As filed with the Securities and Exchange Commission on or about November 2,
1998
Securities Act Registration No. 33-______
Investment Company Act Registration No. 811- ____
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes)
STRONG LIFE STAGE SERIES, INC.
(Exact Name of Registrant as Specified in Charter)
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
Thomas P. Lemke
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable
after the Registration Statement becomes effective.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
1
<PAGE>
INFORMATION CONTAINED IN THIS PROSPECTUS PERTAINING TO THE STRONG LIFE STAGE
PORTFOLIOS IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION
STATEMENT RELATING TO,
AMONG OTHER THINGS, SECURITIES OF THE STRONG LIFE STAGE PORTFOLIOS HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. SECURITIES OF THE STRONG
LIFE STAGE PORTFOLIOS MAY NOT BE SOLD NOR MAY OFFERS TO BUY SECURITIES OF THE
STRONG LIFE STAGE PORTFOLIOS BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
SECURITIES OF THE STRONG LIFE STAGE PORTFOLIO IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATE OF ISSUANCE: NOVEMBER 3, 1998
STRONG LIFE STAGE SERIES
STRONG CONSERVATIVE PORTFOLIO STRONG FUNDS
STRONG MODERATE PORTFOLIO P.O. Box 2936
STRONG AGGRESSIVE PORTFOLIO Milwaukee, Wisconsin 53201
TELEPHONE: (414) 359-1400
TOLL-FREE: (800) 368-3863
DEVICE FOR THE HEARING-IMPAIRED:
(800) 999-2780
www.strong-funds.com
The Strong Family of Funds ("Strong Funds") is a family of more than forty
diversified and non-diversified mutual funds. All of the Strong Portfolios are
no-load funds, meaning that you may purchase, redeem, or exchange shares
without paying a sales charge. Strong Funds include growth funds, conservative
equity funds, income funds, municipal income funds, international funds, and
cash management funds. Strong Life Stage Series, Inc. is an open-end series
management company that offers three diversified investment portfolios, with
the following investment objectives:
STRONG CONSERVATIVE PORTFOLIO ("Conservative Portfolio") seeks
total return by
investing primarily for income and secondarily for capital growth.
STRONG MODERATE PORTFOLIO ("Moderate Portfolio") seeks total return
by investing primarily for capital growth and secondarily for income.
STRONG AGGRESSIVE PORTFOLIO ("Aggressive Portfolio") seeks capital
growth. These Portfolios are described in this Prospectus. Each Portfolio
seeks to achieve its investment objective by investing all of its assets in a
select group of Strong Funds (the "Underlying Funds"), representing different
combinations of stocks, bonds, and cash investments, and reflecting varying
degrees of potential investment risk and reward.
This Prospectus contains information you should consider before you invest.
Please read it carefully and keep it for future reference. A Statement of
Additional Information for the Portfolios, dated December 31, 1998 ("SAI"),
which contains further information, is incorporated by reference into this
Prospectus, and has been filed with the Securities and Exchange Commission
("SEC"). The prospectuses and SAIs for the Underlying Funds, which contain
further information on the Underlying Funds, are incorporated by reference into
this Prospectus, and have been filed with the SEC. The Prospectus and SAI for
the Portfolios and the prospectuses and SAIs for the Underlying Funds, which
may be revised from time to time, are available without charge upon request to
the above-noted address or telephone number. If you would like to
electronically access additional information about the Portfolios or Underlying
Funds after reading this Prospectus, you may do so by accessing the SEC's World
Wide Web site (http://www.sec.gov) that contains the SAI regarding the
Portfolios and Underlying Funds and other related materials.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
December 30, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
EXPENSES I-X
INVESTMENT OBJECTIVES AND POLICIES . I-X
The Life Stage Portfolios I-X
The Underlying Strong Funds I-X
IMPLEMENTATION OF POLICIES AND RISKS I-X
ABOUT THE PORTFOLIOS I-X
SHAREHOLDER MANUAL II-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the SAI, and
if given or made, such information or representations may not be relied upon as
having been authorized by the Portfolios. This Prospectus does not constitute
an offer to sell securities to any person in any state or jurisdiction in which
such offering may not lawfully be made.
<PAGE>
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Portfolios, will
bear directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Sales Load Imposed on Purchases NONE
Sales Load Imposed on Reinvested Dividends NONE
Deferred Sales Load NONE
Redemption Fees NONE
Exchange Fees NONE
</TABLE>
There are certain charges associated with retirement accounts (such as a $10
charge for closing an IRA account) and with certain other special shareholder
services offered by the Portfolios. Additionally, purchases and redemptions may
also be made through broker-dealers or other financial intermediaries who may
charge fees for their services. (See "Shareholder Manual - How to Buy Shares"
and "- How to Sell Shares.")
The following table summarizes the expenses of each Portfolio. You should keep
in mind that shareholders of each Portfolio bear INDIRECTLY the expenses of the
Underlying Funds in which the Portfolio invests. The Portfolios will indirectly
bear their pro rata share of the fees and expenses (including management fees)
incurred by the Underlying Funds that are borne by all Underlying Fund
shareholders. The investment returns of each Portfolio, therefore, will be
net of that Portfolio's share of the expenses of the Underlying Funds in which
the Portfolio is invested. See "About the Portfolios - Management - Underlying
Fund Expenses" for more information on the expense ratios of each Underlying
Fund after fee waiver or reimbursement, where applicable, as of September 30,
1998.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
UNDERLYING TOTAL
MANAGEMENT ADMINISTRATIVE 12B-1 OTHER FUND OPERATING
PORTFOLIO FEE FEES FEES EXPENSES EXPENSES* EXPENSES
Conservative NONE 0.25% NONE 0.32% 0.85% 1.42%
Moderate NONE 0.25% NONE 0.32% 0.90% 1.47%
Aggressive NONE 0.25% NONE 0.32% 0.94% 1.51%
</TABLE>
* Currently, Strong Capital Management, Inc., the investment adviser of the
Underlying Funds, is waiving advisory fees and/or absorbing expenses for the
Blue Chip 100 and Money Market Funds (see "About the Portfolios - Management -
Underlying Fund Expenses"). Without such waivers and absorptions, the
Underlying Fund Expenses for the Conservative, Moderate, and Aggressive
Portfolios would have been 0.96%, 1.06%, and 1.15%, respectively.
From time to time, Strong Capital Management, Inc., the Portfolios' shareholder
servicing agent and transfer and dividend-disbursing agent ("Strong") may
voluntarily waive its Administrative Fees and/or absorb certain expenses
for a Portfolio. Since the Portfolios are new and did not begin
operations until December 31, 1998, the Other Expenses have been estimated. The
Underlying Fund Expenses have been estimated using the Underlying Funds' Total
Operating Expenses after any waivers and absorptions by Strong as of September
30, 1998. For additional information concerning fees and expenses, see "About
the Portfolios - Management."
<PAGE>
EXAMPLE. You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
PERIOD (IN YEARS)
PORTFOLIO 13
<S> <C> <C>
Conservative $14 $45
Moderate $15 $46
Aggressive $15 $48
</TABLE>
The Example is based on each Portfolio's "Total Operating Expenses," as
described above. PLEASE REMEMBER THAT THE EXAMPLE SHOULD
NOT BE CONSIDERED AS
REPRESENTATIVE OF PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN. The assumption in the Example of a 5% annual
return is required by regulations of the SEC applicable to all mutual funds.
The assumed 5% annual return is not a prediction of, and does not represent,
the projected or actual performance of a Portfolio's shares.
INVESTMENT OBJECTIVES AND POLICIES
THE LIFE STAGE PORTFOLIOS
The Portfolios are designed for investors who are saving for long-term goals,
such as for retirement. Because of the risks associated with common stock and
bond investments, the Portfolios are intended to be long-term investment
vehicles and are not designed to provide investors with a means of speculating
on market movements. By using the Life Stage Portfolios, you may pursue one of
following three distinct objectives.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO INVESTMENT OBJECTIVE
- ------------ ---------------------------------------------------------------------------
Conservative Seeks to provide total return by investing primarily for income
and secondarily for capital growth.
- ------------ ---------------------------------------------------------------------------
Moderate Seeks to provide total return by investing primarily for capital
growth and secondarily for income.
- ------------ ---------------------------------------------------------------------------
Aggressive Seeks to provide capital growth.
</TABLE>
There can be no assurance that the investment objective of any Portfolio will
be achieved. Because the market value of each Portfolio's investments in the
Underlying Funds will change, the net asset value per share of each Portfolio
will also vary.
In order to achieve their investment objectives, the Portfolios maintain
different allocations of stocks, bonds, and cash (which is included in a
Portfolio's bond portion), reflecting varying degrees of potential investment
risk and reward. These asset allocations provide investors with three
diversified, distinct options that meet a wide variety of investment needs.
The pie charts below illustrate the expected asset allocation between stocks
and bonds of each of the Life Stage Portfolios.
<PAGE>
CONSERVATIVE PORTFOLIO
[PIE CHART SHOWING BONDS 60% AND STOCKS 40%]
MODERATE PORTFOLIO
[PIE CHART SHOWING BONDS 40% AND STOCKS 60%]
AGGRESSIVE PORTFOLIO
[PIE CHART SHOWING BONDS 20% AND STOCKS 80%]
Investors may choose to invest in any of the three Life Stage Portfolios based
on investing goals, investment time horizons, personal risk tolerances, and
financial circumstances. The following table is intended to assist investors
in choosing a Portfolio.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
INVESTING PERSONAL
PORTFOLIO INVESTMENT GOAL TIME HORIZON RISK TOLERANCE EXAMPLE
- ------------ ------------------ ---------------- --------------- -------------------------
Conservative Current income 3 years or more. Low to medium. Investors who are
with low to approaching or who are
moderate growth of already retires.
capital.
- ------------ ------------------ ---------------- --------------- -------------------------
Moderate Low to moderate 5 years or more. Medium to high. Middle-aged investors
growth of capital who are saving for
with some current retirement and who plan
income. to retire in their 60s.
- ------------ ------------------ ---------------- --------------- -------------------------
Aggressive Medium to high 5 years or more. High. Younger investors who
growth of capital are saving for retirement
with very low and who plan to retire in
current income their 60s.
</TABLE>
Investors can choose any of these three Portfolios, depending on personal
investment objectives, time horizons, and risk tolerances. For example,
investors in their 40s who are sensitive to market risk may choose the Moderate
Portfolio while investors in their 40s who are not as sensitive to market risk
may choose the Aggressive Portfolio.
The Portfolios may be especially suitable for tax-advantaged retirement
accounts, including:
- - INDIVIDUAL RETIREMENT PLANS, including Traditional IRAs, Roth
IRAs, and
SEP-IRAs (for one-person businesses). Call 1-800-368-3863 for more
information.
- - QUALIFIED RETIREMENT PLANS, including 401(k) plans, SIMPLEs,
SEP-IRAs, Keoghs, 403(b)(7), profit sharing plans, and pension plans.
Call 1-800-368-2882 for more information.
While these Portfolios are specifically designed for tax-advantaged retirement
accounts, shares may also be purchased by investors for other long-term general
savings purposes.
Investors who engage in excessive account activity generate additional costs
which are borne by all of the Portfolios' shareholders. In order to minimize
such costs, the Portfolios have adopted the following policies. The Portfolios
reserve the right to:
- - To reject any purchase request (including exchange purchases from other
Strong Funds) for any reason. Generally, this is used to reject purchase
requests that are deemed to be disruptive to a Portfolio, either because of
the timing of the investment or previous excessive trading by the investor.
- - To discontinue the exchange privilege of any shareholder at any time.
Generally, this is used to eliminate market timers ability to freely move
from one Strong Fund to another.
<PAGE>
THE UNDERLYING STRONG FUNDS
Each Portfolio invests all its assets in the Underlying Funds as described
below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
UNDERLYING FUNDS CONSERVATIVE MODERATE AGGRESSIVE
- --------------------------------- ------------ -------- ----------
Strong Growth Fund 10% 15% 20%
Strong Growth and Income Fund 10% 15% 20%
Strong Blue Chip 100 Fund 10% 15% 20%
Strong Common Stock Fund 10% 15% 20%
- --------------------------------- ------------ -------- ----------
Strong Advantage Fund 30% 15% None
Strong Short-Term Bond Fund 20% 10% 5%
Strong Government Securities Fund 5% 10% 10%
Strong Money Market Fund 5% 5% 5%
- --------------------------------- ------------ -------- ----------
</TABLE>
The Board of Directors of the Portfolios may (i) reallocate a Portfolio's
assets among its Underlying Funds, or (ii) replace an Underlying Fund with
another Strong Fund for any reason. The Board of Directors may take this
action without shareholder vote. Although the Board of Directors may in the
future reallocate assets and make substitutions of Strong Funds they believe
that these occasions will happen infrequently and only for good cause.
As a result of market gains or losses, the percentage of a Portfolio's assets
invested in stocks or bonds may exceed or be less than the asset allocation
models shown above. Strong will rebalance a Portfolio's assets among the
Underlying Funds in accordance with its asset allocation model once a calendar
quarter, or more often as necessary.
The following provides a concise description of the investment objective and
principal investment strategy of each Underlying Fund. For a complete
description of these Funds, please see the Underlying Fund prospectuses, which
are incorporated into this Prospectus by reference and are available free of
charge by calling 1-800-368-3863.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
UNDERLYING INVESTMENT OBJECTIVE PRINCIPAL INVESTMENT
STRATEGY
FUND
- --------------- ----------------------------- ----------------------------------------
Growth Fund Capital growth. Focuses on common stocks of companies that its
manager believes are reasonably priced and have
above-average growth potential. The portfolio can
include stocks of any size.
- --------------- ----------------------------- --------------------------------------------------
Common Stock Capital growth. Primarily invests in common stocks of companies that
Fund the Fund's managers believe to be under-priced, yet
have attractive growth prospects. The managers base
their analysis on a company's "private market value" -
the price an investor would pay for the entire company
given its management, financial health, and growth
potential. The managers apply this approach primarily
to small-company stocks.
- --------------- ----------------------------- ----------------------------------------------------
Growth & High total return by Primarily focuses on the common stocks of large,
Income Fund investing for both capital dividend-paying companies. These companies
growth and income. typically offer well-known products and services
and may enjoy strong earnings growth. In addition,
the Fund invests a limited amount of its assets in mid-size
companies that have the potential for rapid growth.
- --------------- ----------------------------- --------------------------------------------------------
Blue Chip 100 High total return by Invests in the common stocks of the 100
largest
Fund investing for both capital companies traded in the U.S. Half of the Fund's
assets
growth and income. are invested in these stocks in proportion to size.
The other half of the Fund's assets are used to
overweight positions in those stocks the Fund's manager
believes offer greater return potential.
- --------------- ------------------------- --------------------------------------------------------
Money Market Current income, a stable Managed to provide attractive yields and a stable share
Fund share price, and daily price of $1.00. The Fund invests in a portfolio of
liquidity. high-quality, short-term debt securities issued by
corporations, banks, and other financial institutions.
- --------------- ----------------------------- --------------------------------------------------
Advantage Current income with a very Invests primarily in very short-term, high-
quality
Fund low degree of share-price bonds and money market securities. To
enhance its
fluctuation. return potential, the Fund also invests a portion of its
assets in bonds that have longer maturities or are of
lower quality. To help limit changes in share price,
the Fund's average maturity is usually one year or less
- --------------- ----------------------------- ------------------------------------------------------
Short-Term Total return by investing for Invests primarily in short- and intermediate-
term,
Bond Fund a high level of current medium- and high-quality bonds. The Fund's average
income with a low degree of maturity will normally be between one and three
years.
share-price fluctuation. The Fund may also invest a limited portion of its assets
in lower-quality bonds.
- --------------- ----------------------------- ---------------------------------------------------
Government Total return by investing for Invests primarily in high-quality bonds issued by the
Securities Fund a high level of current U.S. government or its agencies. The Fund's average
income with a moderate maturity will normally be between five to ten years.
degree of share-price
fluctuation.
- --------------- ----------------------------- --------------------------------------------------
</TABLE>
* Investments in the Money Market Fund are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. This
Fund's goal is to preserve its share price at $1.00 per share. However, it is
possible to lose money by investing in this Fund.
<PAGE>
Each Portfolio has adopted certain fundamental investment restrictions that are
set forth in the Portfolio's SAI. Those restrictions, each Portfolio's
investment objective, and any other investment policies identified as
"fundamental" cannot be changed without shareholder approval. To further
guide investment activities, each Portfolio has also instituted a number of
non-fundamental operating polices, which are described in this Prospectus and
in the SAI. Although operating policies may be changed by a Portfolio's Board
of Directors without shareholder approval, a Portfolio will promptly notify
shareholders of any material change in operating policies.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to certain
restrictions described below), the Underlying Funds may invest in some or all
of the following securities and may employ some or all of the following
investment techniques, as more fully indicated in the matrix below, some of
which may present special risks as described below. For a more complete
discussion of certain of these securities and investment techniques and the
associated risks, please see the Portfolios' SAI and the Underlying Funds SAI,
which are available free of charge by calling 1-800-368-3863. The matrix
below provides details on which Underlying Funds invest in certain securities
and/or utilize certain investment techniques. Percentages indicated
how much of an Underlying Fund's assets may be committed to a specific
type of security. Please note that a "no" entry indicates that the Underlying
Fund does not invest in that type of security or engage in the investing
technique or, it does so in immaterial amount (I.E., < 5%).
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short
Securities or Growth & Blue Chip Common Term Government
Money
Techniques Growth Income 100 Stock Advantage Bond Securities Market
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Foreign Securities <25% <25% Yes(1) <25% <25% <25% 20%(1)
25%(1)
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Foreign Investment Yes Yes No Yes Yes Yes No No
Companies
- --------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Derivatives Yes Yes Yes Yes Yes Yes Yes Yes(2)
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Illiquid <15% <15% <15% <15% <15% <15% <15%
<10%
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Small and Medium Yes Yes No Yes No No No No
Companies Stocks
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Debt Obligations <35% <35% No <20% Yes Yes Yes
Yes(2)
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
High-Yield Securities <5% <5% No <5% <25%(3) <25%(3) No
No
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Mortgage and Asset No Yes No No Yes Yes Yes Yes
Back Securities
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Loan Interests No No No No Yes Yes Yes Yes
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Municipal Obligations No No No No Yes Yes Yes Yes
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Repurchase Agreements No No No No Yes Yes Yes Yes
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Zero Coupon, Step No Yes No No Yes Yes Yes Yes
Coupon and Pay-in
Kind Securities
- -------------------- ------ -------- --------- ------ --------- ------- ---------- ------
Reverse Repurchase No No No No Yes Yes Yes Yes
Agreements and
Mortgage Dollar Rolls
- ------------------- ------ -------- --------- ------ --------- ------- ---------- ------
When-Issued and Yes Yes No Yes Yes Yes Yes Yes
Delayed Delivered
Securities
- ------------------ ------ -------- --------- ------ --------- ------- ---------- ------
Participation Interests No No No No Yes Yes Yes Yes
- ----------------------- ------ -------- --------- ------ --------- ------- ---------- ------
</TABLE>
(1) FOREIGN SECURITIES - The Blue Chip 100 Fund may invest in dollar-
denominated foreign securities to the extent that they are issued by the 100
largest companies traded in the U.S.; and the Government Securities and Money
Market Funds may only invest in dollar denominated foreign securities.
(2) RULE 2A-7 - The Money Market Fund may only invest in derivatives to the
extent allowed by Rule 2a-7 under the Investment Company Act of 1940, which
regulates money funds.
(3) HIGH-YIELD SECURITIES - The Advantage and Short-Term Bond Funds
may invest up to 25% in BB or comparably rated securities.
<PAGE>
FOREIGN SECURITIES AND CURRENCIES
Certain Underlying Funds may invest in foreign securities either directly or
indirectly through the use of depositary receipts. Depositary receipts are
generally issued by banks or trust companies and evidence ownership of
underlying foreign securities. Foreign investments involve special risks,
including:
- - expropriation, confiscatory taxation, and withholding taxes on dividends and
interest;
- - less extensive regulation of foreign brokers, securities markets, and
issuers;
- - less publicly available information and different accounting standards;
- - costs incurred in conversions between currencies, possible delays in
settlement in foreign securities markets, limitations on the use or transfer
of assets (including suspension of the ability to transfer currency from a
given country), and difficulty of enforcing obligations in other countries;
and
- - diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy
in various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance-of-payments positions. Many foreign securities
may be less liquid and their prices more volatile than comparable U.S.
securities. Although the Funds generally invest only in securities that are
regularly traded on recognized exchanges or in over-the-counter ("OTC")
markets, from time to time foreign securities may be difficult to liquidate
rapidly without adverse price effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs, may be higher than
those attributable to domestic investing.
The Funds may invest in securities of issuers in developing or emerging markets
and economies. Risks of investing in developing or emerging markets include:
- - less social, political, and economic stability;
- - smaller securities markets and lower trading volume, which may result in a
lack of liquidity and greater price volatility;
- - certain national policies that may restrict a Fund's investment
opportunities, including restrictions on investments in issuers or industries
deemed sensitive to national interests, or expropriation or confiscation of
assets or property, which could result in a Fund's loss of its entire
investment in that market; and
- - less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes,
and other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values, and other protectionist measures negotiated or imposed by the
countries with which they trade.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Underlying Portfolios could be affected by
changes in foreign currency exchange rates to some extent. The value of a
Fund's assets denominated in foreign currencies will increase or decrease in
response to fluctuations in the value of those foreign currencies relative to
the U.S. dollar. Currency exchange rates can be volatile at times in response
to supply and demand in the currency exchange markets, international
balances-of-payments, governmental intervention, speculation, and other
political and economic conditions.
The Funds may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options, and futures
transactions for hedging or any other lawful purpose. (See "Derivative
Instruments.")
<PAGE>
FOREIGN INVESTMENT COMPANIES
Certain Underlying Funds may invest, to a limited extent, in foreign investment
companies. Some of the countries in which the Funds may invest may not permit
direct investment by outside investors. Investments in such countries may only
be permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may be
less expensive and more expedient for a Fund to invest in a foreign investment
company in a country which permits direct foreign investment. Investing through
such vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the Investment Company Act of 1940 ("1940 Act").
The Funds do not intend to invest in such investment companies unless, in the
judgment of Strong, the potential benefits of such investments justify the
payment of any associated fees or expenses.
DERIVATIVE INSTRUMENTS
Underlying Funds may use derivative instruments for any lawful purpose
consistent with the Fund's investment objective such as hedging or managing
risk. Derivative instruments are commonly defined to include securities or
contracts the values of which depend on (or "derive" from) the value of one or
more other assets, such as securities, currencies, or commodities. These "other
assets" are commonly referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to OPTIONS or FORWARD CONTRACTS. Options
and forward contracts are considered to be the basic "building blocks" of
derivatives. For example, forward-based derivatives include forward contracts,
swap contracts, as well as exchange-traded futures. Option-based derivatives
include privately negotiated, OTC options (including caps, floors, collars, and
options on forward and swap contracts) and exchange-traded options on futures.
Diverse types of derivatives may be created by combining options or forward
contracts in different ways, and by applying these structures to a wide range of
underlying assets.
An option is a contract in which the "holder" ("buyer") pays a certain amount
("premium") to the "writer" ("seller") to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time.
The holder pays the premium at inception and has no further financial
obligation. The holder of an option-based derivative generally will benefit
from favorable movements in the price of the underlying asset but is not
exposed to corresponding losses due to adverse movements in the value of the
underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long" position) and
a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed future
date and the seller agrees to deliver the asset. The seller hopes that the
market price on the delivery date is less than the agreed upon price, while the
buyer hopes for the contrary. The change in value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset.
Derivative instruments may include (i) options; (ii) futures; (iii) options on
futures; (iv) short sales in which a Fund sells a security for delivery at a
future date; (v) swaps, in which two parties agree to exchange a series of cash
flows in the future, such as interest-rate payments; (vi) interest-rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap";
(vii) interest-rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall
below a specified level, or "floor"; (viii) forward currency contracts and
foreign currency exchange-related securities; and (ix) structured instruments
which combine the foregoing in different ways.
Derivatives may be exchange traded or traded in OTC transactions between
private parties. OTC transactions are subject to additional risks, such as the
credit risk of the counterparty to the instrument and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other
<PAGE>
party to the transaction. Derivative instruments may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
instrument in relation to the underlying asset may be magnified. When required
by SEC guidelines, a Fund will set aside permissible liquid assets in a
segregated account to secure its obligations under the derivative.
The successful use of derivatives by a Fund is dependent upon a variety of
factors, particularly Strong's ability to correctly anticipate trends in the
underlying asset. In a hedging transaction, if Strong incorrectly anticipates
trends in the underlying asset, a Fund may be in a worse position than if no
hedging had occurred. In addition, there may be imperfect correlation between a
Fund's derivative transactions and the instruments being hedged. To the extent
that the Fund is engaging in derivative transactions for risk management, the
Fund's successful use of such transactions is more dependent upon Strong's
ability to correctly anticipate such trends, since losses in these transactions
may not be offset by gains in the Fund's portfolio or in lower purchase prices
for assets it intends to acquire. Strong's prediction of trends in underlying
assets may prove to be inaccurate, which could result in substantial losses to
a Fund.
A Fund may also use derivative instruments to make investments that are
consistent with a Fund's investment objective but that are impracticable or not
feasible in the cash market (E.G., using derivative instruments to create a
synthetic security or to derive exposure to a region or asset class when cash
markets are inefficient and/or illiquid). A Fund will only engage in this
strategy when Strong reasonably believes it to be more advantageous to the
Fund.
In addition to the derivative instruments and strategies described above,
Strong expects to discover additional derivative instruments and other trading
techniques. Strong may utilize these new derivative instruments and techniques
to the extent that they are consistent with a Fund's investment objective and
permitted by the Fund's investment limitations, operating policies, and
applicable regulatory authorities.
ILLIQUID SECURITIES
Each Underlying Fund may invest up to 15% of its net assets in illiquid
securities, except for the Money Market Fund which may only invest up to 10%
of its net assets. Illiquid securities are those securities that are not readily
marketable, including restricted securities and repurchase obligations maturing
in more than seven days. Certain restricted securities that may be resold to
institutional investors pursuant to Rule 144A under the Securities Act of 1933
and Section 4(2) commercial paper may be determined liquid under guidelines
adopted by each Fund's Board of Directors.
SMALL AND MEDIUM COMPANIES
Certain Underlying Funds may invest in the securities of small and medium
companies. While small and medium companies generally have potential for
rapid growth, investments in small and medium companies often involve greater
risks than investments in larger, more established companies because small and
medium companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In
addition, in many instances the securities of small and medium companies are
traded only OTC or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Therefore, the securities of small and medium companies may be
subject to greater and more abrupt price fluctuations. When making large
sales, a Fund may have to sell portfolio holdings at discounts from quoted
prices or may have to make a series of small sales over an extended period of
time due to the trading volume of small and medium company securities.
Investors should be aware that, based on the foregoing factors, an investment in
the Funds may be subject to greater price fluctuations than an investment in
a fund that invests primarily in larger, more established companies. Strong's
research efforts may also play a greater role in selecting securities for the
Funds than in a fund that invests in larger, more established companies.
DEBT OBLIGATIONS
Certain Underlying Funds may invest in any debt obligations. A Fund's authority
to invest in certain types of debt obligations may be restricted or subject to
objective investment criteria.
<PAGE>
TYPES OF OBLIGATIONS. Debt obligations include (i) corporate debt securities,
including bonds, debentures, and notes; (ii) bank obligations, such as
certificates of deposit, banker's acceptances, and time deposits of domestic
and foreign banks and their subsidiaries and branches, and domestic savings and
loan associations; (iii) commercial paper (including variable-amount master
demand notes); (iv) repurchase agreements; (v) loan interests; (vi) foreign
debt obligations issued by foreign issuers traded either in foreign markets or
in domestic markets through depositary receipts; (vii) convertible securities -
debt obligations of corporations convertible into or exchangeable for equity
securities or debt obligations that carry with them the right to acquire equity
securities, as evidenced by warrants attached to such securities, or acquired
as part of units of the securities; (viii) preferred stocks - securities that
represent an ownership interest in a corporation and that give the owner a
prior claim over common stock on the company's earnings or assets; (ix) trust
preferred securities - certain obligations which have characteristics of both
debt and preferred stock; (x) U.S. government securities; (xi) mortgage-backed
securities, collateralized mortgage obligations, and similar securities; and
(xii) municipal obligations.
HIGH-YIELD (HIGH-RISK) SECURITIES
High-yield (high-risk) securities, also referred to as "junk bonds," are those
securities that are rated lower than investment grade and unrated securities of
comparable quality. Although these securities generally offer higher yields
than investment-grade securities with similar maturities, lower-quality
securities involve greater risks, including the possibility of default or
bankruptcy. In general, they are regarded to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal. Other
potential risks associated with investing in high-yield securities include:
- - substantial market-price volatility resulting from changes in interest rates,
changes in or uncertainty about economic conditions, and changes in the
actual or perceived ability of the issuer to meet its obligations;
- - greater sensitivity of highly leveraged issuers to adverse economic changes
and individual-issuer developments;
- - subordination to the prior claims of other creditors;
- - additional Congressional attempts to restrict the use or limit the tax and
other advantages of these securities; and
- - adverse publicity and changing investor perceptions about these securities.
As with any other asset in a Fund's portfolio, any reduction in the value of
such securities as a result of the factors listed above would be reflected in
the net asset value of the Fund. In addition, a Fund that invests in
lower-quality securities may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal and/or
interest on its holdings. As a result of the associated risks, successful
investments in high-yield, high-risk securities will be more dependent on the
Advisor's credit analysis than generally would be the case with investments in
investment-grade securities.
It is uncertain how the high-yield market will perform during a prolonged
period of rising interest rates. A prolonged economic downturn or a prolonged
period of rising interest rates could adversely affect the market for these
securities, increase their volatility, and reduce their value and liquidity. In
addition, lower-quality securities tend to be less liquid than higher-quality
debt securities because the market for them is not as broad or active. If
market quotations are not available, these securities will be valued in
accordance with procedures established by the Fund's Board of Directors.
Judgment may, therefore, play a greater role in valuing these securities. The
lack of a liquid secondary market may have an adverse effect on market price
and a Fund's ability to sell particular securities.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government
<PAGE>
agencies or instrumentalities or by private issuers, generally originators in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by private lenders may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first-lien
mortgage loans or interests therein; rather they include assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property and receivables from credit
card or other revolving credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may be supported by
non-governmental credit enhancements similar to those utilized in connection
with mortgage-backed securities.
The yield characteristics of mortgage- and asset-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if a Fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is
slower than expected will reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time
the principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government sponsored mortgage-backed securities.
Certain Underlying Fund may invest in stripped mortgage- or asset-backed
securities, which receive differing proportions of the interest and principal
payments from the underlying assets. The market value of such securities
generally is more sensitive to changes in prepayment and interest rates than is
the case with traditional mortgage- and asset-backed securities, and in some
cases the market value may be extremely volatile. With respect to certain
stripped securities, such as interest-only ("IO") and principal-only ("PO")
classes, a rate of prepayment that is faster or slower than anticipated may
result in a Fund failing to recover all or a portion of its investment, even
though the securities are rated investment grade.
LOAN INTERESTS
Certain Underlying Funds may each invest a portion of their assets in loan
interests, which are interests in amounts owed by a corporate, governmental or
other borrower to lenders or lending syndicates. Loan interests purchased by a
Fund may have a maturity of any number of days or years, and may be secured or
unsecured. Loan interests, which may take the form of participation interests
in, assignments of, or novations of a loan, may be acquired from U.S. and
foreign banks, insurance companies, finance companies or other financial
institutions that have made loans or are members of a lending syndicate or from
the holders of loan interests. Loan interests involve the risk of loss in case
of default or bankruptcy of the borrower and, in the case of participation
interests, involve a risk of insolvency of the agent lending bank or other
financial intermediary. Loan interests are not rated by any NRSROs and are, at
present, not readily marketable and may be subject to contractual restrictions
on resale.
MUNICIPAL OBLIGATIONS
IN GENERAL. Municipal obligations are debt obligations issued by or on behalf
of states, territories, and possessions of the United States and the District
of Columbia and their political subdivisions, agencies, and instrumentalities.
Municipal obligations generally include debt obligations issued to obtain
<PAGE>
funds for various public purposes. Certain types of municipal obligations are
issued in whole or in part to obtain funding for privately operated facilities
or projects. Municipal obligations include general obligation bonds, revenue
bonds, industrial development bonds, notes, municipal lease obligations, and
mortgage-backed bonds.
BONDS AND NOTES. General obligation bonds are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of interest
and principal. Revenue bonds are payable only from the revenues derived from a
project or facility or from the proceeds of a specified revenue source.
Industrial development bonds are generally revenue bonds secured by payments
from and the credit of private users. Municipal notes are issued to meet the
short-term funding requirements of state, regional, and local governments.
Municipal notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax and revenue anticipation notes, construction
loan notes, short-term discount notes, tax-exempt commercial paper, demand
notes, and similar instruments. Municipal obligations include obligations, the
interest on which is exempt from federal income tax, that may become available
in the future as long as the Board of Directors of a Fund determines that an
investment in any such type of obligation is consistent with that Fund's
investment objective.
LEASE OBLIGATIONS. Municipal lease obligations may take the form of a lease,
an installment purchase, or a conditional sales contract. They are issued by
state and local governments and authorities to acquire land, equipment, and
facilities, such as state and municipal vehicles, telecommunications and
computer equipment, and other capital assets. A Fund may purchase these
obligations directly, or it may purchase participation interests in such
obligations. (See "Participation Interests" below.) Municipal leases are
generally subject to greater risks than general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet in order to issue municipal obligations. Municipal
leases may contain a covenant by the state or municipality to budget for,
appropriate, and make payments due under the obligation. Certain municipal
leases may, however, contain "non-appropriation" clauses which provide that the
issuer is not obligated to make payments on the obligation in future years
unless funds have been appropriated for this purpose each year. Accordingly,
such obligations are subject to "non-appropriation" risk. While municipal
leases are secured by the underlying capital asset, it may be difficult to
dispose of any such asset in the event of non-appropriation or other default.
MORTGAGE-BACKED BONDS. A Fund's investments in municipal obligations
may include mortgage-backed municipal obligations, which are a type of municipal
security issued by a state, authority, or municipality to provide financing for
residential housing mortgages to target groups, generally low-income
individuals who are first-time home buyers. A Fund's interest, evidenced by
such obligations, is an undivided interest in a pool of mortgages. Payments
made on the underlying mortgages and passed through to the Fund will represent
both regularly scheduled principal and interest payments. A Fund may also
receive additional principal payments representing prepayments of the
underlying mortgages. While a certain level of prepayments can be expected,
regardless of the interest rate environment, it is anticipated that prepayment
of the underlying mortgages will accelerate in periods of declining interest
rates. In the event that a Fund receives principal prepayments in a declining
interest-rate environment, its reinvestment of such funds may be in bonds with
a lower yield.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with certain banks and non-bank
dealers. In a repurchase agreement, a Fund buys a security at one price, and at
the time of sale, the seller agrees to repurchase the obligation at a mutually
agreed upon time and price (usually within seven days). The repurchase
agreement determines the yield during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the value of the underlying
security. A Fund may enter into repurchase agreements with respect to any
security in which it may invest. Strong will monitor, on an ongoing basis, the
value of the underlying securities to ensure that the value always equals or
exceeds the repurchase price plus accrued interest. Repurchase agreements could
involve certain risks in the event of a default or insolvency of the other
party to the agreement, including possible delays or restrictions upon a Fund's
ability to dispose of the underlying securities. Although no definitive
creditworthiness criteria are
<PAGE>
used, Strong reviews the creditworthiness of the banks and non-bank dealers
with which the Portfolios enter into repurchase agreements to evaluate those
risks. A Fund may, under certain circumstances, deem repurchase agreements
collateralized by U.S. government securities to be investments in U.S.
government securities.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
Certain Underlying Funds may invest in zero-coupon, step-coupon, and
pay-in-kind securities. These securities are debt securities that do not make
regular cash interest payments. Zero-coupon and step-coupon securities are sold
at a deep discount to their face value. Pay-in-kind securities pay interest
through the issuance of additional securities. Because such securities do not
pay current cash income, the price of these securities can be volatile when
interest rates fluctuate. While these securities do not pay current cash
income, federal income tax law requires the holders of zero-coupon,
step-coupon, and pay-in-kind securities to include in income each year the
portion of the original issue discount (or deemed discount) and other non-cash
income on such securities accrued during that year. In order to continue to
qualify for treatment as a "regulated investment company" under the Internal
Revenue Code of 1986 ("IRC") and avoid a certain excise tax, each Fund may be
required to distribute a portion of such discount and income and may be
required to dispose of other portfolio securities, which may occur in periods
of adverse market prices, in order to generate cash to meet these distribution
requirements.
REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR
ROLLS
Certain Underlying Funds may engage in reverse repurchase agreements to
facilitate portfolio liquidity, a practice common in the mutual fund industry,
or for arbitrage transactions discussed below. In a reverse repurchase
agreement, a Fund would sell a security and enter into an agreement to
repurchase the security at a specified future date and price. The Fund
generally retains the right to interest and principal payments on the security.
Since the Fund receives cash upon entering into a reverse repurchase agreement,
it may be considered a borrowing. When required by SEC guidelines, a Fund will
set aside permissible liquid assets in a segregated account to secure its
obligation to repurchase the security.
Each Fund may also enter into mortgage dollar rolls, in which the Fund would
sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid on
the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sale price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. When required by SEC
guidelines, a Fund would set aside permissible liquid assets in a segregated
account to secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions may be considered
a borrowing by the Portfolios.
The mortgage dollar rolls and reverse repurchase agreements entered into by the
Funds may be used as arbitrage transactions in which a Fund will maintain an
offsetting position in investment-grade debt obligations or repurchase
agreements that mature on or before the settlement date of the related mortgage
dollar roll or reverse repurchase agreement. Since a Fund will receive interest
on the securities or repurchase agreements in which it invests the transaction
proceeds, such transactions may involve leverage. However, since such
securities or repurchase agreements will be high quality and will mature on or
before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, Strong believes that such arbitrage transactions do not present the
risks to the Portfolios that are associated with other types of leverage.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Certain Underlying Funds may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date.
Purchasing when-issued or delayed-delivery securities allows a Fund to lock in
a fixed price or yield on a security it
<PAGE>
intends to purchase. However, when a Fund purchases these types of securities,
it immediately assumes the risk of ownership, including the risk of price
fluctuation.
The greater a Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued or delayed-delivery securities may involve the
additional risk that the yield available in the market when the delivery occurs
may be higher or the market price lower than that obtained at the time of
commitment. Although a Fund may be able to sell these securities prior to the
delivery date, it will purchase them for the purpose of actually acquiring the
securities, unless, after entering into the commitment, a sale appears
desirable for investment reasons. When required by SEC guidelines, a Fund will
set aside permissible liquid assets in a segregated account to secure its
outstanding commitments for these types of securities.
PARTICIPATION INTERESTS
If a Fund may invest in municipal obligations, it may also invest in
participation interests in municipal obligations without limitation. A
participation interest gives a Fund an undivided interest in a municipal
obligation in the proportion that the Fund's participation interest bears to
the principal amount of the obligation. These instruments may have fixed,
floating, or variable rates of interest. A Fund will only purchase
participation interests if accompanied by an opinion of counsel that the
interest earned on the underlying municipal obligations will be tax-exempt. If
a Fund purchases unrated participation interests, the Board of Directors or its
delegate must have determined that the credit risk is equivalent to the rated
obligations in which the Fund may invest. Participation interests may be
backed by a letter of credit or guaranty of the selling institution. When
determining whether such a participation interest meets a Fund's credit quality
requirements, the Fund may look to the credit quality of any financial
guarantor providing a letter of credit or guaranty.
PORTFOLIO TURNOVER
The annual portfolio turnover rate of a Portfolio is not expected to exceed 50%
annually. A portfolio turnover rate of 50% for a Portfolio would occur if one
half of a Portfolio's investments were sold within a year. A Portfolio will
purchase or sell shares of the Underlying Funds to (i) accommodate purchases
and sales of Portfolio shares, (ii) to maintain, or modify the allocation of the
Portfolio's assets between the Underlying Funds, or (iii) to substitute another
Strong Fund for an Underlying Fund. A Portfolio's annual portfolio turnover
rate may exceed 50% annually if the Portfolio's Board of Directors (i)
reallocates a Portfolio's assets among its Underlying Funds, or (ii) replaces
an Underlying Fund with another Strong Fund. If one or both of these
situations were to occur, a Portfolio's annual portfolio turnover rate
generally would not exceed 100%. Although the Board of Directors may in the
future reallocate assets and make substitutions of Strong Funds they believe
that these occasions will happen infrequently and only for good cause.
Although the Portfolio's annual portfolio turnover rate is expected to be
low, the Portfolios indirectly bear the expenses associated with the portfolio
turnover of the Underlying Funds. High portfolio turnover among the Underlying
Funds involves correspondingly greater expenses to an Underlying Fund,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestments in other securities. Shareholders
in the Portfolios may also bear expenses directly or indirectly through sales
of securities held by the Portfolios and the Underlying Funds which result in
the realization of taxable capital gains.
ABOUT THE PORTFOLIOS
MANAGEMENT
The Board of Directors of each Portfolio is responsible for managing its
business and affairs.
INVESTMENT ADVISOR OF THE UNDERLYING FUNDS. Strong serves as the
investment advisor of the Underlying Funds. Strong began conducting business in
1974. Since then, its principal business has been providing continuous in-
vestment supervision for individuals and institutional accounts, such as pension
<PAGE>
funds and profit-sharing plans, as well as mutual funds, several of which are
funding vehicles for variable insurance products. As of ________, 1998, Strong
had over $__ billion under management. Strong's principal mailing address is
P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong, the Chairman
of the Board of each Fund, is the controlling shareholder of Strong.
YEAR 2000 RISKS. Like other mutual funds and financial and business operations
around the world, the Portfolios could be adversely affected if the computer
software, and to a lesser extent, hardware used by Strong and other service
providers are not able to process and calculate date-related information and
data before, during, and after January 1, 2000. This is commonly known as the
"Year 2000 Issue." Strong is taking steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to the computer software
and hardware that it uses and to obtain satisfactory assurances that comparable
steps are being taken by the Portfolios' other major service providers.
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Portfolios.
UNDERLYING FUND EXPENSES. The expenses associated with investing in
a "fund of funds," such as the Portfolios, are generally higher than those for
mutual funds that do not invest primarily in other mutual funds. This is
because shareholders in a fund of funds indirectly pay a portion of the fees and
expenses charged at the underlying fund level. The following table sets forth
expense information for the Underlying Funds as of September 30, 1998.
Shareholders of each Portfolio indirectly bear a proportionate share of these
expenses based on a Portfolio's allocation of its assets among the Underlying
Funds.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TOTAL
TOTAL OPERATING EXPENSES
OTHER OPERATING (AFTER WAIVERS/
UNDERLYING FUND MANAGEMENT FEE EXPENSES EXPENSES
ABSORPTIONS)
Growth 1.00% 0.27% 1.27% 1.27%
Common Stock 1.00 0.16 1.16 1.16
Growth & Income 1.00 0.10 1.10 1.10
Blue Chip 100 0.75 0.64 1.39 0.45
Money Market 0.50 0.38 0.88 0.40
Advantage 0.60 0.14 0.74 0.74
Short-Term Bond 0.625 0.185 0.81 0.81
Government Securities 0.60 0.19 0.79 0.79
</TABLE>
SHAREHOLDER SERVICING AGENT
Strong also acts as the Portfolios' shareholder servicing agent. As shareholder
servicing agent, Strong provides personal services to the Portfolios'
shareholders and maintains the Portfolios' shareholder accounts. Such services
include, without limitation, answering shareholder inquiries, assisting
shareholders with fund transactions, and assisting shareholders with changes to
their accounts.
As compensation for its services, the Portfolios' pays Strong a monthly fee
based on a percentage of each Portfolio's average daily net asset value. The
annual rate is 0.25%. From time to time, Strong may voluntarily waive all or a
portion of its shareholder servicing and/or absorb certain Portfolio expenses
without further notification of the commencement or termination of such waiver
or absorption. Any such waiver or absorption will temporarily lower a
Portfolio's overall expense ratio and increase a Portfolio's overall return to
investors.
Except for expenses assumed by Strong, each Portfolio is responsible for all
its other expenses, including, without limitation, interest charges, taxes,
brokerage commissions, and similar expenses; expenses of issue, sale,
repurchase, or redemption of shares; expenses of registering or qualifying
shares for sale with the states and the SEC; expenses of printing and
distribution of prospectuses to existing shareholders; charges of custodians
(including fees as custodian for keeping books and similar services for a
Fund), transfer agents (including the printing and mailing of reports and
notices to shareholders), registrars, auditing and legal services, and clerical
services related to recordkeeping and shareholder relations; printing of stock
certificates; fees for directors who are not "interested persons" of Strong;
expenses of indemnification; extraordinary expenses; and costs of shareholder
and director meetings.
<PAGE>
TRANSFER AND DIVIDEND-DISBURSING AGENT
Strong, P.O. Box 2936, Milwaukee, Wisconsin 53201, also acts as
dividend-disbursing agent and transfer agent for the Portfolios. Strong is
compensated by the Portfolios for its services based on an annual fee per
account plus certain out-of-pocket expenses. However, the Underlying Funds have
agreed to reimburse the Portfolios for these expenses on a pro-rate basis.
DISTRIBUTOR
Strong Investments, Inc., P.O. Box 2936, Milwaukee, Wisconsin 53201, an
indirect subsidiary of Strong, acts as distributor of the shares of the
Portfolios.
ORGANIZATION
SHAREHOLDER RIGHTS. The Portfolios are series of Strong Life Stage Series,
Inc., a Wisconsin corporation that is authorized to issue an indefinite number
of shares of common stock and series and classes of series of shares of common
stock. Each share of the Portfolios has one vote, and all shares participate
equally in dividends and other capital gains distributions by the respective
Portfolio and in the residual assets of the respective Portfolio in the event
of liquidation. Certificates will be issued for shares held in your account
only upon your written request. You will, however, have full shareholder rights
whether or not you request certificates. Generally, the Portfolios will not
hold an annual meeting of shareholders unless required by the 1940 Act.
Shareholders have certain rights, including the right to call an annual meeting
upon a vote of 10% of a Portfolio's outstanding shares for the purpose of
voting to remove one or more directors or to transact any other business. The
1940 Act requires a Portfolio to assist the shareholders in calling such a
meeting.
SHAREHOLDER PRIVILEGES. The shareholders of each Portfolio may benefit
from the privileges described in the "Shareholder Manual" (see Page II-1).
However, each Portfolio reserves the right, at any time and without prior
notice, to suspend, limit, modify, or terminate any of these privileges or their
use in any manner by any person or class.
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS.
Unless you choose otherwise, all your dividends and capital gains distributions
will be automatically reinvested in additional Portfolio shares. Or, you may
elect to have all your dividends and capital gain distributions from a Portfolio
automatically invested in additional shares of another Strong Fund. Shares are
purchased at the net asset value determined on the payment date. If you request
in writing that your dividends and other distributions be paid in cash, a Port-
folio will credit your bank account by Electronic Portfolios Transfer ("EFT") or
issue a check to you within five business days of the payment date. You may
change your election at any time by calling or writing the Fund. The Fund must
receive any such change 7 days (15 days for EFT) prior to a dividend or capital
gain distribution payment date in order for the change to be effective for that
payment. The policy of each Portfolio is to pay dividends from net investment
income annually and to distribute substantially all net realized capital gains
annually. Each Portfolio may make additional distributions if necessary to
avoid imposition of a 4% excise tax on undistributed income and gains.
TAX STATUS OF DIVIDENDS AND OTHER DISTRIBUTIONS.
You will be subject to federal income tax at ordinary income tax rates on any
dividends you receive that are derived from investment company taxable income
(consisting generally of net investment income, net short-term capital gain, and
net gains from certain foreign currency transactions, if any). Distributions of
net capital gain (the excess of net long-term capital gain over net short-
term capital loss), when designated as such by a Portfolio, are taxable to you
as long-term capital gains, regardless of how long you have held your Portfolio
shares. The Portfolios' distributions are taxable in the year they are paid,
whether they are taken in cash or reinvested in additional shares, except that
certain distributions declared in the last three months of the year and paid in
January are taxable as if paid on December 31.
If a Portfolio's distributions exceed its investment company taxable income and
net capital gain in any year, as a result of currency-related losses or
otherwise, all or a portion of those distributions may be treated as a return
of capital to shareholders for tax purposes.
<PAGE>
YEAR-END TAX REPORTING. After the end of each calendar year, you will receive a
statement (Form 1099) of the federal income tax status of all dividends and
other distributions paid (or deemed paid) during the year.
SHARES SOLD OR EXCHANGED. Your redemption of shares of the Portfolio may result
in a taxable gain or loss to you, depending upon whether the redemption
proceeds payable to you are more or less than your adjusted cost basis for the
redeemed shares. Similar tax consequences generally will result from an
exchange of shares of the Portfolio for shares of another Strong Fund. If you
purchase shares of a Portfolio within 30 days before or after redeeming shares
of the same Portfolio at a loss, a portion or all of that loss will not be
deductible and will increase the cost basis of the newly purchased shares. If
you redeem shares out of a non-IRA retirement account, you will be subject to
withholding for federal income tax purposes unless you transfer the
distribution directly to an "eligible retirement plan."
BUYING A DISTRIBUTION. A distribution paid shortly after you have purchased
shares in a Portfolio will reduce the net asset value of the shares by the
amount of the distribution, which nevertheless will be taxable to you even
though it represents a return of a portion of your investment.
BACKUP WITHHOLDING. If you are an individual or certain other noncorporate
shareholder and do not furnish a Portfolio with a correct taxpayer
identification number, the Portfolio is required to withhold federal income tax
at a rate of 31% (backup withholding) from all dividends, capital gain
distributions, and redemption proceeds payable to you. Withholding at that rate
from dividends and capital gain distributions payable to you also is required
if you otherwise are subject to backup withholding. To avoid backup
withholding, you must provide a taxpayer identification number and state that
you are not subject to backup withholding due to the under-reporting of your
income. This certification is included as part of your application. Please
complete it when you open your account.
TAX STATUS OF THE PORTFOLIOS. Each Portfolio intends to continue to
qualify for treatment as a regulated investment company under Subchapter M of
the IRC and, if so qualified, will not be liable for federal income tax on earn-
ings and gains distributed to its shareholders in a timely manner. This section
is not intended to be a full discussion of present or proposed federal income
tax law and its effects on the Portfolios and investors therein. See the SAI for
a further discussion. There may be other federal, state, or local tax
considerations applicable to a particular investor. You are therefore urged to
consult your own tax adviser.
PERFORMANCE INFORMATION
PERFORMANCE OF THE PORTFOLIOS. Each Portfolio may advertise a
variety of types of performance information, including "yield," "average annual
total return," "total return," and "cumulative total return." Each of these
figures is based upon historical results and does not represent the future per-
formance of a Portfolio. Yield is an annualized figure, which means that it is
assumed that a Portfolio generates the same level of net investment income over
a one-year period. The Portfolios' yield is a measure of the net investment
income per share earned by a Portfolio over a specific one-month period and is
shown as a percentage of the net asset value of the Portfolio's shares at the
end of the period. Average annual total return and total return figures measure
both the net investment income generated by, and the effect of any realized and
unrealized appreciation or depreciation of, the underlying investments in a
Portfolio assuming the reinvestment of all dividends and distributions. Total
return figures are not annualized and simply represent the aggregate change of
a Portfolio's investments over a specified period of time.
PERFORMANCE OF THE UNDERLYING FUNDS. The past performance of the Underlying
Funds is shown in the table below. Please remember that the Underlying Funds'
performance is historical and does not represent the future results of the
Underlying Funds or the Portfolios. Investors should consider that, because
each Portfolio will invest in the Underlying Funds, the performance of a
Portfolio will reflect the combined performance of the Underlying Funds in
which it invests. Moreover, in addition to the expenses borne by each
Underlying Fund, the Portfolios will incur their own direct expenses.
Accordingly, the investment performance of the Portfolios will be less than the
weighted average of the returns of the Underlying Funds in which they invest.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS AS OF 9-30-98
---------------------------------------------------------------------
YEAR-TO-DATE
TOTAL RETURNS
UNDERLYING FUND AS OF 9/30/98 1-YEAR 3-YEAR 5-YEAR 10-YEAR LIFE OF FUND
- --------------------- ------------- ------- ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Growth 1.58% -3.36% 14.36% -- -- 20.13% (12-31-93)
Common Stock -9.65% -13.92% 12.02% 13.13% -- 18.04% (12-29-89)
Growth and Income 7.78% 8.47% -- -- -- 25.16%
(12-29-95)
Blue Chip 100 12.74% 14.02% -- -- -- 17.68%
(6-30-97)
Money Market 3.94% 5.35% 5.37% 5.11% 5.68% 5.92%
(10-22-85)
Advantage 4.07% 5.46% 6.32% 6.03% -- 7.33%
(11-25-88)
Short-Term Bond 3.94% 5.20% 6.95% 5.89% 7.34% 7.66%
(8-31-87)
Government Securities 8.23% 10.93% 8.24% 7.11% 9.46% 9.08%
(10-29-86)
</TABLE>
Average annual total return and total return measure change in the value of an
investment in a Underlying Fund, assuming reinvestment of dividends and capital
gains. Average annual total return reflects annualized change, while total
return reflects aggregate change and is not annualized. Investment returns and
principal value vary, and Underlying Fund may have a gain or loss.
Investments in the Underlying Funds are neither insured nor guaranteed by the
U.S. government.
<PAGE>
SHAREHOLDER MANUAL
<TABLE>
<CAPTION>
<S> <C>
HOW TO BUY SHARES II-__
DETERMINING YOUR SHARE PRICE II-__
HOW TO SELL II-__
SHARES.....................................................
SHAREHOLDER SERVICES II-__
REGULAR INVESTMENT PLANS II-__
RETIREMENT PLAN SERVICES II-__
SPECIAL SITUATIONS II-__
</TABLE>
HOW TO BUY SHARES
All the Portfolios are 100% NO-LOAD, meaning you may purchase, redeem, or
exchange shares directly at net asset value without paying a sales charge.
Because each Portfolio' net asset value changes daily, your purchase price will
be the next net asset value determined after the Portfolio receives and accepts
your purchase order.
Whether you are opening a new account or adding to an existing one, Strong
provides you with several methods to buy its shares.
<PAGE>
TO OPEN A NEW ACCOUNT
<TABLE>
<CAPTION>
<S> <C>
MAIL BY CHECK
Complete and sign the application. Make your check or money order
payable to "Strong Funds."
Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If
you're using an express delivery service, send to Strong Portfolios, 900
Heritage Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
Call 1-800-368-3863 for instructions on establishing an account with an
exchange by mail.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
TELEPHONE BY EXCHANGE
Call 1-800-368-3863 to establish a new account by exchanging funds from
1-800-368-3863 an existing Strong Funds account.
24 HOURS A DAY, Sign up for telephone exchange services when you open your
account. To
7 DAYS A WEEK add the telephone exchange option to your account, call 1-800-368-3863 for
a Shareholder Account Options Form.
Please note that your accounts must be identically registered and that you
must exchange enough into the new account to meet the minimum initial
investment.
Or use STRONG DIRECTSM, Strong Funds' automated telephone response system.
Call 1-800-368-7550.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
IN PERSON Stop by our Investor Center in Menomonee Falls, Wisconsin. Call 1-800
368-3863 for hours and directions.
The Investor Center will only accept checks or money orders payable to
"Strong Funds."
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
WIRE Call 1-800-368-3863 for instructions on opening an account by wire.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM."
If you sign up for Strong's Automatic Investment Plan when you open your
account and contribute monthly, Strong Funds will waive the Fund's
minimum initial investment (see chart on page II-__).
Complete the Automatic Investment Plan section on the account
application.
Mail to the address indicated on the application.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
BROKER-DEALER You may purchase shares in the Portfolio through a broker-dealer or other
institution that may charge a transaction fee.
Strong Funds may only accept requests to purchase shares into a broker
dealer street name account from the broker-dealer.
</TABLE>
<PAGE>
TO ADD TO AN EXISTING ACCOUNT
BY CHECK
- - Complete an Additional Investment Form provided at the bottom of your account
statement, or write a note indicating your fund account number and
registration. Make your check or money order payable to "Strong Funds."
- - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
using an express delivery service, send to Strong Funds, 900 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- - Call 1-800-368-3863 for instructions on exchanging by mail.
BY EXCHANGE
- - Add to an account by exchanging funds from another Strong Funds account.
- - Sign up for telephone exchange services when you open your account. To add
the telephone exchange option to your account, call 1-800-368-3863 for a
Shareholder Account Options Form.
- - Please note that the accounts must be identically registered and that the
minimum exchange is $50 or the balance of your account, whichever is less.
BY TELEPHONE PURCHASE
- - Sign up for telephone purchase when you open your account to make additional
investments from $50 to $25,000 into your Strong Portfolios account by
telephone. To add this option to your account, call 1-800-368-3863 for a
Shareholder Account Options Form.
Or use STRONG DIRECT SM, Strong Funds' automated telephone response system.
Call 1-800-368-7550.
- - Stop by our Investor Center in Menomonee Falls, Wisconsin. Call
1-800-368-3863 for hours and directions.
- - The Investor Center can only accept checks or money orders.
Call 1-800-368-3863 for instructions on adding to an account by wire.
USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS. Sign up for
these services
when you open your account, or call 1-800-368-3863 for instructions on how to
add them to your existing account.
- - AUTOMATIC INVESTMENT PLAN. Make regular, systematic investments (minimum
$50)
into your Strong Funds account from your bank checking or NOW account.
Complete the Automatic Investment Plan section on the account application.
- - AUTOMATIC EXCHANGE PLAN. Make regular, systematic exchanges (minimum $50)
from one eligible Strong Funds account to another. Call 1-800-368-3863 for an
application.
- - PAYROLL DIRECT DEPOSIT. Have a specified amount (minimum $50) regularly
deducted from your paycheck, social security check, military allotment, or
annuity payment invested directly into your Strong Funds account. Call
1-800-368-3863 for an application.
- - AUTOMATIC DIVIDEND REINVESTMENT. Unless you choose otherwise, all your
dividends and capital gain distributions will be automatically reinvested in
additional Portfolio shares. Or, you may elect to have your dividends and
capital gain distributions automatically invested in shares of another Strong
Fund.
- - You may purchase additional shares in a Portfolio through a broker-dealer or
other institution that may charge a transaction fee.
- - Strong Funds may only accept requests to purchase shares into a broker-dealer
street name account from the broker-dealer.
<PAGE>
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- - Please make all checks or money orders payable to "Strong Funds."
- - We cannot accept third-party checks or checks drawn on banks outside the U.S.
- - You will be charged a $20 service fee for each check, wire, or Electronic
Portfolios Transfer ("EFT") purchase that is returned unpaid, and you will be
responsible for any resulting losses suffered by a Fund.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - A Fund reserves the right to decline to accept your purchase order upon
receipt for any reason.
- - Exchange Feature - Please note that certain Strong Funds that you may
exchange into may impose a redemption fee of 0.5% on shares held for less
than six months.
- - Minimum Investment Requirements:
<TABLE>
<CAPTION>
<S> <C>
To open a regular account $2,500
To open a regular IRA, Roth IRA, or one-person SEP account $250
To open an Education IRA account $500*
To open an UGMA/UTMA account $250
To open a SIMPLE, SEP-IRA, Keogh, Profit Sharing the lesser of $250
or Money Purchase Pension Plan, or 403(b) account or $25 per month
To open a qualified retirement plan account where Strong
or a financial intermediary provides administrative services No Minimum
To add to an existing account $50
</TABLE>
* Not eligible for the Automatic Investment Plan and No-Minimum Investment
Program.
The Portfolios offer a No-Minimum Investment Plan that waives the minimum
initial investment requirements for investors who participate in the Strong
Automatic Investment Plan and invest monthly (described on page II-__). Unless
you participate in the Strong No-Minimum Investment Program, please ensure your
purchases meet the minimum investment requirements.
Under certain circumstances (for example, if you discontinue a No-Minimum
Investment Program before you reach a Fund's minimum initial investment), each
Portfolio reserves the right to close your account. Before taking such action,
a Portfolio will provide you with written notice and at least 60 days in which
to reinstate an investment program or otherwise reach the minimum initial
investment required.
DETERMINING YOUR SHARE PRICE
Generally, when you make any purchases, sales, or exchanges, the price of your
shares will be the net asset value ("NAV") next determined after Strong Funds
receives your request in proper form. If Strong Funds receives such request
prior to the close of the New York Stock Exchange ("Exchange") on a day on
which the Exchange is open, your share price will be the NAV determined that
day. The NAV for each Fund is normally determined as of 3:00 p.m. Central Time
("CT") each day the Exchange is open. The Portfolios reserve the right to
change the time at which purchases, redemptions, and exchanges are priced if
the Exchange closes at a time other than 3:00 p.m. CT or if an emergency
exists. Each Portfolio's NAV is calculated by taking the fair value of its
total assets, subtracting all its liabilities, and dividing by the total number
of shares outstanding. Expenses are accrued daily and applied when determining
the NAV. This pricing calculation is made by appraising each Portfolio's
underlying investments (I.E., the underlying Strong Funds) at the price of each
such Fund determined at the close of the Exchange.
<PAGE>
HOW TO SELL SHARES
You can access the money in your account at any time by selling (redeeming)
some or all of your shares back to the Portfolio. Once your redemption request
is received in proper form, Strong will normally mail you the proceeds the next
business day and, in any event, no later than seven days thereafter.
To redeem shares, you may use any of the methods described in the following
chart. However, if you are selling shares in a retirement account, please call
1-800-368-3863 for instructions. Please note that there is a $10.00 fee for
closing an IRA or other retirement account or for transferring assets to
another custodian. For your protection, certain requests may require a
signature guarantee. (See "Special Situations - Signature Guarantees.")
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TO SELL SHARES
- -----------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
Write a "letter of instruction" that includes the following information:
FOR YOUR PROTECTION your account number, the dollar amount or number of
shares you wish
CERTAIN REDEMPTION to redeem, each owner's name, your street address, and the
signature of
REQUESTS MAY REQUIRE A each owner as it appears on the
account.
SIGNATURE
GUARANTEE. SEE "SPECIAL Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If
SITUATIONS - SIGNATURE you're using an express delivery service, send to 900
Heritage Reserve,
GUARANTEES." Menomonee Falls, Wisconsin 53051.
FOR TRUST ACCOUNTS
Same as above. Please ensure that all trustees sign the letter of
instruction.
FOR OTHER REGISTRATIONS
Call 1-800-368-3863 for instructions.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
TELEPHONE Sign up for telephone redemption services when you open your account by
checking the "Yes" box in the appropriate section of the account
1-800-368-3863 application. To add the telephone redemption option to your account,
call 1
24 HOURS A DAY, 800-368-3863 for a Shareholder Account Options
Form.
7 DAYS A WEEK Once the telephone redemption option is in place, you may sell
shares by
phone and arrange to receive the proceeds in one of three ways:
TO RECEIVE A CHECK BY MAIL
At no charge, we will mail a check to the address to which your
account is registered.
TO DEPOSIT BY EFT
At no charge, we will transmit the proceeds by Electronic Portfolios
Transfer (EFT) to a pre-authorized bank account. Usually, the funds
will arrive at your bank two banking days after we process your
redemption.
TO DEPOSIT BY WIRE
For a $10 fee, we will transmit the proceeds by wire to a pre-authorized
bank account. Usually, the funds will arrive at your bank the next
banking day after we process your redemption.
You may also use STRONG DIRECTSM, Strong Funds' automated
telephone
response system. Call 1-800-368-7550.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
AUTOMATICALLY You can set up automatic withdrawals from your account at
regular
intervals. To establish the Systematic Withdrawal Plan, request a form by
calling 1-800-368-3863.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
BROKER-DEALER You may also redeem shares through broker-dealers or other
financial
intermediaries who may charge a transaction fee.
</TABLE>
<PAGE>
WHAT YOU SHOULD KNOW ABOUT SELLING SHARES
- - If you have recently purchased shares, please be aware that your redemption
request may not be honored until the purchase check or electronic transaction
has cleared your bank, which generally occurs within ten calendar days.
- - You will be charged a $10 service fee for a stop-payment and replacement of a
redemption or dividend check.
- - The right of redemption may be suspended during any period in which (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined by
the SEC exists, making disposal of portfolio securities or valuation of net
assets of a Portfolio not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must endorse
the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
WHAT YOU SHOULD KNOW ABOUT TELEPHONE REDEMPTIONS
- - The Portfolios reserve the right to refuse a telephone redemption if they
believe it advisable to do so.
- - Once you place your telephone redemption request, it cannot be canceled or
modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Portfolios and their
transfer agent employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Portfolios may incur liability if
they do not follow these procedures.
- - Because of increased telephone volume, you may experience difficulty in
implementing a telephone redemption during periods of dramatic economic or
market changes. In these situations, investors may want to consider using
STRONG DIRECTSM, our automated telephone system, to effect such a
transaction
by calling 1-800-368-7550.
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus, or e-mail us at [email protected].
STRONG DIRECT SM AUTOMATED TELEPHONE SYSTEM. Also available 24 hours a day, the
STRONG DIRECTSM automated response system enables you to use a touch-tone
phone to hear fund quotes and returns on any Strong Fund. You may also confirm
account balances, hear records of recent transactions and dividend activity
(1-800-368-5550), and perform purchases, exchanges or redemptions among your
existing Strong accounts (1-800-368-7550). You may also perform an exchange to
open a new Strong account provided that your account has the telephone exchange
option. Please note that your accounts must be identically registered and you
must exchange enough into the new account to meet the minimum initial
investment. Your account information is protected by a personal code.
STRONG NETDIRECTSM. Available 24 hours a day from your personal computer,
STRONG NETDIRECTSM allows you to use the Internet to access your Strong Funds
account information. You may access specific account history, view current
account balances, obtain recent dividend activity, and perform purchases,
exchanges, or redemptions among your existing Strong accounts.
<PAGE>
To register for netDirect, please visit our web site at
http://www.strong-funds.com. Your account information is protected by a
personal password and Internet encryption technology. For more information on
this service, please call 1-800-359-3379 or e-mail us at
[email protected].
STATEMENTS AND REPORTS. At a minimum, each Portfolio will confirm all
transactions for your account on a quarterly basis. We recommend that you file
each quarterly statement - and, especially, each calendar year-end statement -
with your other important financial papers, since you may need to refer to them
at a later date for tax purposes. Should you need additional copies of previous
statements, you may order confirmation statements for the current and preceding
year at no charge. Statements for earlier years are available for $10 each.
Call 1-800-368-3863 to order past statements.
Each year, you will also receive a statement confirming the tax status of any
distributions paid to you, as well as an annual report containing audited
financial statements and a semi-annual report.
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
More complete information regarding each Portfolio's investment policies and
services is contained in its SAI, which you may request by calling or writing
Strong Portfolios at the phone number and address on the cover of this
Prospectus.
CHANGING YOUR ACCOUNT INFORMATION. So that you continue receiving
your Strong
correspondence, including any dividend checks and statements, please notify us
in writing as soon as possible or call us at 1-800-368-3863 if your address
changes. You may use the Additional Investment Form at the bottom of your
confirmation statement, or simply write us a letter of instruction that
contains the following information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to an account's registration - such as adding or removing a joint
owner, changing an owner's name, or changing the type of your account - must
also be submitted in writing. Please call 1-800-368-3863 for instructions. For
your protection, some requests may require a signature guarantee.
TRANSACTION SERVICES
EXCHANGE PRIVILEGE. You may exchange shares between identically
registered Strong Funds accounts, either in writing, by telephone, or through
your personal computer. By establishing exchange services, you authorize the
Portfolio and its agents to act upon your instruction through the telephone or
personal computer to exchange shares from any account you specify. For tax
purposes, an exchange is considered a sale and a purchase of Portfolio shares.
Please obtain and read the appropriate prospectus before investing in any of
the Strong Funds. Since an excessive number of exchanges may be detrimental to
the Portfolios, each Portfolio reserves the right to discontinue the exchange
privilege of any shareholder at any time.
REGULAR INVESTMENT PLANS
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan, all discussed below, are methods of implementing
DOLLAR COST AVERAGING. Dollar cost averaging is an investment strategy
that involves investing a fixed amount of money at regular time intervals. By
always investing the same set amount, you will be purchasing more shares when
the price is low and fewer shares when the price is high. Ultimately, by using
this principle in conjunction with fluctuations in share price, your average
cost per share may be less than your average transaction price. A program of
regular investment cannot ensure a profit or protect against a loss during
declining markets. Since such a
<PAGE>
program involves continuous investment regardless of fluctuating share values,
you should consider your ability to continue the program through periods of
both low and high share-price levels.
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you
to make regular, systematic investments in a Portfolio from your bank checking,
savings, or NOW account. You may choose to make investments on any day of the
month in amounts of $50 or more. You can set up the Automatic Investment Plan
with any financial institution that is a member of the Automated Clearing
House. Because each Portfolio has the right to close an investor's account for
failure to reach the minimum initial investment, please consider your ability
to continue this Plan until you reach the minimum initial investment. To
establish the Plan, complete the Automatic Investment Plan section on the
account application, or call 1-800-368-3863 for an application.
PAYROLL DIRECT DEPOSIT PLAN. Once you meet a Fund's minimum initial
investment
requirement, you may purchase additional Fund shares through the Payroll Direct
Deposit Plan. Through this Plan, periodic investments (minimum $50) are made
automatically from your payroll check into your existing Fund account. By
enrolling in the Plan, you authorize your employer or its agents to deposit a
specified amount from your payroll check into the Fund's bank account. In most
cases, your Fund account will be credited the day after the amount is received
by the Fund's bank. In order to participate in the Plan, your employer must
have direct deposit capabilities through the Automated Clearing House available
to its employees. The Plan may be used for other direct deposits, such as
social security checks, military allotments, and annuity payments.
To establish Direct Deposit for your account, call 1-800-368-3863 to request a
form. Once the Plan is established, you may alter the amount of the deposit,
alter the frequency of the deposit, or terminate your participation in the
program by notifying your employer.
AUTOMATIC EXCHANGE PLAN. The Automatic Exchange Plan allows you to
make regular, systematic exchanges (minimum $50) from one Strong Funds account
into another Strong Funds account. By setting up the Plan, you authorize the
Portfolio and its agents to redeem a set dollar amount or number of shares from
the first account and purchase shares of a second Strong Fund. In addition, you
authorize a Portfolio and its agents to accept telephone instructions to change
the dollar amount and frequency of the exchange. An exchange transaction is a
sale and purchase of shares for federal income tax purposes and may result in a
capital gain or loss. To establish the Plan, request a form by calling
1-800-368-3863.
To participate in the Automatic Exchange Plan, you must have an initial account
balance of $2,500 in the first account and at least the minimum initial
investment in the second account. However, the minimum initial investment in
the second account is waived if you select a monthly investment schedule.
Exchanges may be made on any day or days of your choice. If the amount
remaining in the first account is less than the exchange amount you requested,
then the remaining amount will be exchanged. At such time as the first account
has a zero balance, your participation in the Plan will be terminated. You may
also terminate the Plan at any time by calling or writing to the Portfolio.
Once participation in the Plan has been terminated for any reason, to reinstate
the Plan you must do so in writing; simply investing additional funds will not
reinstate the Plan.
SYSTEMATIC WITHDRAWAL PLAN. You can set up automatic withdrawals
from your account at regular intervals. To begin distributions, you must have an
initial balance of $5,000 in your account and withdraw at least $50 per payment.
To establish the Systematic Withdrawal Plan, request a form by calling
1-800-368-3863. Depending upon the size of the account and the withdrawals
requested (and fluctuations in net asset value of the shares redeemed),
redemptions for the purpose of satisfying such withdrawals may reduce or even
exhaust the account. If the amount remaining in the account is not sufficient
to meet a Plan payment, the remaining amount will be redeemed and the Plan will
be terminated.
RETIREMENT PLAN SERVICES
We offer a wide variety of retirement plans for individuals and institutions,
including large and small businesses. For information on IRAs, including Roth
IRAs, or SEP-IRAs for a one-person business, call 1-800-368-3863. If you are
interested in opening a 401(k) or other company-sponsored retirement plan
<PAGE>
(SIMPLE, SEP, Keogh, 403(b)(7), pension or profit sharing), call 1-800-368-2882
and a Strong Retirement Plan Specialist will help you determine which
retirement plan would be best for your company. Complete instructions about
how to establish and maintain your plan and how to open accounts for you and
your employees will be included in the retirement plan kit you receive in the
mail.
SPECIAL SITUATIONS
POWER OF ATTORNEY. If you are investing as attorney-in-fact for another person,
please complete the account application in the name of such person and sign the
back of the application in the following form: "[applicant's name] by [your
name], attorney-in-fact." To avoid having to file an affidavit prior to each
transaction, please complete the Power of Attorney form available from Strong
Funds at 1-800-368-3863. However, if you would like to use your own power of
attorney form, please call the same number for instructions.
CORPORATIONS AND TRUSTS. If you are investing for a corporation, please
include with your account application a certified copy of your corporate
resolution indicating which officers are authorized to act on behalf of the
corporation. As an alternative, you may complete a Certification of Authorized
Individuals, which can be obtained from the Portfolios. Until a valid corporate
resolution or Certification of Authorized Individuals form is received by the
Portfolio, services such as telephone and wire redemption will not be establish-
ed. If you are investing as a trustee (including trustees of a retirement
plan), please include the date of the trust. All trustees must sign the appli-
cation. If they do not, services such as telephone and wire redemption will not
be established. All trustees must sign redemption requests unless proper
documentation to the contrary is provided to the Portfolio. Failure to provide
these documents or signatures as required when you invest may result in delays
in processing redemption requests.
FINANCIAL INTERMEDIARIES. If you purchase or redeem shares of a Portfolio
through a financial intermediary, certain features of the Portfolio relating to
such transactions may not be available or may be modified. In addition, certain
operational policies of a Portfolio, including those related to settlement and
dividend accrual, may vary from those applicable to direct shareholders of the
Portfolio and may vary among intermediaries. We urge you to consult your
financial intermediary for more information regarding these matters. In
addition, a Portfolio may pay, directly or indirectly through arrangements with
Strong, amounts to financial intermediaries that provide transfer agent type
and/or other administrative services to their customers provided, however, that
the Portfolio will not pay more for these services through intermediary
relationships than it would if the intermediaries' customers were direct
shareholders in the Portfolio. Certain financial intermediaries may charge an
advisory, transaction, or other fee for their services. You will not be charged
for such fees if you purchase or redeem your Portfolio shares directly from a
Portfolio without the intervention of a financial intermediary.
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you
and the Portfolios against fraudulent transactions by unauthorized persons. In
the following instances, the Portfolios will require a signature guarantee for
all authorized owners of an account:
- - when you add the telephone redemption option to your existing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $50,000;
- - when you request to redeem or redeposit shares that have been issued in
certificate form;
- - if you open an account and later decide that you want certificates;
- - when you request that redemption proceeds be sent to a different name or
address than is registered on your account;
- - if you add/change your name or add/remove an owner on your account; and
- - if you add/change the beneficiary on your transfer-on-death account.
<PAGE>
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC. These institutions include banks, savings associations,
credit unions, brokerage firms, and others. PLEASE NOTE THAT A NOTARY
PUBLIC STAMP OR SEAL IS NOT ACCEPTABLE.
<PAGE>
INFORMATION CONTAINED IN THIS STATEMENT OF ADDITIONAL
INFORMATION PERTAINING TO THE STRONG LIFE STAGE
PORTFOLIOS IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO, AMONG OTHER THINGS,
SECURITIES OF THE STRONG LIFE STAGE PORTFOLIOS HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. SECURITIES OF
THE STRONG LIFE STAGE PORTFOLIOS MAY NOT BE SOLD NOR
MAY OFFERS TO BUY SECURITIES OF THE STRONG LIFE STAGE
PORTFOLIOS BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS STATEMENT
OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF SECURITIES OF THE STRONG LIFE STAGE PORTFOLIOS IN
ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATE OF ISSUANCE: NOVEMBER 3
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
STRONG LIFE STAGE SERIES:
STRONG CONSERVATIVE PORTFOLIO
STRONG MODERATE PORTFOLIO
STRONG AGGRESSIVE PORTFOLIO
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
e-mail: [email protected]
Web Site: http://www.strong-funds.com
Throughout this SAI, "the Fund" is intended to refer to each of the Portfolios
listed above, unless otherwise indicated. This SAI is not a Prospectus and
should be read together with the Prospectus for the Fund dated December 30,
1998. Requests for copies of the Prospectus should be made by calling any
number listed above.
Strong Life Stage Series, Inc. is an open-end series management company that
offers three diversified investment portfolios, with the following investment
objectives:
STRONG CONSERVATIVE PORTFOLIO ("Conservative Portfolio") seeks total
return by investing primarily for income and secondarily for capital growth.
STRONG MODERATE PORTFOLIO ("Moderate Portfolio") seeks total return by
investing primarily for capital growth and secondarily for income.
STRONG AGGRESSIVE PORTFOLIO ("Aggressive Portfolio") seeks capital growth.
These Funds are described in the Prospectus and in this SAI. Each Fund seeks
to achieve its investment objective by investing all of its assets in up to
eight Strong Funds (the "Underlying Funds"), representing different
combinations of stocks, bonds, and cash investments, and reflecting varying
degrees of potential investment risk and reward.
December 30, 1998
1
<PAGE>
TABLE OF CONTENTS PAGE
INVESTMENT RESTRICTIONS........................................................4
INVESTMENT POLICIES AND TECHNIQUES.............................................6
The Underlying Strong Funds....................................................6
Asset-Backed Debt Obligations..................................................6
Borrowing......................................................................7
Cash Management................................................................7
Convertible Securities.........................................................7
Depositary Receipts............................................................8
Derivative Instruments.........................................................9
Duration......................................................................17
Foreign Investment Companies..................................................18
Foreign Securities............................................................18
High-Yield (High-Risk) Securities.............................................19
Illiquid Securities...........................................................20
Lending of Portfolio Securities...............................................21
Loan Interests................................................................21
Maturity......................................................................23
Mortgage- and Asset-Backed Debt Securities....................................23
Municipal Obligations.........................................................24
Participation Interests.......................................................25
Repurchase Agreements.........................................................25
Reverse Repurchase Agreements and Mortgage Dollar Rolls.......................25
Rule 2a-7: Maturity, Quality, and Diversification Restrictions...............26
Short Sales...................................................................27
Small and Medium Companies....................................................27
Standby Commitments...........................................................28
Variable- or Floating-Rate Securities.........................................28
Warrants......................................................................29
When-Issued and Delayed-Delivery Securities...................................29
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities..........................29
DIRECTORS AND OFFICERS........................................................30
PRINCIPAL SHAREHOLDERS........................................................31
INVESTMENT ADVISOR OF THE UNDERLYING FUNDS....................................32
DISTRIBUTOR...................................................................33
PORTFOLIO TRANSACTIONS........................................................33
CUSTODIAN.....................................................................33
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT..................................33
SHAREHOLDER SERVICING AGENT...................................................34
TAXES.........................................................................34
DETERMINATION OF NET ASSET VALUE..............................................35
ADDITIONAL SHAREHOLDER INFORMATION............................................35
ORGANIZATION..................................................................38
SHAREHOLDER MEETINGS..........................................................38
PERFORMANCE INFORMATION.......................................................38
GENERAL INFORMATION...........................................................41
INDEPENDENT ACCOUNTANTS.......................................................43
LEGAL COUNSEL.................................................................43
STATEMENT OF ASSETS AND LIABILITIES...........................................44
2
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this SAI and its corresponding
Prospectus, and if given or made, such information or representations may not
be relied upon as having been authorized. This SAI does not constitute an
offer to sell securities.
3
<PAGE>
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT LIMITATIONS
The following are the Fund's fundamental investment limitations which, along
with the Fund's investment objective (which is described in the Prospectus),
cannot be changed without shareholder approval. To obtain approval, a majority
of the Fund's outstanding voting shares must vote for the change. A majority
of the Fund's outstanding voting securities means the vote of the lesser of:
(1) 67% or more of the voting securities present, if more than 50% of the
outstanding voting securities are present or represented, or (2) more than 50%
of the outstanding voting shares.
Unless indicated otherwise below, the Fund:
1. May not with respect to 75% of its total assets, purchase the securities
of any issuer (except securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities) if, as a result, (1) more than 5% of the
Fund's total assets would be invested in the securities of that issuer, or (2)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer.
2. May (1) borrow money from banks and (2) make other investments or engage
in other transactions permissible under the Investment Company Act of 1940
("1940 Act") which may involve a borrowing, provided that the combination of
(1) and (2) shall not exceed 33 1/3% of the value of the Fund's total assets
(including the amount borrowed), less the Fund's liabilities (other than
borrowings), except that the Fund may borrow up to an additional 5% of its
total assets (not including the amount borrowed) from a bank for temporary or
emergency purposes (but not for leverage or the purchase of investments). The
Fund may also borrow money from the other Strong Funds or other persons to the
extent permitted by applicable law.
3. May not issue senior securities, except as permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent the Fund from purchasing or selling options, futures contracts, or
other derivative instruments, or from investing in securities or other
instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's
total assets would be lent to other persons, except through (1) purchases of
debt securities or other debt instruments, or (2) engaging in repurchase
agreements.
7. May not purchase the securities of any issuer if, as a result, more than
25% of the Fund's total assets would be invested in the securities of issuers,
the principal business activities of which are in the same industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Fund from purchasing or selling securities or other instruments backed by real
estate or of issuers engaged in real estate activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objective, policies, and restrictions as the Fund.
10. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of multiple open end
management investment companies from the same group of open end investment
companies to become a "fund of funds" in accordance with Section 12(d)(1)(G) of
the 1940 Act.
4
<PAGE>
NON-FUNDAMENTAL OPERATING POLICIES
The following are the Fund's non-fundamental operating policies which may be
changed by the Fund's Board of Directors without shareholder approval.
Unless indicated otherwise below, the Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, or
unless it covers such short sale as required by the current rules and positions
of the Securities and Exchange Commission ("SEC") or its staff, and provided
that transactions in options, futures contracts, options on futures contracts,
or other derivative instruments are not deemed to constitute selling securities
short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts, options on
futures contracts, or other derivative instruments shall not constitute
purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% (10% with respect to a money fund) of its net assets would be invested
in illiquid securities, or such other amounts as may be permitted under the
1940 Act.
4. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
investment management company with substantially the same fundamental
investment objective, restrictions and policies as the Fund.
6. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act and, in
accordance with Rule 4.5, will use futures or options on futures transactions
solely for bona fide hedging transactions (within the meaning of the Commodity
Exchange Act), provided, however, that the Fund may, in addition to bona fide
hedging transactions, use futures and options on futures transactions if the
aggregate initial margin and premiums required to establish such positions,
less the amount by which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed 5% of the Fund's net
assets.
7. Borrow money except (1) from banks or (2) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when bank
borrowings exceed 5% of its total assets.
8. Make any loans other than loans of portfolio securities, except through
(1) purchases of debt securities or other debt instruments, or (2) engaging in
repurchase agreements.
Unless noted otherwise, if a percentage restriction is adhered to at the time
of investment, a later increase or decrease in percentage resulting from a
change in the Fund's assets (I.E. due to cash inflows or redemptions) or in
market value of the investment or the Fund's assets will not constitute a
violation of that restriction.
5
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
THE UNDERLYING STRONG FUNDS
Each Fund invests all its assets in the Underlying Funds as described below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
UNDERLYING FUNDS CONSERVATIVE MODERATE
AGGRESSIVE
- --------------------------------- -------------- -------------- --------------
Strong Growth Fund 10% 15% 20%
Strong Growth and Income Fund 10% 15% 20%
Strong Blue Chip 100 Fund 10% 15% 20%
Strong Common Stock Fund 10% 15% 20%
- --------------------------------- -------------- -------------- --------------
Strong Advantage Fund 25% 10% 0%
Strong Short-Term Bond Fund 20% 15% 5%
Strong Government Securities Fund 10% 10% 10%
Strong Money Market Fund 5% 5% 5%
- --------------------------------- -------------- -------------- --------------
</TABLE>
The following information supplements discussion of the Underlying Fund's
investment objective, policies, and techniques described in the Prospectus.
References to the "Fund" in the following discussions refer to the Underlying
Portfolios. References to the "Advisor" in this SAI refers to Strong Capital
Management, Inc., the investment adviser of the Underlying Funds, and the
transfer agent, dividend-disbursing agent, and shareholder servicing agent of
the Conservative, Moderate, and Aggressive Portfolios and the Underlying Funds.
THE FOLLOWING SECTION APPLIES ONLY TO THE MONEY MARKET FUND.
ASSET-BACKED DEBT OBLIGATIONS
Asset-backed debt obligations represent direct or indirect participation in, or
secured by and payable from, assets such as motor vehicle installment sales
contracts, other installment loan contracts, home equity loans, leases of
various types of property, and receivables from credit card or other revolving
credit arrangements. Asset-backed debt obligations may include collateralized
mortgage obligations ("CMOs") issued by private companies. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on asset-backed securities generally depends on
the rate of principal payments received on the underlying assets which in turn
may be affected by a variety of economic and other factors. As a result, the
yield on any asset-backed security is difficult to predict with precision and
actual yield to maturity may be more or less than the anticipated yield to
maturity. The yield characteristics of asset-backed debt obligations differ
from those of traditional debt obligations. Among the principal differences
are that interest and principal payments are made more frequently on
asset-backed debt obligations, usually monthly, and that principal may be
prepaid at any time because the underlying assets generally may be prepaid at
any time. As a result, if these debt obligations are purchased at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing the yield to maturity. Conversely, if these debt
obligations are purchased at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is
slower than expected will reduce yield to maturity. Accelerated prepayments on
debt obligations purchased at a premium also imposes a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full.
While many asset-backed securities are issued with only one class of security,
many asset-backed securities are issued in more than one class, each with
different payment terms. Multiple class asset-backed securities are issued for
two main reasons. First,
6
<PAGE>
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. Second, multiple classes may
permit the issuance of securities with payment terms, interest rates, or other
characteristics differing both from those of each other and from those of the
underlying assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests with respect to
the allocation of interest and principal of the assets backing the security),
and securities with class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest rates
(I.E., inter est rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
Asset-backed securities backed by assets, other than as described above, or in
which the payment streams on the underlying assets are allocated in a manner
different than those described above may be issued in the future. The Fund may
invest in such asset-backed securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of the Fund.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS, EXCEPT THAT THE MONEY
MARKET FUND HAS NOT ESTABLISHED A LINE-OF-CREDIT.
BORROWING
The Fund may borrow money from banks and make other investments or engage in
other transactions permissible under the 1940 Act which may be considered a
borrowing (such as mortgage dollar rolls and reverse repurchase agreements).
However, the Fund may not purchase securities when bank borrowings exceed 5% of
the Fund's total assets. Presently, the Fund only intends to borrow from banks
for temporary or emergency purposes.
The Fund has established a line-of-credit ("LOC") with certain banks by which
it may borrow funds for temporary or emergency purposes. A borrowing is
presumed to be for temporary or emergency purposes if it is repaid by the Fund
within 60 days and is not extended or renewed. The Fund intends to use the LOC
to meet large or unexpected redemptions that would otherwise force the Fund to
liquidate securities under circumstances which are unfavorable to the Fund's
remaining shareholders. The Fund pays a commitment fee to the banks for the
LOC.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS, EXCEPT
THE MONEY MARKET
FUND.
CASH MANAGEMENT
The Fund may invest directly in cash and short-term fixed-income securities,
including, for this purpose, shares of one or more money market funds managed
by Strong Capital Management, Inc., the Fund's investment advisor ("Advisor")
(collectively, the "Strong Money Funds"). The Strong Money Funds seek current
income, a stable share price of $1.00, and daily liquidity. All money market
instruments can change in value when interest rates or an issuer's
creditworthiness change dramatically. The Strong Money Funds cannot guarantee
that they will always be able to maintain a stable net asset value of $1.00 per
share.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS, EXCEPT THE MONEY MARKET
FUND.
CONVERTIBLE SECURITIES
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into or exchanged for a specified amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the
holder to receive interest normally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security matures or is redeemed,
converted, or exchanged. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
Most convertible securities currently are issued by U.S. companies, although a
substantial Eurodollar convertible securities market has developed, and the
markets for convertible securities denominated in local currencies are
increasing.
7
<PAGE>
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The investment value of a convertible
security is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on
the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. Generally, the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. A
convertible security generally will sell at a premium over its conversion value
by the extent to which investors place value on the right to acquire the
underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If
a convertible security is called for redemption, the Fund will be required to
permit the issuer to redeem the security, convert it into the underlying common
stock, or sell it to a third party.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS, EXCEPT
THE MONEY MARKET
FUND.
DEPOSITARY RECEIPTS
The Fund may invest in foreign securities by purchasing depositary receipts,
including American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"), or other securities convertible into securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs,
in registered form, are denominated in U.S. dollars and are designed for use in
the U.S. securities markets, while EDRs, in bearer form, may be denominated in
other currencies and are designed for use in the European securities markets.
ADRs are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts evidencing
a similar arrangement. For purposes of the Fund's investment policies, ADRs
and EDRs are deemed to have the same classification as the underlying
securities they represent, except that ADRs and EDRs shall be treated as
indirect foreign investments. For example, an ADR or EDR representing
ownership of common stock will be treated as common stock. Depositary receipts
do not eliminate all of the risks associated with directly investing in the
securities of foreign issuers.
ADR facilities may be established as either "unsponsored" or "sponsored." While
ADRs issued under these two types of facilities are in some respects similar,
there are distinctions between them relating to the rights and obligations of
ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without participation by (or
even necessarily the permission of) the issuer of the deposited securities,
although typically the depositary requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facility. The depositary usually charges
fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions, and the performance of other services. The depositary of an
unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and there may not be a correlation
between such information and the market value of the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary, and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
8
<PAGE>
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE MONEY MARKET FUND.
DERIVATIVE INSTRUMENTS
IN GENERAL. The Fund may use derivative instruments for any lawful purpose
consistent with its investment objective such as hedging or managing risk.
Derivative instruments are commonly defined to include securities or contracts
whose values depend on (or "derive" from) the value of one or more other
assets, such as securities, currencies, or commodities. These "other assets"
are commonly referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to OPTIONS or FORWARD CONTRACTS. Options and
forward contracts are considered to be the basic "building blocks" of deriva-
tives. For example, forward-based derivatives include forward contracts, swap
contracts, as well as exchange-traded futures. Option-based derivatives include
privately negotiated, over-the-counter ("OTC") options (including caps, floors,
collars, and options on forward and swap contracts) and exchange-traded options
on futures. Diverse types of derivatives may be created by combining options or
forward contracts in different ways, and by applying these structures to a wide
range of underlying assets.
An option is a contract in which the "holder" (the buyer) pays a certain amount
("premium") to the "writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time.
The holder pays the premium at inception and has no further financial
obligation. The holder of an option-based derivative generally will benefit
from favorable movements in the price of the underlying asset but is not
exposed to corresponding losses due to adverse movements in the value of the
underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long" position) and
a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed
future date and the seller agrees to deliver the asset. The seller hopes that
the market price on the delivery date is less than the agreed upon price, while
the buyer hopes for the contrary. The change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset.
HEDGING. The Fund may use derivative instruments to protect against possible
adverse changes in the market value of securities held in, or are anticipated
to be held in, its portfolio. Derivatives may also be used to "lock-in"
realized but unrecognized gains in the value of its portfolio securities.
Hedging strategies, if successful, can reduce the risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce the
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. To the extent that a hedge matures prior
to or after the disposition of the investment subject to the hedge, any gain or
loss on the hedge will be realized earlier or later than any offsetting gain or
loss on the hedged investment.
MANAGING RISK. The Fund may also use derivative instruments to manage
the risks of its portfolio. Risk management strategies include, but are not
limited to, facilitating the sale of portfolio securities, managing the
effective maturity or duration of debt obligations in its portfolio,
establishing a position in the derivatives markets as a substitute for buying
or selling certain securities, or creating or altering exposure to certain
asset classes, such as equity, debt, or foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way to invest than "traditional" securities (I.E., stocks
or bonds) would.
EXCHANGE AND OTC DERIVATIVES. Derivative instruments may be
exchange-traded or traded in OTC transactions between private parties.
Exchange-traded derivatives are standardized options and futures contracts
traded in an auction on the floor of a regulated exchange. Exchange contracts
are generally very liquid. The exchange clearinghouse is the counterparty of
every contract. Thus, each holder of an exchange contract bears the credit risk
of the clearinghouse (and has the benefit of its financial strength) rather than
that of a particular counterparty. OTC transactions are subject to additional
risks, such as the credit risk of the counterparty to the instrument, and are
less liquid than exchange-traded derivatives since they often can only be
closed out with the other party to the transaction.
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RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments
involves risks and special considerations as described below. Risks pertaining
to particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as the risk
of the underlying assets, namely that the value of the underlying asset may go
up or down. Adverse movements in the value of an underlying asset can expose
the Fund to losses. Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly the
ability of the Advisor to predict movements of the securities, currencies, and
commodity markets, which requires different skills than predicting changes in
the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed. The Advisor's decision to engage in
a derivative instrument will reflect its judgment that the derivative
transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives, investment limitations, and operating
policies. In making such a judgment, the Advisor will analyze the benefits and
risks of the derivative transaction and weigh them in the context of the Fund's
entire portfolio and investment objective.
(2) CREDIT RISK. The Fund will be subject to the risk that a loss may be
sustained as a result of the failure of a counterparty to comply with the terms
of a derivative instrument. The counterparty risk for exchange-traded
derivative instruments is generally less than for privately negotiated or OTC
derivative instruments, since generally a clearing agency, which is the issuer
or counterparty to each exchange-traded instrument, provides a guarantee of
performance. For privately negotiated instruments, there is no similar
clearing agency guarantee. In all transactions, the Fund will bear the risk
that the counterparty will default, and this could result in a loss of the
expected benefit of the derivative transaction and possibly other losses. The
Fund will enter into transactions in derivative instruments only with
counterparties that the Advisor reasonably believes are capable of performing
under the contract.
(3) CORRELATION RISK. When a derivative transaction is used to completely
hedge another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments. With
a perfect hedge, the value of the combined position remains unchanged for any
change in the price of the underlying asset. With an imperfect hedge, the
values of the derivative instrument and its hedge are not perfectly correlated.
Correlation risk is the risk that there might be imperfect correlation, or even
no correlation, between price movements of an instrument and price movements of
investments being hedged. For example, if the value of a derivative
instruments used in a short hedge (such as writing a call option, buying a put
option, or selling a futures contract) increased by less than the decline in
value of the hedged investments, the hedge would not be perfectly correlated.
Such a lack of correlation might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or other pressures on the
markets in which these instruments are traded. The effectiveness of hedges
using instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and price movements in the investments
being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity risk.
Liquidity risk is the risk that a derivative instrument cannot be sold, closed
out, or replaced quickly at or very close to its fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. The Fund might be required by applicable
regulatory requirement to maintain assets as "cover," maintain segregated
accounts, and/or make margin payments when it takes positions in derivative
instruments involving obligations to third parties (I.E., instruments other
than purchased options). If the Fund was unable to close out its positions in
such instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired, matured, or was
closed out. The requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any derivatives position can
be sold or closed out at a time and price that is favorable to the Fund.
(5) LEGAL RISK. Legal risk is the risk of loss caused by the legal
unenforcibility of a party's obligations under the derivative. While a party
seeking price certainty agrees to surrender the potential upside in exchange
for downside protection, the party taking
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the risk is looking for a positive payoff. Despite this voluntary assumption
of risk, a counterparty that has lost money in a derivative transaction may try
to avoid payment by exploiting various legal uncertainties about certain
derivative products.
(6) SYSTEMIC OR "INTERCONNECTION" RISK. Interconnection risk is the
risk that a disruption in the financial markets will cause difficulties for all
market participants. In other words, a disruption in one market will spill
over into other markets, perhaps creating a chain reaction. Much of the OTC
derivatives market takes place among the OTC dealers themselves, thus creating
a large interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create losses
at other dealers and destabilize the entire market for OTC derivative
instruments.
GENERAL LIMITATIONS. The use of derivative instruments is subject to
applicable regulations of the SEC, the several options and futures exchanges
upon which they may be traded, the Commodity Futures Trading Commission
("CFTC"), and various state regulatory authorities. In addition, the Fund's
ability to use derivative instruments may be limited by certain tax
considerations.
The Fund has filed a notice of eligibility for exclusion from the definition of
the term "commodity pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures markets. In accordance with
Rule 4.5 of the regulations under the Commodity Exchange Act ("CEA"), the
notice of eligibility for the Fund includes representations that the Fund will
use futures contracts and related options solely for bona fide hedging purposes
within the meaning of CFTC regulations, provided that the Fund may hold other
positions in futures contracts and related options that do not qualify as a
bona fide hedging position if the aggregate initial margin deposits and
premiums required to establish these positions, less the amount by which any
such futures contracts and related options positions are "in the money," do not
exceed 5% of the Fund's net assets. Adherence to these guidelines does not
limit the Fund's risk to 5% of the Fund's assets.
The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging the Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of the Fund's assets, as defined under the 1940 Act, the SEC
has stated that the Fund may use coverage or the segregation of the Fund's
assets. To the extent required by SEC guidelines, the Fund will not enter into
any such transactions unless it owns either: (1) an offsetting ("covered")
position in securities, options, futures, or derivative instruments; or (2)
cash or liquid securities positions with a value sufficient at all times to
cover its potential obligations to the extent that the position is not
"covered". The Fund will also set aside cash and/or appropriate liquid assets
in a segregated custodial account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be
sold while the derivative position is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of the Fund's
assets to segregated accounts could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
In some cases, the Fund may be required to maintain or limit exposure to a
specified percentage of its assets to a particular asset class. In such cases,
when the Fund uses a derivative instrument to increase or decrease exposure to
an asset class and is required by applicable SEC guidelines to set aside liquid
assets in a segregated account to secure its obligations under the derivative
instruments, the Advisor may, where reasonable in light of the circumstances,
measure compliance with the applicable percentage by reference to the nature of
the economic exposure created through the use of the derivative instrument and
not by reference to the nature of the exposure arising from the liquid assets
set aside in the segregated account (unless another interpretation is specified
by applicable regulatory requirements).
OPTIONS. The Fund may use options for any lawful purpose consistent with its
investment objective such as hedging or managing risk. An option is a contract
in which the "holder" (the buyer) pays a certain amount ("premium") to the
"writer" (the seller) to obtain the right, but not the obligation, to buy from
the writer (in a "call") or sell to the writer (in a "put") a specific asset at
an agreed upon price ("strike price" or "exercise price") at or before a
certain time ("expiration date"). The holder pays the premium at inception and
has no further financial obligation. The holder of an option will benefit from
favorable movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option will receive fees or premiums but is exposed to
losses due to changes in the value of the underlying asset. The Fund may buy
or write (sell) put and call options on assets, such as securities, currencies,
financial commodities, and indices of debt and equity securities ("underlying
assets") and enter into closing transactions with respect to such options to
terminate an existing position. Options used by the Fund may include European,
American, and Bermuda style options. If an option is exercisable only at
maturity, it is a "European" option; if it is also exercisable prior to
maturity, it is an "American" option. If it is exercisable only at certain
times, it is a "Bermuda" option.
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The Fund may purchase (buy) and write (sell) put and call options underlying
assets and enter into closing transactions with respect to such options to
terminate an existing position. The purchase of a call option serves as a long
hedge, and the purchase of a put option serves as a short hedge. Writing put
or call options can enable the Fund to enhance income by reason of the premiums
paid by the purchaser of such options. Writing call options serves as a
limited short hedge because declines in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security appreciates to a price higher than the exercise price
of the call option, it can be expected that the option will be exercised and
the Fund will be obligated to sell the security at less than its market value
or will be obligated to purchase the security at a price greater than that at
which the security must be sold under the option. All or a portion of any
assets used as cover for OTC options written by the Fund would be considered
illiquid to the extent described under "Investment Policies and Techniques -
Illiquid Securities." Writing put options serves as a limited long hedge
because decreases in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the
security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the Fund
will be obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions.
The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit the Fund to realize the
profit or limit the loss on an option position prior to its exercise or
expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases or writes an OTC option,
it relies on the counterparty to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty to do so
would result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with counter parties that are expected to
be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration. If the Fund were unable to effect a closing
transaction for an option it had purchased, it would have to exercise the
option to realize any profit.
The Fund may engage in options transactions on indices in much the same manner
as the options on securities discussed above, except the index options may
serve as a hedge against overall fluctuations in the securities market
represented by the relevant market index.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of the
attempted hedging.
SPREAD TRANSACTIONS. The Fund may use spread transactions for any lawful
purpose consistent with its investment objective such as hedging or managing
risk. The Fund may purchase covered spread options from securities dealers.
Such covered spread
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options are not presently exchange-listed or exchange-traded. The purchase of
a spread option gives the Fund the right to put, or sell, a security that it
owns at a fixed dollar spread or fixed yield spread in relation to another
security that the Fund does not own, but which is used as a benchmark. The
risk to the Fund in purchasing covered spread options is the cost of the
premium paid for the spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be available. The
purchase of spread options will be used to protect the Fund against adverse
changes in prevailing credit quality spreads, I.E., the yield spread between
high quality and lower quality securities. Such protection is only provided
during the life of the spread option.
FUTURES CONTRACTS. The Fund may use futures contracts for any lawful
purpose consistent with its investment objective such as hedging or managing
risk. The Fund may enter into futures contracts, including, but not limited to,
interest rate and index futures. The Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, and writing covered put options on futures con-
tracts can serve as a limited long hedge, using a strategy similar to that used
for writing covered options in securities. The Fund may also write put options
on futures contracts while at the same time purchasing call options on the same
futures contracts in order to create synthetically a long futures contract
position. Such options would have the same strike prices and expiration dates.
The Fund will engage in this strategy only when the Advisor believes it is more
advantageous to the Fund than purchasing the futures contract.
To the extent required by regulatory authorities, the Fund only enters into
futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce the Fund's exposure to market or interest rate fluctuations, the Fund
may be able to hedge its exposure more effectively and perhaps at a lower cost
through the use of futures contracts.
An interest rate futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (E.G., debt security) for a specified price at a designated date,
time, and place. An index futures contract is an agreement pursuant to which
the parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index futures contract was
originally written. Transaction costs are incurred when a futures contract is
bought or sold and margin deposits must be maintained. A futures contract may
be satisfied by delivery or purchase, as the case may be, of the instrument or
by payment of the change in the cash value of the index. More commonly,
futures contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching futures contract. Although the value of
an index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase
price is less than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting sale price is
more than the original purchase price, the Fund realizes a gain; if it is less,
the Fund realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Fund will be able
to enter into an offsetting transaction with respect to a particular futures
contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the futures contract.
No price is paid by the Fund upon entering into a futures contract. Instead,
at the inception of a futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash
and/or other appropriate liquid assets in an amount generally equal to 10% or
less of the contract value. Margin must also be deposited when writing a call
or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility,
the Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather represents
a daily settlement of the Fund's obligations to or from a futures broker. When
the Fund purchases an option on a future, the premium paid plus
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transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous. Purchasers and sellers of futures positions
and options on futures can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument identical to the instrument
held or written. Positions in futures and options on futures may be closed
only on an exchange or board of trade that provides a secondary market. The
Fund intends to enter into futures transactions only on exchanges or boards of
trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or option on a futures contract can vary
from the previous day's settlement price; once that limit is reached, no trades
may be made that day at a price beyond the limit. Daily price limits do not
limit potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or option on a futures contract
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in
the case of purchased options, the Fund would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities
markets involving arbitrage, "program trading" and other investment strategies
might result in temporary price distortions.
FOREIGN CURRENCIES. The Fund may purchase and sell foreign currency
on a spot basis, and may use currency-related derivatives instruments such as
options on foreign currencies, futures on foreign currencies, options on futures
on foreign currencies and forward currency contracts (I.E., an obligation to
purchase or sell a specific currency at a specified future date, which may be
any fixed number of days from the contract date agreed upon by the parties, at
a price set at the time the contract is entered into). The Fund may use these
instruments for hedging or any other lawful purpose consistent with the Fund's
investment objective, including transaction hedging, anticipatory hedging,
cross hedging, proxy hedging, and position hedging. The Fund's use of
currency-related derivative instruments will be directly related to the Fund's
current or anticipated portfolio securities, and the Fund may engage in
transactions in currency-related derivative instruments as a means to protect
against some or all of the effects of adverse changes in foreign currency
exchange rates on its investment portfolio. In general, if the currency in
which a portfolio investment is denominated appreciates against the U.S.
dollar, the dollar value of the security will increase. Conversely, a decline
in the exchange rate of the currency would adversely affect the value of the
portfolio investment expressed in U.S. dollars.
For example, the Fund might use currency-related derivative instruments to
"lock in" a U.S. dollar price for a portfolio investment, thereby enabling the
Fund to protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date the security is purchased or sold and the
date on which payment is made or received. The Fund also might use
currency-related derivative instruments when the Advisor believes that one
currency may experience a substantial movement against another currency,
including the U.S. dollar, and it may use currency-related derivative
instruments to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the
Fund may use currency-related derivative instruments to hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. The use of this basket hedging technique may be more
efficient and economical than using separate currency-related derivative
instruments for
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each currency exposure held by the Fund. Furthermore, currency-related
derivative instruments may be used for short hedges - for example, the Fund may
sell a forward currency contract to lock in the U.S. dollar equivalent of the
proceeds from the anticipated sale of a security denominated in a foreign
currency.
In addition, the Fund may use a currency-related derivative instrument to shift
exposure to foreign currency fluctuations from one foreign country to another
foreign country where the Advisor believes that the foreign currency exposure
purchased will appreciate relative to the U.S. dollar and thus better protect
the Fund against the expected decline in the foreign currency exposure sold.
For example, if the Fund owns securities denominated in a foreign currency and
the Advisor believes that currency will decline, it might enter into a forward
contract to sell an appropriate amount of the first foreign currency, with
payment to be made in a second foreign currency that the Advisor believes would
better protect the Fund against the decline in the first security than would a
U.S. dollar exposure. Hedging transactions that use two foreign currencies are
sometimes referred to as "cross hedges." The effective use of currency-related
derivative instruments by the Fund in a cross hedge is dependent upon a
correlation between price movements of the two currency instruments and the
underlying security involved, and the use of two currencies magnifies the risk
that movements in the price of one instrument may not correlate or may
correlate unfavorably with the foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the currency
instruments used or investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
The Fund also might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using currency-related derivative instruments on
another foreign currency or a basket of currencies, the values of which the
Advisor believes will have a high degree of positive correlation to the value
of the currency being hedged. The risk that movements in the price of the
hedging instrument will not correlate perfectly with movements in the price of
the currency being hedged is magnified when this strategy is used.
The use of currency-related derivative instruments by the Fund involves a
number of risks. The value of currency-related derivative instruments depends
on the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such derivative
instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots (generally consisting of transactions of greater than $1 million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments might be
required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
When the Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for
exchange-traded instruments is generally less than for privately negotiated or
OTC currency instruments, since generally a clearing agency, which is the
issuer or counterparty to each instrument, provides a guarantee of performance.
For privately negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the transaction and possibly other losses to the Fund. The Fund
will enter into transactions in currency-related derivative instruments only
with counterparties that the Advisor reasonably believes are capable of
performing under the contract.
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Purchasers and sellers of currency-related derivative instruments may enter
into offsetting closing transactions by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract (or
any other currency-related derivative instrument) at a time and price favorable
to the Fund. In addition, in the event of insolvency of the counterparty, the
Fund might be unable to close out a forward currency contract at any time prior
to maturity. In the case of an exchange-traded instrument, the Fund will be
able to close the position out only on an exchange which provides a market for
the instruments. The ability to establish and close out positions on an
exchange is subject to the maintenance of a liquid market, and there can be no
assurance that a liquid market will exist for any instrument at any specific
time. In the case of a privately negotiated instrument, the Fund will be able
to realize the value of the instrument only by entering into a closing
transaction with the issuer or finding a third party buyer for the instrument.
While the Fund will enter into privately negotiated transactions only with
entities who are expected to be capable of entering into a closing transaction,
there can be no assurance that the Fund will in fact be able to enter into such
closing transactions.
The precise matching of currency-related derivative instrument amounts and the
value of the portfolio securities involved generally will not be possible
because the value of such securities, measured in the foreign currency, will
change after the currency-related derivative instrument position has been
established. Thus, the Fund might need to purchase or sell foreign currencies
in the spot (cash) market. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily in
the OTC market, the Fund will normally purchase or sell OTC options on foreign
currency only when the Advisor reasonably believes a liquid secondary market
will exist for a particular option at any specific time.
There will be a cost to the Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. The Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to resell that currency to the
dealer.
When required by the SEC guidelines, the Fund will set aside permissible liquid
assets in segregated accounts or otherwise cover the Fund's potential
obligations under currency-related derivatives instruments. To the extent the
Fund's assets are so set aside, they cannot be sold while the corresponding
currency position is open, unless they are replaced with similar assets. As a
result, if a large portion of the Fund's assets are so set aside, this could
impede portfolio management or the Fund's ability to meet redemption requests
or other current obligations.
The Advisor's decision to engage in a transaction in a particular
currency-related derivative instrument will reflect the Advisor's judgment that
the transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives and policies. In making such a judgment,
the Advisor will analyze the benefits and risks of the transaction and weigh
them in the context of the Fund's entire portfolio and objectives. The
effectiveness of any transaction in a currency-related derivative instrument is
dependent on a variety of factors, including the Advisor's skill in analyzing
and predicting currency values and upon a correlation between price movements
of the currency instrument and the underlying security. There might be
imperfect correlation, or even no correlation, between price movements of an
instrument and price movements of investments being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which these instruments are traded. In addition, the Fund's use of
currency-related derivative instruments is always subject to the risk that the
currency in question could be devalued by the foreign government. In such a
case, any long currency positions would decline in value and could adversely
affect any hedging position maintained by the Fund.
The Fund's dealing in currency-related derivative instruments will generally be
limited to the transactions described above. However, the Fund reserves the
right to use currency-related derivatives instruments for different purposes
and under different circumstances. Of course, the Fund is not required to use
currency-related derivatives instruments and will not do so unless deemed
appropriate by the Advisor. It also should be realized that use of these
instruments does not eliminate, or protect against, price movements in the
Fund's securities that are attributable to other (I.E., non-currency related)
causes. Moreover, while the use
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of currency-related derivatives instruments may reduce the risk of loss due to
a decline in the value of a hedged currency, at the same time the use of these
instruments tends to limit any potential gain which may result from an increase
in the value of that currency.
SWAP AGREEMENTS. The Fund may enter into interest rate, securities index,
commodity, or security and currency exchange rate swap agreements for any
lawful purpose consistent with the Fund's investment objective, such as for the
purpose of attempting to obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or spread. The Fund also may enter
into swaps in order to protect against an increase in the price of, or the
currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to several years. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized
on particular predetermined investments or instruments. The gross returns to
be exchanged or "swapped" between the parties are calculated with respect to a
"notional amount" (I.E., the return on or increase in value of a particular
dollar amount invested at a particular interest rate) in a particular foreign
currency, or in a "basket" of securities representing a particular index. Swap
agreements may include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap;" interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified level, or "floor;" and
interest rate collars, under which a party sells a cap and purchases a floor,
or vice versa, in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, the Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement ("net amount").
The Fund's obligation under a swap agreement will be accrued daily (offset
against amounts owed to the Fund) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash and/or other appropriate liquid assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend, in part, on the Advisor's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Swap agreements may be considered to be
illiquid. Moreover, the Fund bears the risk of loss of the amount expected to
be received under a swap agreement in the event of the default or bankruptcy of
a swap agreement counterparty. Certain restrictions imposed on the Fund by the
Internal Revenue Code of 1986 ("IRC") may limit the Fund's ability to use swap
agreements. The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that the Advisor
reasonably believes are capable of performing under the swap agreements. If
there is a default by the other party to such a transaction, the Fund will have
to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In
addition to the derivative instruments and strategies described above and in the
Prospectus, the Advisor expects to discover additional derivative instruments
and other hedging or risk management techniques. The Advisor may utilize these
new derivative instruments and techniques to the extent that they are consis-
tent with the Fund's investment objective and permitted by the Fund's invest-
ment limitations, operating policies, and applicable regulatory authorities.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE, SHORT-TERM
BOND, AND GOVERNMENT SECURITIES FUNDS.
DURATION
Duration was developed as a more precise alternative to the concept of
"maturity." Traditionally, a debt obligations' maturity has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
maturity measures only the time until a debt obligation provides its final
payment, taking no
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account of the pattern of the security's payments prior to maturity. In
contrast, duration incorporates a bond's yield, coupon interest payments, final
maturity and call features into one measure. Duration management is one of the
fundamental tools used by the Advisor.
Duration is a measure of the expected life of a debt obligation on a present
value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, the time the principal payments
are expected to be received, and weights them by the present values of the cash
to be received at each future point in time. For any debt obligation with
interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest of a fixed income security, the longer
the duration of the security; conversely, the higher the stated or coupon rate
of interest of a fixed income security, the shorter the duration of the
security.
Futures, options and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions will lengthen the duration of the Fund's
portfolio by approximately the same amount of time that holding an equivalent
amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount of time
that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
Finally, the duration of a debt obligation may vary over time in response to
changes in interest rates and other market factors.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE BLUE CHIP 100, GOVERNMENT SECURITIES, AND MONEY
MARKET FUNDS.
FOREIGN INVESTMENT COMPANIES
The Fund may invest, to a limited extent, in foreign investment companies.
Some of the countries in which the Fund invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may be
less expensive and more expedient for the Fund to invest in a foreign
investment company in a country which permits direct foreign investment.
Investing through such vehicles may involve frequent or layered fees or
expenses and may also be subject to limitation under the 1940 Act. Under the
1940 Act, the Fund may invest up to 10% of its assets in shares of other
investment companies and up to 5% of its assets in any one investment company
as long as the investment does not represent more than 3% of the voting stock
of the acquired investment company. The Fund does not intend to invest in such
investment companies unless, in the judgment of the Advisor, the potential
benefits of such investments justify the payment of any associated fees and
expenses.
THE FOLLOWING SECTIONS APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE BLUE CHIP 100 AND MONEY MARKET FUNDS.
FOREIGN SECURITIES
Investing in foreign securities involves a series of risks not present in
investing in U.S. securities. Many of the foreign securities held by the Fund
will not be registered with the SEC, nor will the foreign issuers be subject to
SEC reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning U.S. companies. Disclosure and regulatory standards in
many respects are less stringent in emerging market countries than in the U.S.
and other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets,
and enforcement of existing regulations may be extremely limited. Foreign
companies, and in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting,
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auditing and financial reporting standards, or to other regulatory requirements
comparable to those applicable to U.S. companies. The Fund's net investment
income and capital gains from its foreign investment activities may be subject
to non-U.S. withholding taxes.
The costs attributable to foreign investing that the Fund must bear frequently
are higher than those attributable to domestic investing; this is particularly
true with respect to emerging capital markets. For example, the cost of
maintaining custody of foreign securities exceeds custodian costs for domestic
securities, and transaction and settlement costs of foreign investing also
frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the Fund may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities.
Tax treaties between the U.S. and foreign countries, however, may reduce or
eliminate the amount of foreign tax to which the Fund would be subject.
Foreign markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when
assets of the Fund are uninvested and are earning no investment return. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result either
in losses to the Fund due to subsequent declines in the value of such portfolio
security or, if the Fund has entered into a contract to sell the security,
could result in possible liability to the purchaser.
THIS SECTION APPLIES TO ALL UNDERLYING FUNDS, EXCEPT THE
BLUE CHIP 100, GOVERNMENT SECURITIES, AND MONEY MARKET
FUNDS.
HIGH-YIELD (HIGH-RISK) SECURITIES
IN GENERAL. Non-investment grade debt obligations ("lower-quality securities")
include (1) bonds rated as low as C by Moody's Investors Service ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), and comparable ratings of other
nationally recognized statistical rating organizations ("NRSROs"); (2)
commercial paper rated as low as C by S&P, Not Prime by Moody's, and comparable
ratings of other NRSROs; and (3) unrated debt obligations of comparable
quality. Lower-quality securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to the Appendix for
a description of the securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-
quality and comparable unrated security market is relatively new and its growth
has paralleled a long economic expansion. As a result, it is not clear how
this market may withstand a prolonged recession or economic downturn. Such
conditions could severely disrupt the market for and adversely affect the value
of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, the Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
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As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so
will the Fund's net asset value. If the Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), the Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would force the Fund to sell the more liquid
portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, the Fund may
have to replace the securities with a lower yielding security, which would
result in a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are designed
to evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of lower-quality
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of
the issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in lower-quality and comparable unrated obligations will be more
dependent on the Advisor's credit analysis than would be the case with
investments in investment-grade debt obligations. The Advisor employs its own
credit research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. The Advisor continually monitors the investments in the Fund's
portfolio and carefully evaluates whether to dispose of or to retain
lower-quality and comparable unrated securities whose credit ratings or credit
quality may have changed.
LIQUIDITY AND VALUATION. The Fund may have difficulty disposing of
certain lower-quality and comparable unrated securities because there may be a
thin trading market for such securities. Because not all dealers maintain
markets in all lower-quality and comparable unrated securities, there is no
established retail secondary market for many of these securities. The Fund
anticipates that such securities could be sold only to a limited number of deal-
ers or institutional investors. To the extent a secondary trading market does
exist, it is generally not as liquid as the secondary market for higher-rated
securities. The lack of a liquid secondary market may have an adverse impact
on the market price of the security. As a result, the Fund's asset value and
ability to dispose of particular securities, when necessary to meet the Fund's
liquidity needs or in response to a specific economic event, may be impacted.
The lack of a liquid secondary market for certain securities may also make it
more difficult for the Fund to obtain accurate market quotations for purposes
of valuing the Fund's portfolio. Market quotations are generally available on
many lower-quality and comparable unrated issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. During periods of thin trading, the spread between bid and
asked prices is likely to increase significantly. In addition, adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
LEGISLATION. Legislation may be adopted, from time to time, designed to limit
the use of certain lower-quality and comparable unrated securities by certain
issuers. It is anticipated that if additional legislation is enacted or
proposed, it could have a material affect on the value of these securities and
the existence of a secondary trading market for the securities.
ILLIQUID SECURITIES
The Fund may invest in illiquid securities (I.E., securities that are not
readily marketable). However, the Fund will not acquire illiquid securities
if, as a result, the illiquid securities would comprise more than 15% (10% for
money market funds) of the value of the Fund's net assets (or such other
amounts as may be permitted under the 1940 Act). However, as a matter of
internal policy, the Advisor intends to limit the Fund's investments in
illiquid securities to 10% of its net assets.
The Board of Directors of the Fund, or its delegate, has the ultimate
authority to determine, to the extent permissible under the federal securities
laws, which securities are illiquid for purposes of this limitation. Certain
securities exempt from registration or issued in transactions exempt from
registration under the Securities Act of 1933, as amended ("Securities Act"),
such as securities
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<PAGE>
that may be resold to institutional investors under Rule 144A under the
Securities Act and Section 4(2) commercial paper, may be considered liquid
under guidelines adopted by the Fund's Board of Directors.
The Board of Directors of the Fund has delegated to the Advisor the day-to-day
determination of the liquidity of a security, although it has retained
oversight and ultimate responsibility for such determinations. The Board of
Directors has directed the Advisor to look to such factors as (1) the frequency
of trades or quotes for a security, (2) the number of dealers willing to
purchase or sell the security and number of potential buyers, (3) the
willingness of dealers to undertake to make a market in the security, (4) the
nature of the security and nature of the marketplace trades, such as the time
needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer, (5) the likelihood that the security's marketability
will be maintained throughout the anticipated holding period, and (6) any other
relevant factors. The Advisor may determine 4(2) commercial paper to be liquid
if (1) the 4(2) commercial paper is not traded flat or in default as to
principal and interest, (2) the 4(2) commercial paper is rated in one of the
two highest rating categories by at least two NRSROs, or if only one NRSRO
rates the security, by that NRSRO, or is determined by the Advisor to be of
equivalent quality, and (3) the Advisor considers the trading market for the
specific security taking into account all relevant factors. With respect to
any foreign holdings, a foreign security may be considered liquid by the
Advisor (despite its restricted nature under the Securities Act) if the
security can be freely traded in a foreign securities market and all the facts
and circumstances support a finding of liquidity.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced in accordance with
pricing procedures adopted by the Board of Directors of the Fund. If through
the appreciation of restricted securities or the depreciation of unrestricted
securities the Fund should be in a position where more than 15% of the value of
its net assets are invested in illiquid securities, including restricted
securities which are not readily marketable (except for 144A Securities and
4(2) commercial paper deemed to be liquid by the Advisor), the Fund will take
such steps as is deemed advisable, if any, to protect the liquidity of the
Fund's portfolio.
The Fund may sell OTC options and, in connection therewith, segregate assets or
cover its obligations with respect to OTC options written by the Fund. The
assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that
the Fund may repurchase any OTC option it writes at a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. Although the Fund is authorized to lend, the Fund does not
presently intend to engage in lending. In determining whether to lend
securities to a particular broker-dealer or institutional investor, the Advisor
will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Fund will retain authority to terminate any loans at any time. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when retaining such
rights is considered to be in the Fund's interest.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE, SHORT-
TERM BOND, AND GOVERNMENT SECURITIES FUNDS.
LOAN INTERESTS
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The Fund may acquire a loan interest (a "Loan Interest"). A Loan Interest is
typically originated, negotiated, and structured by a U.S. or foreign
commercial bank, insurance company, finance company, or other financial
institution ("Agent") for a lending syndicate of financial institutions. The
Agent typically administers and enforces the loan on behalf of the other
lenders in the syndicate. In addition, an institution, typically but not
always the Agent ("Collateral Bank"), holds collateral (if any) on behalf of
the lenders. These Loan Interests may take the form of participation interests
in, assignments of or novations of a loan during its secondary distribution, or
direct interests during a primary distribution. Such Loan Interests may be
acquired from U.S. or foreign banks, insurance companies, finance companies, or
other financial institutions who have made loans or are members of a lending
syndicate or from other holders of Loan Interests. The Fund may also acquire
Loan Interests under which the Fund derives its rights directly from the
borrower. Such Loan Interests are separately enforceable by the Fund against
the borrower and all payments of interest and principal are typically made
directly to the Fund from the borrower. In the event that the Fund and other
lenders become entitled to take possession of shared collateral, it is
anticipated that such collateral would be held in the custody of a Collateral
Bank for their mutual benefit. The Fund may not act as an Agent, a Collateral
Bank, a guarantor or sole negotiator or structurer with respect to a loan.
The Advisor will analyze and evaluate the financial condition of the borrower
in connection with the acquisition of any Loan Interest. The Advisor also
analyzes and evaluates the financial condition of the Agent and, in the case of
Loan Interests in which the Fund does not have privity with the borrower, those
institutions from or through whom the Fund derives its rights in a loan
("Intermediate Participants").
In a typical loan, the Agent administers the terms of the loan agreement. In
such cases, the Agent is normally responsible for the collection of principal
and interest payments from the borrower and the apportionment of these payments
to the credit of all institutions which are parties to the loan agreement. The
Fund will generally rely upon the Agent or an Intermediate Participant to
receive and forward to the Fund its portion of the principal and interest
payments on the loan. Furthermore, unless under the terms of a participation
agreement the Fund has direct recourse against the borrower, the Fund will rely
on the Agent and the other members of the lending syndicate to use appropriate
credit remedies against the borrower. The Agent is typically responsible for
monitoring compliance with covenants contained in the loan agreement based upon
reports prepared by the borrower. The seller of the Loan Interest usually
does, but is often not obligated to, notify holders of Loan Interests of any
failures of compliance. The Agent may monitor the value of the collateral and,
if the value of the collateral declines, may accelerate the loan, may give the
borrower an opportunity to provide additional collateral or may seek other
protection for the benefit of the participants in the loan. The Agent is
compensated by the borrower for providing these services under a loan
agreement, and such compensation may include special fees paid upon structuring
and funding the loan and other fees paid on a continuing basis. With respect
to Loan Interests for which the Agent does not perform such administrative and
enforcement functions, the Fund will perform such tasks on its own behalf,
although a Collateral Bank will typically hold any collateral on behalf of the
Fund and the other lenders pursuant to the applicable loan agreement.
A financial institution's appointment as Agent may usually be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held
by the Agent under the loan agreement should remain available to holders of
Loan Interests. However, if assets held by the Agent for the benefit of the
Fund were determined to be subject to the claims of the Agent's general
creditors, the Fund might incur certain costs and delays in realizing payment
on a loan interest, or suffer a loss of principal and/or interest. In
situations involving Intermediate Participants, similar risks may arise.
Purchasers of Loan Interests depend primarily upon the creditworthiness of the
borrower for payment of principal and interest. If the Fund does not receive
scheduled interest or principal payments on such indebtedness, the Fund's share
price and yield could be adversely affected. Loans that are fully secured
offer the Fund more protections than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
borrower's obligation, or that the collateral can be liquidated. Indebtedness
of borrowers whose creditworthiness is poor involves substantially greater
risks, and may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a small
fraction of the amount owed. Direct indebtedness of developing countries will
also involve a risk that the governmental entities responsible for the
repayment of the debt may be unable, or unwilling, to pay interest and repay
principal when due.
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THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE, SHORT-
TERM BOND, AND GOVERNMENT SECURITIES FUNDS.
MATURITY
The Fund's average portfolio maturity represents an average based on the actual
stated maturity dates of the debt securities in the Fund's portfolio, except
that (1) variable-rate securities are deemed to mature at the next
interest-rate adjustment date, (2) debt securities with put features are deemed
to mature at the next put-exercise date, (3) the maturity of mortgage-backed
and certain other asset-backed securities is determined on an "expected life"
basis by the Advisor and (4) securities being hedged with futures contracts may
be deemed to have a longer maturity, in the case of purchases of futures
contracts, and a shorter maturity, in the case of sales of futures contracts,
than they would otherwise be deemed to have. In addition, a security that is
subject to redemption at the option of the issuer on a particular date ("call
date"), which is prior to the security's stated maturity, may be deemed to
mature on the call date rather than on its stated maturity date. The call date
of a security will be used to calculate average portfolio maturity when the
Advisor reasonably anticipates, based upon information available to it, that
the issuer will exercise its right to redeem the security. The average
portfolio maturity of the Fund is dollar-weighted based upon the market value
of the Fund's securities at the time of the calculation.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE BLUE CHIP 100 AND MONEY MARKET FUNDS.
MORTGAGE- AND ASSET-BACKED DEBT SECURITIES
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or are secured by and payable from, assets such as
motor vehicle installment sales contracts, other installment loan contracts,
home equity loans, leases of various types of property, and receivables from
credit card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any mortgage- and asset-backed security is
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional debt
securities. Among the principal differences are that interest and principal
payments are made more frequently on mortgage-and asset-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing the yield to maturity. Conversely, if the Fund purchases these
securities at a discount, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Amounts available for reinvestment by
the Fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates. Accelerated prepayments on
securities purchased by the Fund at a premium also impose a risk of loss of
principal because the
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premium may not have been fully amortized at the time the principal is prepaid
in full. The market for privately issued mortgage- and asset-backed securities
is smaller and less liquid than the market for government-sponsored
mortgage-backed securities.
While many mortgage- and asset-backed securities are issued with only one class
of security, many are issued in more than one class, each with different
payment terms. Multiple class mortgage- and asset-backed securities are issued
for two main reasons. First, multiple classes may be used as a method of
providing credit support. This is accomplished typically through creation of
one or more classes whose right to payments on the security is made subordinate
to the right to such payments of the remaining class or classes. Second,
multiple classes may permit the issuance of securities with payment terms,
interest rates, or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (mortgage- and asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-mortgage-
or asset-backed securities, such as floating interest rates (I.E., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
The Fund may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such
market value may be extremely volatile. With respect to certain stripped
securities, such as interest only and principal only classes, a rate of
prepayment that is faster or slower than anticipated may result in the Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
Mortgage- and asset-backed securities backed by assets, other than as described
above, or in which the payment streams on the underlying assets are allocated
in a manner different than those described above may be issued in the future.
The Fund may invest in such securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of the Fund.
MUNICIPAL OBLIGATIONS
IN GENERAL. Municipal obligations are debt obligations issued by or on behalf
of states, territories, and possessions of the United States and the District
of Columbia and their political subdivisions, agencies, and instrumentalities.
Municipal obligations generally include debt obligations issued to obtain funds
for various public purposes. Certain types of municipal obligations are issued
in whole or in part to obtain funding for privately operated facilities or
projects. Municipal obligations include general obligation bonds, revenue
bonds, industrial development bonds, notes, and municipal lease obligations.
Municipal obligations also include obligations, the interest on which is exempt
from federal income tax, that may become available in the future as long as the
Board of Directors of the Fund determines that an investment in any such type
of obligation is consistent with the Fund's investment objective.
BONDS AND NOTES. General obligation bonds are secured by the issuer's pledge
of its full faith, credit, and taxing power for the payment of interest and
principal. Revenue bonds are payable only from the revenues derived from a
project or facility or from the proceeds of a specified revenue source.
Industrial development bonds are generally revenue bonds secured by payments
from and the credit of private users. Municipal notes are issued to meet the
short-term funding requirements of state, regional, and local governments.
Municipal notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax and revenue anticipation notes, construction
loan notes, short-term discount notes, tax-exempt commercial paper, demand
notes, and similar instruments.
LEASE OBLIGATIONS. Municipal lease obligations may take the form of a lease,
an installment purchase, or a conditional sales contract. They are issued by
state and local governments and authorities to acquire land, equipment, and
facilities, such as state and municipal vehicles, telecommunications and
computer equipment, and other capital assets. The Fund may purchase these
obligations directly, or it may purchase participation interests in such
obligations. (See "Participation Interests" below.) Municipal leases are
generally subject to greater risks than general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet in order to issue municipal obligations. Municipal
leases may contain a covenant by the state or municipality to budget for,
appropriate, and make payments due under the obligation. Certain municipal
leases may, however, contain "non-appropriation" clauses which provide that the
issuer is not obligated to make payments on the
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obligation in future years unless funds have been appropriated for this purpose
each year. Accordingly, such obligations are subject to "non-appropriation"
risk. While municipal leases are secured by the underlying capital asset, it
may be difficult to dispose of any such asset in the event of non-appropriation
or other default.
MORTGAGE-BACKED BONDS. The Fund's investments in municipal obligations
may include mortgage-backed municipal obligations, which are a type of municipal
security issued by a state, authority, or municipality to provide financing for
residential housing mortgages to target groups, generally low-income
individuals who are first-time home buyers. The Fund's interest, evidenced by
such obligations, is an undivided interest in a pool of mortgages. Payments
made on the underlying mortgages and passed through to the Fund will represent
both regularly scheduled principal and interest payments. The Fund may also
receive additional principal payments representing prepayments of the
underlying mortgages. While a certain level of prepayments can be expected,
regardless of the interest rate environment, it is anticipated that prepayment
of the underlying mortgages will accelerate in periods of declining interest
rates. In the event that the Fund receives principal prepayments in a declining
interest-rate environment, its reinvestment of such funds may be in bonds with
a lower yield.
PARTICIPATION INTERESTS
A participation interest gives the Fund an undivided interest in a municipal
obligation in the proportion that the Fund's participation interest bears to
the principal amount of the obligation. These instruments may have fixed,
floating, or variable rates of interest. The Fund will only purchase
participation interests if accompanied by an opinion of counsel that the
interest earned on the underlying municipal obligations will be tax-exempt. If
the Fund purchases unrated participation interests, the Board of Directors or
its delegate must have determined that the credit risk is equivalent to the
rated obligations in which the Fund may invest. Participation interests may be
backed by a letter of credit or guaranty of the selling institution. When
determining whether such a participation interest meets the Fund's credit
quality requirements, the Fund may look to the credit quality of any financial
guarantor providing a letter of credit or guaranty.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. The Advisor will monitor, on an ongoing
basis, the value of the underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued interest. Repurchase
agreements could involve certain risks in the event of a default or insolvency
of the other party to the agreement, including possible delays or restrictions
upon the Fund's ability to dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the Advisor reviews the
creditworthiness of the banks and non-bank dealers with which the Fund enters
into repurchase agreements to evaluate those risks. The Fund may, under
certain circumstances, deem repurchase agreements collateralized by U.S.
government securities to be investments in U.S. government securities.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE BLUE CHIP 100 FUND.
REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR
ROLLS
The Fund may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions as discussed below. In a reverse repurchase agreement, the Fund
would sell a security and enter into an agreement to repurchase the security at
a specified future date and price. The Fund generally retains the right to
interest and principal payments on the security. Since the Fund receives cash
upon entering into a reverse repurchase agreement, it may be considered a
borrowing. When required by guidelines of the SEC, the Fund will set aside
permissible liquid assets in a segregated account to secure its obligations to
repurchase the security.
The Fund may also enter into mortgage dollar rolls, in which the Fund would
sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the
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proceeds of the initial sale. The Fund also could be compensated through the
receipt of fee income equivalent to a lower forward price. At the time the
Fund would enter into a mortgage dollar roll, it would set aside permissible
liquid assets in a segregated account to secure its obligation for the forward
commitment to buy mortgage-backed securities. Mortgage dollar roll
transactions may be considered a borrowing by the Fund.
The mortgage dollar rolls and reverse repurchase agreements entered into by the
Fund may be used as arbitrage transactions in which the Fund will maintain an
offsetting position in investment grade debt obligations or repurchase
agreements that mature on or before the settlement date on the related mortgage
dollar roll or reverse repurchase agreements. Since the Fund will receive
interest on the securities or repurchase agreements in which it invests the
transaction proceeds, such transactions may involve leverage. However, since
such securities or repurchase agreements will be high quality and will mature
on or before the settlement date of the mortgage dollar roll or reverse
repurchase agreement, the Advisor believes that such arbitrage transactions do
not present the risks to the Fund that are associated with other types of
leverage.
THE FOLLOWING SECTION APPLIES TO THE MONEY MARKET FUND
ONLY.
RULE 2A-7: MATURITY, QUALITY, AND DIVERSIFICATION
RESTRICTIONS
All capitalized but undefined terms in this discussion shall have the meaning
such terms have in Rule 2a-7 under the 1940 Act. The Fund is subject to
certain maturity restrictions in accordance with Rule 2a-7 for money market
funds that use the amortized cost method of valuation to maintain a stable net
asset value of $1.00 per share. Accordingly, the Fund will (1) maintain a
dollar weighted average portfolio maturity of 90 days or less, and (2) will
purchase securities with a remaining maturity of no more than 13 months (397
calendar days). Further, the Fund will limit its investments to U.S.
dollar-denominated securities which represent minimal credit risks and meet
certain credit quality and diversification requirements. For purposes of
calculating the maturity of portfolio instruments, the Fund will follow the
requirements of Rule 2a-7. Under Rule 2a-7, the maturity of portfolio
instruments is calculated as indicated below.
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining (calculated from the trade date or such other date on which
the Fund's interest in the instrument is subject to market action) until the
date noted on the face of the instrument as the date on which the principal
amount must be paid, or in the case of an instrument called for redemption, the
date on which the redemption payment must be made, except that:
(1) An instrument that is issued or guaranteed by the U.S. government or
any agency thereof which has a variable rate of interest readjusted no less
frequently than every 762 days shall be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate.
(2) A Variable Rate Instrument, the principal amount of which is scheduled
on the face of the instrument to be paid on 397 calendar days or less shall be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
(3) A Variable Rate Instrument that is subject to a Demand Feature shall be
deemed to have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
(4) A Floating Rate Instrument that is subject to a Demand Feature shall be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
(5) A repurchase agreement shall be deemed to have a maturity equal to the
period remaining until the date on which the repurchase of the underlying
securities is scheduled to occur, or, where no date is specified, but the
agreement is subject to a demand, the notice period applicable to a demand for
the repurchase of the securities.
The Fund is subject to certain credit quality restrictions pursuant to Rule
2a-7 under the 1940 Act. The Fund will invest at least 95% of its assets in
instruments determined to present minimal credit risks and, at the time of
acquisition, are (1) obligations issued or guaranteed by the U.S. government,
its agencies, or instrumentalities; (2) rated by at least two nationally
recognized rating agencies (or by one agency if only one agency has issued a
rating) (the "required rating agencies") in the highest rating
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category for short-term debt obligations; (3) unrated but whose issuer is rated
in the highest category by the required rating agencies with respect to a class
of short-term debt obligations or any security within that class that is
comparable in priority and security with the instrument; or (4) unrated (other
than the type described in (3)) but determined by the Board of Directors of the
Fund to be of comparable quality to the foregoing (provided the unrated
security has not received a short-term rating, and with respect to a long-term
security with a remaining maturity within the Fund's maturity restrictions, has
not received a long-term rating from any agency that is other than in its
highest rating category). The foregoing are referred to as "first-tier
securities."
The balance of the securities in which the Fund may invest are instruments
determined to present minimal credit risks, which do not qualify as first-tier
securities, and, at the time of acquisition, are (1) rated by the required
rating agencies in one of the two highest rating categories for short-term debt
obligations; (2) unrated but whose issuer is rated in one of the two highest
categories by the required rating agencies with respect to a class of
short-term debt obligations or any security within that class that is
comparable in priority and security with the obligation; or (3) unrated (other
than described in (2)) but determined by the Board of Directors of the Fund to
be of comparable quality to the foregoing (provided the unrated security has
not received a short-term rating and, with respect to a long-term security with
a remaining maturity within the Fund's maturity restrictions, has not received
a long-term rating from any agency that is other than in one of its highest two
rating categories). The foregoing are referred to as "second-tier securities."
In addition to the foregoing guidelines, the Fund is subject to certain
diversification restrictions pursuant to Rule 2a-7 under the 1940 Act, which
include (1) the Fund will not acquire a second-tier security of an issuer if,
after giving effect to the acquisition, the Fund would have invested more than
the greater of 1% of its total assets or one million dollars in second-tier
securities issued by that issuer, or (2) the Fund will not invest more than 5%
of the Fund's assets in the securities (other than securities issued by the
U.S. government or any agency or instrumentality thereof) issued by a single
issuer, except for certain investments held for not more than 3 business days.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE BLUE CHIP 100 AND THE MONEY FUNDS.
SHORT SALES
The Fund may sell securities short (1) to hedge unrealized gains on portfolio
securities or (2) if it covers such short sale with liquid assets as required
by the current rules and positions of the SEC or its staff. Selling securities
short against the box involves selling a security that the Fund owns or has the
right to acquire, for delivery at a specified date in the future. If the Fund
sells securities short against the box, it may protect unrealized gains, but
will lose the opportunity to profit on such securities if the price rises.
THE FOLLOWING SECTION APPLIES TO THE GROWTH, COMMON
STOCK, AND GROWTH AND INCOME FUNDS.
SMALL AND MEDIUM COMPANIES
The Fund may invest a substantial portion of its assets in small and medium
companies. While small and medium companies generally have the potential for
rapid growth, investments in small and medium companies often involve greater
risks than investments in larger, more established companies because small and
medium companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In
addition, in many instances the securities of small and medium companies are
traded only OTC or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Therefore, the securities of small and medium companies may be
subject to greater and more abrupt price fluctuations. When making large
sales, the Fund may have to sell portfolio holdings at discounts from quoted
prices or may have to make a series of small sales over an extended period of
time due to the trading volume of small and medium company securities.
Investors should be aware that, based on the foregoing factors, an investment
in the Fund may be subject to greater price fluctuations than an investment in
the Fund that invests primarily in larger, more established companies. The
Advisor's research efforts may also play a greater role in selecting securities
for the Fund than in the Fund that invests in larger, more established
companies.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE BLUE CHIP 100 FUND.
STANDBY COMMITMENTS
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In order to facilitate portfolio liquidity, the Fund may acquire standby
commitments from brokers, dealers, or banks with respect to securities in its
portfolio. Standby commitments entitle the holder to achieve same-day
settlement and receive an exercise price equal to the amortized cost of the
underlying security plus accrued interest. Standby commitments generally
increase the cost of the acquisition of the underlying security, thereby
reducing the yield. Standby commitments are subject to the issuer's ability to
fulfill its obligation upon demand. Although no definitive creditworthiness
criteria are used, the Advisor reviews the creditworthiness of the brokers,
dealers, and banks from which the Fund obtains standby commitments to evaluate
those risks.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE BLUE CHIP 100 FUND.
VARIABLE- OR FLOATING-RATE SECURITIES
The Fund may invest in securities which offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a
new interest rate at fixed intervals (E.G., daily, monthly, semi-annually,
etc.). Floating-rate securities generally provide for automatic adjustment of
the interest rate whenever some specified interest rate index changes. The
interest rate on variable- or floating-rate securities is ordinarily determined
by reference to or is a percentage of a bank's prime rate, the 90-day U.S.
Treasury bill rate, the rate of return on commercial paper or bank certificates
of deposit, an index of short-term interest rates, or some other objective
measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on seven days notice; in
other cases, the demand feature is exercisable at any time on 30 days notice or
on similar notice at intervals of not more than one year. Some securities
which do not have variable or floating interest rates may be accompanied by
puts producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, the Fund may consider that instrument's maturity to be shorter than its
stated maturity.
Variable-rate demand notes include master demand notes which are obligations
that permit the Fund to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Fund, as lender,
and the borrower. The interest rates on these notes fluctuate from time to
time. The issuer of such obligations normally has a corresponding right, after
a given period, to prepay in its discretion the outstanding principal amount of
the obligations plus accrued interest upon a specified number of days notice to
the holders of such obligations. The interest rate on a floating-rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and
is adjusted automatically each time such rate is adjusted. The interest rate
on a variable-rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be traded. There generally
is not an established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and
interest on demand. Such obligations frequently are not rated by credit rating
agencies and, if not so rated, the Fund may invest in them only if the Advisor
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Fund may invest. The Advisor, on
behalf of the Fund, will consider on an ongoing basis the creditworthiness of
the issuers of the floating- and variable-rate demand obligations in the Fund's
portfolio.
The Fund will not invest more than 15% of its net assets (10% for money market
funds) in variable- and floating-rate demand obligations that are not readily
marketable (a variable- or floating-rate demand obligation that may be disposed
of on not more than seven days notice will be deemed readily marketable and
will not be subject to this limitation). In addition, each variable- or
floating-rate obligation must meet the credit quality requirements applicable
to all the Fund's investments at the time of purchase. When determining
whether such an obligation meets the Fund's credit quality requirements, the
Fund may look to the credit quality of the financial guarantor providing a
letter of credit or other credit support arrangement.
In determining the Fund's weighted average portfolio maturity, the Fund will
consider a floating- or variable-rate security to have a maturity equal to its
stated maturity (or redemption date if it has been called for redemption),
except that it may consider (1) variable-rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest rate,
unless subject to a demand feature, (2) variable-rate securities subject to a
demand feature to have a remaining maturity equal to the longer of (a) the next
readjustment in the interest rate or (b) the period remaining until the
principal can be recovered through
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demand, and (3) floating-rate securities subject to a demand feature to have a
maturity equal to the period remaining until the principal can be recovered
through demand. Variable- and floating-rate securities generally are subject
to less principal fluctuation than securities without these attributes since
the securities usually trade at amortized cost following the readjustment in
the interest rate.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE GOVERNMENT SECURITIES AND MONEY MARKET
FUNDS.
WARRANTS
The Fund may acquire warrants. Warrants are securities giving the holder the
right, but not the obligation, to buy the stock of an issuer at a given price
(generally higher than the value of the stock at the time of issuance) during a
specified period or perpetually. Warrants may be acquired separately or in
connection with the acquisition of securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that
they entitle their holder to purchase, and they do not represent any rights in
the assets of the issuer. As a result, warrants may be considered to have more
speculative characteristics than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have value if it is not
exercised prior to its expiration date.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS,
EXCEPT THE BLUE CHIP 100 FUND.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or delayed-delivery basis.
The price of debt obligations so purchased, which may be expressed in yield
terms, generally is fixed at the time the commitment to purchase is made, but
delivery and payment for the securities take place at a later date. During the
period between the purchase and settlement, no payment is made by the Fund to
the issuer and no interest on the debt obligations accrues to the Fund.
Forward commitments involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. While when-issued and
delayed-delivery securities may be sold prior to the settlement date, the Fund
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the Fund
makes the commitment to purchase these types of securities, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Fund does not believe that its net asset value will be adversely
affected by these types of securities purchases.
To the extent required by the SEC, the Fund will maintain cash and marketable
securities equal in value to commitments for when-issued or delayed-delivery
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date. When the time comes to pay for
when-issued or delayed-delivery securities, the Fund will meet its obligations
from then-available cash flow, sale of the securities held in the separate
account, described above, sale of other securities or, although it would not
normally expect to do so, from the sale of the when-issued or delayed-delivery
securities themselves (which may have a market value greater or less than the
Fund's payment obligation).
THE FOLLOWING SECTION APPLIES TO ALL THE UNDERLYING
FUNDS, EXCEPT THE BLUE CHIP 100 FUND.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may invest in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon and step-coupon securities are sold at a deep discount
to their face value. Pay-in-kind securities pay interest through the issuance
of additional securities. Because such securities do not pay current cash
income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, federal
income tax law requires the holders of zero-coupon, step-coupon, and
pay-in-kind securities to include in income each year the portion of the
original issue discount (or deemed discount) and other non-cash income on such
securities accruing that year. In order to continue to qualify as a "regulated
investment company" or "RIC" under the IRC and avoid a certain excise tax, the
Fund may be required to distribute a portion of such discount and income and
may be required to dispose of other portfolio securities, which may occur in
periods of adverse market prices, in order to generate cash to meet these
distribution requirements.
29
<PAGE>
DIRECTORS AND OFFICERS
The Board of Directors of the Fund is responsible for managing the Fund's
business and affairs. Directors and officers of the Fund, together with
information as to their principal business occupations during the last five
years, and other information are shown below. Each director who is deemed an
"interested person," as defined in the 1940 Act, is indicated by an asterisk
(*). Each officer and director holds the same position with the 27 registered
open-end management investment companies consisting of 41 mutual funds
("Strong Funds"). The Strong Funds, in the aggregate, pay each Director who is
not a director, officer, or employee of the Advisor, or any affiliated company
(a "disinterested director") an annual fee of $50,000, plus $100 per Board
meeting for each Strong Fund. In addition, each disinterested director is
reimbursed by the Strong Funds for travel and other expenses incurred in
connection with attendance at such meetings. Other officers and directors of
the Strong Funds receive no compensation or expense reimbursement from the
Strong Funds.
*RICHARD S. STRONG (DOB 5/12/42), Director and Chairman of the Board of the
Strong Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the Advisor,
which he founded in 1974. Since August 1985, Mr. Strong has been a Security
Analyst and Portfolio Manager of the Advisor. In October 1991, Mr. Strong also
became the Chairman of the Advisor. Mr. Strong is a Director of the Advisor.
Mr. Strong has been in the investment management business since 1967.
MARVIN E. NEVINS (DOB 7/19/18), Director of the Strong Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of Wisconsin
Centrifugal Inc., a foundry. From July 1983 to December 1986, he was Chairman
of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins is a
former Chairman of the Wisconsin Association of Manufacturers & Commerce. He
was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin.
WILLIE D. DAVIS (DOB 7/24/34), Director of the Strong Funds.
Mr. Davis has been Director of Alliance Bank since 1980, Sara Lee Corporation
(a food/consumer products company) since 1983, KMart Corporation (a discount
consumer products company) since 1985, Dow Chemical Company since 1988, MGM
Grand, Inc. (an entertainment/hotel company) since 1990, WICOR, Inc. (a utility
company) since 1990, Johnson Controls, Inc. (an industrial company) since 1992,
L.A. Gear (a footwear/sportswear company) since 1992, and Rally's Hamburger,
Inc. since 1994. Mr. Davis has been a trustee of the University of Chicago
since 1980 and Marquette University since 1988. Since 1977, Mr. Davis has been
President and Chief Executive Officer of All Pro Broadcasting, Inc. Mr. Davis
was a Director of the Fireman's Fund (an insurance company) from 1975 until
1990.
STANLEY KRITZIK (DOB 1/9/30), Director of the Strong Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since 1962, a
Director of Aurora Health Care since 1987, and Health Network Ventures, Inc.
since 1992.
WILLIAM F. VOGT (DOB 7/19/47), Director of the Strong Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc. since 1990.
From 1982 until 1990, he served as Executive Director of University Physicians
of the University of Colorado. Mr. Vogt is the Past President of the Medical
Group Management Association and a Fellow of the American College of Medical
Practice Executives.
THOMAS P. LEMKE (DOB 7/30/54), Vice President of the Strong Funds.
Mr. Lemke has been Senior Vice President, Secretary, and General Counsel of the
Advisor since September 1994 and Chief Operating Officer of the Advisor since
November 1996. For two years prior to joining the Advisor, Mr. Lemke acted as
Resident Counsel for Funds Management at J.P. Morgan & Co., Inc. From February
1989 until April 1992, Mr. Lemke acted as Associate General Counsel to Sanford
C. Bernstein & Co., Inc. For two years prior to that, Mr. Lemke was Of Counsel
at the Washington
30
<PAGE>
D.C. law firm of Tew Jorden & Schulte, a successor of Finley, Kumble & Wagner.
From August 1979 until December 1986, Mr. Lemke worked at the SEC, most notably
as the Chief Counsel to the Division of Investment Management (November 1984 -
December 1986), and as Special Counsel to the Office of Insurance Products,
Division of Investment Management (April 1982 - October 1984).
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the
Strong Funds.
Mr. Shenkenberg has been Acting General Counsel of the Advisor since January
1998. From November 1996 until January 1998, Mr. Shenkenberg acted as Deputy
General Counsel to the Advisor. From December 1992 until November 1996, Mr.
Shenkenberg acted as Associate Counsel to the Advisor. From June 1987 until
December 1992, Mr. Shenkenberg was an attorney for Godfrey & Kahn, S.C., a
Milwaukee law firm.
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Strong Funds.
Mr. Weitzer has been Senior Counsel of the Advisor since December 1997. From
July 1993 until December 1997, Mr. Weitzer acted as Associate Counsel to the
Advisor.
MARY F. HOPPA (DOB 5/31/64), Vice President of the Strong Funds.
Ms. Hoppa has been Vice President and Director of Mutual Fund Administration of
the Advisor since January 1998. From October 1996 to January 1998, Ms. Hoppa
acted as Director of Transfer Agency Services of the Advisor and, from January
1988 to October 1996, as Transfer Agency Systems Liaison Manager of the
Advisor. From January 1987 to January 1988, Ms. Hoppa acted as a Shareholder
Services Associate of the Advisor.
JOHN A. FLANAGAN (DOB 6/5/46), Treasurer of the Strong Funds.
Mr. Flanagan has been Senior Vice President of the Advisor since April 1997.
For three years prior to joining the Advisor, Mr. Flanagan was a Partner with
Coopers & Lybrand L.L.P. (an international professional services firm). From
November 1992 to April 1994, Mr. Flanagan was an independent consultant. From
October 1970 to November 1992, Mr. Flanagan was with Ernst & Young (an
international professional services firm), most notably as Partner in charge of
the Investment Company Practice of that firm's Boston office from 1982 to 1992.
Except for Messrs. Nevins, Davis, Kritzik, and Vogt, the address of all of the
above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 34108. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301. Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 2830 East Third Avenue, Denver, Colorado
80206.
Unless otherwise noted below, as of ____________,1998, the officers and
directors of the Fund in the aggregate beneficially owned less than 1% of the
Fund's then outstanding shares.
<TABLE>
<CAPTION>
<S> <C> <C>
FUND SHARES PERCENT
- ------ ------ -------
None
</TABLE>
PRINCIPAL SHAREHOLDERS
Unless otherwise noted below, as of ____________,1998 no persons owned of
record or are known to own of record or beneficially more than 5% of the Fund's
then outstanding shares.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND ADDRESS SHARES PERCENT
- ---------------- ---------- ----------
None
</TABLE>
INVESTMENT ADVISOR OF THE UNDERLYING FUNDS
31
<PAGE>
The Underlying Funds have entered into Advisory Agreements with Strong Capital
Management, Inc. ("Advisor"). Mr. Strong controls the Advisor. Mr. Strong is
the Chairman and a Director of the Advisor, Mr. Lemke is the Chief Operating
Officer, a Senior Vice President, Secretary, and General Counsel of the
Advisor, Mr. Flanagan is a Senior Vice President of the Advisor, Mr.
Shenkenberg is Vice President, Assistant Secretary, and Acting General Counsel
of the Advisor, Ms. Hoppa is a Senior Vice President of the Advisor, and Mr.
Weitzer is Senior Counsel of the Advisor.
As compensation for its services, the Underlying Funds pay to the Advisor a
monthly management fee at the annual rate specified below of the average daily
net asset value of the Underlying Fund. From time to time, the Advisor may
voluntarily waive all or a portion of its management fee for the Underlying
Fund.
<TABLE>
<CAPTION>
<S> <C>
FUND ANNUAL RATE
- --------------------- -----------------
Growth 1.00%
Common Stock 1.00
Growth and Income 1.00
Blue Chip 100 0.75
Money Market 0.50
Advantage 0.60
Short-Term Bond 0.625
Government Securities 0.60
</TABLE>
On July 12, 1994, the SEC filed an administrative action ("Order") against the
Advisor, Mr. Strong, and another employee of the Advisor in connection with
conduct that occurred between 1987 and early 1990. In re Strong/Corneliuson
Capital Management, Inc., et al. Admin. Proc. File No. 3-8411. The proceeding
was settled by consent without admitting or denying the allegations in the
Order. The Order found that the Advisor and Mr. Strong aided and abetted
violations of Section 17(a) of the 1940 Act by effecting trades between mutual
funds, and between mutual funds and Harbour Investments Ltd. ("Harbour"),
without complying with the exemptive provisions of SEC Rule 17a-7 or otherwise
obtaining an exemption. It further found that the Advisor violated, and Mr.
Strong aided and abetted violations of, the disclosure provisions of the 1940
Act and the Investment Advisers Act of 1940 by misrepresenting the Advisor's
policy on personal trading and by failing to disclose trading by Harbour, an
entity in which principals of the Advisor owned between 18 and 25 percent of
the voting stock. As part of the settlement, the respondents agreed to a
censure and a cease and desist order and the Advisor agreed to various
undertakings, including adoption of certain procedures and a limitation for six
months on accepting certain types of new advisory clients.
On June 6, 1996, the Department of Labor ("DOL") filed an action against the
Advisor for equitable relief alleging violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") in connection with cross trades that
occurred between 1987 and late 1989 involving certain pension accounts managed
by the Advisor. Contemporaneous with this filing, the Advisor, without
admitting or denying the DOL's allegations, agreed to the entry of a consent
judgment resolving all matters relating to the allegations. Reich v. Strong
Capital Management, Inc., (U.S.D.C. E.D. WI) ("Consent Judgment"). Under the
terms of the Consent Judgment, the Advisor agreed to reimburse the affected
accounts a total of $5.9 million. The settlement did not have any material
impact on the Advisor's financial position or operations.
For more complete information about the Advisor, including its services,
investment strategies, policies, and procedures, please call 1-800-368-3863 and
ask for a copy of the Advisor's Form ADV.
From time to time, the Advisor votes the shares owned by the Conservative,
Moderate, and Aggressive Portfolios, as well as the Underlying Funds according
to its Statement of General Proxy Voting Policy ("Proxy Voting Policy"). The
general principal of the Proxy Voting Policy is to vote any beneficial interest
in an equity security prudently and solely in the best long-term economic
interest of the Portfolio and/or Underlying Fund and its beneficiaries
considering all relevant factors and without undue influence from individuals
or groups who may have an economic interest in the outcome of a proxy vote.
Shareholders may obtain a copy of the Proxy Voting Policy upon request from the
Advisor.
DISTRIBUTOR
32
<PAGE>
Under a Distribution Agreement with the Fund ("Distribution Agreement"), Strong
Investments, Inc. ("Distributor"), P.O. Box 2936, Milwaukee, Wisconsin, 53201,
acts as underwriter of the Fund's shares. Mr. Strong is the Chairman and
Director of the Distributor, Mr. Lemke is a Vice President of the Distributor,
and Mr. Shenkenberg is a Vice President and Secretary of the Distributor. The
Distribution Agreement provides that the Distributor will use its best efforts
to distribute the Fund's shares. Since the Fund is a "no-load" fund, no sales
commissions are charged on the purchase of Fund shares. The Distribution
Agreement further provides that the Distributor will bear the additional costs
of printing prospectuses and shareholder reports which are used for selling
purposes, as well as advertising and any other costs attributable to the
distribution of the Fund's shares. The Distributor is an indirect subsidiary
of the Advisor and controlled by the Advisor and Richard S. Strong. The
Distribution Agreement is subject to the same termination and renewal
provisions as are described above with respect to the Advisory Agreement.
From time to time, the Distributor may hold in-house sales incentive programs
for its associated persons under which these persons may receive non-cash
compensation awards in connection with the sale and distribution of the Fund's
shares. These awards may include items such as, but not limited to, gifts,
merchandise, gift certificates, and payment of travel expenses, meals, and
lodging. As required by the proposed rule amendments of the National
Association of Securities Dealers, Inc. ("NASD"), any in-house sales incentive
program will be multi-product oriented, I.E., any incentive will be based on an
associated person's gross production of all securities within a product type
and will not be based on the sales of shares of any specifically designated
mutual fund.
PORTFOLIO TRANSACTIONS
The Conservative, Moderate, and Aggressive Portfolios purchase and sell shares
of the Underlying Funds. The Underlying Funds are no-load funds and do not
charge any sales load or other transaction charges.
CUSTODIAN
As custodian of the Fund's assets, Firstar Trust Company, P.O. Box 761,
Milwaukee, Wisconsin 53201, has custody of all securities and cash of the Fund,
delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by officers of the Fund. The custodian is in no way
responsible for any of the investment policies or decisions of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin, 53201, acts as transfer agent
and dividend-disbursing agent for the Fund. The Advisor is compensated based
on an annual fee per open account of $21.75 for equity funds, $31.50 for income
and municipal income funds, and $32.50 for money market funds, plus
out-of-pocket expenses, such as postage and printing expenses in connection
with shareholder communications. The Advisor also receives an annual fee per
closed account of $4.20 from the Fund. The fees received and the services
provided as transfer agent and dividend disbursing agent are in addition to
those received and provided by the Advisor under the Advisory Agreements. In
addition, the Advisor provides certain printing and mailing services for the
Fund, such as printing and mailing of shareholder account statements, checks,
and tax forms.
From time to time, the Fund, directly or indirectly through arrangements with
the Advisor, and/or the Advisor may pay amounts to third parties that provide
transfer agent type services and other administrative services relating to the
Fund to persons who beneficially own interests in the Fund, such as
participants in 401(k) plans. These services may include, among other things,
sub-accounting services, transfer agent type activities, answering inquiries
relating to the Fund, transmitting proxy statements, annual reports, updated
prospectuses, other communications regarding the Fund, and related services as
the Fund or beneficial owners may reasonably request. In such cases, the Fund
will not pay fees based on the number of beneficial owners at a rate that is
greater than the rate the Fund is currently paying the Advisor for providing
these services to Fund shareholders.
Pursuant to the Shareholder Servicing Agent Agreement Relating to Transfer
Agent and Dividend-Disbursing Agent Services, the Underlying Funds, which are
parties to the Agreement, have agreed to reimburse the Conservative, Moderate,
and Aggressive Portfolios on a pro rata basis for expenses related to the
Portfolios' receipt of transfer agency and dividend-disbursing agency services
from the Advisor, including amounts paid to third parties that provide transfer
agent type services and other administrative services relating to the
Portfolios as described in the preceding paragraph. The Underlying Funds have
agreed to
33
<PAGE>
reimburse the Portfolios because the Portfolios provide a means by which the
Underlying Funds can consolidate shareholder accounts thus saving the
Underlying Funds their own transfer agency expenses.
SHAREHOLDER SERVICING AGENT
Under a Shareholder Servicing Agreement with the Fund dated ________, 1998,
the Advisor acts as shareholder servicing agent for the Fund. As shareholder
servicing agent, the Advisor provides personal services to the Fund's
shareholders and maintains the Fund's shareholder accounts. Such services
include, (i) answering shareholder inquiries regarding account status and
history, the manner in which purchases and redemptions of the Fund's shares may
be effected, and certain other matters pertaining to the Fund; (ii) assisting
shareholders in designating and changing dividend options, account designations
and addresses; (iii) providing necessary personnel and facilities to coordinate
the establishment and maintenance of shareholder accounts and records with the
Fund's transfer agent; (iv) transmitting shareholders' purchase and redemption
orders to the Fund's transfer agent; (v) arranging for the wiring or other
transfer of funds to and from shareholder accounts in connection with
shareholder orders to purchase or redeem shares of the Fund; (vi) verifying
purchase and redemption orders, transfers among and changes in
shareholder-designated accounts; (vii) informing the distributor of the Fund of
the gross amount of purchase and redemption orders for the Fund's shares;
(viii) monitoring the activities of the Fund's transfer agent related to
shareholders' accounts, and to statements, confirmations or other reports
furnished to shareholders by the Fund's transfer agent; and (ix) providing such
other related services as the Fund or a shareholder may reasonably request, to
the extent permitted by applicable law.
TAXES
GENERAL
The Fund intends to qualify annually for treatment as a regulated investment
company ("RIC") under Subchapter M of the IRC. If so qualified, the Fund will
not be liable for federal income tax earnings and gains distributed to its
shareholders in a timely manner. This qualification does not involve
government supervision of the Fund's management practices or policies. The
following federal tax discussion is intended to provide you with an overview of
the impact of federal income tax provisions on the Fund or its shareholders.
These tax provisions are subject to change by legislative or administrative
action at the federal, state, or local level, and any changes may be applied
retroactively. Any such action that limits or restricts the Fund's current
ability to pass-through earnings without taxation at the Fund level, or
otherwise materially changes the Fund's tax treatment, could adversely affect
the value of a shareholder's investment in the Fund. Because the Fund's taxes
are a complex matter, you should consult your tax adviser for more detailed
information concerning the taxation of the Fund and the federal, state, and
local tax consequences to shareholders of an investment in the Fund.
In order to qualify for treatment as a RIC under the IRC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if applicable) ("Distribution Requirement") and
must meet several additional requirements. These requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities (or foreign
currencies if applicable) or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of
investing in securities ("Income Requirement"); (2) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs, and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
If Fund shares are sold at a loss after being held for six months or less, the
loss will be treated as long-term, instead of short-term, capital loss to the
extent of any capital gain distributions received on those shares.
The Fund's distributions are taxable in the year they are paid, whether they
are taken in cash or reinvested in additional shares, except that certain
distributions declared in the last three months of the year and paid in January
are taxable as if paid on December 31.
34
<PAGE>
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
The Fund may make additional distributions if necessary to avoid imposition of
a 4% excise tax on undistributed income and gains.
USE OF TAX-LOT ACCOUNTING. When sell decisions are made by the Fund's
portfolio manager, the Advisor generally sells the tax lots of the Fund's
securities that results in the lowest amount of taxes to be paid by the
shareholders on the Fund's capital gain distributions. The Advisor uses
tax-lot accounting to identify and sell the tax lots of a security that have
the highest cost basis and/or longest holding period to minimize adverse tax
consequences to the Fund's shareholders. However, if the Fund has a capital
loss carry forward position, the Advisor would reverse its strategy and sell
the tax lots of a security that have the lowest cost basis and/or shortest
holding period to maximize the use of the Fund's capital loss carry forward
position.
DETERMINATION OF NET ASSET VALUE
The Fund is 100% no load. This means that you may purchase, redeem or exchange
shares at their net asset value ("NAV") without paying a sales charge.
Generally, when you make any purchases, sales, or exchanges, the price of your
shares will be the NAV next determined after Strong Funds receives your request
in proper form. If Strong Funds receives such request prior to the close of
the New York Stock Exchange ("NYSE") on a day on which the NYSE is open, your
share price will be the NAV determined that day. The NAV for each Fund is
normally determined as of 3:00 p.m. Central Time ("CT") each day the Exchange
is open. The net asset value of the Fund will be determined as of the close of
trading on each day the NYSE is open for trading. The NYSE is open for trading
Monday through Friday except, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the
NYSE will not be open for trading on the preceding Friday, and when any such
holiday falls on a Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or yearly accounting period. The Funds reserve the right to
change the time at which purchases, redemptions, and exchanges are priced if
the Exchange closes at a time other than 3:00 p.m. CT or if an emergency
exists. Each Fund's NAV is calculated by taking the fair value of a Fund's
total assets, subtracting all its liabilities, and dividing by the total number
of shares outstanding. Expenses are accrued daily and applied when determining
the NAV.
Shareholders can gain access to the money in their accounts by selling (also
called redeeming) some or all of their shares by mail, telephone, computer,
automatic withdrawals, through a broker-dealer, or by writing a check (assuming
all the appropriate documents and requirements have been met for these account
options). After a redemption request is processed, the proceeds from the sale
will normally be sent on the next business day but, in any event, no more than
seven days later.
ADDITIONAL SHAREHOLDER INFORMATION
TELEPHONE AND INTERNET EXCHANGE/REDEMPTION PRIVILEGES
The Fund employs reasonable procedures to confirm that instructions
communicated by telephone or the Internet are genuine. The Fund may not be
liable for losses due to unauthorized or fraudulent instructions. Such
procedures include but are not limited to requiring a form of personal
identification prior to acting on instructions received by telephone or the
Internet, providing written confirmations of such transactions to the address
of record, tape recording telephone instructions and backing up Internet
transactions.
RIGHT OF SET-OFF
To the extent not prohibited by law, the Fund, any other Strong Fund, and the
Advisor, each has the right to set-off against a shareholder's account balance
with a Strong Fund, and redeem from such account, any debt the shareholder may
owe any of these entities. This right applies even if the account is not
identically registered.
BROKERS RECEIPT OF PURCHASE AND REDEMPTION ORDERS
35
<PAGE>
The Fund has authorized certain brokers to accept purchase and redemption
orders on the Fund's behalf. These brokers are, in turn, authorized to
designate other intermediaries to accept purchase and redemption orders on the
Fund's behalf. The Fund will be deemed to have received a purchase or
redemption order when an authorized broker or, if applicable, a broker's
authorized designee, accepts the order. Purchase and redemption orders
received in this manner will be priced at the Fund's net asset value next
computed after they are accepted by an authorized broker or the broker's
authorized designee.
SIGNATURE GUARANTEES
A signature guarantee is designed to protect shareholders and the Fund against
fraudulent transactions by unauthorized persons. In the following instances,
the Fund will require a signature guarantee for all authorized owners of an
account:
- - when adding the telephone redemption option to an existing account;
- - when transferring the ownership of an account to another individual or
organization;
- - when submitting a written redemption request for more than $50,000;
- - when requesting to redeem or redeposit shares that have been issued in
certificate form;
- - if requesting a certificate after opening an account;
- - when requesting that redemption proceeds be sent to a different name or
address than is registered on an account;
- - if adding/changing a name or adding/removing an owner on an account; and
- - if adding/changing the beneficiary on a transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC. These institutions include banks, savings associations,
credit unions, brokerage firms, and others. Please note that a notary public
stamp or seal is not acceptable.
FINANCIAL INTERMEDIARIES
If an investor purchases or redeems shares of the Fund through a financial
intermediary, certain features of the Fund relating to such transactions may
not be available or may be modified. In addition, certain operational policies
of the Fund, including those related to settlement and dividend accrual, may
vary from those applicable to direct shareholders of the Fund and may vary
among intermediaries. Please consult your financial intermediary for more
information regarding these matters. In addition, the Fund may pay, directly
or indirectly through arrangements with the Advisor, amounts to financial
intermediaries that provide transfer agent type and/or other administrative
services to their customers provided, however, that the Fund will not pay more
for these services through intermediary relationships than it would if the
intermediaries' customers were direct shareholders in the Fund. Certain
financial intermediaries may charge an advisory, transaction, or other fee for
their services. Investors will not be charged for such fees if investors
purchase or redeem Fund shares directly from the Fund without the intervention
of a financial intermediary.
DOLLAR COST AVERAGING
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan are methods of implementing dollar cost averaging.
Dollar cost averaging is an investment strategy that involves investing a fixed
amount of money at regular time intervals. By always investing the same set
amount, an investor will be purchasing more shares when the price is low and
fewer shares when the price is high. Ultimately, by using this principle in
conjunction with fluctuations in share price, an investor's average cost per
share may be less than the average transaction price. A program of regular
investment cannot ensure a profit or protect against a loss during declining
markets. Since such a program involves continuous investment regardless of
fluctuating share values, investors should consider their ability to continue
the program through periods of both low and high share-price levels.
RETIREMENT PLANS
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT (IRA): Everyone under
age 70 1/2 with earned income may contribute to a tax-deferred Traditional IRA.
The Strong Funds offer a prototype plan for you to establish your own
Traditional IRA. You are allowed
36
<PAGE>
to contribute up to the lesser of $2,000 or 100% of your earned income each
year to your Traditional IRA (or up to $4,000 between your Traditional IRA and
your non-working spouses' Traditional IRA). Under certain circumstances, your
contribution will be deductible.
ROTH IRA: Taxpayers, of any age, who have earned income, and whose adjusted
gross income ("AGI") does not exceed $110,000 (single) or $160,000 (joint) can
contribute to a Roth IRA. Allowed contributions begin to phase-out at $95,000
(single) or $150,000 (joint). You are allowed to contribute up to the lesser
of $2,000 or 100% of earned income each year into a Roth IRA. If you also
maintain a Traditional IRA, the maximum contribution to your Roth IRA is
reduced by any contributions that you make to your Traditional IRA.
Distributions from a Roth IRA, if they meet certain requirements, may be
federally tax free. If your AGI is $100,000 or less, you can convert your
Traditional IRAs into a Roth IRA. Conversions of earnings and deductible
contributions are taxable in the year of the distribution. The early
distribution penalty does not apply to amounts converted to a Roth IRA even if
you are under age 59 1/2.
EDUCATION IRA: Taxpayers may contribute up to $500 per year into an Education
IRA for the benefit of a child under age 18. Total contributions to any one
child cannot exceed $500 per year. The contributor must have adjusted income
under $110,000 (single) or $160,000 (joint) to contribute to an Education IRA.
Allowed contributions begin to phase-out at $95,000 (single) or $150,000
(joint). Withdrawals from the Education IRA to pay qualified higher education
expenses are federally tax free. Any withdrawal in excess of higher education
expenses for the year are potentially subject to tax and an additional 10%
penalty.
DIRECT ROLLOVER IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or IRC section
403(b) plan distribution directly into an IRA. The distribution must be
eligible for rollover. The amount of your Direct Rollover IRA contribution
will not be included in your taxable income for the year.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP-IRA): A SEP-IRA plan allows an
employer to make deductible contributions to separate IRA accounts established
for each eligible employee.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLAN (SAR SEP-IRA):
A SAR SEP-IRA plan is a type of SEP-IRA plan in which an employer may allow
employees to defer part of their salaries and contribute to an IRA account.
These deferrals help lower the employees' taxable income. Please note that you
may no longer open new SAR SEP-IRA plans (since December 31, 1996). However,
employers with SAR SEP-IRA plans that were established prior to January 1, 1997
may still open accounts for new employees.
SIMPLIFIED INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE-IRA): A
SIMPLE-IRA plan is a retirement savings plan that allows employees to contribute
a percentage of their compensation, up to $6,000, on a pre-tax basis, to a
SIMPLE-IRA account. The employer is required to make annual contributions to
eligible employees' accounts. All contributions grow tax-deferred.
DEFINED CONTRIBUTION PLAN: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans,
money purchase pension plans, and paired plans (a combination of a
profit-sharing plan and a money purchase plan).
401(K) PLAN: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
403(B)(7) PLAN: A 403(b)(7) plan is a tax-sheltered custodial account designed
to qualify under section 403(b)(7) of the IRC and is available for use by
employees of certain educational, non-profit, hospital, and charitable
organizations.
SHARES IN CERTIFICATE FORM
Certificates will be issued for shares held in a Fund account only upon written
request. A shareholder will, however, have full shareholder rights whether or
not a certificate is requested.
ORGANIZATION
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<PAGE>
The Fund is either a "Corporation" or a "Series" of common stock of a
Corporation, as described in the chart below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Incorporation Date Series Authorized Par
Corporation Date Created Shares Value ($)
- ------------------------------ ------------- ----------- --------------- ---------
Strong Life Stage Series, Inc.
- -Strong Conservative Portfolio
- -Strong Moderate Portfolio
- -Strong Aggressive Portfolio
</TABLE>
The Corporation is a Wisconsin corporation that is authorized to offer separate
series of shares representing interests in separate portfolios of securities,
each with differing investment objectives. The shares in any one portfolio
may, in turn, be offered in separate classes, each with differing preferences,
limitations or relative rights. However, the Articles of Incorporation for the
Corporation provide that if additional series of shares are issued by the
Corporation, such new series of shares may not affect the preferences,
limitations or relative rights of the Corporation's outstanding shares. In
addition, the Board of Directors of the Corporation is authorized to allocate
assets, liabilities, income and expenses to each series and class. Classes
within a series may have different expense arrangements than other classes of
the same series and, accordingly, the net asset value of shares within a series
may differ. Finally, all holders of shares of the Corporation may vote on each
matter presented to shareholders for action except with respect to any matter
which affects only one or more series or class, in which case only the shares
of the affected series or class are entitled to vote. Each share of the Fund
has one vote, and all shares participate equally in dividends and other capital
gains distributions by the Fund and in the residual assets of the Fund in the
event of liquidation. Fractional shares have the same rights proportionately
as do full shares. Shares of the Corporation have no preemptive, conversion, or
subscription rights. If the Corporation issues additional series, the assets
belonging to each series of shares will be held separately by the custodian,
and in effect each series will be a separate fund.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered investment companies,
such as the Fund, to operate without an annual meeting of shareholders under
specified circumstances if an annual meeting is not required by the 1940 Act.
The Fund has adopted the appropriate provisions in its Bylaws and may, at its
discretion, not hold an annual meeting in any year in which the election of
directors is not required to be acted on by shareholders under the 1940 Act.
The Fund's Bylaws allow for a director to be removed by its shareholders with
or without cause, only at a meeting called for the purpose of removing the
director. Upon the written request of the holders of shares entitled to not
less than ten percent (10%) of all the votes entitled to be cast at such
meeting, the Secretary of the Fund shall promptly call a special meeting of
shareholders for the purpose of voting upon the question of removal of any
director. The Secretary shall inform such shareholders of the reasonable
estimated costs of preparing and mailing the notice of the meeting, and upon
payment to the Fund of such costs, the Fund shall give not less than ten nor
more than sixty days notice of the special meeting.
PERFORMANCE INFORMATION
The Strong Funds may advertise a variety of types of performance information as
more fully described below. The Fund's performance is historical and past
performance does not guarantee the future performance of the Fund. From time
to time, the Advisor may agree to waive or reduce its management fee and/or to
absorb certain operating expenses for the Fund. Waivers of management fees and
absorption of expenses will have the effect of increasing the Fund's
performance.
AVERAGE ANNUAL TOTAL RETURN
The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the SEC. The average annual total
return for the Fund for a specific period is calculated by first taking a
hypothetical $10,000 investment ("initial investment") in the Fund's shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The redeemable value is then divided by
the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a
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<PAGE>
percentage. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period.
TOTAL RETURN
Calculation of the Fund's total return is not subject to a standardized
formula. Total return performance for a specific period is calculated by first
taking an investment (assumed below to be $10,000) ("initial investment") in
the Fund's shares on the first day of the period and computing the "ending
value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends paid by the Fund have been reinvested at net asset
value of the Fund on the reinvestment dates during the period. Total return
may also be shown as the increased dollar value of the hypothetical investment
over the period.
CUMULATIVE TOTAL RETURN
Cumulative total return represents the simple change in value of an investment
over a stated period and may be quoted as a percentage or as a dollar amount.
Total returns and cumulative total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship between these factors and their
contributions to total return.
COMPARISONS
U.S. TREASURY BILLS, NOTES, OR BONDS. Investors may want to compare the
performance of the Fund to that of U.S. Treasury bills, notes, or bonds, which
are issued by the U.S. Government. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities.
CERTIFICATES OF DEPOSIT. Investors may want to compare the Fund's
performance to that of certificates of deposit offered by banks and other
depositary institutions. Certificates of deposit may offer fixed or variable
interest rates and principal is guaranteed and may be insured. Withdrawal of
the deposits prior to maturity normally will be subject to a penalty. Rates
offered by banks and other depositary institutions are subject to change at any
time specified by the issuing institution.
MONEY MARKET FUNDS. Investors may also want to compare performance of the
Fund to that of money market funds. Money market fund yields will fluctuate and
shares are not insured, but share values usually remain stable.
LIPPER ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT
RANKING ORGANIZATIONS. From time to time, in marketing and other fund
literature, the Fund's performance may be compared to the performance of other
mutual funds in general or to the performance of particular types of mutual
funds with similar investment goals, as tracked by independent organizations.
Among these organizations, Lipper, a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives, and assets,
may be cited. Lipper performance figures are based on changes in net asset
value, with all income and capital gains dividends reinvested. Such calcula-
tions do not include the effect of any sales charges imposed by other funds.
The Fund will be compared to Lipper's appropriate fund category, that is, by
fund objective and portfolio holdings. The Fund's performance may also be
compared to the average performance of its Lipper category.
MORNINGSTAR, INC. The Fund's performance may also be compared to the
performance of other mutual funds by Morningstar, Inc., which rates funds on
the basis of historical risk and total return. Morningstar's ratings range
from five stars (highest) to one star (lowest) and represent Morningstar's
assessment of the historical risk level and total return of a fund as a
weighted average for 3, 5, and 10 year periods. Ratings are not absolute and
do not represent future results.
INDEPENDENT SOURCES. Evaluations of fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the Fund,
especially those with similar
39
<PAGE>
objectives. Sources for fund performance and articles about the Fund may
include publications such as Money, Forbes, Kiplinger's, Smart Money, Financial
World, Business Week, U.S. News and World Report, The Wall Street Journal,
Barron's, and a variety of investment newsletters.
VARIOUS BANK PRODUCTS. The Fund's performance also may be compared on a
before or after-tax basis to various bank products, including the average rate
of bank and thrift institution money market deposit accounts, Super N.O.W.
accounts and certificates of deposit of various maturities as reported in the
Bank Rate Monitor, National Index of 100 leading banks, and thrift institutions
as published by the Bank Rate Monitor, Miami Beach, Florida. The rates
published by the Bank Rate Monitor National Index are averages of the personal
account rates offered on the Wednesday prior to the date of publication by
100 large banks and thrifts in the top ten Consolidated Standard Metropolitan
Statistical Areas. The rates provided for the bank accounts assume no com-
pounding and are for the lowest minimum deposit required to open an account.
Higher rates may be available for larger deposits.
With respect to money market deposit accounts and Super N.O.W. accounts,
account minimums range upward from $2,000 in each institution and compounding
methods vary. Super N.O.W. accounts generally offer unlimited check writing
while money market deposit accounts generally restrict the number of checks
that may be written. If more than one rate is offered, the lowest rate is
used. Rates are determined by the financial institution and are subject to
change at any time specified by the institution. Generally, the rates offered
for these products take market conditions and competitive product yields into
consideration when set. Bank products represent a taxable alternative income
producing product. Bank and thrift institution deposit accounts may be
insured. Shareholder accounts in the Fund are not insured. Bank passbook
savings accounts compete with money market mutual fund products with respect to
certain liquidity features but may not offer all of the features available from
a money market mutual fund, such as check writing. Bank passbook savings
accounts normally offer a fixed rate of interest while the yield of the Fund
fluctuates. Bank checking accounts normally do not pay interest but compete
with money market mutual fund products with respect to certain liquidity
features (E.G.., the ability to write checks against the account). Bank
certificates of deposit may offer fixed or variable rates for a set term.
(Normally, a variety of terms are available.) Withdrawal of these deposits
prior to maturity will normally be subject to a penalty. In contrast, shares
of the Fund are redeemable at the net asset value (normally, $1.00 per share)
next determined after a request is received, without charge.
INDICES. The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments that a Fund may
purchase and the investments measured by the indices.
HISTORICAL ASSET CLASS RETURNS. From time to time, marketing materials
may portray the historical returns of various asset classes. Such presentations
will typically compare the average annual rates of return of inflation, U.S.
Treasury bills, bonds, common stocks, and small stocks. There are important
differences between each of these investments that should be considered in
viewing any such comparison. The market value of stocks will fluctuate with
market conditions, and small-stock prices generally will fluctuate more than
large-stock prices. Stocks are generally more volatile than bonds. In return
for this volatility, stocks have generally performed better than bonds or cash
over time. Bond prices generally will fluctuate inversely with interest rates
and other market conditions, and the prices of bonds with longer maturities
generally will fluctuate more than those of shorter-maturity bonds. Interest
rates for bonds may be fixed at the time of issuance, and payment of principal
and interest may be guaranteed by the issuer and, in the case of U.S. Treasury
obligations, backed by the full faith and credit of the U.S. Treasury.
ADDITIONAL FUND INFORMATION
PORTFOLIO CHARACTERISTICS. In order to present a more complete picture of
the Fund's portfolio, marketing materials may include various actual or
estimated portfolio characteristics, including but not limited to median
market capitalizations, earnings per share, alphas, betas, price/earnings
ratios, returns on equity, dividend yields, capitalization ranges, growth
rates, price/book ratios, top holdings, sector breakdowns, asset allocations,
quality breakdowns, and breakdowns by geographic region.
MEASURES OF VOLATILITY AND RELATIVE PERFORMANCE. Occasionally
statistics may be used to specify fund volatility or risk. The general premise
is that greater volatility connotes greater risk undertaken in achieving per-
formance. Measures of volatility or risk are generally used to compare the
Fund's net asset value or performance relative to a market index. One measure
of volatility is beta. Beta is the volatility of a fund relative to the total
market as represented by the Standard & Poor's 500 Stock Index. A beta of more
than 1.00 indicates volatility greater than the market, and a beta of less than
1.00 indicates volatility less than the market.
40
<PAGE>
Another measure of volatility or risk is standard deviation. Standard deviation
is a statistical tool that measures the degree to which a fund's performance
has varied from its average performance during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of S(xi - xm)2
n-1
Where: S = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
Statistics may also be used to discuss the Fund's relative performance. One
such measure is alpha. Alpha measures the actual return of a fund compared to
the expected return of a fund given its risk (as measured by beta). The
expected return is based on how the market as a whole performed, and how the
particular fund has historically performed against the market. Specifically,
alpha is the actual return less the expected return. The expected return is
computed by multiplying the advance or decline in a market representation by
the Fund's beta. A positive alpha quantifies the value that the fund manager
has added, and a negative alpha quantifies the value that the fund manager has
lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor, owned by
professionals active in its management. Recognizing that investors are the
focus of its business, the Advisor strives for excellence both in investment
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires specialized skills
and processes for each asset class and style. Therefore, the Advisor believes
that active management should produce greater returns than a passively managed
index. The Advisor has brought together a group of top-flight investment
professionals with diverse product expertise, and each concentrates on their
investment specialty. The Advisor believes that people are the firm's most
important asset. For this reason, continuity of professionals is critical to
the firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their impact on
the Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund include, but are not limited to, changes in interest rates,
political developments, the competitive environment, consumer behavior,
industry trends, technological advances, macroeconomic trends, and the supply
and demand of various financial instruments. In addition, marketing materials
may cite the portfolio management's views or interpretations of such factors.
EIGHT BASIC PRINCIPLES FOR SUCCESSFUL MUTUAL FUND INVESTING
These common sense rules are followed by many successful investors. They make
sense for beginners, too. If you have a question on these principles, or would
like to discuss them with us, please contact us at 1-800-368-3863.
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<PAGE>
1. HAVE A PLAN - even a simple plan can help you take control of your
financial future. Review your plan once a year, or if your circumstances
change.
2. START INVESTING AS SOON AS POSSIBLE. Make time a valuable ally. Let
it put the power of compounding to work for you, while helping to reduce your
potential investment risk.
3. DIVERSIFY YOUR PORTFOLIO. By investing in different asset classes -
stocks, bonds, and cash - you help protect against poor performance in one type
of investment while including investments most likely to help you achieve your
important goals.
4. INVEST REGULARLY. Investing is a process, not a one-time event. By
investing regularly over the long term, you reduce the impact of short-term
market gyrations, and you attend to your long-term plan before you're tempted
to spend those assets on short-term needs.
5. MAINTAIN A LONG-TERM PERSPECTIVE. For most individuals, the best
discipline is staying invested as market conditions change. Reactive, emotional
investment decisions are all too often a source of regret - and principal loss.
6. CONSIDER STOCKS TO HELP ACHIEVE MAJOR LONG-TERM GOALS. Over
time, stocks have provided the more powerful returns needed to help the value of
your investments stay well ahead of inflation.
7. KEEP A COMFORTABLE AMOUNT OF CASH IN YOUR PORTFOLIO. To
meet current needs, including emergencies, use a money market fund or a bank
account - not your long-term investment assets.
8. KNOW WHAT YOU'RE BUYING. Make sure you understand the potential risks
and rewards associated with each of your investments. Ask questions...
request information...make up your own mind. And choose a fund company that
helps you make informed investment decisions.
STRONG RETIREMENT PLAN SERVICES
Strong Retirement Plan Services offers a full menu of high quality, affordable
retirement plan options, including traditional money purchase pension and
profit sharing plans, 401(k) plans, simplified employee pension plans, salary
reduction plans, Keoghs, and 403(b) plans. Retirement plan specialists are
available to help companies determine which type of retirement plan may be
appropriate for their particular situation.
MARKETS. The retirement plan services provided by the Advisor focus on four
distinct markets, based on the belief that a retirement plan should fit the
customer's needs, not the other way around.
1. SMALL COMPANY PLANS. Small company plans are designed for companies
with 1-50 plan participants. The objective is to incorporate the features and
benefits typically reserved for large companies, such as sophisticated
recordkeeping systems, outstanding service, and investment expertise, into a
small company plan without administrative hassles or undue expense. Small
company plan sponsors receive a comprehensive plan administration manual as
well as toll-free telephone support.
2. LARGE COMPANY PLANS. Large company plans are designed for companies
with between 51 and 1,000 plan participants. Each large company plan is
assigned a team of professionals consisting of an account manager, who is
typically an attorney, CPA, or holds a graduate degree in business, a
conversion specialist (if applicable), an accounting manager, a legal/technical
manager, and an education/communications educator.
3. WOMEN-OWNED BUSINESSES.
4. NON-PROFIT AND EDUCATIONAL ORGANIZATIONS (THE 403(B) MARKET).
TURNKEY APPROACH. The retirement plans offered by the Advisor are designed to
be streamlined and simple to administer. To this end, the Advisor has invested
heavily in the equipment, systems, and people necessary to adopt or convert a
plan, and to keep it running smoothly. The Advisor provides all aspects of the
plan, including plan design, administration, recordkeeping, and investment
management. To streamline plan design, the Advisor provides customizable
IRS-approved prototype documents. The
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<PAGE>
Advisor's services also include annual government reporting and testing as well
as daily valuation of each participant's account. This structure is intended
to eliminate the confusion and complication often associated with dealing with
multiple vendors. It is also designed to save plan sponsors time and expense.
The Advisor strives to provide one-stop retirement savings programs that
combine the advantages of proven investment management, flexible plan design,
and a wide range of investment options. The open architecture design of the
plans allow for the use of the family of mutual funds managed by the Advisor as
well as a stable asset value option. Large company plans may supplement these
options with their company stock (if publicly traded) or funds from other
well-known mutual fund families.
EDUCATION. Participant education and communication is key to the success of
any retirement program, and therefore is one of the most important services
that the Advisor provides. The Advisor's goal is twofold: to make sure that
plan participants fully understand their options and to educate them about the
lifelong investment process. To this end, the Advisor provides attractive,
readable print materials that are supplemented with audio and video tapes, and
retirement education programs.
SERVICE. The Advisor's goal is to provide a world class level of service. One
aspect of that service is an experienced, knowledgeable team that provides
ongoing support for plan sponsors, both at adoption or conversion and
throughout the life of a plan. The Advisor is committed to delivering accurate
and timely information, evidenced by straightforward, complete, and
understandable reports, participant account statements, and plan summaries.
The Advisor has designed both "high-tech" and "high-touch" systems, providing
an automated telephone system as well as personal contact. Participants can
access daily account information, conduct transactions, or have questions
answered in the way that is most comfortable for them.
STRONG FINANCIAL ADVISORS GROUP
The Strong Financial Advisors Group is dedicated to helping financial advisors
better serve their clients. Financial advisors receive regular updates on the
mutual funds managed by the Advisor, access to portfolio managers through
special conference calls, consolidated mailings of duplicate confirmation
statements, access to the Advisor's network of regional representatives, and
other specialized services. For more information on the Strong Financial
Advisors Group, call 1-800-368-1683.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 411 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, are the independent accountants for the Fund, providing audit services
and assistance and consultation with respect to the preparation of filings with
the SEC.
LEGAL COUNSEL
Godfrey & Kahn, S.C., 780 North Water Street, Milwaukee, Wisconsin 53202, acts
as legal counsel for the Fund.
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<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
STRONG LIFE STAGE SERIES, INC.
STATEMENT OF ASSETS AND LIABILITIES - December ___, 1998
STRONG CONSERVATIVE PORTFOLIO(1)
ASSETS:
Cash $34,000
TOTAL ASSETS $34,000
NET ASSETS:
Net assets applicable to 3,400 issued and outstanding shares of $.00001
par value
Common Stock; authorized - an indefinite number of shares. $34,000
NET ASSET VALUE:
Net asset value, redemption price and offering price per share
($34,000/3,400) $ 10.00
STRONG MODERATE PORTFOLIO(1)
ASSETS:
Cash $34,000
TOTAL ASSETS $34,000
NET ASSETS:
Net assets applicable to 3,400 issued and outstanding shares of $.00001
par value
Common Stock; authorized - an indefinite number of shares. $34,000
NET ASSET VALUE:
Net asset value, redemption price and offering price per share
($34,000/3,400) $ 10.00
STRONG AGGRESSIVE PORTFOLIO(1)
ASSETS:
Cash $34,000
TOTAL ASSETS $34,000
NET ASSETS:
Net assets applicable to 3,400 issued and outstanding shares of $.00001
par value
Common Stock; authorized - an indefinite number of shares. $34,000
NET ASSET VALUE:
Net asset value, redemption price and offering price per share
($34,000/3,400) $ 10.00
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
(1) Strong Life Stage Series, Inc. (the "Corporation") was incorporated in the
State of Wisconsin; 3,400 shares of Common Stock of Strong Life Stage Funds,
Inc. - Strong Conservative Portfolio, 3,400 shares of Common Stock of Strong
Life Stage Funds, Inc. - Strong Moderate Portfolio, 3,400 shares of Common
Stock of Strong Life Stage Funds, Inc. - Strong Aggressive Portfolio were
issued to Strong Capital Management, Inc. (the "Advisor"). The Corporation may
establish multiple series; currently three series have been established.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder
Strong Life Stage Series, Inc. -
Strong Conservative Portfolio
Strong Moderate Portfolio
Strong Aggressive Portfolio
We have audited the accompanying statement of assets and liabilities of
Strong Life Stage Series, Inc. - Strong Conservative Portfolio, Strong Moderate
Portfolio, and Strong Aggressive Portfolio as of ___________________, 1998.
This financial statement is the responsibility of the management of Strong Life
Stage Series, Inc. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statement of
assets and liabilities. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement of assets and liabilities presentation. We
believe that our audit of the statement of assets and liabilities provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Strong
Life Stage Series, Inc. - Strong Conservative Portfolio, Strong Moderate
Portfolio, and Strong Aggressive Portfolio as of _________________, 1998, in
conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
_____________, 1998
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2
<PAGE>
STRONG LIFE STAGE SERIES, INC.
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements for Strong Conservative Portfolio, Strong
Moderate Portfolio, and Strong Aggressive Portfolio (all
included in Part B)
Report of Independent Accountants
Statement of Assets and Liabilities
(b) Exhibits
(1) Articles of Incorporation*
(2) Bylaws*
(3) Inapplicable
(4) Specimen Stock Certificate*
(5) Inapplicable
(6) Distribution Agreement*
(7) Inapplicable
(8) Custody Agreement*
(9) Shareholder Servicing Agent Agreement (relating to transfer
and dividend-disbursing agent activities)*
(9.1) Shareholder Servicing Agent Agreement (relating to
personal services provided to shareholders)*
(10) Opinion of Counsel*
(11) Consent of Auditor*
(12) Inapplicable
(13) Stock Subscription Agreement*
(14) Inapplicable
(15) Inapplicable
(16) Inapplicable
(17) Inapplicable
(18) Inapplicable
(19) Power of Attorney
(20) Inapplicable
(21.1) Code of Ethics for Access Persons dated October 18, 1996*
(21.2) Code of Ethics for Non-Access Persons dated October 18, 1996*
___________________
* To be included by a Pre-Effective Amendment prior to the effective date
of this Registration Statement.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant neither controls any person nor is under common control with
any other person.
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Item 26. NUMBER OF HOLDERS OF SECURITIES
Number of Record Holders
TITLE OF CLASS AS OF DECEMBER 30, 1998
Common Stock, $.00001 par value
Strong Conservative Portfolio ___
Strong Moderate Portfolio ___
Strong Aggressive Portfolio ___
Item 27. INDEMNIFICATION
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Group and Great
American Insurance Company in the aggregate amount of $100,000,000, subject to
certain deductions. Pursuant to the authority of the Wisconsin Business
Corporation Law ("WBCL"), Article VII of Registrant's Bylaws provides as
follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01. MANDATORY INDEMNIFICATION. The Corporation shall
indemnify, to the full extent permitted by the WBCL, as in effect from time to
time, the persons described in Sections 180.0850 through 180.0859 (or any
successor provisions) of the WBCL or other provisions of the law of the State
of Wisconsin relating to indemnification of directors and officers, as in
effect from time to time. The indemnification afforded such persons by this
section shall not be exclusive of other rights to which they may be entitled as
a matter of law.
SECTION 7.02. PERMISSIVE SUPPLEMENTARY BENEFITS. The Corporation
may, but shall not be required to, supplement the right of indemnification
under Section 7.01 by (a) the purchase of insurance on behalf of any one or
more of such persons, whether or not the Corporation would be obligated to
indemnify such person under Section 7.01; (b) individual or group
indemnification agreements with any one or more of such persons; and (c)
advances for related expenses of such a person.
SECTION 7.03. AMENDMENT. This Article VII may be amended or
repealed only by a vote of the shareholders and not by a vote of the Board of
Directors.
SECTION 7.04. INVESTMENT COMPANY ACT. In no event shall the
Corporation indemnify any person hereunder in contravention of any provision of
the Investment Company Act.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The information contained under "About the Portfolios - Management" in the
Prospectus and under "Directors and Officers" and "Investment Advisor of the
Underlying Funds" and "Distributor" in the Statement of Additional Information
is hereby incorporated by reference pursuant to Rule 411 under the Securities
Act of 1933.
Item 29. PRINCIPAL UNDERWRITERS
(a) Strong Funds Distributors, Inc., principal underwriter for Registrant,
also serves as principal underwriter for Strong Advantage Fund, Inc.; Strong
Asia Pacific Fund, Inc.; Strong Asset Allocation Fund, Inc.; Strong Common
Stock Fund, Inc.; Strong Conservative Equity Funds, Inc.; Strong Corporate Bond
Fund, Inc.; Strong Discovery Fund, Inc.; Strong Equity Funds, Inc.; Strong
Government Securities Fund, Inc.; Strong Heritage Reserve Series, Inc.; Strong
High-Yield Municipal Bond Fund, Inc.; Strong Income Funds, Inc.; Strong
Institutional Funds, Inc.; Strong International Equity Funds, Inc.; Strong
International Income Funds, Inc.; Strong Money Market Fund, Inc.; Strong
Municipal Bond Fund, Inc.; Strong Municipal Funds, Inc.; Strong Opportunity
Fund, Inc.; Strong Opportunity Fund II, Inc.; Strong Schafer Funds, Inc.;
Strong Schafer Value Fund , Inc.: Strong Short-Term Bond
2
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Fund, Inc.; Strong Short-Term Global Bond Fund, Inc.; Strong Short-Term
Municipal Bond Fund, Inc.; Strong Total Return Fund, Inc.; and Strong Variable
Insurance Funds, Inc.
(b)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH UNDERWRITER WITH FUND
Richard S. Strong Director and Chairman Director and Chairman of
900 Heritage Reserve of the Board the Board
Menomonee Falls, WI 53051
Thomas P. Lemke Chief Operating Officer, Vice President
900 Heritage Reserve Vice President and Chief
Menomonee Falls, WI 53051 Compliance Officer
Stephen J. Shenkenberg Vice President, Deputy Vice President and
900 Heritage Reserve Chief Compliance Officer Secretary
Menomonee Falls, WI 53051 and Secretary
Peter D. Schwab Vice President none
900 Heritage Reserve
Menomonee Falls, WI 53051
Joseph R. DeMartine Vice President none
900 Heritage Reserve
Menomonee Falls, WI 53051
Donald G. Tyler Vice President none
900 Heritage Reserve
Menomonee Falls, WI 53051
Anthony J. D'Amato Vice President none
900 Heritage Reserve
Menomonee Falls, WI 53051
Thomas M. Zoeller Treasurer and Chief none
900 Heritage Reserve Financial Officer
Menomonee Falls, WI 53051
Richard T. Weiss Director none
900 Heritage Reserve
Menomonee Falls, WI 53051
(c) Inapplicable
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Vice President,
Thomas P. Lemke, at Registrant's corporate offices, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
Item 31. MANAGEMENT SERVICES
3
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All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 32. UNDERTAKINGS
None
4
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Village of Menomonee Falls, and
State of Wisconsin on the 30th day of October, 1998.
STRONG LIFE STAGE SERIES, INC.
(Registrant)
BY: /S/ THOMAS P. LEMKE
Thomas P. Lemke, Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-1A has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME TITLE DATE
- ----------------------------- ------------------------------------ -----------------
Vice President (Principal Executive
/s/ Thomas P. Lemke Officer) October 30, 1998
- -----------------------------
Thomas P. Lemke
/s/ Richard S. Strong Chairman of the Board and a Director October 30, 1998
- -----------------------------
Richard S. Strong
Treasurer (Principal Financial and
/s/ John A. Flanagan Accounting Officer) October 30, 1998
- -----------------------------
John A. Flanagan
/s/ Marvin E. Nevins Director October 30, 1998
- -----------------------------
Marvin E. Nevins
/s/ Willie D. Davis Director October 30, 1998
- -----------------------------
Willie D. Davis
/s/ William F. Vogt Director October 30, 1998
- -----------------------------
William F. Vogt
/s/ Stanley Kritzik Director October 30, 1998
- -----------------------------
Stanley Kritzik
</TABLE>
1
<PAGE>
STRONG LIFE STAGE SERIES, INC.
(Registrant)
POWER OF ATTORNEY
Each person whose signature appears below, constitutes and appoints Thomas
P. Lemke, Stephen J. Shenkenberg, and John S. Weitzer, and each of them, his
true and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement on Form N-1A, and any and all
amendments thereto, and to file the same, with all exhibits, and any other
documents in connection therewith, with the Securities and Exchange Commission
and any other regulatory body granting unto said attorney-in-fact and agent,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes, as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME
TITLE DATE
- ------------------------------- -------------------------------------------- ------------------
/s/ Thomas P. Lemke Vice President (Principal Executive Officer) October 23, 1998
- -------------------------------
Thomas P. Lemke
/s/ Richard S. Strong Chairman of the Board and a Director October 23,
1998
- -------------------------------
Richard S. Strong
Treasurer (Principal Financial and
/s/ John A. Flanagan Accounting Officer) October 23, 1998
- -------------------------------
John A. Flanagan
/s/ Marvin E. Nevins Director October 23, 1998
- -------------------------------
Marvin E. Nevins
/s/ Willie D. Davis Director October 23, 1998
- -------------------------------
Willie D. Davis
/s/ William F. Vogt Director October 23, 1998
- -------------------------------
William F. Vogt
/s/ Stanley Kritzik Director October 23, 1998
- -------------------------------
Stanley Kritzik
</TABLE>
2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
EDGAR
EXHIBIT NO. EXHIBIT EXHIBIT NO.
19 Power of Attorney (see the page immediately following the signature page)
</TABLE>
1
<PAGE>