As filed with the Securities and Exchange Commission on or about October 1,
1999
Securities Act Registration No. 333-66647
Investment Company Act Registration No. 811-9091
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 1 [ X ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 2 [ X ]
(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
Stephen J. Shenkenberg
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ X ] on November 30, 1999 pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
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THE STRONG LIFE STAGE SERIES
PROSPECTUS - ___________, 1999
The Strong Conservative Portfolio
The Strong Moderate Portfolio
The Strong Aggressive Portfolio
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Your Investment.................................................................
Key Information.................................................................
What are the funds' goals?......................................................
What are the funds' principal investment strategies?............................
What are the main risks of investing in the funds?..............................
What are the funds' fees and expenses?..........................................
Who are the funds' investment advisor and portfolio managers?..................
Other Important Information You Should Know.....................................
Comparing the Underlying Funds..................................................
Financial Highlights............................................................
Your Account....................................................................
Share Price.....................................................................
Buying Shares...................................................................
Selling Shares..................................................................
Additional Policies.............................................................
Distributions...................................................................
Taxes...........................................................................
Services For Investors..........................................................
Reserved Rights.................................................................
For More Information..................................................Back Cover
IN THIS PROSPECTUS, "WE" REFERS TO STRONG CAPITAL MANAGEMENT, INC., THE
ADMINISTRATOR AND TRANSFER AGENT FOR THE STRONG LIFE STAGE PORTFOLIOS. "FUND"
OR "FUNDS" REFERS TO THE LIFE STAGE PORTFOLIOS. "UNDERLYING FUND" OR
"UNDERLYING FUNDS" REFERS TO THE MUTUAL FUNDS IN WHICH THE STRONG LIFE STAGE
PORTFOLIOS INVEST.
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YOUR INVESTMENT
KEY INFORMATION
WHAT ARE THE FUNDS' GOALS?
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.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
In order to achieve their investment objectives, the Conservative, Moderate,
and Aggressive Portfolios maintain different allocations of stocks, bonds, and
cash (which is included in a fund's bond portion), reflecting varying degrees
of potential investment risk and reward. These asset allocations provide you
with three diversified, distinct options that can meet a wide variety of
investment needs. The pie charts below illustrate each of the fund's expected
stock and bond asset allocations.
CONSERVATIVE PORTFOLIO
[PIE CHART SHOWING BONDS 60% AND STOCKS 40%]
MODERATE PORTFOLIO
[PIE CHART SHOWING BONDS 40% AND STOCKS 60%]
AGGRESSIVE PORTFOLIO
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[PIE CHART SHOWING BONDS 40% AND STOCKS 60%]
You may choose to invest in any of the funds based on your investment goals,
investment time horizons, personal risk tolerances, and financial
circumstances. 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 funds are
not designed to provide you with a means of speculating on market movements.
The following table is intended to assist you in choosing a fund.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PERSONAL
FUND INVESTMENT GOAL RISK TOLERANCE EXAMPLE
- ------------- ------------------- ----------------- -------------------------
Conservative Current income with Low to medium Investors who are
low to moderate approaching or who are
growth of capital retired
- ------------- ------------------- ----------------- -------------------------
Moderate Low to moderate 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 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>
Each fund invests substantially all of its assets in a select group of Strong
Funds (Underlying Funds) as shown below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
UNDERLYING FUNDS CONSERVATIVE MODERATE AGGRESSIVE
- ------------------------------ ------------- ------------- -------------
Strong Growth 10% 15% 20%
Strong Growth and Income 10% 15% 20%
Strong Blue Chip 100 10% 15% 20%
Strong Common Stock 10% 15% 20%
- ------------------------------ ------------- ------------- -------------
Strong Advantage * 20% 10% None
Strong Short-Term Bond * 30% 15% 5%
Strong Government Securities * 5% 10% 10%
Strong Heritage Money ** 5% 5% 5%
- ------------------------------ ------------- ------------- -------------
</TABLE>
* Invested in Investor Class shares only.
** The funds may invest in either the HERITAGE MONEY FUND or in cash-type
securities (high-quality, short-term debt securities issued by corporations,
banks, and other financial institutions).
As a result of market gains or losses, the percentage of a fund's assets
invested in stocks or bonds may exceed or be less than the asset allocation
models shown above. We will rebalance a fund's assets among the Underlying
Funds in accordance with the fund's asset allocation model once a calendar
quarter, or more often as necessary.
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Also, the funds may not move their portfolios to cash as a temporary defensive
position. However, some of the Underlying Funds may invest a portion or all of
their assets in cash or cash-type securities as a temporary defensive position
to avoid losses during adverse market conditions. This could reduce the
benefit to the Underlying Funds and the funds if the market goes up. In this
case, the Underlying Funds and the funds may not achieve their investment
goals.
The Board of Directors of the funds may (1) change a fund's asset allocation
model or (2) for any reason, replace an Underlying Fund with another Strong
Fund. The Board of Directors may take this action without shareholder vote.
A fund's annual portfolio turnover rate is not expected to exceed 50% annually.
A portfolio turnover rate of 50% would occur if one half of a fund's
investments were sold within a year. A fund will purchase or sell shares of
the Underlying Funds to (1) accommodate purchases and sales of fund shares,
(2) maintain or modify the asset allocation model of the fund's assets between
the Underlying Funds, or (3) substitute another Strong Fund for an Underlying
Fund.
A fund's annual portfolio turnover rate may exceed 50% annually if the fund's
Board of Directors (1) reallocates a fund's assets among its Underlying Funds
or (2) replaces an Underlying Fund with another Strong Fund. If one or both of
these situations were to occur, a fund's annual portfolio turnover rate
generally would not exceed 100%. However, The Board of Directors believes
this will happen infrequently and only for good cause.
The funds indirectly bear the expenses caused by the portfolio turnover of the
Underlying Funds. High portfolio turnover among the Underlying Funds involves
correspondingly greater expenses to a fund. These expenses include brokerage
commissions, dealer mark-ups, and other transaction costs on the sale of
securities and reinvestments in other securities. Fund shareholders may also
directly or indirectly bear expenses caused by taxable capital gains realized
from the sales of securities held by the funds and the Underlying Funds.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS?
The main risks of the funds depend on the main risks of the Underlying Funds.
This chart illustrates the main risks of the Underlying Funds.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
VALUE-
AND MORTGAGE-
GENERAL GROWTH- SMALLER AND HIGH- AND ASSET
STOCK STYLE FOREIGN MEDIUM YIELD BACKED
UNDERLYING FUNDS RISKS INVESTING BOND RISKS SECURITIES COMPANIES SECURITIES SECURITIES
- ---------------------- --------- ---------- ----------- ---------- ----------- ---------- ----------
Growth X X X X
Growth and Income X X
Blue Chip 100 X X**
Common Stock X X X X
- ---------------------- --------- ---------- ----------- ---------- ----------- ---------- ----------
Advantage X X X X
Short-Term Bond X X X X
Government Securities X X** X
Heritage Money *
- ---------------------- --------- ---------- ----------- ---------- ----------- ---------- ----------
</TABLE>
* Your investment in the HERITAGE MONEY FUND is not insured or guaranteed by
the Federal Deposit Insurance Corporation (FDIC) or any other government
agency. The fund's goal is to preserve the value of your investment at $1.00
per share. However, it is possible to lose money by investing in this fund.
** The BLUE CHIP 100 FUND may invest in dollar-denominated foreign securities
to the extent that they are issued by the 100 largest market capitalization
companies primarily traded in the U.S. The GOVERNMENT SECURITIES FUND may
only invest in dollar denominated foreign securities.
GENERAL STOCK RISKS: Funds that invest in the stock market may experience
sudden, unpredictable declines in value, as well as periods of poor
performance. Because stock values go up and down, the value of the Underlying
Fund's
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shares may go up and down. Therefore, when you sell your investment, you may
receive more or less money than you originally invested.
VALUE- AND GROWTH-STYLE INVESTING: Different types of stocks tend to shift
into and out of favor with stock market investors depending on market and
economic conditions. Because the GROWTH FUND and COMMON STOCK FUND focus on
either value- or growth-style stocks, each Underlying Fund's performance may at
times be better or worse than the performance of stock funds that focus on
other types of stocks or that have a broader investment style.
BOND RISKS: A bond's market value is affected significantly by changes in
interest rates-generally, when interest rates rise, the bond's market value
declines and when interest rates decline, its market value rises (interest-rate
risk). Generally, the longer a bond's maturity, the greater the risk and the
higher its yield. Conversely, the shorter a bond's maturity, the lower the risk
and the lower its yield (maturity risk). A bond's value can also be affected by
changes in the bond's credit quality rating or its issuer's financial condition
(credit-quality risk). Because bond values fluctuate, the Underlying Fund's
share price fluctuates. So, when you sell your investment, you may receive
more or less money than you originally invested.
FOREIGN SECURITIES: Foreign investments involve additional risks, including
currency-rate fluctuations, political and economic instability, differences in
financial reporting standards, and less-strict regulation of securities
markets.
SMALLER AND MEDIUM COMPANIES: Small- and medium-capitalization companies often
have narrower markets and more limited managerial and financial resources than
larger, more established companies. As a result, their performance can be more
volatile and they face greater risk of business failure, which could increase
the volatility of the Underlying Funds' portfolios. Generally, the smaller the
company size, the greater these risks.
HIGH-YIELD (HIGH-RISK) SECURITIES: Some of the Underlying Funds invest in
medium- and lower-quality bonds, including high-yield bonds (commonly referred
to as junk bonds). Lower-quality bonds involve greater interest-rate and
credit-quality risks than higher- and medium-quality bonds. High-yield bonds
possess an increased possibility that the bond's issuer may not be able to make
its payments of interest and principal. If that happens, the Underlying Fund's
share price would decrease and its income distributions would be reduced. An
economic downturn or period of rising interest rates could adversely affect the
high-yield bond market and reduce the Underlying Fund's ability to sell its
high-yield bonds (liquidity risk). A lack of a liquid market for these bonds
could decrease the Underlying Fund's share price.
MORTGAGE- AND ASSET-BACKED SECURITIES: Mortgage-backed and asset-backed
securities are subject to prepayment risk, which is the risk that the borrower
will prepay some or all of the principal owed to the issuer. If that happens,
the Underlying Fund may have to replace the security by investing the proceeds
in a less attractive security. This could reduce the Underlying Fund's share
price and its income distributions.
The funds are appropriate for investors who are comfortable with the risks
described here. The Conservative Portfolio is appropriate for investors whose
financial goals are three or more years in the future. The Moderate and
Aggressive Portfolios are appropriate for investors whose financial goals are
five or more years in the future. The funds are not appropriate for investors
concerned primarily with principal stability.
Since the Conservative, Moderate, and Aggressive Portfolios are new and did not
begin operations until December 30, 1998, performance information for the last
calendar year is not available.
WHAT ARE THE FUNDS' FEES AND EXPENSES?
This section describes the fees and expenses that you may pay if you buy and
hold shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
The funds are 100% no-load, so you pay no sales charges (loads) to buy or sell
shares.
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<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
The costs of operating each fund are deducted from fund assets, which means you
pay them indirectly. These costs are deducted before computing the daily share
price or making distributions. As a result, they don't appear on your account
statement, but instead reduce the total return you receive from your
investment.
The following table summarizes the expenses of each fund. You should keep in
mind that shareholders of each fund bear INDIRECTLY the expenses of the
Underlying Funds in which the funds invest. The funds 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 fund, then, will be net of that
fund's share of the expenses of the Underlying Funds in which the fund is
invested. See "Other Important Information You Should Know" for more
information on the expenses of each Underlying Fund.
Annual Fund Operating Expenses*
(as a percentage of average net assets)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
FEE WAIVERS
UNDERLYING TOTAL ANNUAL AND/OR
OTHER FUND OPERATING ABSORPTIONS NET FUND
FUND MANAGEMENT FEE EXPENSES** EXPENSES*** EXPENSES **** EXPENSES
- ------------ --------------- ----------- ------------ ------------ ----------- -----------
Conservative NONE 0.82% 0.91% 1.73% 0.82% 0.91%
Moderate NONE 0.82% 0.98% 1.80% 0.82% 0.98%
Aggressive NONE 0.82% 1.06% 1.88% 0.82% 1.06%
</TABLE>
* The expenses associated with investing in a "fund of funds," such as the
Conservative, Moderate, and Aggressive Portfolios, are generally higher than
those of 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.
** Based on estimated amounts for the current fiscal year.
*** Underlying Fund Expenses do not reflect our waiver of management fees
and/or absorptions. With waivers and absorptions for the HERITAGE MONEY FUND,
the Underlying Fund Expenses for the Conservative, Moderate, and Aggressive
Portfolios are 0.90%, 0.97%, and 1.04%, respectively. We can terminate this
waiver and absorption at any time.
**** We have contractually agreed to waive our administrative fee and/or
absorb expenses for the funds until January 1, 2000.
STRONG HAS CONTRACTUALLY AGREED TO WAIVE ITS ADMINISTRATIVE FEE AND ABSORB
OPERATING COSTS UNTIL JANUARY 1, 2000.
EXAMPLE: This example is intended to help you compare the cost of investing in
the fund, before any waivers or absorptions as described above, with the cost
of investing in other mutual funds. The example assumes that you invest $10,000
in the fund for the time periods indicated, and then redeem all of your shares
at the end of those periods. The example also assumes that your investment has
a 5% return each year and that the fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions,
your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C>
FUND 1 YEAR 3 YEARS
- ------------ ------- -------
Conservative $XXX $XXX
Moderate $XXX $XXX
Aggressive $XXX $XXX
</TABLE>
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<PAGE>
WHO ARE THE FUNDS' INVESTMENT ADVISOR AND PORTFOLIO MANAGERS?
The Board of Directors of each fund is responsible for managing its business
and affairs. Because the funds invest all of their assets in the Underlying
Funds, they do not have their own investment advisor or portfolio managers.
The Underlying Funds' investment advisor is Strong Capital Management, Inc.
(Strong). Strong provides investment management services for mutual funds and
other investment portfolios representing assets of over $35 billion. Strong
began conducting business in 1974. Since then, its principal business has been
providing investment advice for individuals and institutional accounts, such as
pension and profit-sharing plans, as well as mutual funds, several of which are
available through variable insurance products. Strong's address is P.O. Box
2936, Milwaukee, WI 53201.
For information on the portfolio managers of the Underlying Funds, please see
the prospectuses of the Underlying Funds, which are available free of charge by
calling 1-800-368-3863.
((Side Box))
YEAR 2000 ISSUES
Your investment could be adversely affected if the computer systems used by the
funds, Strong, and the funds' service providers do not properly process and
calculate date-related information before, on, and after January 1, 2000. Year
2000-related computer problems could have a negative impact on your fund, the
fund's investments, and the Underlying Funds' investments. However, we are
working to avoid these problems and to obtain assurances from our service
providers that they are taking similar steps. Please note that Year
2000-related computer problems may have a greater negative impact on foreign
capital markets and foreign investments, especially in emerging markets.
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<PAGE>
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
COMPARING THE UNDERLYING FUNDS
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES. The following table
will help you distinguish the investment objective and principal investment
strategy of each Underlying Fund. For a complete description of these
Underlying Funds, please see the prospectuses of the Underlying Funds, which
are available free of charge by calling 1-800-368-3863.
<TABLE>
<CAPTION>
<S> <C> <C>
UNDERLYING INVESTMENT OBJECTIVE PRINCIPAL INVESTMENT STRATEGY SUMMARY
FUND
- --------------------------------------------------- ------------------------------------------------------------
Growth Capital growth Focuses on stocks of companies that its manager
believes have favorable prospects for accelerating
growth of earnings but are selling at reasonable
valuations based on earnings, cash flow, or asset value.
The portfolio can include stocks of any size.
- --------------------------------------------------- ------------------------------------------------------------
Growth and High total return by investing Focuses primarily on the stocks of large-capitalization,
Income Fund for capital growth and dividend-paying U.S. companies that also offer
income potential for capital growth. The manager evaluates
domestic and international economic conditions and
events. He then identifies stocks in those sectors that
appear likely to benefit from those conditions, and
avoids those that appear likely to suffer. The
manager's philosophy is to remain fully invested in
stocks, despite market fluctuations.
- --------------------------------------------------- ------------------------------------------------------------
Blue Chip 100 Total return by investing for Invests in the common stocks of the 100 largest market
capital growth and income capitalization companies primarily traded in the U.S. as
determined by the fund's manager. Half of the fund's
assets are invested in these stocks in proportion to size.
The other half of the fund's assets are selectively
invested in 20-30 of those same 100 companies that the
fund's manager believes offer greater return potential.
- --------------------------------------------------- ------------------------------------------------------------
Common Stock Capital growth Invests at least 65% of its assets in stocks of small- and
medium-capitalization companies that the fund's
manager believes are under-priced, yet have attractive
growth prospects. The manager bases his analysis on a
company's "private market value" - the price an
investor would be willing to pay for the entire company
given its management, financial health, and growth
potential. The manager determines a company's
private market value based on a fundamental analysis
of a company's cash flows, asset valuations,
competitive situation, and franchise value.
- --------------------------------------------------- ------------------------------------------------------------
Advantage Current income with a very Invests primarily in very short-term, corporate, and
low degree of share-price mortgage- and asset-backed bonds. The fund invests
fluctuation primarily in higher- and medium-quality bonds. To
enhance its return potential, the fund also invests a
portion of its assets in bonds that have longer maturities
or are of lower quality (high-yield or junk bonds),
though it may not invest in bonds rated below BB. The
managers focus on high-yield bonds rated BB with positive
or improving credit fundamentals. To help limit changes
in share price, the fund's average maturity is usually
one year or less.
- --------------------------------------------------- -------------------------------------------------------------
Short-Term Total return by investing Invests primarily in short- and intermediate-term,
Bond for a high level of current corporate, mortgage- and asset-backed, and U.S.
income with a low degree of government (and its agencies) bonds. The fund invests
share-price fluctuation primarily in higher- and medium-quality bonds. The
fund's dollar-weighted average maturity will normally
be between one and three years. The fund may also
invest a portion of its assets in lower-quality, high-yield
bonds. The managers focus primarily on high-yield
bonds rated BB with positive or improving credit
fundamentals.
- -------------------------------------------------- --------------------------------------------------------------
Government Total return by investing Invests primarily in higher-quality bonds issued by the
Securities for a high level of current U.S. government or its agencies. The fund's dollar-
Income with a moderate degree weighted average maturity will normally be between
Of share-price fluctuation five and ten years.
- ------------------------------------------------------------------------------------------------------------------
Heritage Current income, a stable Managed to provide attractive yields and a stable share
Money* share price, and daily price of $1.00. The fund invests in a portfolio of high-
liquidity quality, short-term debt securities issued by
corporations, banks, and other financial institutions.
- -------------------------------------------------- -------------------------------------------------------------
</TABLE>
*Your investment in the HERITAGE MONEY FUND is not insured nor guaranteed by
the FDIC or any other government agency. The fund's goal is to preserve the
value of your investment at $1.00 per share. However, it is possible to lose
money by investing in this fund.
PERFORMANCE. The past performance of the Underlying Funds is shown below.
These results are historical and do not represent the future results of the
Underlying Funds. Each fund invests in the Underlying Funds, so the
performance of a fund will reflect the performance of the Underlying Funds in
which it invests. However, because the funds also incur their own direct
expenses, the funds' performance will be less than the weighted average of the
returns of the Underlying Funds in which they invest.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 9-30-99
-----------------------------------------------------
YEAR-TO-DATE
TOTAL RETURNS SINCE
UNDERLYING FUND AS OF 9/30/99 1-YEAR 3-YEAR 5-YEAR 10-YEAR INCEPTION
- --------------------- ------------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Growth X.XX% X.XX% X.XX% X.XX% -- X.XX% (12-31-93)
Growth and Income X.XX% X.XX% X.XX% -- -- X.XX% (12-29-95)
Blue Chip 100 X.XX% X.XX% -- -- -- X.XX% (6-30-97)
Common Stock X.XX% X.XX% X.XX% X.XX% -- X.XX% (12-29-89)
Advantage X.XX% X.XX% X.XX% X.XX% X.XX% X.XX% (11-25-88)
Short-Term Bond X.XX% X.XX% X.XX% X.XX% X.XX% X.XX% (8-31-87)
Government Securities X.XX% X.XX% X.XX% X.XX% X.XX% X.XX% (10-29-86)
Heritage Money X.XX% X.XX% X.XX% -- -- X.XX% (6-29-95)
</TABLE>
Average annual total return and total return measure change in the value of an
investment in an 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 the Underlying Fund may have a gain or
loss.
EXPENSES. The following table gives expense information for the Underlying
Funds as of ______, 1999. Shareholders in a "fund of funds", such as the
Conservative, Moderate, and Aggressive Portfolios, pay expenses at both the
fund and Underlying Fund level. Because of this, the expenses associated with
investing in the funds may be higher than those of funds that do not invest
primarily in other mutual funds.
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TOTAL ANNUAL FUND
UNDERLYING FUND MANAGEMENT FEE OTHER EXPENSES OPERATING EXPENSES
- ---------------------- -------------- -------------- ------------------
Growth 1.00% 0.27% 1.27%
Growth and Income 1.00 0.09 1.09
Blue Chip 100 0.75 0.28 1.03
Common Stock 1.00 0.16 1.16
- ---------------------- -------------- -------------- ------------------
Advantage 0.35 0.40 0.75
Short-Term Bond 0.375 0.42 0.80
Government Securities 0.35 0.44 0.79
Heritage Money 0.50 0.07 0.57*
- ---------------------- -------------- -------------- ------------------
</TABLE>
*Total Operating Expenses do not reflect our waiver of management fees and/or
absorption of expenses. With waivers and/or absorptions, the Total Annual Fund
Operating Expenses of the HERITAGE MONEY FUND were 0.32%. We can terminate
waivers and absorptions for this fund at any time.
FINANCIAL HIGHLIGHTS
This information describes investment performance for the period shown.
Certain information reflects financial results for a single fund share. "Total
return" shows how much your investment in the fund would have increased (or
decreased) during each period, assuming you had reinvested all dividends and
distributions. These figures are unaudited.
<<Financial Highlights for 6 month period>>
YOUR ACCOUNT
All of the Strong Funds are 100% no-load. This means that you may purchase,
redeem, or exchange shares directly at their net asset value without paying a
sales charge.
SHARE PRICE
Your transaction price for buying, selling, or exchanging shares is the net
asset value per share (NAV). NAV is generally calculated as of the close of
trading on the New York Stock Exchange (usually 3:00 p.m. Central Time) every
day the NYSE is open. If the NYSE closes at any other time, or if an
emergency exists, NAV may be calculated at a different time. Your share price
will be the next NAV calculated after we accept your order.
Each fund's NAV is calculated by taking the fair value of its total assets,
subtracting all of its liabilities, and dividing by the total number of shares
outstanding. Expenses are accrued daily and applied when determining NAV.
This pricing calculation is made by appraising each fund's underlying
investments (ie., the underlying Strong Funds) at the price of each such fund
determined at the close of the NYSE. If market prices are not available, NAV
is based on a security's fair value as determined in good faith by us under
the supervision of the Board of Directors of the Strong Funds.
11
<PAGE>
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
We determine share price or NAV by dividing net assets
(the value of its investments, cash, and other assets minus
its liabilities) by the number of shares outstanding.
- -----------------------------------------------------------
</TABLE>
BUYING SHARES
INVESTMENT MINIMUMS: When buying shares, you must meet the following
investment minimum requirements.
<TABLE>
<CAPTION>
<S> <C> <C>
INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENT MINIMUM
- -------------------------------- ----------------------------- -----------------------------
Regular accounts $2,500 $50
- -------------------------------- ----------------------------- -----------------------------
Education IRA accounts $500 $50
- -------------------------------- ----------------------------- -----------------------------
Other IRAs and UGMA/UTMA $250 $50
accounts
- -------------------------------- ----------------------------- -----------------------------
SIMPLE IRA, SEP-IRA, 403(b)(7), the lesser of $250 or $25 per $50
Keogh, Pension Plan, and Profit month
Sharing accounts
- -------------------------------- ----------------------------- -----------------------------
</TABLE>
PLEASE REMEMBER ...
- - If you use an Automatic Investment Plan, we waive the initial investment
minimum to open an account and the additional investment minimum is $50.
- - You cannot use an Automatic Investment Plan with an Education IRA.
- - If you open a qualified retirement plan account where we or one of our
alliance partners provides administrative services, there is no initial
investment minimum.
BUYING INSTRUCTIONS
You can buy shares in several ways.
MAIL
You can open or add to an account by mail with a check or money order made
payable to Strong Funds. Send it to the address listed on the back of this
prospectus, along with your account application (for a new account) or an
Additional Investment Form (for an existing account).
EXCHANGE OPTION
Sign up for the exchange option when you open your account. To add this
option to an existing account, visit the Shareholder Services area of Strong
On-line (WWW.STRONGFUNDS.COM) or call 1-800-368-3863 for a Shareholder Account
Options Form.
((Side Box))
Questions?
Call 1-800-368-3863
24 hours a day
7 days a week
EXPRESS PURCHASESM
You can make additional investments to your existing account directly from
your bank account. If you didn't establish this option when you opened your
account, visit the Shareholder Services area of Strong On-line
(WWW.STRONGFUNDS.COM) or call us at 1-800-368-3863 for a Shareholder Account
Options Form.
12
<PAGE>
STRONG DIRECT(R)
You can use Strong Direct(R) to add to your investment from your bank account
or to exchange shares between Strong Funds by calling 1-800-368-7550. See
"Services for Investors" for more information.
STRONG NETDIRECT(R)
You can use Strong netDirect(R) at our web site, WWW.STRONGFUNDS.COM, to add
to your investment from your bank account or to exchange shares between Strong
Funds. See "Services for Investors" for more information.
INVESTOR CENTER
You can visit our Investor Center in Menomonee Falls, Wisconsin, near
Milwaukee. Call 1-800-368-3863 for hours and directions. The Investor Center
only accepts checks or money orders payable to Strong Funds. It does not
accept cash or third-party checks.
WIRE
Call 1-800-368-3863 for instructions before wiring funds either to open or add
to an account. This helps to ensure that your account will be credited
promptly and correctly.
AUTOMATIC INVESTMENT SERVICES
See "Services for Investors" for detailed information on all of our automatic
investment services. You can sign up for these plans when you open your
account or call 1-800-368-3863 for instructions on how to add them.
BROKER-DEALER
You may purchase shares through a broker-dealer or other intermediary who may
charge you a fee.
PLEASE REMEMBER . . .
- - Make checks or money orders payable to Strong Funds.
- - We do not accept cash, third-party checks (checks payable to you written by
another party), credit card convenience checks, or checks drawn on banks
outside the U.S.
- - You will be charged $20 for every check, money order, wire, or Electronic
Funds Transfer returned unpaid.
SELLING SHARES
You can access the money in your account by selling (also called redeeming)
some or all of your shares by one of the methods below. After your redemption
request is accepted, we normally send you the proceeds on the next business
day.
SELLING INSTRUCTIONS
You can sell shares in several ways.
MAIL
Write a letter of instruction. It should specify your account number, the
dollar amount or number of shares you wish to redeem, the names and signatures
of the owners (or other authorized persons), and your mailing address. Then,
mail it to the address listed on the back of this prospectus.
REDEMPTION OPTION
Sign up for the redemption option when you open your account or add it later
by visiting the Shareholder Services area of Strong On-line
(WWW.STRONGFUNDS.COM) or by calling 1-800-368-3863 to request a Shareholder
Account Options Form. With this option, you may sell shares by phone or via
the internet and receive the proceeds in one of three ways:
13
<PAGE>
(1) We can mail a check to your account's address. Checks will not be
forwarded by the Postal Service, so please notify us if your address has
changed.
(2) We can transmit the proceeds by Electronic Funds Transfer to a
properly pre-authorized bank account. The proceeds usually will arrive at your
bank two banking days after we process your redemption.
(3) For a $10 fee, we can transmit the proceeds by wire to a properly
pre-authorized bank account. The proceeds usually will arrive at your bank the
first banking day after we process your redemption.
STRONG DIRECT(R)
You can redeem shares through Strong Direct(R) at 1-800-368-7550. See
"Services for Investors" for more information.
STRONG NETDIRECT(R)
You can use Strong netDirect(R) at our web site, WWW.STRONGFUNDS.COM, to
redeem shares. See "Services for Investors" for more information.
INVESTOR CENTER
You can visit our Investor Center in Menomonee Falls, Wisconsin, near
Milwaukee. Call 1-800-368-3863 for hours and directions.
AUTOMATIC INVESTMENT SERVICES
You can set up automatic withdrawals from your account at regular intervals.
See "Services for Investors" for information on all of our automatic
investment services.
BROKER-DEALER
You may sell shares through a broker-dealer or other intermediary who may
charge you a fee.
PLEASE REMEMBER ...
- - If you recently purchased shares, a redemption request on those shares will
not be honored until 10 days after we receive the purchase check or
electronic transaction.
- - Some transactions and requests require a signature guarantee.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must sign
the certificates and all signatures must be guaranteed.
- - With an IRA (or other retirement account), you will be charged (1) a $10
annual account maintenance fee for each account up to a maximum of $30 and
(2) a $10 fee for transferring assets to another custodian or for closing an
account.
- - If you sell shares out of a non-IRA retirement account and you are eligible
to roll the sale proceeds into another retirement plan, we will withhold for
federal income tax purposes a portion of the sale proceeds unless you
transfer all of the proceeds to an eligible retirement plan.
((Side Box))
There may be special distribution requirements that apply to retirement
accounts. For instructions on:
- - Roth and Traditional IRA accounts, call
1-800-368-3863, and
- - SIMPLE IRA, SEP-IRA , 403(b)(7), Keogh, Pension Plan, Profit Sharing Plan, or
401(k) Plan accounts, call 1-800-368-2882.
14
<PAGE>
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE GUARANTEES help ensure that major
transactions or changes to your account are in fact
authorized by you. For example, we require a
signature guarantee on written redemption requests
for more than $50,000. You can obtain a signature
guarantee for a nominal fee from most banks,
brokerage firms, and other financial institutions.
A notary public stamp or seal cannot be
substituted for a signature guarantee.
- ---------------------------------------------------
</TABLE>
ADDITIONAL POLICIES
TELEPHONE TRANSACTIONS
Once you place a telephone transaction request, it cannot be canceled or
modified. We use reasonable procedures to confirm that telephone transaction
requests are genuine. We may be responsible if we do not follow these
procedures. You are responsible for losses resulting from fraudulent or
unauthorized instructions received over the telephone, provided we reasonably
believe the instructions were genuine. During times of unusual market
activity, our phones may be busy and you may experience a delay placing a
telephone request. During these times, consider trying STRONG DIRECT(R), our
24-hour automated telephone system, by calling 1-800-368-7550, or STRONG
NETDIRECT(R), our on-line transaction center, by visiting WWW.STRONGFUNDS.COM.
Please remember that you must have telephone redemption as an option on your
account to redeem shares through STRONG DIRECT(R) or STRONG NETDIRECT(R).
INVESTING THROUGH A THIRD PARTY
If you invest through a third party (rather than directly with Strong Funds),
the policies and fees may be different than described in this prospectus.
Banks, brokers, 401(k) plans, financial advisors, and financial supermarkets
may charge transaction fees and may set different minimum investments or
limitations on buying or selling shares. Consult a representative of your
plan or financial institution if you are not sure.
EXCHANGE OPTION LIMITATIONS
The funds' exchange options are not intended to afford shareholders a way to
speculate on short-term movements in the market. Accordingly, in order to
prevent excessive use of the exchange option that may potentially disrupt the
management of the funds and increase transaction costs, the funds have
established a policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive if limited to two
substantive exchange redemptions from the funds during any twelve month
period. "Substantive" means either a dollar amount or a series of movements
between Strong Funds that we determine, in our sole discretion, could have an
adverse impact on the management of the fund. Notwithstanding these
limitations, the funds reserve the right to reject any purchase request
(including exchange purchases from other Strong funds) that is reasonably
deemed to be disruptive to the efficient implementation of the fund's
investment programs.
DISTRIBUTIONS
DISTRIBUTION POLICY
The Moderate and Aggressive Portfolios pay you dividends from net investment
income and distribute substantially all net realized capital gains annually.
The Conservative Portfolio pays you dividends from net investment income
quarterly and distributes substantially all net realized capital gains
annually. Each fund may make additional distributions if necessary to avoid
imposition of a 4% excise tax on undistributed income and gains.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
15
<PAGE>
Your dividends and capital gain distributions will be automatically reinvested
in additional shares, unless you choose otherwise. Your other options are to
receive checks for these payments, have them automatically invested in another
Strong Fund, or have them deposited into your bank account. To change the
current option for payment of dividends and capital gains distributions,
please call 1-800-368-3863.
TAXES
TAXABLE DISTRIBUTIONS
Any net investment income and net short-term capital gain distributions you
receive are taxable as ordinary dividend income at your income tax rate.
Distributions of net capital gains are generally taxable as long-term capital
gains. This is generally true no matter how long you have owned your shares
and whether you reinvest your distributions or take them in cash. You may
also have to pay taxes when you exchange or sell shares if your shares have
increased in value since you bought them.
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
Generally, if your investment is in a Traditional
IRA or other TAX-DEFERRED ACCOUNT, your
dividends and distributions will not be taxed at the
time they are paid, but instead at the time you
withdraw them from your account.
- ----------------------------------------------------
</TABLE>
RETURN OF CAPITAL
If your fund's (1) income distributions exceed its net investment income and
net short-term capital gains or (2) capital gain distributions exceed its net
capital gains in any year, all or a portion of those distributions may be
treated as a return of capital to you. Although a return of capital is not
taxed, it will reduce the cost basis of your shares.
YEAR-END STATEMENT
To assist you in tax preparation, after the end of each calendar year, we send
you a statement of your fund's ordinary dividends and net capital gain
distributions (Form 1099).
BACKUP WITHHOLDING
By law, we must withhold 31% of your distributions and proceeds if (1) you are
subject to backup withholding or (2) you have not provided us with complete
and correct taxpayer information such as your Social Security Number (SSN) or
Tax Identification Number (TIN).
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
Unless your investment is in a tax-deferred
retirement account such as an IRA, you may want to
avoid:
-Investing a large amount in a fund close to the
end of the calendar year. If the fund makes a
capital gains distribution, you may receive some
of your investment back as a taxable
distribution.
-Selling shares of a fund at a loss and then
investing in the same fund within 30 days before
or after the sale. This is called a WASH SALE and
you will not be allowed to claim a tax loss on
the transaction.
- --------------------------------------------------
</TABLE>
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
COST BASIS is the amount that you paid for the shares.
When you sell shares, you subtract the cost basis from
the sale proceeds to determine whether you realized an
investment gain or loss. For example, if you bought a
share at $10 and you sold it two years later at $11,
your cost basis on the share is $10 and your gain is $1.
- ---------------------------------------------------------
</TABLE>
Because everyone's tax situation is unique, you should consult your tax
professional for assistance.
SERVICES FOR INVESTORS
Strong provides you with a variety of services to help you manage your
investment. For more details, call 1-800-368-3863, 24 hours a day, 7 days a
week. These services include:
STRONG DIRECT (R) AUTOMATED TELEPHONE SYSTEM
Our 24-hour automated response system enables you to use a touch-tone phone to
access current share prices (1-800-368-3550), to access fund and account
information (1-800-368-5550), and to make purchases, exchanges, or redemptions
among your existing accounts if you have elected these services
(1-800-368-7550). Passwords help to protect your account information.
STRONG ON-LINE
Visit us on-line at WWW.STRONGFUNDS.COM to access your fund's performance and
portfolio holding information. In addition to general information about
investing, Strong On-line offers daily performance information, portfolio
manager commentaries, and information on available account options.
STRONGMAIL
If you register for StrongMail at WWW.STRONGMAIL.COM, you will receive your
fund's closing price by e-mail each business day. In addition, StrongMail
offers market news and updates throughout the day.
STRONG NETDIRECT(R)
If you are a shareholder, you may use netDirect(R) to access your account
information 24 hours a day from your personal computer. Strong netDirect(R)
allows you to view account history, account balances, and recent dividend
activity, as well as to make purchases, exchanges, or redemptions among your
existing accounts if you have elected these services. Encryption technology
and passwords help to protect your account information. You may register to
use netDirect(R) at WWW.STRONGFUNDS.COM.
STRONG EXCHANGE OPTION
You may exchange shares of a fund for shares of another Strong Fund, either in
writing, by telephone, or through your personal computer, if the accounts are
identically registered (with the same name, address, and taxpayer
identification number). Please ask us for the appropriate prospectus and read
it before investing in any of the Strong Funds. Remember, an exchange of
shares of one Strong Fund for those of another Strong Fund is considered a
sale and a purchase of shares for tax purposes and may result in a capital
gain or loss. Some Strong Funds that you may want to exchange into may charge
a redemption fee of 0.50% to 1.00% on the sale of shares held for less than
six months. Purchases by exchange are subject to the investment requirements
and other criteria of the fund purchased.
STRONG AUTOMATIC INVESTMENT SERVICES
You may invest or redeem automatically in the following ways, some of which
may be subject to additional restrictions or conditions.
AUTOMATIC INVESTMENT PLAN (AIP)
This plan allows you to make regular, automatic investments from your bank
checking or savings account.
AUTOMATIC EXCHANGE PLAN
17
<PAGE>
This plan allows you to make regular, automatic exchanges from one eligible
Strong Fund to another.
AUTOMATIC DIVIDEND REINVESTMENT
Your dividends and capital gains will be automatically reinvested in
additional shares unless you choose otherwise. Your other options are to
receive checks for these payments, have them automatically invested in another
Strong Fund, or have them deposited into your bank account.
NO-MINIMUM INVESTMENT PLAN
This plan allows you to invest without meeting the minimum initial investment
requirements if you invest monthly and you participate in the AIP, Automatic
Exchange Plan, or Payroll Direct Deposit Plan.
PAYROLL DIRECT DEPOSIT PLAN
This plan allows you to send all or a portion of your paycheck, social
security check, military allotment, or annuity payment to the Strong Funds of
your choice.
SYSTEMATIC WITHDRAWAL PLAN
This plan allows you to redeem a fixed sum from your account on a regular
basis. Payments may be sent electronically to a bank account or as a check to
you or anyone you properly designate.
STRONG RETIREMENT PLAN SERVICES
We offer a wide variety of retirement plans for individuals and institutions,
including large and small businesses. For information on:
- - INDIVIDUAL RETIREMENT PLANS, including Traditional IRAs and Roth IRAs, call
1-800-368-3863.
- - QUALIFIED RETIREMENT PLANS, including SIMPLE IRAs, SEP-IRAs, 403(b)(7)s,
Keoghs, Pension Plans, Profit Sharing Plans, and 401(k) Plans, call
1-800-368-2882.
SOME OF THESE SERVICES MAY BE SUBJECT TO ADDITIONAL RESTRICTIONS OR
CONDITIONS. CALL 1-800-368-3863 FOR MORE INFORMATION.
RESERVED RIGHTS
We reserve the right to:
- - Refuse, change, discontinue, or temporarily suspend account services,
including purchase, exchange, or telephone and netDirect(R) redemption
privileges, for any reason.
- - Reject any purchase request for any reason including exchanges from other
Strong Funds. Generally, we do this if the purchase or exchange is
disruptive to the efficient management of a fund (due to the timing of the
investment or an investor's history of excessive trading).
- - Change the minimum or maximum investment amounts.
- - Delay sending out redemption proceeds for up to seven days (this generally
only applies to very large redemptions without notice, excessive trading, or
during unusual market conditions).
- - Suspend redemptions or postpone payments when the NYSE is closed for any
reason other than its usual weekend or holiday closings, when trading is
restricted by the SEC, or under any emergency circumstances.
18
<PAGE>
- - Make a redemption-in-kind (a payment in portfolio securities rather than
cash) if the amount you are redeeming is in excess of the lesser of (1)
$250,000 or (2) 1% of the fund's assets. Generally, redemption-in-kind is
used when large redemption requests may cause harm to the fund and its
shareholders.
- - Close any account that does not meet minimum investment requirements. We
will give you notice and 60 days to begin an automatic investment program or
to increase your balance to the required minimum.
- - Reject any purchase or redemption request that does not contain all required
documentation.
19
<PAGE>
FOR MORE INFORMATION
More information is available upon request at no charge, including:
SHAREHOLDER REPORTS: Additional information is available in the semi-annual
report to shareholders. This report contains a letter from management,
discusses recent market conditions, economic trends and investment strategies
that significantly affected your investment's performance during the last
fiscal year, and lists portfolio holdings.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI contains more details about
investment policies and techniques. A current SAI is on file with the SEC and
is incorporated into this prospectus by reference. This means that the SAI is
legally considered a part of this prospectus even though it is not physically
contained within this prospectus.
To request information or to ask questions:
BY TELEPHONE FOR HEARING-IMPAIRED (TDD)
(414) 359-1400 or (800) 368-3863 (800) 999-2780
BY MAIL BY OVERNIGHT DELIVERY
Strong Funds Strong Funds
P.O. Box 2936 900 Heritage Reserve
Milwaukee, Wisconsin 53201-2936 Menomonee Falls, Wisconsin 53051
ON THE INTERNET BY E-MAIL
VIEW ONLINE OR DOWNLOAD DOCUMENTS: [email protected]
Strong Funds: WWW.STRONGFUNDS.COM
SEC*: www.sec.gov
To reduce the volume of mail you receive, only one copy of most financial
reports and prospectuses is mailed to your household. Call 1-800-368-3863 if
you wish to receive additional copies, free of charge.
This prospectus is not an offer to sell securities in any place where it would
be illegal to do so.
*YOU CAN ALSO OBTAIN COPIES BY VISITING THE SEC'S PUBLIC REFERENCE ROOM IN
WASHINGTON, D.C. OR BY SENDING YOUR REQUEST AND A DUPLICATING FEE TO THE
SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE SECTION, WASHINGTON, D.C.
20549-6009. YOU CAN CALL 1-800-SEC-0330 FOR INFORMATION ON THE OPERATION OF THE
PUBLIC REFERENCE ROOM.
Strong Conservative Portfolio, Strong Moderate Portfolio, and Strong Aggressive
Portfolio are series of Strong Life Stage Series, Inc., SEC file number:
811-9091
20
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
STRONG CONSERVATIVE PORTFOLIO, A SERIES OF STRONG LIFE STAGE SERIES, INC.
STRONG MODERATE PORTFOLIO, A SERIES OF STRONG LIFE STAGE SERIES, INC.
STRONG AGGRESSIVE PORTFOLIO, A SERIES OF STRONG LIFE STAGE SERIES, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
e-mail: [email protected]
Web Site: http://www.strongfunds.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 _____________,
1999. Requests for copies of the Prospectus should be made by calling any
number listed above. The financial statements appearing in the Semi-Annual
Report, which accompanies this SAI, are incorporated into this SAI by
reference.
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 substantially 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.
_____________, 1999
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
Debt Obligations...............................................................8
Depositary Receipts............................................................8
Derivative Instruments.........................................................9
Duration......................................................................18
Foreign Investment Companies..................................................18
Foreign Securities............................................................18
U.S. Government Securities....................................................19
High-Yield (High-Risk) Securities.............................................19
Illiquid Securities...........................................................21
Lending of Portfolio Securities...............................................22
Loan Interests................................................................22
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.......................26
Rule 2a-7: Maturity, Quality, and Diversification Restrictions...............26
Short Sales...................................................................27
Small and Medium Companies....................................................27
Standby Commitments...........................................................27
Variable- or Floating-Rate Securities.........................................27
Warrants......................................................................28
When-Issued and Delayed-Delivery Securities...................................28
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities..........................29
DIRECTORS AND OFFICERS........................................................29
PRINCIPAL SHAREHOLDERS........................................................31
INVESTMENT ADVISOR OF THE UNDERLYING FUNDS....................................31
DISTRIBUTOR...................................................................32
PORTFOLIO TRANSACTIONS........................................................33
CUSTODIAN.....................................................................33
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT..................................33
SHAREHOLDER SERVICING AGENT...................................................33
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
FINANCIAL STATEMENTS..........................................................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 substantially 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* 20% 10% None
Strong Short-Term Bond Fund* 30% 15% 5%
Strong Government Securities Fund* 5% 10% 10%
Strong Heritage Money Fund** 5% 5% 5%
- ---------------------------------- ------------ -------- ----------
</TABLE>
* Invests in Investor Class shares only.
** The Portfolios may invest in either the Strong Heritage Money Fund or in
cash-type securities (high-quality, short-term debt securities issued by
corporations, banks, and other financial institutions).
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 HERITAGE MONEY 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.
6
<PAGE>
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, 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., interest 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 HERITAGE
MONEY 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 HERITAGE
MONEY 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 HERITAGE
MONEY 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.
DEBT OBLIGATIONS
The Fund may invest a portion of its assets in debt obligations. Issuers of
debt obligations have a contractual obligation to pay interest at a specified
rate on specified dates and to repay principal on a specified maturity date.
Certain debt obligations (usually intermediate- and long-term bonds) have
provisions that allow the issuer to redeem or "call" a bond before its
maturity. Issuers are most likely to call such securities during periods of
falling interest rates and the Fund may have to replace such securities with
lower yielding securities, which could result in a lower return for the Fund.
PRICE VOLATILITY. The market value of debt obligations is affected primarily
by changes in prevailing interest rates. The market value of a debt obligation
generally reacts inversely to interest-rate changes, meaning, when prevailing
interest rates decline, an obligation's price usually rises, and when
prevailing interest rates rise, an obligation's price usually declines.
MATURITY. In general, the longer the maturity of a debt obligation, the higher
its yield and the greater its sensitivity to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. Commercial paper is generally considered the shortest
maturity form of debt obligation.
CREDIT QUALITY. The values of debt obligations may also be affected by changes
in the credit rating or financial condition of their issuers. Generally, the
lower the quality rating of a security, the higher the degree of risk as to the
payment of interest and return of principal. To compensate investors for
taking on such increased risk, those issuers deemed to be less creditworthy
generally must offer their investors higher interest rates than do issuers with
better credit ratings.
In conducting its credit research and analysis, the Advisor considers both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings
compiled by a number of Nationally Recognized Statistical Rating Organizations
("NRSROs").
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS, EXCEPT THE HERITAGE
MONEY 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
8
<PAGE>
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.
THE FOLLOWING SECTION APPLIES TO ALL UNDERLYING FUNDS, EXCEPT THE HERITAGE
MONEY 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 derivatives. 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.
9
<PAGE>
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.
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
10
<PAGE>
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 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.
11
<PAGE>
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.
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.
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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 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 contracts
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
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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 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
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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 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.
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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.
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
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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 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
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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 consistent
with the Fund's investment objective and permitted by the Fund's investment
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 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 HERITAGE MONEY 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
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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 HERITAGE MONEY 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, 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.
U.S. GOVERNMENT SECURITIES
U.S. government securities are issued or guaranteed by the U.S. government or
its agencies or instrumentalities. Securities issued by the government include
U.S. Treasury obligations, such as Treasury bills, notes, and bonds. Securities
issued by government agencies or instrumentalities include obligations of the
following:
- -the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, and the Government
National Mortgage Association ("GNMA"), including GNMA pass-through
certificates, whose securities are supported by the full faith and credit of
the United States;
- - the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association, the Interamerican Development Bank,
and International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
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THIS SECTION APPLIES TO ALL UNDERLYING FUNDS, EXCEPT THE BLUE CHIP 100,
GOVERNMENT SECURITIES, AND HERITAGE MONEY 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 ("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.
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
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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 dealers 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 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
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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
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
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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.
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 HERITAGE MONEY 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
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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 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.
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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 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
25
<PAGE>
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 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 HERITAGE MONEY 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.
26
<PAGE>
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, in accordance
with the terms of the security, the principal amount must unconditionally be
paid, or in the case of an instrument called for redemption, the date on which
the redemption payment must be made.
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. 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. These are
referred to as "second-tier securities."
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 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
27
<PAGE>
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
28
<PAGE>
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 HERITAGE MONEY 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.
DIRECTORS AND OFFICERS
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<PAGE>
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 53 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. Mr. Nevins is a former Chairman of the Wisconsin
Association of Manufacturers & Commerce. He has been a Director of A-Life
Medical, Inc., San Diego, CA since 1996 and Surface Systems, Inc. (a weather
information company), St. Louis, MO since 1992. 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 and Carroll College.
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,
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.
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the
Strong Funds.
Mr. Shenkenberg has been Deputy General Counsel of the Advisor since November
1996. 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.
30
<PAGE>
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.
THOMAS M. ZOELLER (DOB 2/2/64), Vice President of the Strong Funds.
Mr. Zoeller has been a Senior Vice President, Chief Financial Officer,
Treasurer and Controller of the Advisor since February 1998 and a member of the
Office of the Chief Executive since November 1998. From October 1991 to
February 1998, Mr. Zoeller was the Treasurer and Controller of the Advisor, and
from August 1991 to October 1991 he was the Controller. From August 1989 to
August 1991, Mr. Zoeller was the Assistant Controller of the Advisor. From
September 1986 to August 1989, Mr. Zoeller was a Senior Accountant at Arthur
Anderson & Co.
JOHN W. WIDMER (DOB 1/19/65), Treasurer of the Strong Funds.
Mr. Widmer has been Manager of Financial Management & Sales Reporting Systems
since May 1997. From May 1992 to May 1997, Mr. Widmer was an Accounting and
Business Advisory Manager in the Milwaukee office of Arthur Andersen LLP. From
June 1987 to May 1992, Mr. Widmer was an accountant at Arthur Andersen LLP.
RHONDA K. HAIGHT (DOB 11/13/64), Assistant Treasurer of the Strong Funds.
Ms. Haight has been Manager of the Mutual Fund Accounting Department of the
Advisor since January 1994. From May 1990 to January 1994, Ms. Haight was a
supervisor in the Mutual Fund Accounting Department of the Advisor. From June
1987 to May 1990, Ms. Haight was a Mutual Fund Accountant of the Advisor.
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 _______________, 1999, the officers and
directors of the Fund in the aggregate beneficially owned less than 1% of the
Fund's then outstanding shares.
PRINCIPAL SHAREHOLDERS
Unless otherwise noted below, as of _______________, 1999, no persons owned of
record or are known to own of record or beneficially more than 5% of the Fund's
then outstanding shares.
INVESTMENT ADVISOR OF THE UNDERLYING FUNDS
The Underlying Funds have entered into Advisory Agreements with Strong Capital
Management, Inc. ("Advisor"). Mr. Strong controls the Advisor due to his stock
ownership of the Advisor. Mr. Strong is the Chairman and a Director of the
Advisor, Mr. Zoeller is Senior Vice President and Chief Financial Officer of
the Advisor, Mr. Shenkenberg is Vice President, Assistant Secretary, and Deputy
General Counsel of the Advisor, Mr. Weitzer is Senior Counsel of the Advisor,
Mr. Widmer is Treasurer
31
<PAGE>
and Manager of Financial Management & Sales Reporting Systems of the Advisor,
and Ms. Haight is Assistant Treasurer and Manager of the Mutual Fund Accounting
Department of the Advisor. As of ______________, 1999, the Advisor had $__
billion under management.
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 0.80
Blue Chip 100 0.75
Heritage Money 0.50
Advantage 0.35
Short-Term Bond 0.375
Government Securities 0.35
</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.
The Advisor also provides a program of custom portfolio management called the
Strong Advisor. This program is designed to determine which investment
approach fits an investor's financial needs and then provides the investor with
a custom built portfolio of Strong Funds based on that allocation. The
Advisor, on behalf of participants in the Strong Advisor program, may determine
to invest a portion of the program's assets in any one Strong Fund, which
investment, particularly in the case of a smaller Strong Fund, could represent
a material portion of the Fund's assets. In such cases, a decision to redeem
the Strong Advisor program's investment in a Fund on short notice could raise a
potential conflict of interest for the Advisor, between the interests of
participants in the Strong Advisor program and of the Fund's other
shareholders. In general, the Advisor does not expect to direct the Strong
Advisor program to make redemption requests on short notice. However, should
the Advisor determine this to be necessary, the Advisor will use its best
efforts and act in good faith to balance the potentially competing interests of
participants in the Strong Advisor program and the Fund's other shareholders in
a manner the Advisor deems most appropriate for both parties in light of the
circumstances.
The Advisor provides investment advisory services for multiple clients through
different types of investment accounts (E.G., mutual funds, hedge funds,
separately managed accounts, etc.) who may have similar or different investment
objectives and investment policies (E.G., some accounts may have an active
trading strategy while others follow a "buy and hold" strategy). In managing
these accounts, the Advisor seeks to maximize each account's return, consistent
with the account's investment
32
<PAGE>
objectives and investment strategies. While the Advisor's policies are
designed to ensure that over time similarly-situated clients receive similar
treatment, to the maximum extent possible, because of the range of the
Advisor's clients, the Advisor may give advice and take action with respect to
one account that may differ from the advice given, or the timing or nature of
action taken, with respect to another account (the Advisor, its principals and
associates also may take such actions in their personal securities
transactions, to the extent permitted by and consistent with the Code). For
example, the Advisor may use the same investment style in managing two
accounts, but one may have a shorter-term horizon and accept high-turnover
while the other may have a longer-term investment horizon and desire to
minimize turnover. If the Advisor reasonably believes that a particular
security may provide an attractive opportunity due to short-term volatility but
may no longer be attractive on a long-term basis, the Advisor may cause
accounts with a shorter-term investment horizon to buy the security at the same
time it is causing accounts with a longer-term investment horizon to sell the
security. The Advisor takes all reasonable steps to ensure that investment
opportunities are, over time, allocated to accounts on a fair and equitable
basis relative to the other similarly-situated accounts and that the investment
activities of different accounts do not unfairly disadvantage other accounts.
From time to time, the Advisor may make available to third parties current and
historical information about the portfolio holdings of the Advisor's mutual
funds or other clients. Release may be made to entities such as fund ratings
entities, industry trade groups, and financial publications. Generally, the
Advisor will release this type of information only where it is otherwise
publicly available. This information may also be released where the Advisor
reasonably believes that the release will not be to the detriment of the best
interests of its clients.
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 Part II 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
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, and Mr. Shenkenberg is Vice President, Chief
Compliance Officer 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.
33
<PAGE>
CUSTODIAN
As custodian of the Fund's assets, Firstar Bank Milwaukee, N.A., 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
as follows:
<TABLE>
<CAPTION>
<S> <C>
FUND TYPE/SHARE CLASS FEE*
- ------------------------------------ ------------------------------------------------------------------------------
Money Funds $32.50 annual open account fee, $4.20 annual closed account fee.
- ------------------------------------ ------------------------------------------------------------------------------
Income Funds and Investor Class $31.50 annual open account fee, $4.20 annual closed account fee.
shares of Income Funds
- ------------------------------------ ------------------------------------------------------------------------------
Advisor Class shares of Income 0.20% of the average daily net asset value of all Advisor Class shares.
Funds
- ------------------------------------ ------------------------------------------------------------------------------
Institutional Class shares of Income 0.015% of the average daily net asset value of all Institutional Class shares.
Funds
- ------------------------------------ ------------------------------------------------------------------------------
Equity Funds $21.75 annual open account fee, $4.20 annual closed account fee.
- ------------------------------------ ------------------------------------------------------------------------------
</TABLE>
* Plus out-of-pocket expenses, such as postage and printing expenses in
connection with shareholder communications.
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 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, 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
34
<PAGE>
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.
As compensation for its services, the Fund pays the Advisor a monthly fee based
on a percentage of the Fund's average daily net asset value. The annual rate
is 0.25%. From time to time, the Advisor may voluntarily waive all or a
portion of its shareholder servicing fee and/or absorb certain Fund expenses
without further notification of the commencement or termination of such waiver
or absorption. Any such waiver or absorption will temporarily lower the Fund's
overall expense ratio and increase the Fund's overall return to investors.
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 on 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 12 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.
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.
DETERMINATION OF NET ASSET VALUE
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<PAGE>
The Fund is 100% no load. This means that an investor may purchase, redeem or
exchange shares at the net asset value ("NAV") applicable to the Fund or to the
appropriate class of shares without paying a sales charge. Generally, when an
investor makes any purchases, sales, or exchanges, the price of the investor's
shares will be the NAV next determined after Strong Funds receives a request in
proper form (which includes receipt of all necessary and appropriate
documentation and subject to available funds). If Strong Funds receives such a
request prior to the close of the New York Stock Exchange ("NYSE") on a day on
which the NYSE is open, the share price will be the NAV determined that day.
The NAV for each Fund or each class of shares is normally determined as of 3:00
p.m. Central Time ("CT") each day the NYSE is open. The NYSE is open for
trading Monday through Friday except, New Year's Day, Martin Luther King Jr.
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 Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the NYSE closes at a time other than
3:00 p.m. CT or if an emergency exists. The NAV of each Fund or of each class
of shares of a Fund is calculated by taking the fair value of the Fund's total
assets attributable to that Fund or class, subtracting all its liabilities
attributable to that Fund or class, and dividing by the total number of shares
outstanding of that Fund or class. Expenses are accrued daily and applied when
determining the NAV. The Fund's portfolio securities are valued based on market
quotations or at fair value as determined by the method selected by the Fund's
Board of Directors.
ADDITIONAL SHAREHOLDER INFORMATION
FUND REDEMPTIONS
Shareholders (except Institutional Class 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). Institutional Class
shareholders may redeem some or all of their shares by telephone or by faxing a
written request. 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.
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
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.
36
<PAGE>
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. These
methods are unavailable for Institutional Class accounts..
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 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.
37
<PAGE>
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 (other than Institutional Class shares)
held in a Fund account only upon written request. Certificates will not be
issued for Institutional Class shares of any Fund. A shareholder will,
however, have full shareholder rights whether or not a certificate is
requested.
MOVING ACCOUNT OPTIONS AND INFORMATION
When establishing a new account (other than an Institutional Class account) by
exchanging funds from an existing Strong Funds account, some account options
(such as checkwriting, telephone exchange, telephone purchase and telephone
redemption), if existing on the account from which money is exchanged, will
automatically be made available on the new account unless the shareholder
indicates otherwise, or the option is not available on the new account.
Subject to applicable Strong Funds policies, other account options, including
automatic investment, automatic exchange and systematic withdrawal, may be
moved to the new account at the request of the shareholder. These options are
not available for Institutional Class accounts. If allowed by Strong Funds
policies (i) once the account options are established on the new account, the
shareholder may modify or amend the options, and (ii) account options may be
moved or added from one existing account to another new or existing account.
Account
38
<PAGE>
information, such as the shareholder's address of record and social security
number, will be copied from the existing account to the new account.
PROMOTIONAL ITEMS OF NOMINAL VALUE
From time to time, the Advisor and/or Distributor may give de minimis gifts or
other immaterial consideration to investors who open new accounts or add to
existing accounts with the Strong Funds.
ORGANIZATION
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. 10/22/98 Indefinite 0.00001
- -Strong Conservative Portfolio 10/22/98 Indefinite 0.00001
- -Strong Moderate Portfolio 10/22/98 Indefinite 0.00001
- -Strong Aggressive Portfolio 10/22/98 Indefinite 0.00001
</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.
39
<PAGE>
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 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 calculations 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.
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<PAGE>
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 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 compounding 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.
PRODUCT LIFE CYCLES. Discussions of product life cycles and their potential
impact on the Fund's investments may be used in advertisements and sales
materials. The basic idea is that most products go through a life cycle that
generally consists of an early adoption phase, a rapid growth phase, and a
maturity phase. The early adoption phase generally includes the time period
during which the product is first being developed and marketed. The rapid
growth phase usually occurs when the general public becomes aware of the new
product and sales are rising. The maturity phase generally includes the time
period when the public has been aware of the product for a period of time and
sales have leveled off or declined.
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By identifying and investing in companies that produce or service products that
are in the early adoption phase of their life cycle, it may be possible for the
Fund to benefit if the product moves into a prolonged period of rapid growth
that enhances the company's stock price. However, you should keep in mind that
investing in a product in its early adoption phase does not provide any
guarantee of profit. A product may experience a prolonged rapid growth and
maturity phase without any corresponding increase in the company's stock price.
In addition, different products have life cycles that may be longer or shorter
than those depicted and these variations may influence whether the product has
a positive effect on the company's stock price. For example, a product may not
positively impact a company's stock price if it experiences an extremely short
rapid growth or maturity phase because the product becomes obsolete soon after
it is introduced to the general public. Other products may never move past the
early adoption phase and have no impact on the company's stock price.
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 performance.
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. 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.
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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.
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.
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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 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, 100 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.
44
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45
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FINANCIAL STATEMENTS
The Semi-Annual Report for the Fund that is attached to this SAI contains the
following unaudited financial information:
1. Schedule of Investments in Securities.
2. Statement of Operations.
3. Statement of Assets and Liabilities.
4. Statement of Changes in Net Assets.
5. Notes to Financial Statements.
6. Financial Highlights.
45
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STRONG LIFE STAGE SERIES, INC.
PART C
OTHER INFORMATION
Item 23. EXHIBITS
(a) Articles of Incorporation dated October 22, 1998(2)
(b) Bylaws dated October 23, 1998(2)
(c) Specimen Stock Certificate(2)
(d) Inapplicable
(e) Distribution Agreement(2)
(f) Inapplicable
(g) Custody Agreement(2)
(h) Shareholder Servicing Agent Agreement (relating to transfer and
dividend-disbursing agent activities) (2)
(h.1) Shareholder Servicing Agent Agreement (relating to personal services
provided to shareholders)(2)
(i) Inapplicable
(j) Inapplicable
(k) Inapplicable
(l) Inapplicable
(m) Inapplicable
(n) Inapplicable
(o) Inapplicable
(p) Power of Attorney dated October 23, 1998(1)
(p.1) Power of Attorney dated December 22, 1998(2)
(q) Inapplicable
(r) Code of Ethics for Access Persons dated October 22, 1998(2)
(r.1) Code of Ethics for Non-Access Persons dated October 22, 1998(2)
___________________
(1) Incorporated herein by reference to the Initial Registration Statement
on Form N-1A of Registrant filed on or about November 2, 1998.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-1A of Registrant filed on or about
December 23, 1998.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant neither controls any person nor is under common control with
any other person.
Item 25. 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.
1
<PAGE>
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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The information contained under "Who are the funds' investment advisor and
portfolio managers?" in the Prospectus and under "Directors and Officers,"
"Investment Advisor of the Underlying Funds," "Distributor," and "Shareholder
Servicing Agent" in the Statement of Additional Information is hereby
incorporated by reference pursuant to Rule 411 under the Securities Act of
1933.
Item 27. PRINCIPAL UNDERWRITERS
(a) Strong Investments, 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 Income Funds II,
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 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
Stephen J. Shenkenberg Vice President, Deputy Vice President
900 Heritage Reserve Chief Compliance Officer and Secretary
Menomonee Falls, WI 53051 and Secretary
Bradley C. Tank President none
900 Heritage Reserve
Menomonee Falls, WI 53051
2
<PAGE>
Thomas M. Zoeller Treasurer and Chief Vice President
900 Heritage Reserve Financial Officer
Menomonee Falls, WI 53051
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
Anthony J. D'Amato Vice President none
900 Heritage Reserve
Menomonee Falls, WI 53051
Dana J. Russart Vice President none
900 Heritage Reserve
Menomonee Falls, WI 53051
Dennis A. Wallestad Vice President none
900 Heritage Reserve
Menomonee Falls, WI 53051
Richard T. Weiss Director none
900 Heritage Reserve
Menomonee Falls, WI 53051
(c) None
Item 28. 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,
Stephen J. Shenkenberg, at Registrant's corporate offices, 100 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
Item 29. MANAGEMENT SERVICES
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 30. UNDERTAKINGS
None
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereto duly authorized, in the
Village of Menomonee Falls, and State of Wisconsin on the 30th day of
September, 1999.
STRONG LIFE STAGE SERIES, INC.
(Registrant)
BY: /S/ STEPHEN J. SHENKENBERG
Stephen J. Shenkenberg, Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the 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
- ------------------------------ ---------------------------------- ------------------
Chairman of the Board (Principal
/s/ Richard S. Strong Executive Officer) and a Director September 30, 1999
- ------------------------------
Richard S. Strong
Treasurer (Principal Financial and
/s/ John W. Widmer Accounting Officer) September 30, 1999
- ------------------------------
John W. Widmer
Director September 30, 1999
- ------------------------------
Marvin E. Nevins*
Director September 30, 1999
- ------------------------------
Willie D. Davis*
Director September 30, 1999
- ------------------------------
William F. Vogt*
Director September 30, 1999
- ------------------------------
Stanley Kritzik*
</TABLE>
* John S. Weitzer signs this document pursuant to powers of attorney filed
with the Initial Registration Statement on Form N-1A.
By: /S/ JOHN S. WEITZER
John S. Weitzer
1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
EDGAR
EXHIBIT NO. EXHIBIT EXHIBIT NO.
- ----------- ----------------------- ------------
None
</TABLE>
1
<PAGE>
