Cash equivalents 6.08% 4,032,736
Other assets, less liabilities (1.72%) (1,140,543)
------- -----------
TOTAL NET ASSETS 100.00% $66,303,931
======= ===========
* Indicates non-income producing security.
12
<PAGE>
STRATUS FUND, INC.
Schedule of Investments
June 30, 1999
GOVERNMENT SECURITIES PORTFOLIO
Percent
of Net Market
Principal Assets Value
Amount U.S. Government Securities
- ------------ ---------------------------- ------- --------
89.30%
$2,000,000 Federal Home Loan Bond 6.06% due 10/15/02 $1,989,996
2,000,000 Federal Home Loan Bond 5.80% due 8/24/01 1,992,112
1,000,000 Federal National Mtg. Assn. 6.20% due 6/6/00 1,006,140
2,000,000 Federal National Mtg. Assn. 6.35% due 6/10/05 2,009,000
1,000,000 Federal National Mtg. Assn. 5.10% due 11/29/00 992,263
3,000,000 U.S. Treasury Note 6.50% due 5/31/01 3,051,094
2,000,000 U.S. Treasury Bond 6.625% due 3/31/02 2,049,062
1,200,000 U.S. Treasury Bond 6.375% due 7/15/99 1,200,937
3,000,000 U.S. Treasury Bond 6.375% due 1/15/00 3,019,219
3,000,000 U.S. Treasury Bond 5.75% due 8/15/03 3,000,469
1,000,000 U.S. Treasury Bond 7.75% due 11/30/99 1,011,250
3,000,000 U.S. Treasury Bond 5.75% due 10/31/00 3,011,719
2,000,000 U.S. Treasury Bond 5.50% due 12/31/00 2,000,625
---------
26,333,886
Corporate Bonds 8.46%
---------------
1,500,000 Wachovia 6.70% due 6/21/04 1,510,077
1,000,000 Xerox Europe 5.75% due 5/15/02 983,689
-------
2,493,766
Total investment in securities
(cost $28,632,520) 97.76% $28,827,652
Cash equivalents 0.72% 210,004
Other assets, less liabilities 1.52% 450,850
----- -------
TOTAL NET ASSETS 100.00% $29,488,506
======= ===========
13
<PAGE>
STRATUS FUND, INC.
Schedule of Investments
June 30, 1999
CAPITAL APPRECIATION PORTFOLIO
Percent
of Net Market
Shares COMMON STOCK - 95.82% Assets Value
- ------ --------------------- ------ -----
Aerospace/Defense 1.38%
-----------------
4,000 Primex Technologies, Inc. $86,250
Airlines 1.28%
--------
3,200 SkyWest, Inc. 79,800
Building Residential/Commercial 1.45%
-------------------------------
2,400 Lone Star Industries, Inc. 90,150
Commercial Services 2.86%
-------------------
11,000 Mail-Well, Inc.* 178,063
Computer Related 24.95%
----------------
2,000 Autobytel.com, Inc.* 44,000
3,500 Affiliated Computer, Inc.* 177,188
9,000 Ciber, Inc.* 172,125
10,000 Dianon Systems, Inc.* 108,750
5,000 Keane, Inc.* 113,125
2,600 Micros Systems, Inc.* 88,400
2,000 Mercury Interactive Corp.* 70,750
3,000 Pomeroy Computer Resources* 41,813
1,500 PSINet, Inc.* 65,625
3,500 Sterling Software* 93,406
10,300 Symantec Corp.* 262,650
5,000 Transaction Systems* 195,000
4,000 Veritas DGC, Inc.* 73,250
3,000 Wind River Systems, Inc.* 48,187
------
1,554,269
Cosmetics/Personal Care 1.36%
-----------------------
6,000 Orthodontic Centers of America, Inc.* 84,750
14
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
CAPITAL APPRECIATION PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------ ------- -------
Electrical Equipment 3.54%
--------------------
7,200 C & D Tech, Inc. $220,500
Electronics 2.90%
-----------
3,500 Technitrol, Inc. 112,875
4,000 Varian Semiconductor 68,000
------
180,875
Educational Services 2.62%
--------------------
6,000 Sylvan Learning Systems* 163,125
Entertainment/Leisure 2.02%
---------------------
8,000 Vistana, Inc.* 126,000
Financial Services 3.06%
------------------
2,000 Cullen/Frost Bankers, Inc.* 55,125
3,800 Oriental Financial Group 91,675
500 SEI Investments, Co. 44,125
------
190,925
Food/Berverage/Tobacco 3.08%
----------------------
4,500 U.S. Foodservice* 191,812
Food Processing 2.22%
---------------
4,600 Pilgrims Pride Corp. 138,000
Household Products/Wares 3.08%
------------------------
2,250 Ethan Allen Interiors, Inc. 84,937
6,500 Shaw Industries, Inc.* 107,250
-------
192,187
Human Resources 1.32%
---------------
4,000 Interim Services* 82,500
15
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
CAPITAL APPRECIATION PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------ ------- -------
Insurance 3.02%
---------
4,600 First American Finance Corp. $82,225
5,600 Fremont General Corp. 105,700
-------
187,925
Manufacturing 4.86%
-------------
4,000 Kaydon Corp. 134,500
3,000 USG Corp. 168,000
-------
302,500
Medical Supplies/Services 2.88%
-------------------------
3,500 Biomatrix, Inc.* 75,688
4,000 Renal Care Group, Inc.* 103,500
-------
179,188
Oil Refining & Marketing 1.28%
------------------------
5,000 Tesoro Petroleum Corp.* 79,687
Pharmaceutical/Medical 7.54%
----------------------
2,700 Advance Paradigm, Inc.* 164,700
2,000 IDEC Pharmaceuticals Corp.* 154,125
2,000 Jones Pharma, Inc. 78,750
2,000 Millennium Pharmaceuticals, Inc. * 72,000
------
469,575
Publishing/Printing 2.00%
-------------------
3,900 Big Flower Holdings, Inc.* 124,313
Real Estate 1.60%
-----------
4,000 CB Richard Ellis Services, Inc.* 99,500
Retail/Apparel 3.98%
--------------
6,200 Zale Corp.* 248,000
16
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
CAPITAL APPRECIATION PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------- -------- --------
Retail Store 3.86%
------------
8,000 BJ's Wholesale Club* $240,500
Retirement/Aged Care 2.46%
--------------------
4,400 Sunrise Assisted Living* 153,450
Utilities-Electric 5.22%
------------------
6,000 MidAmerican Energy Holdings Co.* 207,750
4,500 Empire District Electric Co. 117,281
-------
325,031
Total investment in securities
(cost $5,340,449) 95.82% $5,968,875
Cash equivalents 4.17% 259,830
Other assets, less liabilities 0.01% 893
----- ----------
TOTAL NET ASSETS 100.00% $6,229,598
======= ==========
*Indicates nonincome-producing security
17
<PAGE>
STRATUS FUND, INC.
SCHEDULE OF INVESTMENTS
June 30, 1999
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Percent
Principal of Net Market
Amount Government Agency Bonds Assets Value
- ------------- -------------------------- --------- --------
$500,000 U.S. Treasury Bond 6.25% due 1/31/02 92.38% $507,500
400,000 U.S. Treasury Bond 6.625% due 4/30/02 410,250
400,000 U.S. Treasury Bond 6.375% due 1/15/00 402,563
500,000 U.S. Treasury Bond 7.125% due 2/29/00 506,406
500,000 U.S. Treasury Bond 6.125% due 7/31/00 503,672
500,000 U.S. Treasury Bond 6.25% due 10/31/01 507,109
-------
2,837,500
Total investment in securities
(cost $2,803,025) 92.38% $2,837,500
Cash equivalents 5.81% 178,445
Other assets, less liabilities 1.81% 55,531
----- ------
TOTAL NET ASSETS 100.00% $3,071,476
======= ==========
18
<PAGE>
STRATUS FUND, INC.
Schedule of Investments
June 30, 1999
INTERNATIONAL PORTFOLIO
Percent
of Net Market
Shares Common Stock - 101.27% Assets Value
- ------ ---------------------- ------ -----
Auto/Truck/Parts 8.74%
----------------
950 Bridgestone Corp. ADR $287,269
4,300 Hino Motors Ltd. ADR* 202,502
5,700 PSA Peugeot Citroen ADR 224,842
21,500 Volkswagon Ag ADR 277,464
-------
992,077
Building Materials/Construction 0.84%
-------------------------------
3,000 Lafarge SA ADR 94,988
Chemicals 1.22%
---------
3,900 Quimica Minera Chili SA ADR 137,962
Comercial Services 2.38%
------------------
1,300 Secom Limited ADR 270,663
Computer Related 3.40%
----------------
1,000 Equant NV* 94,125
2,900 Fujitsu Limited ADR 291,710
-------
385,835
Diversified Operations 8.60%
----------------------
7,919 Barlow Ltd. ADR 45,669
15,600 Vivendi Sp ADR 252,739
20,800 Kawasaki Industries Ltd. ADR 225,466
8,800 Orkla ASA-ADR 136,937
3,000 Telecom Italia ADR 315,563
-------
976,374
Electronics 1.92%
-----------
1,100 Matsushita Electric Industry Co., Ltd. ADR 218,144
19
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
INTERNATIONAL PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------ ----------- ----------
Financial Services 21.22%
------------------
6,000 Allied Irish Banks ADR $163,500
2,500 Barclays Plc ADR 298,750
10,485 Banco Frances Del Rio De La Plata S.A. ADR 199,215
4,000 Banque National Paris ADR 333,306
3,900 Dresdner Bank ADR 151,627
2,800 Deutsche Bank ADR 167,015
8,000 Istituto Bancario San Paolo-IMI ADR* 220,000
3,050 National Australia Bank Ltd. ADR 256,200
700 National Westminster Bank 90,956
7,000 Societe Generale ADR 246,741
1,500 Sumitomo Bank ADR 186,019
4,000 Uniao De Bancos S.A. 96,250
------
2,409,579
Food/Beverage/Tobacco 2.58%
---------------------
11,000 Cadbury Schweppes ADR 292,875
Holding Company 0.98%
---------------
12,805 South Africa Brewing ADR 111,195
Index Series 1.60%
------------
4,600 Webs-Italy Index Series 112,988
8,000 Webs-Singapore Index Series 69,000
------
181,988
Insurance 2.73%
---------
3,596 Allied Zurich Plc ADR 89,843
2,024 Aegon N.V. ADR 149,776
5,500 Liberty Life Association of Africa ADR 70,456
------
310,075
Machinery/Equipment 1.32%
-------------------
1,000 Mannesmann Ag Spon ADR 149,534
Manufacturing 1.85%
-------------
14,200 Olympus Opitcal ADR 209,886
20
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
INTERNATIONAL PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------ ----------- ----------
Medical Supplies/Services 3.90%
-------------------------
700 Banyu Pharmacuetical Ltd. ADR $231,336
1,000 Roche Holdings Ltd. ADR* 102,792
1,650 Smithkline Beecham ADR 109,003
-------
443,131
Oil-Field Services 1.00%
------------------
7,600 Petroleum Geo Services ADR* 113,050
Oil Exploration/Production 1.13%
--------------------------
2,000 Total SA Sponsor ADR 128,875
Oil/Gas Drilling 2.37%
----------------
1,000 Eni Spa ADR 60,000
4,500 Shell Transport & Trading Company ADR 208,687
-------
268,687
Oil Company-Integrated 1.61%
----------------------
11,900 Petrolio Brasileiro ADR 183,237
Pharmaceutical/Medical 2.96%
----------------------
4,600 Novartis AG ADR 335,844
Publishing/Printing 5.69%
-------------------
10,200 Elsevier NV Spon ADR 240,975
10,145 Vnu-Verenigde Nederlandse ADR 405,410
-------
646,385
Real Estate 3.16%
-----------
20,800 City Developments Ltd. ADR 133,172
25,400 Chueng Kong Holdings Ltd. ADR 225,890
-------
359,062
Recreation 1.78%
----------
25,500 Hilton Group Plc ADR 202,383
Retail Store
12,884 Cifra SA ADR 5.60% 247,106
3,300 Ito-Yokado Co., Ltd. ADR 223,988
5,000 Mauri Co. Ltd. ADR* 165,240
-------
636,334
21
<PAGE>
STRATUS FUND, INC.
Schedule of Investments (Continued)
INTERNATIONAL PORTFOLIO
Percent
of Net Market
Shares Assets Value
- ------ ----------- ----------
Telecommunications 9.48%
------------------
1,400 British Tele Plc ADR $239,750
5,900 Cia de Telecommunications de Chile Sa ADR 146,025
4,600 Nippon Telegraph & Telephone ADR 288,075
3,600 Telecom Corporation of New Zealand 125,775
2,000 Portugal Telecom sa ADR 82,375
3,000 Swisscom Spon ADR 115,125
400 Vodaphone Airtouch PLC 78,800
------
1,075,925
Utlities-Electric 1.82%
-----------------
5,900 Scottishpower Plc ADR 206,500
Utlities/Telecommunications 1.39%
---------------------------
1,073 Telefonica de Espana ADR 157,865
-------
Total investment in securities
(cost $10,639,134) 101.27% $11,498,453
Cash equivalents 2.23% 252,931
Other assets, less liabilities (3.50%) (396,622)
------- ---------
TOTAL NET ASSETS 100.00% $11,354,762
======= ===========
* Indicates non-income producing security.
22
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statement of Assets and Liabilities
June 30, 1999
Government Capital
Growth Securities Appreciation
Assets: Portfolio Portfolio Portfolio
------------- ------------- ----------------
<S> <C> <C> <C>
Investments in securities, at market value
(cost $48,138,385, $28,632,520 and $5,340,449) $63,411,738 $28,827,652 $5,968,875
Cash equivalents 4,032,736 210,004 259,830
Accrued interest and dividends receivable 86,502 423,601 3,539
Receivable for securities sold 1,128,685 - 43,595
Receivable for fund shares sold 17,781 55,048 27,109
------- ------- ------
Total assets 68,677,442 29,516,305 6,302,948
=========== =========== =========
Liabilities:
Accrued expenses, including investment
management and distribution expense payable to
adviser, administrator and distributor (note 3) 63,836 25,192 11,355
Payable for securities purchased 235,875 - 59,061
Commissions payable for fund shares sold 104 - 6
Payable for fund shares redeemed 2,073,696 2,607 2,928
---------- ------ -----
Total liabilities 2,373,511 27,799 73,350
---------- ------- ------
Net assets applicable to outstanding capital stock $66,303,931 $29,488,506 $6,229,598
============ ============ ==========
Net assets are represented by:
Capital stock outstanding, at par (note 5) $3,398 $3,012 $476
Additional paid-in capital 43,461,463 29,724,995 6,496,572
Accumulated undistributed net investment income (loss) 185 269 (34,432)
Accumulated net realized gain/(loss) on investments 7,565,532 (434,902) (861,444)
Unrealized appreciation (note 4) 15,273,353 195,132 628,426
----------- -------- -------
Total net assets applicable to shares outstanding $66,303,931 $29,488,506 $6,229,598
============ ============ ==========
Shares outstanding and net asset value per share
Institutional Shares of Capital Stock Outstanding 3,331,458 2,995,214 457,708
Net Asset Value and offering price per
share - Institutional Shares $19.51 $9.79 $13.08
====== ===== ======
Retail Shares of Capital Stock Outstanding 66,265 17,110 18,708
Net Asset Value per share - Retail Shares $19.51 $9.79 $13.04
Maximum sales charge (note 3) 0.92 0.30 0.61
---- ---- ----
Maximum offering price to public $20.43 $10.09 $13.65
====== ====== ======
See accompanying notes to financial statements.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statement of Assets and Liabilities
June 30, 1999
Intermediate
Government
Bond International
Assets: Portfolio Portfolio
------------- --------------
<S> <C> <C>
Investments in securities, at market value
(cost $2,803,025 and $10,639,134 respectively) $2,837,500 $11,498,453
Cash equivalents 178,445 252,931
Accrued interest and dividends receivable 59,713 33,160
Receivable for fund shares sold - 1,373
----------- -----------
Total assets $3,075,658 $11,785,917
=========== ===========
Liabilities:
Accrued expenses, including investment
management and distribution expense payable to
adviser, administrator and distributor (note 3) 4,182 15,475
Payable for commissions on shares sold - 25
Payable for fund shares redeemed - 415,655
------ -------
Total liabilities 4,182 431,155
------ -------
Net assets applicable to outstanding capital stock $3,071,476 $11,354,762
=========== ===========
Net assets are represented by:
Capital stock outstanding, at par (note 5) $293 $977
Additional paid-in capital 3,152,357 10,011,481
Accumulated undistributed net investment income 23 152
Accumulated net realized gain/(loss) on investments (115,672) 482,833
Unrealized appreciation (note 4) 34,475 859,319
------- -------
Total net assets applicable to shares outstanding $3,071,476 $11,354,762
=========== ===========
Shares outstanding and net asset value per share
Institutional Shares of Capital Stock Outstanding 291,243 962,434
Net Asset Value per share - Institutional Shares $10.50 $11.62
====== ======
Retail Shares of Capital Stock Outstanding 1,277 14,841
Net Asset Value per share - Retail Shares $10.50 $11.62
Maximum sales charge (note 3) 0.33 0.55
---- ----
Maximum offering price to public $10.83 $12.17
====== ======
See accompanying notes to financial statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statement of Operations
Year Ended June 30, 1999
Intermediate
Government Capital Government
Growth Securities Appreciation Bond International
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $651,645 $ - $25,186 $ - $201,506
Interest 200,263 1,780,176 18,716 212,144 13,508
-------- ---------- ------- -------- -------
Total investment income 851,908 1,780,176 43,902 212,144 215,014
-------- ---------- ------- -------- --------
Expenses (note 3):
Investment advisory fees 467,752 150,186 39,016 23,320 122,831
Administration Fees 155,739 75,276 17,467 8,994 26,690
Distribution Expenses - Retail Class 3,079 507 734 80 464
Accounting 7,686 6,381 4,219 4,838 5,373
Custodial fees - - 11,886 3,807 -
Securities Pricing 5,079 - 4,361 - 7,037
Other operating expenses 20,622 8,365 898 645 978
------- ------ ---- ---- ------
Total expenses 659,957 240,715 78,581 41,684 163,372
-------- -------- ------- ------- -------
Net investment income (loss) 191,951 1,539,461 (34,679) 170,460 51,642
======== ========== ======== ======== ======
Realized and unrealized gain (loss) on
investments (note 4):
Net realized gain (loss) 7,852,458 4,501 (860,212) 205 689,531
Net unrealized appreciation
(depreciation)
Beginning of period 14,247,166 436,489 714,191 54,272 1,542,266
End of period 15,273,353 195,132 628,426 34,475 859,319
----------- -------- -------- ------- -------
Net unrealized appreciation
(depreciation) 1,026,187 (241,357) (85,765) (19,797) (682,947)
--------- --------- -------- -------- ---------
Net realized and unrealized
gain (loss)
on investments 8,878,645 (236,856) (945,977) (19,592) 6,584
---------- --------- --------- -------- -----
Net increase (decrease) in net assets
resulting from operations $9,070,596 $1,302,605 ($980,656) $150,868 $58,226
=========== ========== ========== ======== =======
See accompanying notes to financial statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statement of Changes in Net Assets
Years Ended June 30, 1999 and 1998
Government
Growth Securities
Portfolio Portfolio
--------------------------- --------------------------
Year Ended Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------ -------------- --------------
Operations:
<S> <C> <C> <C> <C>
Net investment income $191,951 $355,054 $1,539,461 $1,459,915
Net realized gain on investments 7,852,458 8,100,736 4,501 3,634
Unrealized appreciation
(depreciatioN) 1,026,187 2,638,991 (241,357) 453,367
------------ ------------- ------------ ------------
Net increase in net assets
resting from operations 9,070,596 11,094,781 1,302,605 1,916,916
------------ ------------- ------------ ------------
Distributions to shareholders from:
Net investment income:
Institutional Class 192,811 354,256 1,533,764 1,455,518
Retail Class 201 797 8,326 1,947
------------ ------------- ------------ ------------
193,012 355,053 1,542,090 1,457,465
Net realized gains
Institutional Class 5,324,844 5,694,496 - -
Retail Class 85,354 - - -
------------ ------------- ------------ ------------
5,410,198 5,694,496 - -
------------ ------------- ------------ ------------
Total Distributions 5,603,210 6,049,549 1,542,090 1,457,465
------------ ------------- ------------ ------------
Capital share transactions (note 5):
Proceeds from sales 11,447,294 12,330,363 10,167,190 6,597,334
Payment for redemptions (17,142,994) (4,620,192) (12,344,732) (4,417,351)
Reinvestment of net investment
income and net realized gain
distributions
at net asset value 4,651,155 4,936,588 1,398,687 1,333,543
------------ ------------- ------------ ------------
Total increase (decrease)
from capital
share transactions (1,044,545) 12,646,759 (778,855) 3,513,526
------------ ------------- ------------ ------------
Total increase (decrease)
in netassets 2,422,841 17,691,991 (1,018,340) 3,972,977
Net Assets:
Beginning of period 63,881,090 46,189,099 30,506,846 26,533,869
------------ ------------- ------------ ------------
End of period $66,303,931 $63,881,090 $29,488,506 $30,506,846
============ ============= ============ ============
See accompanying notes to financial statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
Statement of Changes in Net Assets
Years Ended June 30, 1999 and 1998
Intermediate
Capital Government
Appreciation Bond
Portfolio Portfolio
--------------------------- --------------------------
Year Ended Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------ -------------- --------------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) ($34,679) $15,394 $170,460 $219,211
Net realized gain (loss)
on investments (860,212) 474,396 205 2,969
Unrealized appreciation
(depreciation) (85,765) (34,705) (19,797) 50,307
------------ ------------- ------------ -------------
Net increase (decrease)
in net assets
resting from operations (980,656) 455,085 150,868 272,487
------------ ------------- ------------ -------------
Distributions to shareholders from:
Net investment income:
Institutional Class - 15,226 169,995 217,970
Retail Class - - 1,170 511
------------- ---------- - ------------ -------------
- 15,226 171,165 218,481
Net realized gains
Institutional Class 23,255 461,511 - -
Retail Class 860 - - -
------------ ------------- ------------ -------------
24,115 461,511 - -
------------ ------------- ------------ -------------
Total Distributions 24,115 476,737 171,165 218,481
------------ ------------- ------------ -------------
Capital share transactions (note 5):
Proceeds from sales 2,166,995 3,781,440 34,934 240,311
Payment for redemptions (4,351,054) (1,569,897) (1,141,219) (1,059,642)
Reinvestment of net investment
income and net realized gain
distributions
at net asset value 23,641 472,356 160,118 197,547
------------ ------------- ------------ -------------
Total increase (decrease)
from capital
share transactions (2,160,418) 2,683,899 (946,167) (621,784)
------------ ------------- ------------ -------------
Total increase (decrease)
in net assets (3,165,189) 2,662,247 (966,464) (567,778)
Net Assets:
Beginning of period 9,394,787 6,732,540 4,037,940 4,605,718
------------ ------------- ------------ -------------
End of period $6,229,598 $9,394,787 $3,071,476 $4,037,940
============ ============= ============ =============
See accompanying notes to financial statements.
</TABLE>
27
<PAGE>
STRATUS FUND, INC.
Statement of Changes in Net Assets
Years Ended June 30, 1999 and 1998
International
Portfolio
----------------------------
Year Ended
June 30, 1999 June 30, 1998
----------------------------
Operations:
Net investment income $51,642 $23,436
Net realized gain on investments 689,531 476
Unrealized appreciation (depreciation) (682,947) 639,696
-------------- ------------
Net increase in net assets
resting from operations 58,226 663,608
-------------- ------------
Distributions to shareholders from:
Net investment income:
Institutional Class 51,751 22,988
Retail Class 237 149
-------------- ------------
51,988 23,137
Net realized gains
Institutional Class 204,146 131,684
Retail Class 3,025 -
-------------- ------------
207,171 131,684
-------------- ------------
Total Distributions 259,159 154,821
-------------- ------------
Capital share transactions (note 5):
Proceeds from sales 2,843,478 2,588,389
Payment for redemptions (3,136,480) (2,081,544)
Reinvestment of net investment
income and net realized gain distributions
at net asset value 249,768 152,190
-------------- ------------
Total increase (decrease) from capital
share transactions (43,234) 659,035
-------------- ------------
Total increase (decrease) in net assets (244,167) 1,167,822
Net Assets:
Beginning of period 11,598,929 10,431,107
-------------- ------------
End of period $11,354,762 $11,598,929
============== ============
See accompanying notes to financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Years Ended June 30, 1999, 1998, 1997, 1996, and 1995
Growth Portfolio- Institutional Class
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C> <C>
Beginning of period $18.53 $17.07 $13.67 $11.47 $9.84
------ ------ ------ ------ -----
Income from investment operations:
Net investment income 0.06 0.11 0.22 0.23 0.22
Net realized and unrealized gain
on investments 2.53 3.45 3.99 2.36 1.72
----- ----- ----- ----- ----
Total income from investment
operations 2.59 3.56 4.21 2.59 1.94
----- ----- ----- ----- ----
Less distributions:
Dividends from net investment income (0.06) (0.11) (0.22) (0.22) (0.22)
Distribution from capital gains (1.55) (1.99) (0.59) (0.17) (0.09)
------ ------ ------ ------ ------
Total distributions (1.61) (2.10) (0.81) (0.39) (0.31)
------ ------ ------ ------ ------
End of period $19.51 $18.53 $17.07 (a) $13.67 $11.47
------ ------ ------ ------ ------
Total return: 16.34% 22.29% 32.6% (a) 22.6% 20.3%
------ ------ ----- ----- -----
Ratios/Supplemental data:
Net assets, end of period $65,011,189 63,096,914 46,189,099 24,627,983 12,813,352
Ratio of expenses to average
net assets 1.05% 0.76% 0.72% 0.71% 0.82%
Ratio of net income to average
net assets 0.31% 0.18% 1.46% 1.78% 2.14%
Portfolio turnover rate 194.23% 137.03% 88.53% 92.72% 19.89%
(a) Excludes maximum sales load of 4%
See accompanying notes to financial statements.
</TABLE>
29
<PAGE>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Year Ended June 30, 1999 and the Period from January 7, 1998
(commencement of class shares) to June 30, 1998
Growth Portfolio- Retail Class
----------------------------------
1999 Period Ended
June 30, 1998
Net asset value: ---------- ---------------
Beginning of period $18.52 $15.86
------- ------
Income from investment operations:
Net investment income 0.00 0.04
Net realized and unrealized gain
on investments 2.47 2.66
----- ----
Total income from investment operations 2.47 2.70
----- ----
Less distributions:
Dividends from net investment income 0.00 (0.04)
Distribution from capital gains (1.48) 0.00
------ ----
Total distributions (1.48) (0.04)
------ ------
End of period $19.51 (a) $18.52 (a)
------ ------
Total return: 16.09% (a) 16.89% (a)(b)
------ ------
Ratios/Supplemental data:
Net assets, end of period $1,292,742 $784,176
Ratio of expenses to average net assets 1.35% 1.50% (c )
Ratio of net income to average net assets 0.01% 0.13% (c )
Portfolio turnover rate 194.23% 137.03%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the total
return for the year.
(c) Annualized for those periods less than twelve months in
duration.
See accompanying notes to financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Years Ended June 30, 1999, 1998, 1997, 1996, and 1995
Government Securities Portfolio- Institutional Class
--------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C> <C>
Beginning of period $9.88 $9.72 $9.64 $9.77 $9.40
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income 0.51 0.51 0.51 0.49 0.45
Net realized and unrealized
gain (loss)
on investments (0.09) 0.16 0.08 (0.13) 0.37
------ ----- ----- ------ ----
Total income (loss) from investment
operations 0.42 0.67 0.59 0.36 0.82
----- ----- ----- ----- ----
Less distributions from
net investment income (0.51) (0.51) (0.51) (0.49) (0.45)
------ ------ ------ ------ ------
End of period $9.79 $9.88 $9.72 (a) $9.64 $9.77
----- ----- ----- ----- -----
Total return: 4.33% 7.04% 6.3% (a) 3.7% 9.0%
----- ----- ---- ---- ----
Ratios/Supplemental data:
Net assets, end of period $29,321,012 30,367,682 26,533,869 23,043,163 13,885,204
Ratio of expenses to average net assets 0.80% 0.82% 0.71% 0.69% 0.80%
Ratio of net income to average net assets 5.13% 5.17% 5.21% 5.04% 4.82%
Portfolio turnover rate 18.66% 2.07% 27.20% 40.61% 33.88%
(a) Excludes maximum sales load of 3%
See accompanying notes to financial statements.
</TABLE>
31
<PAGE>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Year Ended June 30, 1999 and the Period from January 13,
1998 (commencement of class shares) to June 30, 1998
Government Securities- Retail Class
----------------------------------
1999 Period Ended
June 1998
--------- --------------
Net asset value:
Beginning of period $9.89 $9.97
------ -----
Income from investment operations:
Net investment income 0.48 0.25
Net realized and unrealized loss
on investments (0.09) (0.08)
------ ------
Total income from investment operations 0.39 0.17
----- ----
Less distributions:
Dividends from net investment income (0.49) (0.25)
Distribution from capital gains 0.00 0.00
----- -----
Total distributions (0.49) (0.25)
------ ------
End of period $9.79 $9.89
----- -----
Total return: 3.96% (a) 1.58%(a)(b)
----- -----
Ratios/Supplemental data:
Net assets, end of period $167,494 $139,164
Ratio of expenses to average net assets 1.10% 1.21% (c)
Ratio of net income to average net assets 4.83% 5.49% (c)
Portfolio turnover rate 18.66% 2.07%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the total
return for the year.
(c) Annualized for those periods less than twelve months in
duration.
See accompanying notes to financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Years Ended June 30, 1999, 1998, 1997, 1996, and 1995
Capital Appreciation Portfolio-Institutional Class
--------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C> <C>
Beginning of period $14.39 $14.25 $13.19 $11.23 $8.95
------ ------ ------ ------ -----
Income (loss) from investment operations:
Net investment income (loss) (0.06) 0.03 0.18 (0.19) (0.15)
Net realized and unrealized gain (loss)
on investments (1.21) 0.86 1.48 2.88 2.62
------ ----- ----- ----- ----
Total income (loss) from investment
operations (1.27) 0.89 1.66 2.69 2.47
------ ----- ----- ----- ----
Less distributions from
net investment income 0.00 (0.03) (0.12) 0.00 0.00
Less distributions from capital gains (0.04) (0.72) (0.48) (0.73) (0.19)
------ ------ ------ ------ ------
Total Distributions (0.04) (0.75) (0.60) (0.73) (0.19)
------ ------ ------ ------ ------
End of period $13.08 $14.39 $14.25 (a) $13.19 $11.23
------ ------ ------ ------ ------
Total return: (8.79%) 7.47% 11.7% (a) 26.0% 28.6%
------- ----- ----- ----- -----
Ratios/Supplemental data:
Net assets, end of period $5,985,704 $9,174,664 6,732,540 2,474,470 748,588
Ratio of expenses to average net assets 1.11% 0.76% 0.91% 2.84% 2.69%
Ratio of net income (loss) to average net (0.49%) 0.18% 1.31% (1.54%) (1.59%)
Portfolio turnover rate 109.49% 277.31% 322.07% 179.06% 214.47%
(a) Excludes maximum sales load of 4% See accompanying notes to financial
statements.
</TABLE>
33
<PAGE>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Year Ended June 30, 1999 and the Period from January 7,
1998 (commencement of class shares) to June 30, 1998
Capital Appreciation- Retail Class
------------------------------------
1999 Period Ended
June 30, 1998
------- ---------------
Net asset value:
Beginning of period $14.39 $13.21
------- ------
Income from investment operations:
Net investment loss (0.10) (0.03)
Net realized and unrealized loss
on investments (1.21) 1.21
Total income (loss) from investment
operations (1.31) 1.18
Less distributions:
Dividends from net investment income 0.00 0.00
----- ----
Distribution from capital gains (0.04) 0.00
------ ----
Total distributions (0.04) 0.00
------ ----
End of period $13.04 (a) $14.39 (a)
------ ------
Total return: (9.07%)(a) 8.93% (a)(b)
------- -----
Ratios/Supplemental data:
Net assets, end of period $243,894 $220,123
Ratio of expenses to average net assets 1.41% 1.25% (c )
Ratio of net income (loss) to average
net assets (0.79%) (0.18%)(c )
Portfolio turnover rate 109.49% 277.31%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the total
return for the year.
(c) Annualized for those periods less than twelve months in
duration.
See accompanying notes to financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Years Ended June 30, 1999, 1998, 1997, 1996, and 1995
Intermediate Government Bond Portfolio-Institutional Class
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net asset value:
<S> <C> <C> <C> <C> <C>
Beginning of period $10.60 $10.48 $10.47 $10.56 $10.29
------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income 0.51 0.52 0.54 0.52 0.50
Net realized and unrealized
gain (loss)
on investments (0.10) 0.12 0.02 (0.09) 0.27
------ ----- ----- ------ ----
Total income from investment
operations 0.41 0.64 0.56 0.43 0.77
----- ----- ----- ----- ----
Less distributions:
Dividends from net
investment income (0.51) (0.52) (0.55) (0.52) (0.50)
Distributions from capital gains 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- -----
Total distributions (0.51) (0.52) (0.55) (0.52) (0.50)
End of period $10.50 $10.60 $10.48 (a) $10.47 $10.56
------ ------ ------ ------ ------
Total return: 3.96% 6.27% 5.6% (a) 4.1% 7.9%
----- ----- ---- ---- ----
Ratios/Supplemental data:
Net assets, end of period $3,058,068 4,008,700 4,605,718 7,224,506 5,518,431
Ratio of expenses to average
net assets 1.16% 1.17% 1.02% 1.03% 1.11%
Ratio of net income to average
net assets 4.75% 4.93% 5.14% 4.95% 4.84%
Portfolio turnover rate 0.00% 0.00% 26.88% 4.05% 27.67%
(a) Excludes maximum sales load of 3%
See accompanying notes to financial statements.
</TABLE>
35
<PAGE>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Year Ended June 30, 1999 and the Period from January 27, 1998
(commencement of class shares) to June 30, 1998
Intermediate Government Bond Portfolio
Retail Class
--------------------------------------
1999 Period Ended
June 30, 1998
-------- ----------------
Net asset value:
Beginning of period $10.59 $10.63
------- ------
Income from investment operations:
Net investment income 0.47 0.29
Net realized and unrealized loss
on investments (0.09) (0.04)
------ ------
Total income from investment operations 0.38 0.25
----- ----
Less distributions:
Dividends from net investment income (0.47) 0.29
Distribution from capital gains 0.00 0.00
----- ----
Total distributions (0.47) 0.29
------ ----
End of period $10.50 (a) $10.59 (a)
------ ------
Total return: 3.73% (a) 1.69%(a)(b)
----- -----
Ratios/Supplemental data:
Net assets, end of period $13,408 $29,240
Ratio of expenses to average net assets 1.46% 1.63% (c )
Ratio of net income to average net assets 4.45% 5.18% (c )
Portfolio turnover rate 0.00% 0.00%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the total
return for the year.
(c) Annualized for those periods less than twelve months in
duration.
See accompanying notes to financial statements.
36
<PAGE>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Years ended June 30, 1999 and 1998 and the Period from
October 1, 1996 (commencement of class shares) to June 30, 1997
International Portfolio- Institutional Class
--------------------------------------------
1999 1998 Period Ended
June 30, 1997
---- ---- ---------------
Net asset value:
Beginning of period $11.75 $11.22 $10.00
------ ------ ------
Income from investment operations:
Net investment income 0.05 0.02 0.15
Net realized and unrealized gain
on investments 0.09 0.64 1.22
----- ----- ----
Total income from investment
operations 0.14 0.66 1.37
----- ----- ----
Less distributions:
Dividends from net investment
income (0.05) (0.02) (0.15)
Distributions from capital gains (0.22) (0.11) 0.00
------ ------ ----
Total Distributions (0.27) (0.13) (0.15)
------ ------ ------
End of period $11.62 $11.75 $11.22 (a)
------ ------ ------
Total return: 1.4% 6.27% 18.20%(a)(b)
---- ----- ------
Ratios/Supplemental data:
Net assets, end of period $11,182,332 $11,473,772 10,431,107
Ratio of expenses to average net
assets 1.53% 1.65% 1.48%(b)
Ratio of net income to average net
assets 0.49% 0.21% 1.89%(b)
Portfolio turnover rate 40.00% 52.92% 33.77%
(a) Excludes maximum sales load of 4%
(b) Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
37
<PAGE>
STRATUS FUND, INC.
FINANCIAL HIGHLIGHTS
Year ended June 30, 1999 and the Period from January 7, 1998
(commencement of class shares) to June 30, 1998
International Portfolio - Retail Class
---------------------------------------
1999 Period Ended
June 30, 1998
------ ---------------
Net asset value:
Beginning of period $11.75 $10.33
------- ------
Income from investment operations:
Net investment income 0.02 0.03
Net realized and unrealized gain (loss)
on investments 0.09 1.42
----- ----
Total income from investment operations 0.11 1.45
----- ----
Less distributions:
Dividends from net investment income (0.02) (0.03)
Distribution from capital gains (0.22) 0.00
------ ----
Total distributions (0.24) (0.03)
------ ------
End of period $11.62 (a) $11.75 (a)
------ ------
Total return: 1.07% (a) 13.88%(a)(b)
----- ------
Ratios/Supplemental data:
Net assets, end of period $172,430 $125,157
Ratio of expenses to average net assets 1.83% 1.94% (c )
Ratio of net income to average net assets 0.19% 0.27% (c )
Portfolio turnover rate 40.00% 52.92%
(a) Excludes maximum sales load of 4%
(b) Total return is not annualized, as it may not be representative of the total
return for the year.
(c) Annualized for those periods less than twelve months in
duration.
See accompanying notes to financial statements.
38
<PAGE>
STRATUS FUND, INC.
Notes to Financial Statements
June 30, 1999
1. Organization
Stratus Fund, Inc. (the Fund) is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. The Fund issues its shares in series, each series representing a
distinct portfolio with its own investment objectives and policies. At June
30, 1999, the following series are presently authorized and have shares
outstanding.
Growth Portfolio Capital Appreciation Portfolio
Government Intermediate Government
Securities Portfolio Bond Portfolio
International Portfolio
Each portfolio has two classes of shares authorized and outstanding:
retail and institutional
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies employed by
the Fund in preparing its financial statements.
Use of Estimates: In preparing the financial statements in accordance with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and changes in net assets for the period.
Actual results could differ from those estimates.
Valuation of Investments
Investment securities are carried at market determined using the following
valuation methods:
o Securities traded on a national or regional stock exchange or included
in the NASDAQ National Market System are valued at the last quoted
sales price.
o Securities not listed on an exchange or securities for which the latest
quoted sales price is not readily available and securities traded
over-the-counter but not included in the NASDAQ National Market System
are valued at the mean of the closing bid and asked prices.
o Securities including bonds, restricted securities, or other assets for
which reliable recent market quotations are not readily available are
valued at fair market value as determined in good faith or under the
direction of the Board of Directors. Determination of fair value
involves, among other things, reference to market indices, matrices and
data from independent brokers and pricing services.
39
<PAGE>
STRATUS FUND, INC.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (Continued)
All securities are valued in accordance with the above noted policies at
the close of each business day.
The Growth, Capital Appreciation, and International Portfolios are
authorized to purchase exchange-traded put and call options.
At June 30, 1999, the Growth, Capital Appreciation and International
Portfolios had no such exchange traded options nor were any purchased
during the year then ended.
The Portfolios may sell a security it does not own in anticipation of a
decline in the market value of that security (short-sale). When a Portfolio
makes a short-sale, it must borrow the security sold short and deliver it
to the buyer. The proceeds from the short-sale will be retained by the
broker-dealer through which it made the short-sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The
Portfolio may have to pay a fee to borrow the security and may be obligated
to remit any interest received on such borrowed securities. A gain or loss
is recognized upon the termination of the short sale, if the market price
at termination is less than or greater than the proceeds originally
received.
At June 30, 1999, the cost of investment securities is identical for
financial reporting and income tax purposes.
Security Transactions
Security transactions are accounted for on the date securities are
purchased or sold (trade date). Dividend income is recognized on the
ex-dividend date and interest income is accrued daily. Amortization of
premium and discount is accrued daily using both the constant yield and the
straight-line methods. Realized investment gains and losses are determined
by specifically identifying the issue sold.
Federal Income Taxes
It is the policy of each Portfolio to comply with the requirements of the
Internal Revenue Code (the Code) applicable to regulated investment
companies and to distribute virtually all of the taxable income generated
by the Portfolios to their shareholders within the time period allowed by
the Federal law. Consequently, no liability for Federal income taxes is
required. Internal Revenue Code requirements regarding distributions may
differ from amounts determined under generally accepted accounting
principles. These book/tax differences are either temporary or permanent in
nature. To the extent these differences are permanent, they are
40
<PAGE>
STRATUS FUND, INC.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (Continued)
charged or credited to paid-in-capital or accumulated net realized gain, as
appropriate in the period that the differences arise. Each Portfolio is
treated as a separate entity for tax purposes, and on a calendar basis,
will distribute substantially all of its net investment income and realized
gains, if any, to avoid payment of any Federal excise tax. There will be no
net realized gain distributions until the net realized loss carry forwards
have been offset or expired. The losses will expire in 8 years. Each
Portfolio prepares its tax return on an accrual basis. The Government
Securities, Intermediate Government Bond, and Capital Appreciation
Portfolios have unused capital loss carry forwards of approximately
$378,000, $124,000, and $455,000 respectively, available for federal income
tax purposes at June 30, 1999. The losses begin expiring in 2003 and 2005
for the Government Securities and Intermediate Government Bond portfolios,
respectively.
Distribution to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. In
accordance with resolutions enacted by the Board of Directors, the
Government Securities and Intermediate Government Bond Portfolios declare
dividends monthly and the Growth, Capital Appreciation, and International
Portfolios declare dividends semi-annually. The dividends declared become
payable immediately.
Cash Equivalents
Cash equivalents consist of money market funds which declare dividends
daily. As of June 30, 1999, the average yield on such funds was
approximately 4.50%.
3. Fees, Expenses and Related Party Transactions
The Fund and each of its Portfolios have retained Union Bank & Trust
Company (UBATCO) as their exclusive investment adviser and custodian of the
Fund's assets (hereinafter, the Adviser). The agreement provides that the
Capital Appreciation Portfolio will compensate the Adviser on a performance
based scale, whereby the Portfolio will pay a fee of 1.40% per annum of
daily average net assets. The fee may be increased or decreased by up to
1.00% of the average daily net assets during the latest 12 months (a
rolling average method), depending upon the performance of this Portfolio
relative to the Russell 2000 Index. For the twelve months ended June 30,
1999, the annualized fee was 0.56%.
41
<PAGE>
STRATUS FUND, INC.
Notes to Financial Statements
3. Fees, Expenses and Related Party Transactions (Continued)
The remaining Portfolios pay the following advisory fee rates per annum of
their average daily net asset values:
Portfolio Annual Fee Rate
----------- ----------------
Growth .75%
Government Securities .50%
Intermediate Government Bond .65%
International 1.15%
The Fund and each of its Portfolios have retained UBATCO as the custodian
of the Fund's investments. The agreement provides that the portfolios
(except the Growth, Government Securities, and International Portfolios,
which pay no fee), will pay the custodian an annual fee which is calculated
and billed monthly. The fee calculation does not include cash equivalents.
The fee consists of an investment transaction charge of $12 for each
transaction, a fee of $100 per account, plus an additional fee calculated
in accordance with the following table.
Net assets of:
$0 - $10 million 11 basis points
$10 - $20 million 6 basis points
Over $20 million 2.5 basis points
The Fund and each of its Portfolios have retained Lancaster Administrative
Services, Inc. (the Administrator) to act as their transfer agent and
administrator to provide all necessary record keeping and share transfer
services for the Fund. As of July 1, 1999 the Administrator is a related
party to the Fund. The agreement provides that each Portfolio will pay an
administrative fee to the Administrator equal to .25% per annum of average
daily net assets.
The Fund has also retained SMITH HAYES Financial Services Corporation (the
Distributor) to act as the underwriter and distributor of the fund's
shares. Retail shares for the Growth, Capital Appreciation, and
International portfolios include a maximum sales charge of 4.5%. Retail
shares for the Government Securities and Intermediate Government Bond
portfolios include a maximum sales charge of 3.0%. For sales of all
Portfolios of $50,000 or more, the sales charge is reduced. Pursuant to the
shareholder approved distribution plan under Rule 12b-1, Retail shares of
each fund will reimburse the distributor for shareholder-related expenses
incurred in connection with the distribution of the fund's shares, however,
under no circumstances shall such reimbursement exceed .30% per annum of
the fund's average daily net assets. The Distributor received $14,590 and
paid out $11,992 of this amount as commissions and dealer reallowances.
Institutional shares for all portfolios are not charged sales charges or
12b-1 fees.
42
<PAGE>
STRATUS FUND, INC.
Notes to Financial Statements
3. Fees, Expenses and Related Party Transactions (Continued)
Under the terms of the advisory, custodian, administrative and distribution
agreements outlined above, the Portfolios collectively incurred $803,105;
$15,693; $284,165 and $4,864 for such services. Of the amount paid to the
Distributor, 100% was paid out to Union Bank & Trust Company under a Dealer
Service Agreement.
At June 30, 1999, the following accrued investment advisory and
administrative fees were payable to the Adviser and Administrator.
Payable to Payable to Payable to
Adviser Administrator Distributor Total
--------- ------------ ----------- -----
Growth Portfolio $41,003 $5,472 $310 $46,785
Government Securities Portfolio 12,162 2,418 41 14,621
Capital Appreciation Portfolio 6,856 490 57 7,403
Intermediate Government
Bond Portfolio 1,644 266 3 1,913
International Portfolio 11,007 952 41 12,000
Under the terms of the advisory agreement, the Adviser may be obligated to
reimburse a Portfolio up to the amount of the Adviser's fee paid to the
Adviser if during any year the expenses of the Portfolio, including the
Adviser's fee, exceed certain limitations. At June 30, 1999, no expense
reimbursement was required.
In addition to the amounts paid by the Portfolios under advisory,
custodian, and administration agreements, the Portfolios used SMITH HAYES
Financial Services Corporation (SMITH HAYES), a company related through
common management, to affect security trades on their behalf. As is
customary in the industry, the investment adviser evaluates the pricing and
ability to execute the transactions in selecting brokers to affect trades.
SMITH HAYES was paid commissions in the amount of $26,842 for their
brokerage services during the twelve months ended June 30, 1999.
At June 30, 1999, directors, officers and employees of the Fund, the
Adviser and Administrator and their immediate families held the following
in each Portfolio:
Shares Value
--------- --------
Growth Portfolio Institutional Class 307,874 $6,006,622
Government Securities Portfolio
Institutional Class 335,092 3,280,552
Capital Appreciation Portfolio
Institutional Class 63,476 830,271
Intermediate Gov't Bond Portfolio
Institutional Class - -
International Portfolio Institutional Class 83,018 964,666
43
<PAGE>
STRATUS FUND, INC.
Notes to Financial Statements
3. Fees, Expenses and Related Party Transactions (Continued)
At June 30, 1999, UBATCO held, in nominee name, the following in each
Portfolio:
Shares Value
-------- -------
Growth Portfolio Institutional Class 3,223,122 $64,834,110
Growth Portfolio Retail Class 59,973 1,170,081
Government Securities Portfolio
Institutional Class 2,995,214 29,321,012
Government Securities Portfolio Retail Class 17,110 167,494
Capital Appreciation Portfolio
Institutional Class 456,959 5,977,024
Capital Appreciation Portfolio Retail Class 18,188 237,179
Intermediate Gov't Bond Portfolio
Institutional Class 286,728 3,010,644
Intermediate Gov't Bond Portfolio Retail Class 1,277 13,408
International Portfolio Institutional Class 962,259 11,181,450
International Portfolio Retail Class 14,808 172,069
4. Securities Transactions
Purchases of securities and proceeds from sales were as follows for each
Portfolio:
Purchases of Proceeds
Securities from Sales
------------- ------------
Growth Portfolio $112,467,589 $118,698,905
Government Securities Portfolio 5,504,240 4,304,773
Capital Appreciation Portfolio 7,278,521 9,198,136
Intermediate Government Bond Portfolio - 1,050,328
International Portfolio 4,525,897 4,191,336
At June 30, 1999, the aggregate gross unrealized appreciation and the
aggregate gross unrealized depreciation of securities in each Portfolio
were as follows:
Aggregate Gross
Unrealized
Appreciation Depreciation
-------------- -------------
Growth Portfolio $16,005,419 $732,065
Government Securities Portfolio 237,086 41,954
Capital Appreciation Portfolio 1,007,041 378,615
Intermediate Government Bond Portfolio 34,475 -
International Portfolio 1,962,208 1,102,889
44
<PAGE>
STRATUS FUND, INC.
Notes to Financial Statements
5. Capital Share Transactions
The Fund is authorized to issue a total of 1 billion shares of common stock
in series with a par value of $.001 per share. The Board of Directors has
authorized twenty million shares to be issued in the Growth Portfolio and
ten million each in the Government Securities Portfolio, Capital
Appreciation Portfolio, Intermediate Government Bond Portfolio, and the
International Portfolio.
Transactions in the capital stock of each Portfolio for the twelve
months ended June 30, 1999 were as follows:
Growth Growth
Portfolio Portfolio
Institutional Shares Retail Shares
Transactions in shares: --------------------- -------------
Shares sold 604,780.391 28,498.234
Shares redeemed (964,596.917) (10,137.807)
Reinvested dividends 285,304.330 5,379.448
----------- -----------
Net increase/(decrease) (74,512.196) 23,739.875
============== ==========
Transactions in dollars:
Dollars sold $10,936,522 $510,772
Dollars redeemed (16,962,447) (180,547)
Reinvested dividends 4,565,600 85,555
Net increase/(decrease) (1,460,325) 415,780
============ =======
Government Government
Securities Portfolio Securities Port.
Institutional Shares Retail Shares
Transactions in shares:
Shares sold 1,017,926.590 4,508.363
Shares redeemed (1,235,858.445) (2,286.824)
Reinvested dividends 140,060.686 811.520
-------------- -------------
Net increase/(decrease) (77,871.169 3,033.059
============== =============
Transactions in dollars:
Dollars sold $10,122,315 $44,875
Dollars redeemed (12,322,021) (22,711)
Reinvested dividends 1,390,629 8,058
Net increase/(decrease) (809,076) 30,222
============ =======
45
<PAGE>
STRATUS FUND, INC.
Notes to Financial Statements
5. Capital Share Transactions (Continued)
Capital Appreciation Capital Appreciation
Portfolio Portfolio
Institutional Shares Retail Shares
------------------ -------------
Transactions in shares:
Shares sold 163,963.107 10,919.333
Shares redeemed (335,674.249) (7,581.852)
Reinvested dividends 1881.201 71.132
--------------- ------------
Net increase/(decrease) (169,829.941) 3,408.613
============= =============
Transactions in dollars:
Dollars sold $2,032,580 $134,415
Dollars redeemed (4,258,566) (92,488)
Reinvested dividends 22,781 860
----------- ---------
Net increase/(decrease) (2,203,205) 42,787
========== =========
Intermediate Gov't Intermediate Gov't
Bond Portfolio Bond Portfolio
Institutional Shares Retail Shares
------------------ -------------
Transactions in shares:
Shares sold 3,290.152 .000
Shares redeemed (105,297.562) (1,593.098)
Reinvested dividends 14,942.669 109.942
------------- ----------
Net increase/(decrease) (87,064.741) (1,483.156)
=============== ===========
Transactions in dollars:
Dollars sold $34,934 $0
Dollars redeemed (1,124,406) (16,813)
Reinvested dividends 158,948 1,170
------------ -----
Net increase/(decrease) (930,524) (15,643)
International International
Portfolio Portfolio
Institutional Shares Retail Shares
------------------ -------------
Transactions in shares:
Shares sold 243,612.224 7,918.977
Shares redeemed (279,958.877) (4,032.711)
Reinvested dividends 22,696.235 302.734
------------- ------------
Net increase/(decrease) (13,650.418) 4,189.000
============== ===========
Transactions in dollars:
Dollars sold $2,758,103 $85,375
Dollars redeemed (3,092,484) (43,996)
Reinvested dividends 246,505 3,263
------------ --------
Net increase/(decrease) (87,876) (44,642)
============ ========
46
