As filed with the Securities and Exchange Commission on or about April 29, 1998
Securities Act Registration No. 33-45320
Investment Company Act Registration No. 811-6552
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. 11 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 12 [X]
(Check appropriate box or boxes)
STRONG OPPORTUNITY FUND II, INC.
(f/k/a Strong Special Fund II, Inc.)
(Exact Name of Registrant as Specified in Charter)
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
Thomas P. Lemke
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1998 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) 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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STRONG OPPORTUNITY FUND II, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
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Caption or Subheading in Prospectus or
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------
PART A - Information Required in Prospectus
1. Cover Page Cover Page
2. Synopsis Inapplicable
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant The Fund; Investment Objective and Policies;
Implementation of Policies and Certain Risks;
Special Considerations; Additional Information
5. Management of the Fund Management; Additional Information
5A. Management's Discussion of Fund Performance *
6. Capital Stock and Other Securities Additional Information
7. Purchase of Securities Being Offered Additional Information
8. Redemption or Repurchase Additional Information
9. Pending Legal Proceedings Inapplicable
PART B - Information Required in Statement of Additional
Information
10. Cover Page Cover page
11. Table of Contents Table of Contents
12. General Information and History **
13. Investment Objectives and Policies Investment Restrictions; Investment Policies and
Techniques
14. Management of the Fund Directors and Officers
15. Control Persons and Principal Holders of Securities Principal Shareholders; Directors and Officers;
Investment Advisor; Distributor
16. Investment Advisory and Other Services Investment Advisor; Distributor; Management (in
Prospectus); Custodian; Transfer Agent and
Dividend-Disbursing Agent; Independent
Accountants; Legal Counsel
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Included in Prospectus under the heading
Additional Information
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Caption or Subheading in Prospectus or
ITEM NO. ON FORM N-1A
STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------------------------
19. Purchase, Redemption and Pricing of Securities Included in Prospectus under the headings:
Being Offered Additional Information; and in the Statement of
Additional Information under the heading
Determination of Net Asset Value
20. Tax Status Included in Prospectus under the heading Additional
Information and Special Considerations; and in the
Statement of Additional Information under the
heading Taxes
21. Underwriters Investment Advisor; Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
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* Complete answer to Item is contained in Registrant's Annual Report.
** Complete answer to Item is contained in Registrant's Prospectus.
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STRONG OPPORTUNITY FUND II
Strong Opportunity Fund II ("Fund") is a diversified open-end management
investment company, commonly called a mutual fund. The Fund seeks capital
growth. It currently emphasizes medium-sized companies that the Fund's Advisor
believes are under-researched and attractively valued.
Shares of the Fund are only offered and sold to the separate accounts of
certain insurance companies for the purpose of funding variable annuity and
variable life insurance contracts. This Prospectus should be read together
with the prospectus of the separate account of the specific insurance product
which preceded or accompanies this Prospectus.
This Prospectus contains information that you should consider before you
invest. Please read it carefully and keep it for future reference. A
Statement of Additional Information for the Fund, dated May 1, 1998 ("SAI"),
which contains further information, is incorporated by reference into this
Prospectus, and has been filed with the Securities and Exchange Commission
("SEC"). The SAI, which may be revised from time to time, is available upon
request and without charge by writing to the Fund at P.O. Box 2936, Milwaukee,
Wisconsin 53201 or by calling 1-800-368-1683.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
May 1, 1998
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TABLE OF CONTENTS
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THE FUND I-1
FINANCIAL HIGHLIGHTS I-1
INVESTMENT OBJECTIVE AND POLICIES I-1
IMPLEMENTATION OF POLICIES AND RISKS I-2
SPECIAL CONSIDERATIONS I-5
MANAGEMENT I-6
ADDITIONAL INFORMATION I-7
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the SAI and,
if given or made, such information or representations may not be relied upon as
having been authorized by the Fund. This Prospectus does not constitute an
offer to sell securities to any person in any state or jurisdiction in which
such offering may not lawfully be made.
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THE FUND
The Fund is a diversified, open-end management investment company. The Fund
offers and sells its shares only to separate accounts of insurance companies
for the purpose of funding variable annuity and variable life insurance
contracts. The Fund does not impose any sales or redemption charges. Strong
Capital Management, Inc. ("Advisor") is the investment advisor for the Fund.
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FINANCIAL HIGHLIGHTS
The annual Financial Highlights for the Fund on the following page have been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
Their report for the fiscal year ended December 31, 1997 is included in the
Fund's Annual Report that is contained in the SAI. The Financial Highlights
should be read in conjunction with the Financial Statements and related notes
included in the Fund's Annual Report. Additional information about the
performance of the Fund is contained in the Fund's Annual Report, which may be
obtained without charge by calling or writing Strong Funds. Please note that
the total return shown in the Financial Highlights does not reflect expenses
that apply to the separate account or the related insurance policies.
Inclusion of these charges would reduce the total return for the periods shown.
The Financial Highlights presents information relating to a share of common
stock outstanding for the entire period ended as indicated.
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5
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5
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SELECTED PER-SHARE DATA (a)
---------------------------
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<S><C> <C><C> <C><C>
Income From Investment Operations Less Distributions Ratios and Supplemental Data
--------------------------------- ------------------ ----------------------------
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Net Real- In Excess Net Assets,
Net Asset Net ized and Total From Net of Net Asset End of
Value, Invest- Unrealized from Invest- Invest- From Net Total Value, Period
Beginning ment Gains on Investment ment ment Realized Distri- End of Total (In
Year Ended of Period Income Investments Operations Income Income Gains butions Period Return Millions)
Dec. 31, 1997 $19.24 $0.07 $4.35 $4.42 ($0.07) ($0.01) ($1.88) ($1.96) $21.70 +25.5% $835
Dec. 31, 1996 17.04 0.13 2.87 3.00 (0.13) __ (0.67) (0.80) 19.24 +18.2% 632
Dec. 31, 1995 14.23 0.12 3.42 3.54 (0.12) (0.03) (0.58) (0.73) 17.04 +25.8% 452
Dec. 31, 1994 14.12 0.11 0.41 0.52 (0.11) __ (0.30) (0.41) 14.23 +3.6% 300
Dec. 31, 1993 11.33 0.06 2.79 2.85 (0.06) __ __ (0.06) 14.12 +25.2% 151
Dec. 31, 1992(c)10.00 0.02 1.57 1.59 (0.02) __ (0.24) (0.26) 11.33 +16.2% 27
<S> <C> <C> <C> <C>
Ratio of Net
Ratio of Investment
Expenses Income to Portfolio Average
to Average Average Net Turnover Commission
Year Ended Net Assets Assets Rate Rate Paid(b)
Dec. 31, 1997 1.1% 0.4% 101.1% $0.0522
Dec. 31, 1996 1.2% 0.7% 89.8% 0.0505
Dec. 31, 1995 1.2% 0.8% 91.1%
Dec. 31, 1994 1.1% 0.9% 74.8%
Dec. 31, 1993 1.1% 0.5% 103.1%
Dec. 31, 1992 (c) 1.6%* 0.3%* 249.5%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
Fund outstanding for the entire period.
(b) Disclosure required, effective for reporting periods beginning
after September 1, 1995.
(c) Inception date is May 9, 1992. Total return and portfolio
turnover rate are not annualized.
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INVESTMENT OBJECTIVE AND POLICIES
The Fund has adopted certain fundamental investment restrictions that are set
forth in the SAI. Those restrictions, the Fund's investment objective and any
other investment policies identified as "fundamental" cannot be changed without
shareholder approval. To further guide investment activities, the Fund has
also instituted a number of non-fundamental operating policies, which are
described throughout this Prospectus and in the SAI. Although these additional
policies may be changed by the Fund's Board of Directors without shareholder
approval, the Fund will promptly notify shareholders of any material change in
operating policies.
The Fund seeks capital growth. The Fund invests primarily in equity securities
and currently emphasizes investments in medium-sized companies the Advisor
believes are under-researched and attractively valued.
The Fund will invest at least 70% of its net assets in equity securities,
including common stocks, preferred stocks, and securities that are convertible
into common or preferred stocks, such as warrants and convertible bonds. Under
normal market conditions, the Fund expects to be fully invested in equities.
The Fund may, however, invest up to 30% of its net assets in debt obligations,
including intermediate- to long-term corporate or U.S. government debt
securities and, when the Advisor determines that market conditions warrant a
temporary defensive position, it may use that allowance to invest up to 30% of
its net assets in cash and short-term fixed-income securities. The Fund may
invest up to 5% of its net assets in non-investment-grade debt obligations.
(See "Implementation of Policies and Risks - Debt Obligations.") The Fund may
invest up to 25% of its net assets in foreign securities, including both direct
investments and investments made through depositary receipts. (See
"Implementation of Policies and Risks - Foreign Securities and Currencies" for
the special risks associated with foreign investments.)
In selecting its equity investments, the Advisor seeks to identify attractive
investment opportunities that have not become widely recognized by other stock
analysts or the financial press. Through first-hand research that often
includes on-site visits with the leaders of companies, the Advisor looks for
companies with fundamental value or growth potential that is not yet reflected
in their current market prices.
In many cases, companies in the small- and medium-capitalization markets are
under-followed and, as a result, less efficiently priced than their larger,
better-known counterparts. The Fund's investments are therefore likely to
consist, in part, of securities in small- and medium-sized companies. Many of
these companies may have successfully emerged from the start-up phase and have
potential for future growth. Because of their longer track records and more
seasoned management, they generally pose less investment uncertainty than do
the smallest companies. In general, however, smaller-capitalization companies
often involve greater risks than investments in established companies. (See
"Implementation of Policies and Risks - Small and Medium Companies.")
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IMPLEMENTATION OF POLICIES AND RISKS
In addition to the Fund's investment policies described above (and subject to
certain restrictions described herein), the Fund may invest in some or all of
the following securities and employ some or all of the following investment
techniques, some of which may present special risks as described below. The
Fund may also engage in reverse repurchase agreements and mortgage dollar roll
transactions. A more complete discussion of these securities and investment
techniques and their associated risks is contained in the SAI.
FOREIGN SECURITIES AND CURRENCIES
The Fund may invest in foreign securities either directly or indirectly through
the use of depositary receipts. Depositary receipts are generally issued by
banks or trust companies and evidence ownership of underlying foreign
securities. Foreign investments involve special risks, including:
- - expropriation, confiscatory taxation, and withholding taxes on dividends and
interest;
- - less extensive regulation of foreign brokers, securities markets, and
issuers;
- - less publicly available information and different accounting standards;
- - costs incurred in conversions between currencies, possible delays in
settlement in foreign securities markets, limitations on the use or transfer
of assets (including suspension of the ability to transfer currency from a
given country), and difficulty of enforcing obligations in other countries;
and
- - diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance-of-payments positions. Many foreign securities
may be less liquid and their prices more volatile than comparable U.S.
securities. Although the Fund generally invests only in securities that are
regularly traded on recognized exchanges or in over-the-counter ("OTC")
markets, from time to time foreign securities may be difficult to liquidate
rapidly without adverse price effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs, may be higher than
those attributable to domestic investing.
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Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Fund could be affected by changes in foreign
currency exchange rates to some extent. The value of the Fund's assets
denominated in foreign currencies will increase or decrease in response to
fluctuations in the value of those foreign currencies relative to the U.S.
dollar. Currency exchange rates can be volatile at times in response to supply
and demand in the currency exchange markets, international balances of
payments, governmental intervention, speculation, and other political and
economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or any other lawful purpose. (See "Derivative Instruments.")
FOREIGN INVESTMENT COMPANIES
The Fund may invest, to a limited extent, in foreign investment companies.
Some of the countries in which the Fund invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may be
less expensive and more expedient for the Fund to invest in a foreign
investment company in a country which permits direct foreign investment.
Investing through such vehicles may involve frequent or layered fees or
expenses and may also be subject to limitation under the Investment Company Act
of 1940 ("1940 Act"). 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 or expenses.
DERIVATIVE INSTRUMENTS
The Fund may use derivative instruments for any lawful purpose consistent with
the Fund's investment objective such as hedging or managing risk. Derivative
instruments are commonly defined to include securities or contracts 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, 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.
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11
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An option is a contract in which the "holder" ("buyer") pays a certain amount
("premium") to the "writer" ("seller") to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time.
The holder pays the premium at inception and has no further financial
obligation. The holder of an option-based derivative generally will benefit
from favorable movements in the price of the underlying asset but is not
exposed to corresponding losses due to adverse movements in the value of the
underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long" position) and
a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed
future date and the seller agrees to deliver the asset. The seller hopes that
the market price on the delivery date is less than the agreed upon price, while
the buyer hopes for the contrary. The change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset.
Derivative instruments may include (i) options; (ii) futures; (iii) options on
futures; (iv) short sales in which the Fund sells a security for delivery at a
future date; (v) swaps, in which two parties agree to exchange a series of cash
flows in the future, such as interest-rate payments; (vi) interest-rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap";
(vii) interest-rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall
below a specified level, or "floor"; (viii) forward currency contracts and
foreign currency exchange-related securities; and (ix) structured instruments
which combine the foregoing in different ways.
Derivatives may be exchange-traded in OTC transactions between private parties.
OTC transactions are subject to additional risks, such as the credit risk of
the counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. Derivative instruments may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. When required by SEC
guidelines, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under the derivative.
The successful use of derivatives by the Fund is dependent upon a variety of
factors, particularly the Advisor's ability to correctly anticipate trends in
the underlying asset. In a hedging transaction, if the Advisor incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect
correlation between the Fund's derivative transactions and the instruments
being hedged. To the extent that the Fund is engaging in derivative
transactions for risk management, the Fund's successful use of such
transactions is more dependent upon the Advisor's ability to correctly
anticipate such trends, since losses in these transactions may not be offset by
gains in the Fund's portfolio or in lower purchase prices for assets it intends
to acquire. The Advisor's prediction of trends in underlying assets may prove
to be inaccurate, which could result in substantial losses to the Fund.
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The Fund may also use derivative instruments to make investments that are
consistent with the Fund's investment objective but that are impracticable or
not feasible in the cash market (E.G., using derivative instruments to create a
synthetic security or to derive exposure to a region or asset class when cash
markets are inefficient and/or illiquid). The Fund will only engage in this
strategy when the Advisor reasonably believes it to be more advantageous to the
Fund.
In addition to the derivative instruments and strategies described above, the
Advisor expects to discover additional derivative instruments and other trading
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.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are those securities that are not readily marketable,
including restricted securities and repurchase obligations maturing in more
than seven days. Certain restricted securities that may be resold to
institutional investors pursuant to Rule 144A under the Securities Act of 1933
and Section 4(2) commercial paper may be determined to be liquid under
guidelines adopted by the Fund's Board of Directors.
SMALL AND MEDIUM COMPANIES
The Fund may invest in the securities of small and medium companies. While
small and medium companies generally have potential for rapid growth,
investments in small and medium companies often involve greater risks than
investments in larger, more established companies because smaller 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 a 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 a fund that
invests in larger, more established companies.
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DEBT OBLIGATIONS
IN GENERAL. Debt obligations in which the Fund will invest will be primarily
investment-grade debt obligations, although the Fund may invest up to 5% of its
net assets in non-investment-grade debt obligations. The market value of all
debt obligations is affected by changes in the prevailing interest rates. The
market value of such instruments generally reacts inversely to interest rate
changes. If the prevailing interest rates decline, the market value of debt
obligations generally increases. If the prevailing interest rates increase,
the market value of debt obligations generally decreases. In general, the
longer the maturity of a debt obligation, the greater its sensitivity to
changes in interest rates.
Investment-grade debt obligations include:
- - U.S. government securities;
- - bonds or bank obligations rated in one of the four highest rating categories,
(E.G., BBB or higher by Standard & Poor's Ratings Group or "S&P");
- - short-term notes rated in one of the two highest rating categories (E.G.,
SP-2 or higher by S&P);
- - short-term bank obligations rated in one of the three highest rating
categories (E.G., A-3 or higher by S&P), with respect to obligations maturing
in one year or less;
- - commercial paper rated in one of the three highest rating categories (E.G.,
or higher by S&P);
- - unrated debt obligations which are determined by the Advisor to be of
comparable quality; and
- - repurchase agreements involving investment-grade debt obligations.
Investment-grade debt obligations are generally believed to have relatively low
degrees of credit risk. All ratings are determined at the time of investment.
Any subsequent rating downgrade of a debt obligation will be monitored by the
Advisor to consider what action, if any, the Fund should take consistent with
its investment objective. For purposes of determining whether a security is
investment grade, the Advisor may use the highest rating assigned to that
security by any nationally recognized statistical rating organization
("NRSRO"). Securities rated in the fourth-highest category (E.G., BBB by S&P),
although considered investment grade, have speculative characteristics and may
be subject to greater fluctuations in value than higher-rated securities.
Non-investment-grade debt obligations include:
securities rated as low as C by S&P or their equivalents;
- - commercial paper rated as low as C by S&P or its equivalents; and
- - unrated debt securities judged to be of comparable quality by the Advisor.
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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, 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.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date.
Purchasing when-issued or delayed-delivery securities allows the Fund to lock
in a fixed price or yield on a security it intends to purchase. However, when
the Fund purchases these types of securities, it immediately assumes the risk
of ownership, including the risk of price fluctuation.
The greater the Fund's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of the
Fund. Purchasing when-issued or delayed-delivery securities may involve the
additional risk that the yield available in the market when the delivery occurs
may be higher or the market price lower than that obtained at the time of
commitment. Although the Fund may be able to sell these securities prior to
the delivery date, it will purchase them for the purpose of actually acquiring
the securities, unless after entering into the commitment a sale appears
desirable for investment reasons. When required by SEC guidelines, the Fund
will set aside permissible liquid assets in a segregated account to secure its
outstanding commitments for these types of securities.
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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 the Advisor (collectively, "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 Fund may also participate in pooled transactions involving cash and
short-term fixed-income securities with other Strong Funds.
PORTFOLIO TURNOVER
The Fund's historical portfolio turnover rate is listed under "Financial
Highlights." The annual portfolio turnover rate indicates changes in the
Fund's portfolio. The turnover rate may vary from year to year, as well as
within a year. It may also be affected by sales of portfolio securities
necessary to meet cash requirements for redemption of shares. High portfolio
turnover in any year will result in the payment by the Fund of above-average
amounts of transaction costs. The Fund may engage in substantial short-term
trading that involves substantial risks and may be considered speculative.
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SPECIAL CONSIDERATIONS
The Fund is designed as an investment vehicle for variable annuity and variable
life insurance contracts funded by separate accounts of certain insurance
companies. Section 817(h) of the Internal Revenue Code of 1986 ("IRC") and the
regulations thereunder impose certain diversification standards on the
investments underlying variable annuity and variable life insurance contracts
in order for such contracts to be treated for tax purposes as annuities or life
insurance. Section 817(h) of the IRC provides that a variable annuity and
variable life insurance contract based on a separate account shall not be
treated as an annuity or life insurance contract for any period (and any
subsequent period) for which the account's investments are not adequately
diversified. These diversification requirements are in addition to the
diversification requirements applicable to the Fund under Subchapter M of the
IRC and the 1940 Act and may affect the composition of the Fund's investments.
18
<PAGE>
Since the shares of the Fund are currently sold to segregated asset accounts
underlying such variable annuity and variable life insurance contracts, the
Fund intends to comply with the diversification requirements as set forth in
the regulations. The Secretary of the Treasury may in the future issue
additional regulations or revenue rulings that may prescribe the circumstances
in which a contract owner's control of the investments of a separate account
may cause the contract owner, rather than the insurance company, to be treated
as the owner of assets of the separate account. Failure to comply with Section
817(h) of the IRC or any regulation thereunder, or with any future regulations
or revenue rulings on contract owner control, would cause earnings regarding a
contract owner's interest in an insurance company's separate account to be
included in the contract owner's gross income in the year earned. Such
standards may apply only prospectively, although retroactive application is
possible. In the event that any such regulations or revenue rulings are
adopted, the Fund may not be able to continue to operate as currently described
in this Prospectus, or maintain its investment program.
The Fund will be managed in such a manner as to comply with the requirements of
Subchapter L of the IRC. It is possible that in order to comply with such
requirements, less desirable investment decisions may be made which would
affect the investment performance of the Fund.
The Fund may sell its shares to the separate accounts of various insurance
companies, which are not affiliated with each other, for the purpose of funding
variable annuity and variable life insurance contracts. The Fund currently
does not foresee any disadvantages to contract owners arising out of the fact
that it offers its shares to separate accounts of various insurance companies,
which are not affiliated with each other, to serve as an investment medium for
their variable products. However, it is theoretically possible that the
interests of owners of various contracts participating in the Fund through the
separate accounts might, at some time, be in conflict. The Board of Directors
of the Fund, however, will monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response to such conflicts. If such a conflict were
to occur, one or more insurance companies' separate accounts might be required
to withdraw its investments in the Fund, and shares of another fund may be
substituted. This might force the Fund to sell securities at disadvantageous
prices. In addition, the Board of Directors may refuse to sell Fund shares to
any separate account or may suspend or terminate the offering of Fund shares if
such action is required by law or regulatory authority or is in the best
interest of the shareholders of the Fund.
Except for the organizational shares of the Fund, the Fund's shares may be held
of record only by insurance company separate accounts. As of March 31, 1998,
Nationwide Life Insurance Company owned approximately 98% of the Fund.
Nationwide Life Insurance Company's ownership of greater than 25% of the Fund's
shares may result in it being deemed to be the controlling entity of the Fund.
It may continue to be deemed as such until other insurance companies, if any,
selling significant numbers of variable annuity and variable life insurance
contracts, have made substantial investments in the Fund's shares.
18
<PAGE>
MANAGEMENT
The Board of Directors of the Fund is responsible for managing its business and
affairs. The Fund has entered into an investment advisory agreement (an
"Advisory Agreement") with the Advisor. Under the terms of the Advisory
Agreement, the Advisor manages the Fund's investments and business affairs,
subject to the supervision of the Board of Directors.
The Advisor began conducting business in 1974. Since then, its principal
business has been providing continuous investment supervision for individuals
and institutional accounts, such as pension funds and profit-sharing plans, as
well as mutual funds, several of which are funding vehicles for variable
insurance products. As of March 31, 1998, the Advisor had over $29 billion
under management. The Advisor's principal mailing address is P.O. Box 2936,
Milwaukee, Wisconsin 53201. Mr. Richard S. Strong, the Chairman of the Board
of the Fund, is the controlling shareholder of the Advisor.
As compensation for its services, the Fund pays the Advisor a monthly
management fee. The annual fee is 1.00% of the average daily net asset value
of the Fund. Under the terms of the Advisory Agreement, the Advisor provides
office space and all necessary office facilities, equipment, and personnel for
servicing the investments of the Fund. From time to time, the Advisor may
voluntarily waive all or a portion of its management fee and/or absorb certain
expenses for the Fund without further notification of the commencement or
termination of any such waiver or absorption. Any such waiver or absorption
will have the effect of lowering the overall expense ratio of the Fund and
increasing the Fund's return to investors at the time such amounts were waived
and/or absorbed.
The Advisor permits portfolio managers and other persons who may have access to
information about the purchase or sale of securities in the Fund's portfolio
("access persons") to purchase and sell securities for their own accounts,
subject to the Advisor's policy governing personal investing. The policy
requires access persons to conduct their personal investment activities in a
manner that the Advisor believes is not detrimental to the Fund or to the
Advisor's other advisory clients. Among other things, the policy requires
access persons to obtain preclearance before executing personal trades and
prohibits access persons from keeping profits derived from the purchase or sale
of the same security within 60 calendar days. See the SAI for more information.
YEAR 2000 RISKS. Like other mutual funds and financial and business operations
around the world, the Fund could be adversely affected if the computer
software, and to a lesser extent, hardware used by the Advisor and other
service providers are not able to process and calculate date-related
information and data before, during, and after January 1, 2000. This is
commonly know as the "Year 2000 Issue." The Advisor is taking steps that it
believes are reasonably designed to address the Year 2000 Issue with respect to
the computer software and hardware that it uses and to obtain satisfactory
assurances that comparable steps are being taken by the Fund's other major
service providers. However, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Fund.
PRIOR PERFORMANCE OF SIMILAR FUND MANAGED BY THE ADVISOR. The Strong
Opportunity Fund II, which commenced operations on May 8, 1992, has been
modeled after the Strong Opportunity Fund, an existing retail fund managed by
the Advisor. The Strong Opportunity Fund began operations on December 31, 1985
and, as of March 31, 1998, had approximately $2.2 billion in assets. The
investment objective, policies, and strategies of the Strong Opportunity Fund
are substantially similar to those of the Strong Opportunity Fund II and the
Funds have substantially comparable expense ratios. Both Funds have been
managed in a substantially identical manner. The average annual and cumulative
total returns for the Strong Opportunity Fund II and Strong Opportunity Fund as
of March 31, 199
19
<PAGE>
are presented in the table below. These performance returns have been audited
through December 31, 1997, and are unaudited thereafter.
<TABLE>
<CAPTION>
<S> <C> <C>
PERFORMANCE STRONG OPPORTUNITY STRONG OPPORTUNITY
RETURNS(1) FUND II FUND
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
AVERAGE ANNUAL RETURNS
1 Year 46.53% 43.65%
5 Year 20.26% 19.74%
10 Year --- 16.50%
Since Inception 21.85% 19.61%
CUMULATIVE RETURNS 220.82% 796.50%
- ---------------------- ------- -------
</TABLE>
(1) Average annual and cumulative total returns reflect changes in share
prices and reinvestment of dividends and distributions and are net of fund
expenses.
Historical performance does not indicate future performance. THE STRONG
OPPORTUNITY FUND IS A SEPARATE FUND AND ITS HISTORICAL PERFORMANCE IS NOT
INDICATIVE OF THE PAST OR FUTURE PERFORMANCE OF THE STRONG OPPORTUNITY FUND II.
THE PERFORMANCE OF THE STRONG OPPORTUNITY FUND II MAY BE GREATER OR LESS THAN
THE PERFORMANCE OF THE STRONG OPPORTUNITY FUND DUE TO, AMONG OTHER THINGS,
DIFFERENCES IN EXPENSES AND CASH FLOWS. Share prices and investment returns
will fluctuate.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Fund.
RICHARD T. WEISS. Mr. Weiss joined the Advisor in 1991 from Chicago-based
Stein Roe & Farnham, where he began his career as a research analyst in 1975.
He was named a portfolio manager in 1981. Mr. Weiss received his B.S. in
Business Administration in 1973 from the University of Southern California and
his M.B.A. in Business in 1975 from Harvard Graduate School of Business
Administration. He has managed the Strong Opportunity Fund II since its
inception in May 1992.
20
<PAGE>
21
<PAGE>
MARINA T. CARLSON. Before she joined the Advisor as an equity research analyst
in 1991, Ms. Carlson worked in a similar capacity at Stein Roe & Farnham, where
she began her investment career in 1986. She has worked with portfolio manager
Richard T. Weiss since 1989, and, in 1993, she was named a co-manager of the
Strong Opportunity Fund II. A Chartered Financial Analyst, Ms. Carlson
received her B.B.A. in Finance in 1986 from Drake University and her M.B.A. in
Finance in 1989 from DePaul University.
ADDITIONAL INFORMATION
HOW TO INVEST. Investments in the Fund may only be made by separate accounts
established and maintained by insurance companies for purposes of funding
variable annuity and variable life insurance contracts. For instructions on
how to direct a separate account to purchase shares in the Fund, please refer
to the prospectus of the insurance company's separate account. The Fund does
not impose any sales charge or 12b-1 fee. Certain sales charges may apply to
the variable annuity or variable life insurance contract, which should be
described in the prospectus of the insurance company's separate account. The
Fund may decline to accept a purchase order upon receipt when, in the judgment
of the Advisor, it would not be in the best interest of the existing
shareholders to accept the order. Shares of the Fund will be sold at the net
asset value next determined after receipt by the Fund of a purchase order in
proper form placed by an insurance company invested in the Fund. Certificates
for shares in the Fund will not be issued.
CALCULATION OF NET ASSET VALUE. The net asset value ("NAV") per share for the
Fund is determined as of the close of trading on the New York Stock Exchange
("Exchange"), currently 3:00 p.m. Central Time, on days the Exchange is open
for business. The NAV will not be determined for the Fund on days during which
the Fund receives no orders to purchase shares and no shares are tendered for
redemption. The Fund's NAV is calculated by taking the fair value of the
Fund's total assets, subtracting all liabilities, and dividing by the total
number of outstanding shares. Expenses are accrued and applied daily 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 Board of Directors.
Equity securities traded on a national securities exchange or NASDAQ are valued
at the last sales price on the national securities exchange or NASDAQ on which
such securities are primarily traded. Securities traded on NASDAQ for which
there were no transactions on a given day or securities not listed on an
exchange or NASDAQ are valued at the average of the most recent bid and asked
prices. Other exchange-traded securities (generally foreign securities) will
be valued based on market quotations.
21
<PAGE>
Debt securities are valued by a pricing service that utilizes electronic data
processing techniques to determine values for normal institutional-sized
trading units of debt securities without regard to sale or bid prices when such
valuations are believed to more accurately reflect the fair market value for
such securities. Otherwise, sale or bid prices are used. Any securities or
other assets for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Directors. Debt
securities of the Fund having remaining maturities of 60 days or less are
valued by the amortized cost method when the fair value of such securities is
their amortized cost.
HOW TO REDEEM SHARES. Shares of the Fund may be redeemed on any business day.
The price received upon redemption will be the net asset value next determined
after the redemption request in proper form is received by the Fund. (See
"Calculation of Net Asset Value.") Contract owners should refer to the
withdrawal or surrender instructions in the prospectus of the separate account
for instructions on how to redeem shares. Once the redemption request is
received in proper form, the Fund will ordinarily forward payment to the
separate account no later than seven days after receipt.
The right of redemption may be suspended during any period in which: (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency, as determined by the
SEC, exists which makes disposal of portfolio securities or valuation of net
assets of the Fund not reasonably practicable.
DISTRIBUTIONS AND TAXES. The policy of the Fund is to pay dividends to the
insurance company's separate accounts from net investment income quarterly and
to distribute substantially all net realized capital gains, after using any
available capital loss carryovers, annually. All dividends and capital gain
distributions paid to the insurance company's separate accounts will be
automatically reinvested in additional Fund shares.
The Fund intends to continue to qualify for treatment as a Regulated Investment
Company or "RIC" under Subchapter M of the IRC and, if so qualified, will not
be liable for federal income tax on earnings and gains distributed to its
shareholders in a timely manner. If the Fund does not so qualify, however, it
would be treated for tax purposes as an ordinary corporation and would receive
no tax deduction for distributions made to its shareholders. For more
information regarding tax implications for owners of variable annuity or
variable life insurance contracts investing in the Fund, please refer to the
prospectus of your insurance company's separate account. See "Special
Considerations" for a discussion of special tax considerations relating to the
Fund's compliance with Subchapter L of the IRC, as an investment vehicle for
variable annuity and variable life insurance contracts of certain insurance
companies.
23
<PAGE>
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effect on the Fund and investors. (See the SAI
for a further discussion.) Investors are urged to consult their own tax
adviser.
ORGANIZATION. The Fund is a Wisconsin corporation that is authorized to issue
an indefinite number of shares of common stock and series and classes of series
of shares of common stock. Each share of the 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.
Generally, the Fund will not hold an annual meeting of shareholders unless
required by the 1940 Act.
The insurance company separate accounts, as the record shareholders in the
Fund, have the right to vote on matters submitted for a shareholder vote.
Under current interpretations of the 1940 Act, these insurance companies must
solicit voting instructions from contract owners and vote Fund shares in
accordance with the instructions received or, for Fund shares for which no
voting instructions were received, in the same proportion as those Fund shares
for which instructions were received. Contract owners should refer to the
prospectus of the insurance company's separate account for a complete
description of their voting rights.
TRANSFER AGENT, DIVIDEND-DISBURSING AGENT, AND DISTRIBUTOR. The Advisor, P.O.
Box 2936, Milwaukee, Wisconsin 53201, acts as transfer agent and
dividend-disbursing agent for the Fund. Strong Funds Distributors, Inc., P.O.
Box 2936, Milwaukee, Wisconsin 53201, an indirect subsidiary of the Advisor,
acts as distributor of the shares of the Fund.
PERFORMANCE INFORMATION. The Fund may advertise a variety of types of
performance information, including "average annual total return," "total
return," and "cumulative total return." Each of these figures is based upon
historical results and does not represent the future performance of the Fund.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in the Fund
assuming the reinvestment of all dividends and distributions. Total return
figures are not annualized and simply represent the aggregate change of the
Fund's investments over a specified period of time.
The Fund's shares are sold at the net asset value per share of the Fund.
Returns and net asset value will fluctuate. Shares of the Fund are redeemable
by the separate accounts of insurance companies at the then current net asset
value per share for the Fund, which may be more or less than the original cost.
TOTAL RETURNS CONTAINED IN ADVERTISEMENTS INCLUDE THE EFFECT OF DEDUCTING THE
FUND'S EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE TO ANY
PARTICULAR INSURANCE PRODUCT. SINCE SHARES MAY ONLY BE PURCHASED BY THE
SEPARATE ACCOUNTS OF CERTAIN INSURANCE COMPANIES, CONTRACT OWNERS SHOULD
CAREFULLY REVIEW THE PROSPECTUS OF THE SEPARATE ACCOUNT FOR INFORMATION ON FEES
AND EXPENSES. Excluding such fees and expenses from the Fund's total return
quotations has the effect of increasing the performance quoted. The Fund will
not use information concerning its investment performance in advertisements or
sales materials unless appropriate information concerning the relevant separate
account is also included. Additional information concerning the Fund's
performance appears in the SAI.
24
<PAGE>
25
<PAGE>
NOTES
27
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
STRONG OPPORTUNITY FUND II
P.O. Box 2936
Milwaukee, Wisconsin 53201
Toll-Free: (800) 368-1683
The Fund serves as an investment vehicle for variable annuity and variable life
insurance contracts of insurance companies. Shares in the Fund are only
offered and sold to the separate accounts of insurance companies. This SAI is
not a Prospectus and should read together with the Prospectus for the Fund
dated May 1, 1998 and the prospectus for the separate account of the specific
insurance product offering the Fund. Requests for copies of the Prospectus
should be made by calling any number listed above. The financial statements
appearing in the Annual Report, which accompanies this SAI, are incorporated
into this SAI by reference.
May 1, 1998
1
<PAGE>
TABLE OF CONTENTS PAGE
INVESTMENT RESTRICTIONS........................................................3
INVESTMENT POLICIES AND TECHNIQUES.............................................5
Borrowing......................................................................5
Convertible Securities.........................................................5
Depositary Receipts............................................................5
Derivative Instruments.........................................................6
Foreign Investment Companies..................................................15
Foreign Securities............................................................15
High-Yield (High-Risk) Securities.............................................16
Illiquid Securities...........................................................17
Lending of Portfolio Securities...............................................18
Mortgage- and Asset-Backed Debt Securities....................................18
Repurchase Agreements.........................................................20
Reverse Repurchase Agreements and Mortgage Dollar Rolls.......................20
Short Sales...................................................................20
Small and Medium Companies....................................................20
Warrants......................................................................21
When-Issued and Delayed-Delivery Securities...................................21
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities..........................21
DIRECTORS AND OFFICERS........................................................22
PRINCIPAL SHAREHOLDERS........................................................23
INVESTMENT ADVISOR............................................................24
DISTRIBUTOR...................................................................26
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................26
CUSTODIAN.....................................................................29
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT..................................29
ADMINISTRATIVE SERVICES.......................................................29
TAXES.........................................................................30
DETERMINATION OF NET ASSET VALUE..............................................32
ADDITIONAL SHAREHOLDER INFORMATION............................................32
ORGANIZATION..................................................................33
SHAREHOLDER MEETINGS..........................................................33
PERFORMANCE INFORMATION.......................................................33
GENERAL INFORMATION...........................................................36
PORTFOLIO MANAGEMENT..........................................................37
INDEPENDENT ACCOUNTANTS.......................................................38
LEGAL COUNSEL.................................................................38
FINANCIAL STATEMENTS..........................................................38
APPENDIX......................................................................39
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.
2
<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.
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.
3
<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.
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.
4
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment
objective, policies, and techniques described in the Prospectus.
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.
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.
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.
DEPOSITARY RECEIPTS
5
<PAGE>
The Fund may invest in foreign securities by purchasing depositary receipts,
including American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"), or other securities convertible into securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs,
in registered form, are denominated in U.S. dollars and are designed for use in
the U.S. securities markets, while EDRs, in bearer form, may be denominated in
other currencies and are designed for use in the European securities markets.
ADRs are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts evidencing
a similar arrangement. For purposes of the Fund's investment policies, ADRs
and EDRs are deemed to have the same classification as the underlying
securities they represent, except that ADRs and EDRs shall be treated as
indirect foreign investments. For example, an ADR or EDR representing
ownership of common stock will be treated as common stock. Depositary receipts
do not eliminate all of the risks associated with directly investing in the
securities of foreign issuers.
ADR facilities may be established as either "unsponsored" or "sponsored." While
ADRs issued under these two types of facilities are in some respects similar,
there are distinctions between them relating to the rights and obligations of
ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without participation by (or
even necessarily the permission of) the issuer of the deposited securities,
although typically the depositary requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facility. The depositary usually charges
fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions, and the performance of other services. The depositary of an
unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and there may not be a correlation
between such information and the market value of the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary, and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
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
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derivative generally will receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long" position) and
a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed
future date and the seller agrees to deliver the asset. The seller hopes that
the market price on the delivery date is less than the agreed upon price, while
the buyer hopes for the contrary. The change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset.
HEDGING. The Fund may use derivative instruments to protect against possible
adverse changes in the market value of securities held in, or are anticipated
to be held in, its portfolio. Derivatives may also be used to "lock-in"
realized but unrecognized gains in the value of its portfolio securities.
Hedging strategies, if successful, can reduce the risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce the
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. To the extent that a hedge matures prior
to or after the disposition of the investment subject to the hedge, any gain or
loss on the hedge will be realized earlier or later than any offsetting gain or
loss on the hedged investment.
MANAGING RISK. The Fund may also use derivative instruments to manage the
risks of its portfolio. Risk management strategies include, but are not
limited to, facilitating the sale of portfolio securities, managing the
effective maturity or duration of debt obligations in its portfolio,
establishing a position in the derivatives markets as a substitute for buying
or selling certain securities, or creating or altering exposure to certain
asset classes, such as equity, debt, or foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way to invest than "traditional" securities (I.E., stocks
or bonds) would.
EXCHANGE AND OTC DERIVATIVES. Derivative instruments may be exchange-traded or
traded in OTC transactions between private parties. Exchange-traded
derivatives are standardized options and futures contracts traded in an auction
on the floor of a regulated exchange. Exchange contracts are generally very
liquid. The exchange clearinghouse is the counterparty of every contract.
Thus, each holder of an exchange contract bears the credit risk of the
clearinghouse (and has the benefit of its financial strength) rather than that
of a particular counterparty. OTC transactions are subject to additional
risks, such as the credit risk of the counterparty to the instrument, and are
less liquid than exchange-traded derivatives since they often can only be
closed out with the other party to the transaction.
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 Strong Capital Management, Inc. ("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
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transactions in derivative instruments only with counterparties that the
Advisor reasonably believes are capable of performing under the contract.
(3) CORRELATION RISK. When a derivative transaction is used to completely
hedge another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments. With
a perfect hedge, the value of the combined position remains unchanged for any
change in the price of the underlying asset. With an imperfect hedge, the
values of the derivative instrument and its hedge are not perfectly correlated.
Correlation risk is the risk that there might be imperfect correlation, or even
no correlation, between price movements of an instrument and price movements of
investments being hedged. For example, if the value of a derivative
instruments used in a short hedge (such as writing a call option, buying a put
option, or selling a futures contract) increased by less than the decline in
value of the hedged investments, the hedge would not be perfectly correlated.
Such a lack of correlation might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or other pressures on the
markets in which these instruments are traded. The effectiveness of hedges
using instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and price movements in the investments
being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity risk.
Liquidity risk is the risk that a derivative instrument cannot be sold, closed
out, or replaced quickly at or very close to its fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. The Fund might be required by applicable
regulatory requirement to maintain assets as "cover," maintain segregated
accounts, and/or make margin payments when it takes positions in derivative
instruments involving obligations to third parties (I.E., instruments other
than purchased options). If the Fund was unable to close out its positions in
such instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired, matured, or was
closed out. The requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any derivatives position can
be sold or closed out at a time and price that is favorable to the Fund.
(5) LEGAL RISK. Legal risk is the risk of loss caused by the legal
unenforcibility of a party's obligations under the derivative. While a party
seeking price certainty agrees to surrender the potential upside in exchange
for downside protection, the party taking 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
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such futures contracts and related options positions are "in the money," do not
exceed 5% of the Fund's net assets. Adherence to these guidelines does not
limit the Fund's risk to 5% of the Fund's assets.
The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging the Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of the Fund's assets, as defined under the 1940 Act, the SEC
has stated that the Fund may use coverage or the segregation of the Fund's
assets. To the extent required by SEC guidelines, the Fund will not enter into
any such transactions unless it owns either: (1) an offsetting ("covered")
position in securities, options, futures, or derivative instruments; or (2)
cash or liquid securities positions with a value sufficient at all times to
cover its potential obligations to the extent that the position is not
"covered". The Fund will also set aside cash and/or appropriate liquid assets
in a segregated custodial account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be
sold while the derivative position is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of the Fund's
assets to segregated accounts could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
In some cases, the Fund may be required to maintain or limit exposure to a
specified percentage of its assets to a particular asset class. In such cases,
when the Fund uses a derivative instrument to increase or decrease exposure to
an asset class and is required by applicable SEC guidelines to set aside liquid
assets in a segregated account to secure its obligations under the derivative
instruments, the Advisor may, where reasonable in light of the circumstances,
measure compliance with the applicable percentage by reference to the nature of
the economic exposure created through the use of the derivative instrument and
not by reference to the nature of the exposure arising from the liquid assets
set aside in the segregated account (unless another interpretation is specified
by applicable regulatory requirements).
OPTIONS. The Fund may use options for any lawful purpose consistent with its
investment objective such as hedging or managing risk. An option is a contract
in which the "holder" (the buyer) pays a certain amount ("premium") to the
"writer" (the seller) to obtain the right, but not the obligation, to buy from
the writer (in a "call") or sell to the writer (in a "put") a specific asset at
an agreed upon price ("strike price" or "exercise price") at or before a
certain time ("expiration date"). The holder pays the premium at inception and
has no further financial obligation. The holder of an option will benefit from
favorable movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option will receive fees or premiums but is exposed to
losses due to changes in the value of the underlying asset. The Fund may buy
or write (sell) put and call options on assets, such as securities, currencies,
financial commodities, and indices of debt and equity securities ("underlying
assets") and enter into closing transactions with respect to such options to
terminate an existing position. Options used by the Fund may include European,
American, and Bermuda style options. If an option is exercisable only at
maturity, it is a "European" option; if it is also exercisable prior to
maturity, it is an "American" option. If it is exercisable only at certain
times, it is a "Bermuda" option.
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.
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The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit the Fund to realize the
profit or limit the loss on an option position prior to its exercise or
expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases or writes an OTC option,
it relies on the counterparty to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty to do so
would result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with counter parties that are expected to
be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration. If the Fund were unable to effect a closing
transaction for an option it had purchased, it would have to exercise the
option to realize any profit.
The Fund may engage in options transactions on indices in much the same manner
as the options on securities discussed above, except the index options may
serve as a hedge against overall fluctuations in the securities market
represented by the relevant market index.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of the
attempted hedging.
SPREAD TRANSACTIONS. The Fund may use spread transactions for any lawful
purpose consistent with its investment objective such as hedging or managing
risk. The Fund may purchase covered spread options from securities dealers.
Such covered spread 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.
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To the extent required by regulatory authorities, the Fund only enters into
futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce the Fund's exposure to market or interest rate fluctuations, the Fund
may be able to hedge its exposure more effectively and perhaps at a lower cost
through the use of futures contracts.
An interest rate futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (E.G., debt security) for a specified price at a designated date,
time, and place. An index futures contract is an agreement pursuant to which
the parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index futures contract was
originally written. Transaction costs are incurred when a futures contract is
bought or sold and margin deposits must be maintained. A futures contract may
be satisfied by delivery or purchase, as the case may be, of the instrument or
by payment of the change in the cash value of the index. More commonly,
futures contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching futures contract. Although the value of
an index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase
price is less than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting sale price is
more than the original purchase price, the Fund realizes a gain; if it is less,
the Fund realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Fund will be able
to enter into an offsetting transaction with respect to a particular futures
contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the futures contract.
No price is paid by the Fund upon entering into a futures contract. Instead,
at the inception of a futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash
and/or other appropriate liquid assets in an amount generally equal to 10% or
less of the contract value. Margin must also be deposited when writing a call
or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility,
the Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather represents
a daily settlement of the Fund's obligations to or from a futures broker. When
the Fund purchases an option on a future, the premium paid plus 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.
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Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities
markets involving arbitrage, "program trading" and other investment strategies
might result in temporary price distortions.
FOREIGN CURRENCIES. The Fund may purchase and sell foreign currency on a spot
basis, and may use currency-related derivatives instruments such as options on
foreign currencies, futures on foreign currencies, options on futures on
foreign currencies and forward currency contracts (I.E., an obligation to
purchase or sell a specific currency at a specified future date, which may be
any fixed number of days from the contract date agreed upon by the parties, at
a price set at the time the contract is entered into). The Fund may use these
instruments for hedging or any other lawful purpose consistent with the Fund's
investment objective, including transaction hedging, anticipatory hedging,
cross hedging, proxy hedging, and position hedging. The Fund's use of
currency-related derivative instruments will be directly related to the Fund's
current or anticipated portfolio securities, and the Fund may engage in
transactions in currency-related derivative instruments as a means to protect
against some or all of the effects of adverse changes in foreign currency
exchange rates on its investment portfolio. In general, if the currency in
which a portfolio investment is denominated appreciates against the U.S.
dollar, the dollar value of the security will increase. Conversely, a decline
in the exchange rate of the currency would adversely affect the value of the
portfolio investment expressed in U.S. dollars.
For example, the Fund might use currency-related derivative instruments to
"lock in" a U.S. dollar price for a portfolio investment, thereby enabling the
Fund to protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date the security is purchased or sold and the
date on which payment is made or received. The Fund also might use
currency-related derivative instruments when the Advisor believes that one
currency may experience a substantial movement against another currency,
including the U.S. dollar, and it may use currency-related derivative
instruments to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the
Fund may use currency-related derivative instruments to hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. The use of this basket hedging technique may be more
efficient and economical than using separate currency-related derivative
instruments for 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
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Fund may hedge against price movements in that currency by entering into
transactions using currency-related derivative instruments on another foreign
currency or a basket of currencies, the values of which the Advisor believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the hedging instrument
will not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.
The use of currency-related derivative instruments by the Fund involves a
number of risks. The value of currency-related derivative instruments depends
on the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such derivative
instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots (generally consisting of transactions of greater than $1 million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments might be
required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
When the Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for
exchange-traded instruments is generally less than for privately negotiated or
OTC currency instruments, since generally a clearing agency, which is the
issuer or counterparty to each instrument, provides a guarantee of performance.
For privately negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the transaction and possibly other losses to the Fund. The Fund
will enter into transactions in currency-related derivative instruments only
with counterparties that the Advisor reasonably believes are capable of
performing under the contract.
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.
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Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily in
the OTC market, the Fund will normally purchase or sell OTC options on foreign
currency only when the Advisor reasonably believes a liquid secondary market
will exist for a particular option at any specific time.
There will be a cost to the Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. The Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to resell that currency to the
dealer.
When required by the SEC guidelines, the Fund will set aside permissible liquid
assets in segregated accounts or otherwise cover the Fund's potential
obligations under currency-related derivatives instruments. To the extent the
Fund's assets are so set aside, they cannot be sold while the corresponding
currency position is open, unless they are replaced with similar assets. As a
result, if a large portion of the Fund's assets are so set aside, this could
impede portfolio management or the Fund's ability to meet redemption requests
or other current obligations.
The Advisor's decision to engage in a transaction in a particular
currency-related derivative instrument will reflect the Advisor's judgment that
the transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives and policies. In making such a judgment,
the Advisor will analyze the benefits and risks of the transaction and weigh
them in the context of the Fund's entire portfolio and objectives. The
effectiveness of any transaction in a currency-related derivative instrument is
dependent on a variety of factors, including the Advisor's skill in analyzing
and predicting currency values and upon a correlation between price movements
of the currency instrument and the underlying security. There might be
imperfect correlation, or even no correlation, between price movements of an
instrument and price movements of investments being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which these instruments are traded. In addition, the Fund's use of
currency-related derivative instruments is always subject to the risk that the
currency in question could be devalued by the foreign government. In such a
case, any long currency positions would decline in value and could adversely
affect any hedging position maintained by the Fund.
The Fund's dealing in currency-related derivative instruments will generally be
limited to the transactions described above. However, the Fund reserves the
right to use currency-related derivatives instruments for different purposes
and under different circumstances. Of course, the Fund is not required to use
currency-related derivatives instruments and will not do so unless deemed
appropriate by the Advisor. It also should be realized that use of these
instruments does not eliminate, or protect against, price movements in the
Fund's securities that are attributable to other (I.E., non-currency related)
causes. Moreover, while the use 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,
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one party agrees to make payments to the other to the extent that interest
rates fall below a specified level, or "floor;" and interest rate collars,
under which a party sells a cap and purchases a floor, or vice versa, in an
attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, the Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement ("net amount").
The Fund's obligation under a swap agreement will be accrued daily (offset
against amounts owed to the Fund) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash and/or other appropriate liquid assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend, in part, on the Advisor's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Swap agreements may be considered to be
illiquid. Moreover, the Fund bears the risk of loss of the amount expected to
be received under a swap agreement in the event of the default or bankruptcy of
a swap agreement counterparty. Certain restrictions imposed on the Fund by the
Internal Revenue Code of 1986 ("IRC") may limit the Fund's ability to use swap
agreements. The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that the Advisor
reasonably believes are capable of performing under the swap agreements. If
there is a default by the other party to such a transaction, the Fund will have
to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In addition to the
derivative instruments and strategies described above and in the Prospectus,
the Advisor expects to discover additional derivative instruments and other
hedging or risk management techniques. The Advisor may utilize these new
derivative instruments and techniques to the extent that they are consistent
with the Fund's investment objective and permitted by the Fund's investment
limitations, operating policies, and applicable regulatory authorities.
FOREIGN INVESTMENT COMPANIES
The Fund may invest, to a limited extent, in foreign investment companies.
Some of the countries in which the Fund invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may be
less expensive and more expedient for the Fund to invest in a foreign
investment company in a country which permits direct foreign investment.
Investing through such vehicles may involve frequent or layered fees or
expenses and may also be subject to limitation under the 1940 Act. Under the
1940 Act, the Fund may invest up to 10% of its assets in shares of other
investment companies and up to 5% of its assets in any one investment company
as long as the investment does not represent more than 3% of the voting stock
of the acquired investment company. The Fund does not intend to invest in such
investment companies unless, in the judgment of the Advisor, the potential
benefits of such investments justify the payment of any associated fees and
expenses.
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.
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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.
HIGH-YIELD (HIGH-RISK) SECURITIES
IN GENERAL. Non-investment grade debt obligations ("lower-quality securities")
include (1) bonds rated as low as C by Moody's Investors Service ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), and comparable ratings of other
nationally recognized statistical rating organizations ("NRSROs"); (2)
commercial paper rated as low as C by S&P, Not Prime by Moody's, and comparable
ratings of other NRSROs; and (3) unrated debt obligations of comparable
quality. Lower-quality securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to the Appendix for
a description of the securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated security market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such
conditions could severely disrupt the market for and adversely affect the value
of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, the Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
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As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so
will the Fund's net asset value. If the Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), the Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would force the Fund to sell the more liquid
portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, the Fund may
have to replace the securities with a lower yielding security, which would
result in a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are designed
to evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of lower-quality
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of
the issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in lower-quality and comparable unrated obligations will be more
dependent on the Advisor's credit analysis than would be the case with
investments in investment-grade debt obligations. The Advisor employs its own
credit research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. The Advisor continually monitors the investments in the Fund's
portfolio and carefully evaluates whether to dispose of or to retain
lower-quality and comparable unrated securities whose credit ratings or credit
quality may have changed.
LIQUIDITY AND VALUATION. The Fund may have difficulty disposing of certain
lower-quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets
in all lower-quality and comparable unrated securities, there is no established
retail secondary market for many of these securities. The Fund anticipates
that such securities could be sold only to a limited number of 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
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that may be resold to institutional investors under Rule 144A under the
Securities Act and Section 4(2) commercial paper, may be considered liquid
under guidelines adopted by the Fund's Board of Directors.
The Board of Directors of the Fund has delegated to the Advisor the day-to-day
determination of the liquidity of a security, although it has retained
oversight and ultimate responsibility for such determinations. The Board of
Directors has directed the Advisor to look to such factors as (1) the frequency
of trades or quotes for a security, (2) the number of dealers willing to
purchase or sell the security and number of potential buyers, (3) the
willingness of dealers to undertake to make a market in the security, (4) the
nature of the security and nature of the marketplace trades, such as the time
needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer, (5) the likelihood that the security's marketability
will be maintained throughout the anticipated holding period, and (6) any other
relevant factors. The Advisor may determine 4(2) commercial paper to be liquid
if (1) the 4(2) commercial paper is not traded flat or in default as to
principal and interest, (2) the 4(2) commercial paper is rated in one of the
two highest rating categories by at least two NRSROs), or if only one NRSRO
rates the security, by that NRSRO, or is determined by the Advisor to be of
equivalent quality, and (3) the Advisor considers the trading market for the
specific security taking into account all relevant factors. With respect to
any foreign holdings, a foreign security may be considered liquid by the
Advisor (despite its restricted nature under the Securities Act) if the
security can be freely traded in a foreign securities market and all the facts
and circumstances support a finding of liquidity.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced in accordance with
pricing procedures adopted by the Board of Directors of the Fund. If through
the appreciation of restricted securities or the depreciation of unrestricted
securities the Fund should be in a position where more than 15% of the value of
its net assets are invested in illiquid securities, including restricted
securities which are not readily marketable (except for 144A Securities and
4(2) commercial paper deemed to be liquid by the Advisor), the Fund will take
such steps as is deemed advisable, if any, to protect the liquidity of the
Fund's portfolio.
The Fund may sell OTC options and, in connection therewith, segregate assets or
cover its obligations with respect to OTC options written by the Fund. The
assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that
the Fund may repurchase any OTC option it writes at a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. Although the Fund is authorized to lend, the Fund does not
presently intend to engage in lending. In determining whether to lend
securities to a particular broker-dealer or institutional investor, the Advisor
will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Fund will retain authority to terminate any loans at any time. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when retaining such
rights is considered to be in the Fund's interest.
MORTGAGE- AND ASSET-BACKED DEBT SECURITIES
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Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or are secured by and payable from, assets such as
motor vehicle installment sales contracts, other installment loan contracts,
home equity loans, leases of various types of property, and receivables from
credit card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any mortgage- and asset-backed security is
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional debt
securities. Among the principal differences are that interest and principal
payments are made more frequently on mortgage-and asset-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing the yield to maturity. Conversely, if the Fund purchases these
securities at a discount, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Amounts available for reinvestment by
the Fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates. Accelerated prepayments on
securities purchased by the Fund at a premium also impose a risk of loss of
principal because the 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.
19
<PAGE>
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.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. The Advisor will monitor, on an ongoing
basis, the value of the underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued interest. Repurchase
agreements could involve certain risks in the event of a default or insolvency
of the other party to the agreement, including possible delays or restrictions
upon the Fund's ability to dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the Advisor reviews the
creditworthiness of the banks and non-bank dealers with which the Fund enters
into repurchase agreements to evaluate those risks. The Fund may, under
certain circumstances, deem repurchase agreements collateralized by U.S.
government securities to be investments in U.S. government securities.
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.
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.
SMALL AND MEDIUM COMPANIES
20
<PAGE>
The Fund may invest a substantial portion of its assets in small and medium
companies. While small and medium companies generally have the potential for
rapid growth, investments in small and medium companies often involve greater
risks than investments in larger, more established companies because small and
medium companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In
addition, in many instances the securities of small and medium companies are
traded only OTC or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Therefore, the securities of small and medium companies may be
subject to greater and more abrupt price fluctuations. When making large
sales, the Fund may have to sell portfolio holdings at discounts from quoted
prices or may have to make a series of small sales over an extended period of
time due to the trading volume of small and medium company securities.
Investors should be aware that, based on the foregoing factors, an investment
in the Fund may be subject to greater price fluctuations than an investment in
the Fund that invests primarily in larger, more established companies. The
Advisor's research efforts may also play a greater role in selecting securities
for the Fund than in the Fund that invests in larger, more established
companies.
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.
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).
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
21
<PAGE>
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
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 26 registered open-end
management investment companies consisting of 46 mutual funds ("Strong Funds").
The Strong Funds, in the aggregate, pay each Director who is not a director,
officer, or employee of the Advisor, or any affiliated company (a
"disinterested director") an annual fee of $50,000, plus $100 per Board meeting
for each Strong Fund. In addition, each disinterested director is reimbursed
by the Strong Funds for travel and other expenses incurred in connection with
attendance at such meetings. Other officers and directors of the Strong Funds
receive no compensation or expense reimbursement from the Strong Funds.
*RICHARD S. STRONG (DOB 5/12/42), Director and Chairman of the Board of the
Strong Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the Advisor,
which he founded in 1974. Since August 1985, Mr. Strong has been a Security
Analyst and Portfolio Manager of the Advisor. In October 1991, Mr. Strong also
became the Chairman of the Advisor. Mr. Strong is a Director of the Advisor.
Mr. Strong has been in the investment management business since 1967.
MARVIN E. NEVINS (DOB 7/19/18), Director of the Strong Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of Wisconsin
Centrifugal Inc., a foundry. From July 1983 to December 1986, he was Chairman
of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins is a
former Chairman of the Wisconsin Association of Manufacturers & Commerce. He
was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin.
WILLIE D. DAVIS (DOB 7/24/34), Director of the Strong Funds.
Mr. Davis has been Director of Alliance Bank since 1980, Sara Lee Corporation
(a food/consumer products company) since 1983, KMart Corporation (a discount
consumer products company) since 1985, Dow Chemical Company since 1988, MGM
Grand, Inc. (an entertainment/hotel company) since 1990, WICOR, Inc. (a utility
company) since 1990, Johnson Controls, Inc. (an industrial company) since 1992,
L.A. Gear (a footwear/sportswear company) since 1992, and Rally's Hamburger,
Inc. since 1994. Mr. Davis has been a trustee of the University of Chicago
since 1980 and Marquette University since 1988. Since 1977, Mr. Davis has been
President and Chief Executive Officer of All Pro Broadcasting, Inc. Mr. Davis
was a Director of the Fireman's Fund (an insurance company) from 1975 until
1990.
STANLEY KRITZIK (DOB 1/9/30), Director of the Strong Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since 1962, a
Director of Aurora Health Care since 1987, and Health Network Ventures, Inc.
since 1992.
WILLIAM F. VOGT (DOB 7/19/47), Director of the Strong Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc. since 1990.
From 1982 until 1990, he served as Executive Director of University Physicians
of the University of Colorado. Mr. Vogt is the Past
22
<PAGE>
President of the Medical Group Management Association and a Fellow of the
American College of Medical Practice Executives.
THOMAS P. LEMKE (DOB 7/30/54), Vice President of the Strong Funds.
Mr. Lemke has been Senior Vice President, Secretary, and General Counsel of the
Advisor since September 1994 and Chief Operating Officer of the Advisor since
November 1997. For two years prior to joining the Advisor, Mr. Lemke acted as
Resident Counsel for Funds Management at J.P. Morgan & Co., Inc. From February
1989 until April 1992, Mr. Lemke acted as Associate General Counsel to Sanford
C. Bernstein Co., Inc. For two years prior to that, Mr. Lemke was Of Counsel
at the Washington D.C. law firm of Tew Jorden & Schulte, a successor of Finley,
Kumble & Wagner. From August 1979 until December 1986, Mr. Lemke worked at the
SEC, most notably as the Chief Counsel to the Division of Investment Management
(November 1984 - December 1986), and as Special Counsel to the Office of
Insurance Products, Division of Investment Management (April 1982 - October
1984).
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the
Strong Funds.
Mr. Shenkenberg has been Acting General Counsel of the Advisor since January
1998. From November 1996 until January 1998, Mr. Shenkenberg acted as Deputy
General Counsel to the Advisor. From December 1992 until November 1996, Mr.
Shenkenberg acted as Associate Counsel to the Advisor. From June 1987 until
December 1992, Mr. Shenkenberg was an attorney for Godfrey & Kahn, S.C., a
Milwaukee law firm.
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Strong Funds.
Mr. Weitzer has been Senior Counsel of the Advisor since December 1997. From
July 1993 until December 1997, Mr. Weitzer acted as Associate Counsel to the
Advisor.
MARY F. HOPPA (DOB 5/31/64), Vice President of the Strong Funds.
Ms. Hoppa has been Vice President and Director of Mutual Fund Administration of
the Advisor since January 1998. From October 1996 to January 1998, Ms. Hoppa
acted as Director of Transfer Agency Services of the Advisor and, from January
1988 to October 1996, as Transfer Agency Systems Liaison Manager of the
Advisor. From January 1987 to January 1988, Ms. Hoppa acted as a Shareholder
Services Associate of the Advisor.
JOHN A. FLANAGAN (DOB 6/5/46), Treasurer of the Strong Funds.
Mr. Flanagan has been Senior Vice President of the Advisor since April 1997.
For three years prior to joining the Advisor, Mr. Flanagan was a Partner with
Coopers & Lybrand L.L.P. (an international professional services firm). From
November 1992 to April 1994, Mr. Flanagan was an independent consultant. From
October 1970 to November 1992, Mr. Flanagan was with Ernst & Young (an
international professional services firm), most notably as Partner in charge of
the Investment Company Practice of that firm's Boston office from 1982 to 1992.
Except for Messrs. Nevins, Davis, Kritzik, and Vogt, the address of all of the
above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 34108. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301. Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 2830 East Third Avenue, Denver, Colorado
80206.
Unless otherwise noted below, as of March 31, 1998, the officers and directors
of the Fund in the aggregate beneficially owned less than 1% of the Fund's then
outstanding shares.
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
FUND SHARES PERCENT
- ---- ------ -------
None
</TABLE>
PRINCIPAL SHAREHOLDERS
Except for the organizational shares of the Fund, the Fund's shares may only be
held of record by the separate accounts of insurance companies. As March 31,
1998, the following insurance companies owned of record or is known by the Fund
to own of record or beneficially more than 5% of the Fund's then outstanding
shares:
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND ADDRESS SHARES PERCENT
- ----------------------------- ---------- -------
Nationwide Life Insurance Co. 43,223,460 98.33%
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>
Any person owning more than 25% of the Fund's shares may be considered a
"controlling person" of the Fund. Accordingly, a controlling person's vote
could have a more significant effect on matters presented to shareholders for
approval than the vote of other Fund shareholders.
INVESTMENT ADVISOR
The Fund has entered into an Advisory Agreement with Strong Capital Management,
Inc. ("Advisor"). Mr. Strong controls the Advisor. Mr. Strong is the Chairman
and a Director of the Advisor, Mr. Lemke is the Chief Operating Officer, a
Senior Vice President, Secretary, and General Counsel of the Advisor, Mr.
Flanagan is a Senior Vice President of the Advisor, Mr. Shenkenberg is Vice
President, Assistant Secretary, and Acting General Counsel of the Advisor, and
Mr. Weitzer is Senior Counsel of the Advisor.
The Advisory Agreement is required to be approved annually by either the Board
of Directors of the Fund or by vote of a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act). In either case, each annual
renewal must be approved by the vote of a majority of the Fund's directors who
are not parties to the Advisory Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement is terminable, without penalty, on 60 days
written notice by the Board of Directors of the Fund, by vote of a majority of
the Fund's outstanding voting securities, or by the Advisor, and will terminate
automatically in the event of its assignment.
Under the terms of the Advisory Agreement, the Advisor manages the Fund's
investments subject to the supervision of the Fund's Board of Directors. The
Advisor is responsible for investment decisions and supplies investment
research and portfolio management. The Advisory Agreement authorizes the
Advisor to delegate its investment advisory duties to a subadvisor in
accordance with a written agreement under which the subadvisor would furnish
such investment advisory services to the Advisor. In that situation, the
Advisor continues to have responsibility for all investment advisory services
furnished by the subadvisor under the subadvisory agreement. At its expense,
the Advisor provides office space and all necessary office facilities,
equipment and personnel for servicing the investments of the Fund. The Advisor
places all orders for the purchase and sale of the Fund's portfolio securities
at the Fund's expense.
Except for expenses assumed by the Advisor, as set forth above, or by Strong
Funds Distributors, Inc. with respect to the distribution of the Fund's shares,
the Fund is responsible for all its other expenses, including, without
limitation, interest charges, taxes, brokerage commissions, and similar
expenses; expenses of issue, sale, repurchase or redemption of shares; expenses
of registering or qualifying shares for sale with the states and the SEC;
expenses for printing and distribution of prospectuses to existing
shareholders; charges of custodians (including fees as custodian for keeping
books and similar services for the Fund),
24
<PAGE>
transfer agents (including the printing and mailing of reports and notices to
shareholders), registrars, auditing and legal services, and clerical services
related to recordkeeping and shareholder relations; printing of stock
certificates; fees for directors who are not "interested persons" of the
Advisor; expenses of indemnification; extraordinary expenses; and costs of
shareholder and director meetings.
As compensation for its services, the Fund pays to the Advisor a monthly
management fee at the annual rate specified below of the average daily net
asset value of the Fund. From time to time, the Advisor may voluntarily waive
all or a portion of its management fee for the Fund.
<TABLE>
<CAPTION>
<S> <C>
FUND ANNUAL RATE
- ------------------- -----------
Opportunity Fund II 1.00%
</TABLE>
The Fund paid the following management fees for the time periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MANAGEMENT FEE
FISCAL YEAR ENDED MANAGEMENT FEE ($) WAIVER ($) AFTER WAIVER ($)
- ----------------- ------------------ ---------- ----------------
12/31/95 3,754,907 0 3,754,907
12/31/96 5,514,942 0 5,514,942
12/31/97 7,255,725 0 7,255,725
</TABLE>
The Advisory Agreement requires the Advisor to reimburse the Fund in the event
that the expenses and charges payable by the Fund in any fiscal year, including
the management fee but excluding taxes, interest, brokerage commissions, and
similar fees and to the extent permitted extraordinary expenses, exceed two
percent (2%) of the average net asset value of the Fund for such year, as
determined by valuations made as of the close of each business day of the year.
Reimbursement of expenses in excess of the applicable limitation will be made
on a monthly basis and will be paid to the Fund by reduction of the Advisor's
fee, subject to later adjustment, month by month, for the remainder of the
Fund's fiscal year. The Advisor may from time to time voluntarily absorb
expenses for the Fund in addition to the reimbursement of expenses in excess of
applicable limitations.
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.
25
<PAGE>
The Fund and the Advisor have adopted a Code of Ethics ("Code") which governs
the personal trading activities of all "Access Persons" of the Advisor. Access
Persons include every director and officer of the Advisor and the investment
companies managed by the Advisor, including the Fund, as well as certain
employees of the Advisor who have access to information relating to the
purchase or sale of securities by the Advisor on behalf of accounts managed by
it. The Code is based upon the principal that such Access Persons have a
fiduciary duty to place the interests of the Fund and the Advisor 's other
clients ahead of their own.
The Code requires Access Persons (other than Access Persons who are independent
directors of the investment companies managed by the Advisor, including the
Fund) to, among other things, preclear their securities transactions (with
limited exceptions, such as transactions in shares of mutual funds, direct
obligations of the U.S. government, and certain options on broad-based
securities market indexes) and to execute such transactions through the
Advisor's trading department. The Code, which applies to all Access Persons
(other than Access Persons who are independent directors of the investment
companies managed by the Advisor, including the Fund), includes a ban on
acquiring any securities in an initial public offering, other than a new
offering of a registered open-end investment company, and a prohibition from
profiting on short-term trading in securities. In addition, no Access Person
may purchase or sell any security which is contemporaneously being purchased or
sold, or to the knowledge of the Access Person, is being considered for
purchase or sale, by the Advisor on behalf of any mutual fund or other account
managed by it. Finally, the Code provides for trading "black out" periods of
seven calendar days during which time Access Persons who are portfolio managers
may not trade in securities which have been purchased or sold by any mutual
fund or other account managed by the portfolio manager.
The Advisor provides investment advisory services for multiple clients and may
give advice and take action, with respect to any client, that may differ from
the advice given, or the timing or nature of action taken, with respect to any
one account. However, the Advisor will allocate over a period of time, to the
extent practical, investment opportunities to each account on a fair and
equitable basis relative to other similarly-situated client accounts. The
Advisor, its principals and associates (to the extent not prohibited by the
Code), and other clients of the Advisor may have, acquire, increase, decrease,
or dispose of securities or interests therein at or about the same time that
the Advisor is purchasing or selling securities or interests therein for an
account which purchase or sale is or may be deemed to be inconsistent with the
actions taken by such persons.
From time to time, the Advisor votes the shares owned by the Fund 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 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
Funds Distributors, Inc. ("Distributor") acts as underwriter of the Fund's
shares. Mr. Strong is the Chairman and Director of the Distributor, Mr. Lemke
is a Vice President of the Distributor, and Mr. Shenkenberg is a Vice President
and Secretary of the Distributor. The Distribution Agreement provides that the
Distributor will use its best efforts to distribute the Fund's shares. Shares
are only offered and sold to the separate accounts of certain insurance
companies. Since the Fund is a "no-load" fund, no sales commissions are
charged on the purchase of Fund shares. Certain sales charges may apply to the
variable annuity or life insurance contract, which should be described in the
prospectus of the insurance company's separate account. 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 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 Mr. Strong. The Distribution
Agreement is subject to the same termination and renewal provisions as are
described above with respect to the Advisory Agreement.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities for the
Fund and for the placement of the Fund's investment business and the
negotiation of the commissions to be paid on such transactions. It is the
policy of the Advisor, to seek the best
26
<PAGE>
execution at the best security price available with respect to each
transaction, in light of the overall quality of brokerage and research services
provided to the Advisor, or the Fund. In OTC transactions, orders are placed
directly with a principal market maker unless it is believed that a better
price and execution can be obtained using a broker. The best price to the Fund
means the best net price without regard to the mix between purchase or sale
price and commissions, if any. In selecting broker-dealers and in negotiating
commissions, the Advisor considers a variety of factors, including best price
and execution, the full range of brokerage services provided by the broker, as
well as its capital strength and stability, and the quality of the research and
research services provided by the broker. Brokerage will not be allocated
based on the sale of any shares of the Strong Funds.
The Advisor has adopted procedures that provide generally for the Advisor to
seek to bunch orders for the purchase or sale of the same security for the
Fund, other mutual funds managed by the Advisor, and other advisory clients
(collectively, "client accounts"). The Advisor will bunch orders when it deems
it to be appropriate and in the best interest of the client accounts. When a
bunched order is filled in its entirety, each participating client account will
participate at the average share price for the bunched order on the same
business day, and transaction costs shall be shared pro rata based on each
client's participation in the bunched order. When a bunched order is only
partially filled, the securities purchased will be allocated on a pro rata
basis to each client account participating in the bunched order based upon the
initial amount requested for the account, subject to certain exceptions, and
each participating account will participate at the average share price for the
bunched order on the same business day.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment advisor, under certain circumstances, to cause an account to pay
a broker or dealer a commission for effecting a transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
the transaction in recognition of the value of the brokerage and research
services provided by the broker or dealer. Brokerage and research services
include (1) furnishing advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; (2) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement, the Advisor may cause
the Fund to pay a broker, which provides brokerage and research services to the
Advisor, a commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting the transaction. The
Advisor believes it is important to its investment decision-making process to
have access to independent research. The Advisory Agreement provides that such
higher commissions will not be paid by the Fund unless (1) the Advisor
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Advisor's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion; (2) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal laws, and the
Advisory Agreement; and (3) in the opinion of the Advisor, the total
commissions paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term. The investment management fee paid by the Fund
under the Advisory Agreement is not reduced as a result of the Advisor's
receipt of research services.
Generally, research services provided by brokers may include information on the
economy, industries, groups of securities, individual companies, statistical
information, accounting and tax law interpretations, political developments,
legal developments affecting portfolio securities, technical market action,
pricing and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. Such
research services are received primarily in the form of written reports,
telephone contacts, and personal meetings with security analysts. In addition,
such research services may be provided in the form of access to various
computer-generated data, computer hardware and software, and meetings arranged
with corporate and industry spokespersons, economists, academicians, and
government representatives. In some cases, research services are generated by
third parties but are provided to the Advisor by or through brokers. Such
brokers may pay for all or a portion of computer hardware and software costs
relating to the pricing of securities.
Where the Advisor itself receives both administrative benefits and research and
brokerage services from the services provided by brokers, it makes a good faith
allocation between the administrative benefits and the research and brokerage
services, and will pay for any administrative benefits with cash. In making
good faith allocations between administrative benefits and research and
brokerage services, a conflict of interest may exist by reason of the Advisor's
allocation of the costs of such benefits and services between those that
primarily benefit the Advisor and those that primarily benefit the Fund and
other advisory clients.
27
<PAGE>
From time to time, the Advisor may purchase new issues of securities for the
Fund in a fixed income price offering. In these situations, the seller may be a
member of the selling group that will, in addition to selling the securities to
the Fund and other advisory clients, provide the Advisor with research. The
NASD has adopted rules expressly permitting these types of arrangements under
certain circumstances. Generally, the seller will provide research "credits" in
these situations at a rate that is higher than that which is available for
typical secondary market transactions. These arrangements may not fall within
the safe harbor of Section 28(e).
At least annually, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Fund and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e), the
Advisor allocates brokerage to those firms, provided that the value of any
research and brokerage services was reasonable in relationship to the amount of
commission paid and was subject to best execution. In no case will the
Advisor make binding commitments as to the level of brokerage commissions it
will allocate to a broker, nor will it commit to pay cash if any informal
targets are not met. The Advisor anticipates it will continue to enter into
such brokerage arrangements.
The Advisor may direct the purchase of securities on behalf of the Fund and
other advisory clients in secondary market transactions, in public offerings
directly from an underwriter, or in privately negotiated transactions with an
issuer. When the Advisor believes the circumstances so warrant, securities
purchased in public offerings may be resold shortly after acquisition in the
immediate aftermarket for the security in order to take advantage of price
appreciation from the public offering price or for other reasons. Short-term
trading of securities acquired in public offerings, or otherwise, may result in
higher portfolio turnover and associated brokerage expenses.
With respect to the Fund's foreign equity investing, the Advisor is responsible
for selecting brokers in connection with foreign securities transactions. The
fixed commissions paid in connection with most foreign stock transactions are
usually higher than negotiated commissions on U.S. stock transactions. Foreign
stock exchanges and brokers are subject to less government supervision and
regulation as compared with the U.S. exchanges and brokers. In addition,
foreign security settlements may in some instances be subject to delays and
related administrative uncertainties.
The Advisor places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Advisor. Research services
furnished by firms through which the Fund effects its securities transactions
may be used by the Advisor in servicing all of its accounts; not all of such
services may be used by the Advisor in connection with the Fund. In the
opinion of the Advisor, it is not possible to measure separately the benefits
from research services to each of the accounts managed by the Advisor. Because
the volume and nature of the trading activities of the accounts are not
uniform, the amount of commissions in excess of those charged by another broker
paid by each account for brokerage and research services will vary. However,
in the opinion of the Advisor, such costs to the Fund will not be
disproportionate to the benefits received by the Fund on a continuing basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In
making such allocations between the Fund and other advisory accounts, the main
factors considered by the Advisor are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending
the investment.
Where consistent with a client's investment objectives, investment
restrictions, and risk tolerance, the Advisor may purchase securities sold in
underwritten public offerings for client accounts, commonly referred to as
"deal" securities. The Advisor has adopted deal allocation procedures
("Procedures"), summarized below, that reflect the Advisor's overriding policy
that deal
28
<PAGE>
securities must be allocated among participating client accounts in a fair and
equitable manner and that deal securities may not be allocated in a manner that
unfairly discriminates in favor of certain clients or types of clients.
The Procedures provide that, in determining which client accounts a portfolio
manager team will seek to have purchase deal securities, the team will consider
all relevant factors including, but not limited to, the nature, size, and
expected allocation to the Advisor of deal securities; the size of the
account(s); the accounts' investment objectives and restrictions; the risk
tolerance of the client; the client's tolerance for possibly higher portfolio
turnover; the amount of commissions generated by the account during the past
year; and the number and nature of other deals the client has participated in
during the past year.
Where more than one of the Advisor's portfolio manager team seeks to have
client accounts participate in a deal and the amount of deal securities
allocated to the Advisor by the underwriting syndicate is less than the
aggregate amount ordered by the Advisor (a "reduced allocation"), the deal
securities will be allocated among the portfolio manager teams based on all
relevant factors. The primary factor shall be assets under management,
although other factors that may be considered in the allocation decision
include, but are not limited to, the nature, size, and expected allocation of
the deal; the amount of brokerage commissions or other amounts generated by the
respective participating portfolio manager teams; and which portfolio manager
team is primarily responsible for the Advisor receiving securities in the deal.
Based on relevant factors, the Advisor has established general allocation
percentages for its portfolio manager teams, and these percentages are reviewed
on a regular basis to determine whether asset growth or other factors make it
appropriate to use different general allocation percentages for reduced
allocations.
When a portfolio manager team receives a reduced allocation of deal securities,
the portfolio manager team will allocate the reduced allocation among client
accounts in accordance with the allocation percentages set forth in the team's
initial allocation instructions for the deal securities, except where this
would result in a DE MINIMIS allocation to any client account. On a regular
basis, the Advisor reviews the allocation of deal securities to ensure that
they have been allocated in a fair and equitable manner that does not unfairly
discriminate in favor of certain clients or types of clients.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"). The Fund's procedures in selecting FCMs to execute the
Fund's transactions in futures contracts are similar to those in effect with
respect to brokerage transactions in securities.
The Fund paid the following brokerage commissions for the time periods
indicated:
<TABLE>
<CAPTION>
<S> <C>
FISCAL YEAR ENDED BROKERAGE COMMISSIONS ($)
- ------------------ -------------------------
12/31/95 1,330,000
12/31/96 1,853,000
12/31/97 2,379,476
</TABLE>
Unless otherwise noted below, the Fund has not acquired securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
their parents:
<TABLE>
<CAPTION>
<S> <C>
REGULAR BROKER OR DEALER (OR PARENT) ISSUER VALUE OF SECURITIES OWNED AS OF DECEMBER 31, 1997
- ------------------------------------------- -------------------------------------------------
None
</TABLE>
CUSTODIAN
As custodian of the Fund's assets, Firstar Trust Company, P.O. Box 761,
Milwaukee, Wisconsin 53201, has custody of all securities and cash of the Fund,
delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by officers of the Fund. The custodian is in no way
responsible for any of the investment policies or decisions of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Advisor acts as transfer agent and dividend-disbursing agent for the Fund
at no cost.
29
<PAGE>
ADMINISTRATIVE SERVICES
From time to time the Fund and/or the Advisor may enter into arrangements under
which certain administrative services may be performed by the insurance
companies that purchase shares of the Fund. These administrative services may
include, among other things, responding to ministerial inquiries concerning the
Fund's investment objective, investment program, policies and performance,
transmitting, on behalf of the Fund, proxy statements, annual reports, updated
prospectuses, and other communications regarding the Fund, and providing only
related services as the Fund or its shareholders may reasonably request.
Depending on the arrangements, the Fund and/or Advisor may compensate such
insurance companies or their agents directly or indirectly for the
administrative services. To the extent the Fund compensates the insurance
company for these services, the Fund will pay the insurance company an annual
fee that will vary depending upon the number of contract holders that utilize
the Fund as the funding medium for their contracts. The insurance company may
impose other account or service charges. See the prospectus for the separate
account of the insurance company for additional information regarding such
charges.
30
<PAGE>
TAXES
GENERAL
The Fund intends to qualify annually for treatment as a regulated investment
company ("RIC") under the IRC. 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. From time to time the Advisor
may find it necessary to make certain types of investments for the purpose of
ensuring that the Fund continues to qualify for treatment as a RIC under the
IRC.
If Fund shares are sold at a loss after being held for six months or less, the
loss will be treated as long-term, instead of short-term, capital loss to the
extent of any capital gain distributions received on those shares.
In addition, the Fund must satisfy the diversification requirements of Section
817(h) of the IRC. In general, for a Fund to meet these investment
diversification requirements, Treasury regulations require that no more than
55% of the total value of the assets of the Fund may be represented by any one
investment, no more than 70% by two investments, no more than 80% by three
investments and no more than 90% by four investments. Generally, for purposes
of the regulations, all securities of the same issuer are treated as a single
investment. With respect to the United States Government securities (including
any security that is issued, guaranteed or insured by the United States or an
instrumentality of the United States), each governmental agency or
instrumentality is treated as a separate issuer. Compliance with the
regulations is tested on the last day of each calendar year quarter. There is
a 30-day period after the end of each calendar year quarter in which to cure
any non-compliance with these requirements.
FOREIGN TRANSACTIONS
Dividends and interest received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the U.S may reduce or eliminate these foreign taxes, however, and
many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, it will be eligible to, and may, file an election with the
Internal Revenue Service that would enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions income taxes paid by it. The Fund would treat those taxes as
dividends paid to its shareholders and each shareholder would be required to
(1) include in gross income, and treat as paid by the shareholder, the
shareholder's proportionate share of those taxes, (2) treat the shareholder's
share of those taxes and of any dividend paid by the Fund that represents
income from foreign or U.S. possessions sources as the shareholder's own income
from those sources, and (3) either deduct the taxes deemed paid by the
shareholder in computing the shareholder's taxable income or, alternatively,
use the foregoing information in calculating the foreign tax credit against the
shareholder's federal income tax. The Fund will report to its shareholders
shortly after each taxable year their respective shares of its income from
sources within, and taxes paid to, foreign countries and U.S. possessions if it
makes this election.
The Fund holding foreign securities in its investment portfolio maintains its
accounts and calculates its income in U.S. dollars. In general, gain or loss
(1) from the disposition of foreign currencies and forward currency contracts,
(2) from the disposition of foreign-currency-denominated debt securities that
are attributable to fluctuations in exchange rates between the date the
securities are acquired and their disposition date, and (3) attributable to
fluctuations in exchange rates between the time the Fund accrues
31
<PAGE>
interest or other receivables or expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects those receivables or
pays those liabilities, will be treated as ordinary income or loss. A
foreign-currency-denominated debt security acquired by the Fund may bear
interest at a high normal rate that takes into account expected decreases in
the value of the principal amount of the security due to anticipated currency
devaluations; in that case, the Fund would be required to include the interest
in income as it accrues but generally would realize a currency loss with
respect to the principal only when the principal was received (through
disposition or upon maturity).
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs") in accordance with its investment objective, policies and
restrictions. A PFIC is a foreign corporation that, in general, meets either
of the following tests: (1) at least 75% of its gross income is passive or (2)
an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain on disposition of the stock (collectively,
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC
income will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If the Fund invests in a PFIC and elects to treat the
PFIC as a "qualified electing fund," then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the qualified electing fund's annual ordinary earnings
and net capital gain (the excess of net long-term capital gain over net
short-term capital loss) -- which probably would have to be distributed to its
shareholders to satisfy the Distribution Requirement and avoid imposition of
the Excise Tax -- even if those earnings and gain were not received by the
Fund. In most instances it will be very difficult, if not impossible, to make
this election because of certain requirements thereof.
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling (writing)
options and futures and entering into forward currency contracts, if
applicable, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains and losses the Fund
realizes in connection therewith. Gains from the disposition of foreign
currencies, if any (except certain gains therefrom that may be excluded by
future regulations), and income from transactions in options, futures, and
forward currency contracts, if applicable, derived by the Fund with respect to
its business of investing in securities or foreign currencies, if applicable,
will qualify as permissible income under the Income Requirement.
For federal income tax purposes, the Fund is required to recognize as income
for each taxable year its net unrealized gains and losses on options, futures,
or forward currency contracts, if any, that are subject to section 1256 of the
IRC ("Section 1256 Contracts") and are held by the Fund as of the end of the
year, as well as gains and losses on Section 1256 Contracts actually realized
during the year. Except for Section 1256 Contracts that are part of a "mixed
straddle" and with respect to which the Fund makes a certain election, any gain
or loss recognized with respect to Section 1256 Contracts is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Section 1256 Contract.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may acquire zero-coupon, step-coupon, or other securities issued with
original issue discount. As a holder of those securities, the Fund must
include in its income the original issue discount that accrues on the
securities during the taxable year, even if the Fund receives no corresponding
payment on the securities during the year. Similarly, the Fund must include in
its income securities it receives as "interest" on pay-in-kind securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income, including any original issue discount and other
non-cash income, to satisfy the Distribution Requirement, it may be required in
a particular year to distribute as a dividend an amount that is greater than
the total amount of cash it actually receives. Those distributions may be made
from the proceeds on sales of portfolio securities, if
32
<PAGE>
necessary. The Fund may realize capital gains or losses from those sales,
which would increase or decrease its investment company taxable income or net
capital gain, or both.
USE OF TAX-LOT ACCOUNTING. When sell decisions are made by the Fund's
portfolio manager, the Advisor generally sells the tax lots of the Fund's
securities that results in the lowest amount of taxes to be paid by the
shareholders on the Fund's capital gain distributions. The Advisor uses
tax-lot accounting to identify and sell the tax lots of a security that have
the highest cost basis and/or longest holding period to minimize adverse tax
consequences to the Fund's shareholders. However, if the Fund has a capital
loss carry forward position, the Advisor would reverse its strategy and sell
the tax lots of a security that have the lowest cost basis and/or shortest
holding period to maximize the use of the Fund's capital loss carry forward
position.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund will be determined as of the close of trading
on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE
is open for trading Monday through Friday except, New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. Additionally, if any of the aforementioned holidays falls
on a Saturday, the NYSE will not be open for trading on the preceding Friday,
and when any such holiday falls on a Sunday, the NYSE will not be open for
trading on the succeeding Monday, unless unusual business conditions exist,
such as the ending of a monthly or yearly accounting period.
Debt securities are valued by a pricing service that utilizes electronic data
processing techniques to determine values for normal institutional-sized
trading units of debt securities without regard to sale or bid prices when such
values are believed to more accurately reflect the fair market value for such
securities. Otherwise, sale or bid prices are used. Any securities or other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by the Board of Directors of the Fund. Debt
securities having remaining maturities of 60 days or less are valued by the
amortized cost method when the Fund's Board of Directors determines that the
fair value of such securities is their amortized cost. Under this method of
valuation, a security is initially valued at its acquisition cost, and
thereafter, amortization of any discount or premium is assumed each day,
regardless of the impact of the fluctuating rates on the market value of the
instrument.
ADDITIONAL SHAREHOLDER INFORMATION
REDEMPTION-IN-KIND
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one
shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the
assets of the Fund. If the Advisor determines that existing conditions make
cash payments undesirable, redemption payments may be made in whole or in part
in securities or other financial assets, valued for this purpose as they are
valued in computing the NAV for the Fund's shares (a "redemption-in-kind").
Shareholders receiving securities or other financial assets in a
redemption-in-kind may realize a gain or loss for tax purposes, and will incur
any costs of sale, as well as the associated inconveniences. If you expect to
make a redemption in excess of the lesser of $250,000 or 1% of the Fund's
assets during any 90-day period and would like to avoid any possibility of
being paid with securities in-kind, you may do so by providing Strong Funds
with an unconditional instruction to redeem at least 15 calendar days prior to
the date on which the redemption transaction is to occur, specifying the dollar
amount or number of shares to be redeemed and the date of the transaction
(please call 1-800-368-3863). This will provide the Fund with sufficient time
to raise the cash in an orderly manner to pay the redemption and thereby
minimize the effect of the redemption on the interests of the Fund's remaining
shareholders.
ORGANIZATION
33
<PAGE>
The Fund is either a "Corporation" or a "Series" of common stock of a
Corporation, as described in the chart below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Incorporation Date Series Authorized Par
Corporation Date Created Shares Value ($)
- ----------------------------------- ------------- ----------- ---------- ---------
Strong Opportunity Fund II, Inc.(1) 12/28/90 Indefinite .00001
</TABLE>
(1) Prior to July 16, 1997, the Corporation's name was Strong Special Fund II,
Inc.
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. 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.
DISTRIBUTION RATE
The distribution rate for the Fund is computed, according to a non-standardized
formula, by dividing the total amount of actual distributions per share paid by
the Fund over a twelve month period by the Fund's net asset value on the last
day of the period.
34
<PAGE>
The distribution rate differs from the Fund's yield because the distribution
rate includes distributions to shareholders from sources other than dividends
and interest, such as short-term capital gains. Therefore, the Fund's
distribution rate may be substantially different than its yield. Both the
Fund's yield and distribution rate will fluctuate.
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.
TOTAL RETURN
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment December 31, 1997 Total Return Total Return
- ----------- --------------- ----------------- ------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Average
TOTAL RETURN ANNUAL TOTAL RETURN
One Year $10,000 12,545 25.45% 25.45%
- ------------- ------- ------ ------------ -------------------
Five Year $10,000 24,183 141.83% 19.32%
- ------------- ------- ------ ------------ -------------------
Life of Fund* $10,000 28,093 180.93% 20.07%
- ------------- ------- ------ ------------ -------------------
</TABLE>
35
<PAGE>
* Commenced operations on May 8, 1992.
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.
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.
VARDS REPORT. The Fund's performance may also be compared to the performance
of other variable annuity products in general or to the performance of
particular types of variable annuity products, with similar investment goals,
as tracked by the VARDS Report (Variable Annuity Research and Data Service
Report) produced by Financial Planning Resources, Inc. The VARDS Report is a
monthly performance analysis of the variable annuity industry.
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.
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.
STRONG VARIABLE INSURANCE FUNDS. The Strong Variable Insurance Funds offer a
range of investment options. All of the members of the Strong Variable
Insurance Funds and their investment objectives are listed below. The Funds are
listed in ascending order of risk and return, as determined by the Advisor.
FUND NAME INVESTMENT OBJECTIVE
<TABLE>
<CAPTION>
<S> <C>
Strong Opportunity Fund II Capital growth.
- ---------------------------------- ---------------
Strong Growth Fund II Capital growth.
- ---------------------------------- ---------------
Strong Discovery Fund II Capital growth.
- ---------------------------------- ---------------
Strong International Stock Fund II Capital growth.
- ---------------------------------- ---------------
Strong Schafer Value Fund II Capital growth.
- ---------------------------------- ---------------
</TABLE>
The Fund may from time to time be compared to the other funds in the Strong
Variable Insurance Funds based on a risk/reward spectrum. In general, the
amount of risk associated with any investment product is commensurate with that
product's potential level of reward. The Strong Variable Insurance Funds'
risk/reward continuum or any fund's position on the continuum may be described
or diagrammed in marketing materials. The Strong Variable Insurance Funds'
risk/reward continuum positions the risk and reward potential of the Fund
relative to the other Strong Variable Insurance Funds, but is not intended to
position any fund relative to other mutual funds or investment products.
Marketing materials may also discuss the relationship between risk and reward
as it relates to an individual investor's portfolio. Financial goals vary from
person to person. You may choose one or more of the Strong Variable Insurance
Funds to help you reach your financial goals.
ADDITIONAL FUND INFORMATION
36
<PAGE>
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.
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
37
<PAGE>
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.
PORTFOLIO MANAGEMENT
The Fund's portfolio manager(s) works with a team of analysts, traders, and
administrative personnel. From time to time, marketing materials may discuss
various members of the team, including their education, investment experience,
and other credentials.
The Advisor uses a research-intensive, "bottom up" securities selection
discipline to identify well-run, profitable companies whose prospects for
growth and other financial characteristics, when compared to the price of their
securities, indicate fundamental value and the potential for significant
capital appreciation. The Advisor's goal is to find well-managed companies
that have sustainable growth prospects but that are selling at prices below
their private market values. While not limited to smaller-capitalization
stocks, this investment approach often leads to smaller, newer companies that
have not yet captured the attention of investment professionals.
It should be noted, however, that investments in securities of under-researched
companies with smaller market capitalizations, while generally offering a
greater opportunity for appreciation, also involve a greater risk of
depreciation than securities of companies with larger market capitalization.
In addition, since companies with smaller market capitalizations are not as
broadly traded as those of companies with larger market capitalizations, these
securities are often subject to wider and more abrupt fluctuations in market
price.
The Advisor's investment philosophy is that (1) underfollowed stocks with low
institutional ownership and low analyst coverage tend to be undervalued; (2)
unpopular or "quiet" sectors of the market tend to be undervalued; (3) stock
prices are more volatile than underlying intrinsic business values; and (4)
smaller capitalization stocks historically have had higher growth rates and
have outperformed larger cap stocks, but may also entail significantly greater
price variability than those of larger companies.
38
<PAGE>
The Advisor's investment process includes (1) independent, fundamental
analysis; (2) screening for stocks covered by fewer than 10 analysts; (3)
identifying unpopular or "quiet" sectors of the market; (4) identifying
companies with consistent earnings per share growth greater than 10% and
price/earnings ratios below the S&P 500; (5) visiting companies and meeting
management; (6) establishing intrinsic business value and buy/sell targets, and
(7) diversifying the portfolio.
The Advisor considers selling a stock when it reaches 80 to 100% of private
market value, it becomes widely followed, or there is a change in company
fundamentals.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 411 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, are the independent accountants for the Fund, providing audit services
and assistance and consultation with respect to the preparation of filings with
the SEC.
LEGAL COUNSEL
Godfrey & Kahn, S.C., 780 North Water Street, Milwaukee, Wisconsin 53202, acts
as legal counsel for the Fund.
FINANCIAL STATEMENTS
The Annual Report for the Fund that is attached to this SAI contains the
following audited 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.
7. Report of Independent Accountants.
39
<PAGE>
APPENDIX
BOND RATINGS
STANDARD & POOR'S ISSUE CREDIT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium-term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement of the obligation and takes into account the
currency in which the obligation is denominated.
Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers to be
reliable. Standard & Poor's does not perform an audit in connection with any
credit ratings and may, on occasion, rely on unaudited financial information.
Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition
to the usual long-term rating. Medium-term notes are assigned long-term
ratings.
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of the
obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy.
AAA Obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet is financial commitment on the
obligation is extremely strong.
AA Obligation rated 'AA' differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Obligation rated 'A' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
40
<PAGE>
BB Obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues . However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet the financial commitment on the
obligation.
B Obligation rated 'B' is more vulnerable to nonpayment than obligations rated
'BB' but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC Obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC Obligation rated 'CC' is currently highly vulnerable to nonpayment.
C Obligation rated 'C' may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D Obligation rated 'D' is in payment default. The 'D' rating category is used
when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grade period. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
41
<PAGE>
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH IBCA, INC. ("FITCH") LONG-TERM NATIONAL CREDIT RATINGS
AAA
Obligations which have the highest rating assigned by Fitch on its national
rating scale for that country. This rating is automatically assigned to all
obligations issued or guaranteed by the sovereign state. Capacity for timely
repayment of principal and interest is extremely strong, relative to other
obligors in the same country.
AA
Obligations for which capacity for timely repayment of principal and interest
is very strong relative to other obligors in the same country. The risk
attached to these obligations differs only slightly from the country's highest
rated debt.
A
Obligations for which capacity for timely repayment of principal and interest
is strong relative to other obligors in the same country. However, adverse
changes in business, economic or financial conditions are more likely to affect
the capacity for timely repayment than for obligations in higher rated
categories.
BBB
Obligations for which capacity for timely repayment of principal and interest
is adequate relative to other obligors in the same country. However, adverse
changes in business, economic or financial conditions are more likely to affect
the capacity for timely repayment than for obligations in higher rated
categories.
BB
Obligations for which capacity for timely repayment of principal and interest
is uncertain relative to other obligors in the same country. Within the
context of the country, these obligations are speculative to some degree and
capacity for timely repayment remains susceptible over time to adverse changes
in business, financial or economic conditions.
B
Obligations for which capacity for timely repayment of principal and interest
is uncertain relative to other obligors in the same country. Timely repayment
of principal and interest is not sufficiently protected against adverse changes
in business, economic or financial conditions and these obligations are more
speculative than those in higher rated categories.
CCC
Obligations for which there is a current perceived possibility of default
relative to other obligors in the same country. Timely repayment of principal
and interest is dependent on favorable business, economic or financial
conditions and these obligations are far more speculative than those in higher
rated categories.
42
<PAGE>
CC
Obligations which are highly speculative relative to other obligors in the same
country or which have a high risk of default.
43
<PAGE>
C
Obligations which are currently in default.
DUFF & PHELPS, INC. LONG-TERM DEBT AND PREFERRED STOCK RATINGS
Rating Definition
AAA Highest credit quality. The risk factors are negligible, being only
slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest,
but may
AA vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are
more
A variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
to
BB- industry conditions or company fortunes. Overall quality may move up
or
down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be
met
B when due. Financial protection factors will fluctuate widely according
to
B- economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a
higher
or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty
exists as to
timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or
interest payments.
DP Preferred stock with dividend arrearages.
THOMSON BANKWATCH LONG-TERM DEBT RATINGS
Long-Term Debt Ratings assigned by Thomson BankWatch also weigh heavily
government ownership and support. The quality of both the company's management
and franchise are of even greater importance in the Long-Term Debt Rating
decisions. Long-Term Debt Ratings look out over a cycle and are not adjusted
frequently for what it believes are short-term performance aberrations.
44
<PAGE>
Long-Term Debt Ratings can be restricted to local currency debt - ratings will
be identified by the designation LC. In addition, Long-Term Debt Ratings may
include a plus (+) or minus (-) to indicate where within the category the issue
is placed. BankWatch Long-Term Debt Ratings are based on the following scale:
INVESTMENT GRADE
AAA (LC-AAA) - Indicates that the ability to repay principal and interest on a
timely basis is extremely high.
AA (LC-AA) - Indicates a very strong ability to repay principal and interest on
a timely basis, with limited incremental risk compared to issues rated in the
highest category.
A (LC-A) - Indicates the ability to repay principal and interest is strong.
Issues rated A could be more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
BBB (LC-BBB) - The lowest investment-grade category; indicates an acceptable
capacity to repay principal and interest. BBB issues are more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
NON-INVESTMENT GRADE - may be speculative in the likelihood of timely repayment
of principal and interest
BB (LC-BB) - While not investment grade, the BB rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the ability to
adequately service debt obligations.
B (LC-B) - Issues rated B show higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely
basis.
CCC (LC-CCC) - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
CC (LC-CC) - CC is applied to issues that are subordinate to other obligations
rated CCC and are afforded less protection in the event of bankruptcy or
reorganization.
D (LC-D) - Default.
SHORT-TERM RATINGS
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
'A-1"
A short-term obligation rated 'A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
'A-2'
A short-term obligation rated 'A-2' is somewhat more susceptible to the averse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its
financial commitment on the obligations is satisfactory.
'A-3'
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<PAGE>
A short-term obligation rated 'A-3' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
'B'
A short-term obligation rated 'B' is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligations; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
'C'
A short-term obligation rated 'C' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
'D'
A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing or a bankruptcy petition of the taking
of a similar action if payments on an obligation are jeopardized.
MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: (i) leading
market positions in well-established industries, (ii) high rates of return on
funds employed, (iii) conservative capitalization structure with moderate
reliance on debt and ample asset protection, (iv) broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and (v)
well established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
FITCH IBCA, INC. ("FITCH") SHORT-TERM NATIONAL CREDIT RATINGS
A1
46
<PAGE>
Obligations assigned this rating have the highest capacity for timely repayment
under Fitch's national rating scale for that country, relative to other
obligations in the same country. This rating is automatically assigned to all
obligations issued or guaranteed by the sovereign state. Where issues possess
a particularly strong credit feature, a "+" is added to the assigned rating.
A2
Obligations supported by a strong capacity for timely repayment relative to
other obligors in the same country. However, the relative degree of risk is
slightly higher than for issues classified as 'A1' and capacity for timely
repayment may be susceptible to adverse change in business, economic, or
financial conditions.
A3
Obligations supported by an adequate capacity for timely repayment relative to
other obligors in the same country. Such capacity is more susceptible to
adverse changes in business, economic, or financial conditions than for
obligations in higher categories.
B
Obligations for which the capacity for timely repayment is uncertain relative
to other obligors in the same country. The capacity for timely repayment is
susceptible to adverse changes in business, economic, or financial conditions.
C
Obligations for which there is a high risk of default to other obligors in the
same country or which are in default.
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
RATING: DEFINITION
HIGH GRADE
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
SATISFACTORY GRADE
D-3 Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
NON-INVESTMENT GRADE
D-4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
DEFAULT
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
TBW assigns Short-Term Debt Ratings to specific debt instruments with original
maturities of one year or less.
TBW-1 (LC-1) The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 (LC-2) The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".
TBW-3 (LC-3) The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 (LC-4) The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
<PAGE>
STRONG OPPORTUNITY FUND II, INC.
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements (all included or incorporated by reference in
Parts A & B) (Audited)
Schedule of Investments in Securities
Statement of Operations
Statement of Assets and Liabilities
Statement of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
Incorporated by reference to the Annual Report to Shareholders of the
Strong Opportunity Fund II dated December 31, 1997, pursuant to Rule 411 under
the Securities Act of 1933. (File Nos. 33-45320 and 811-6552)
(b) Exhibits
(1) Articles of Incorporation dated July 31, 1996(3)
(2) Bylaws dated October 20, 1995(2)
(3) Inapplicable
(4) Specimen Stock Certificate(2)
(5) Investment Advisory Agreement(1)
(6) Distribution Agreement(2)
(7) Inapplicable
(8) Custody Agreement(2)
(8.1) Global Custody Agreement(2)
(9) Shareholder Servicing Agent Agreement(2)
(9.1) Amended and Restated Fund Participation Agreement(2)
(10) Inapplicable
(11) Consent of Independent Accountants
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16) Inapplicable
(17) Financial Data Schedule
(18) Inapplicable
(19) Power of Attorney dated April 24, 1997(3)
(20) Letter of Representation
(21.1) Code of Ethics for Access Persons dated October 18,
1996(3)
(21.2) Code of Ethics for Non-Access Persons dated October 18,
1996(3)
(1) Incorporated herein by reference to Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A of Registrant filed on or about April
21, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 8 to
the Registration Statement on Form N-1A of Registrant filed on or about April
23, 1996.
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<PAGE>
(3) Incorporated herein by reference to Post-Effective Amendment No. 10 to
the Registration Statement on Form N-1A of Registrant filed on or about April
25, 1997.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant neither controls any person nor is under common control with
any other person.
Item 26. NUMBER OF HOLDERS OF SECURITIES
Number of Record Holders
TITLE OF CLASS AS OF MARCH 31, 1998
Common Stock, $.00001 par value 14
Item 27. INDEMNIFICATION
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Group and Great
American Insurance Company in the aggregate amount of $100,000,000, subject to
certain deductions. Pursuant to the authority of the Wisconsin Business
Corporation Law ("WBCL"), Article VII of Registrant's Bylaws provides as
follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01. MANDATORY INDEMNIFICATION. The Corporation shall
indemnify, to the full extent permitted by the WBCL, as in effect from time to
time, the persons described in Sections 180.0850 through 180.0859 (or any
successor provisions) of the WBCL or other provisions of the law of the State
of Wisconsin relating to indemnification of directors and officers, as in
effect from time to time. The indemnification afforded such persons by this
section shall not be exclusive of other rights to which they may be entitled as
a matter of law.
SECTION 7.02. PERMISSIVE SUPPLEMENTARY BENEFITS. The Corporation may,
but shall not be required to, supplement the right of indemnification under
Section 7.01 by (a) the purchase of insurance on behalf of any one or more of
such persons, whether or not the Corporation would be obligated to indemnify
such person under Section 7.01; (b) individual or group indemnification
agreements with any one or more of such persons; and (c) advances for related
expenses of such a person.
SECTION 7.03. AMENDMENT. This Article VII may be amended or repealed
only by a vote of the shareholders and not by a vote of the Board of Directors.
SECTION 7.04. INVESTMENT COMPANY ACT. In no event shall the Corporation
indemnify any person hereunder in contravention of any provision of the
Investment Company Act.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The information contained under "Management" in the Prospectus and under
"Directors and Officers," "Investment Advisor," and "Distributor" in the
Statement of Additional Information is hereby incorporated by reference
pursuant to Rule 411 under the Securities Act of 1933.
Item 29. PRINCIPAL UNDERWRITERS
(a) Strong Funds Distributors, Inc., principal underwriter for Registrant,
also serves as principal underwriter for Strong Advantage Fund, Inc.; Strong
Asia Pacific Fund, Inc.; Strong Asset Allocation Fund, Inc.; Strong Common
Stock Fund, Inc.; Strong Conservative Equity Funds, Inc.; Strong Corporate Bond
Fund, Inc.; Strong Discovery Fund, Inc.; Strong Equity Funds, Inc.; Strong
Government Securities Fund, Inc.; Strong Heritage Reserve Series, Inc.; Strong
High-Yield Municipal Bond Fund, Inc.; Strong Income Funds, Inc.; Strong
Institutional Funds, Inc.; Strong International Income Funds, Inc.; Strong
International Stock Fund, Inc.; Strong Money Market Fund, Inc.; Strong
2
<PAGE>
Municipal Bond Fund, Inc.; Strong Municipal Funds, Inc.; Strong Opportunity
Fund, 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) The information contained under "Management" in the Prospectus and
under "Directors and Officers," "Investment Advisor," and "Distributor" in the
Statement of Additional Information is hereby incorporated by reference
pursuant to Rule 411 under the Securities Act of 1933.
(c) None
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Vice President,
Thomas P. Lemke, at Registrant's corporate offices, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
Item 31. MANAGEMENT SERVICES
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 32. UNDERTAKINGS
The Registrant undertakes to furnish to each person to whom a prospectus
is delivered, upon request and without charge, a copy of the Registrant's
latest annual report to shareholders.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 11 to
the Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment No. 11 to the
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the Village of Menomonee Falls, and State of Wisconsin on
the 28th day of April, 1998.
STRONG OPPORTUNITY FUND II, INC.
(Registrant)
By: /S/ THOMAS P. LEMKE
Thomas P. Lemke, Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 11 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
- ---------------------------- ------------------------------------ -----------------
Vice President (Principal Executive
/s/ Thomas P. Lemke Officer) April 28, 1998
- ----------------------------
Thomas P. Lemke
/s/ Richard S. Strong Chairman of the Board and a Director April 28, 1998
- ----------------------------
Richard S. Strong
Treasurer (Principal Financial and
/s/ John A. Flanagan Accounting Officer) April 28, 1998
- ----------------------------
John A. Flanagan
Director April 28, 1998
- ----------------------------
Marvin E. Nevins*
Director April 28, 1998
- ----------------------------
Willie D. Davis*
Director April 28, 1998
- ----------------------------
William F. Vogt*
Director April 28, 1998
- ----------------------------
Stanley Kritzik*
</TABLE>
* John S. Weitzer signs this document pursuant to powers of attorney filed
with Post-Effective Amendment No. 10 to the 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.
(11) Consent of Independent Accountants EX-99.B11
(17) Financial Data Schedule EX-27.CLASSA
(20) Letter of Representation EX-99.B20
</TABLE>
1
<PAGE>
Consent of Independent Accountants
To the Board of Directors of
Strong Opportunity Fund II, Inc.
We consent to the incorporation by reference in Post-Effective
Amendment No. 11 to the Registration Statement of Strong
Opportunity Fund II, Inc. on Form N-1A of our report dated
February 4, 1998 on our audits of the financial statements and
financial highlights of Strong Opportunity Fund II, Inc., which
report is included in the Annual Report to Shareholders for the
year ended December 31, 1997, which is also incorporated by
reference in the Registration Statement. We also consent to the
reference to our Firm under the captions "Financial Highlights"
in the Prospectus and "Independent Accountants" in the Statement
of Additional Information.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
April 28, 1998
1
<PAGE>
[ARTICLE] 6
[CIK] 0000883678
[NAME] "Strong Opportunity II Fund, Inc."
[MULTIPLIER]
<TABLE>
<S> <C>
[PERIOD-TYPE] Year
[FISCAL-YEAR-END] Dec-31-1997
[PERIOD-START] Jan-01-1997
[PERIOD-END] Dec-31-1997
[INVESTMENTS-AT-COST] 687601336
[INVESTMENTS-AT-VALUE] 832581407
[RECEIVABLES] 7976513
[ASSETS-OTHER] 9950
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 840567870
[PAYABLE-FOR-SECURITIES] 5308301
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 50847
[TOTAL-LIABILITIES] 5359148
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 580141960
[SHARES-COMMON-STOCK] 38480500
[SHARES-COMMON-PRIOR] 32843531
[ACCUMULATED-NII-CURRENT] 303495
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 109925308
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 144837959
[NET-ASSETS] 835208722
[DIVIDEND-INCOME] 7596912
[INTEREST-INCOME] 3339254
[OTHER-INCOME] 0
[EXPENSES-NET] 8365136
[NET-INVESTMENT-INCOME] 2571030
[REALIZED-GAINS-CURRENT] 110951151
[APPREC-INCREASE-CURRENT] 49558727
[NET-CHANGE-FROM-OPS] 163080908
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] "(2,733,693)"
[DISTRIBUTIONS-OF-GAINS] "(60,859,506)"
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 10580657
[NUMBER-OF-SHARES-REDEEMED] "(8,576,774)"
[SHARES-REINVESTED] 3633086
[NET-CHANGE-IN-ASSETS] 203267908
[ACCUMULATED-NII-PRIOR] 303495
[ACCUMULATED-GAINS-PRIOR] 109925308
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 7255725
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 8365136
[AVERAGE-NET-ASSETS] 727467422
1
<PAGE>
[PER-SHARE-NAV-BEGIN] 19.24
[PER-SHARE-NII] 0.07
[PER-SHARE-GAIN-APPREC] 4.35
[PER-SHARE-DIVIDEND] (0.08)
[PER-SHARE-DISTRIBUTIONS] (1.88)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 21.70
[EXPENSE-RATIO] 1.1
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
2
<PAGE>
GODFREY & KAHN, S.C.
ATTORNEYS AT LAW
780 North Water Street
Milwaukee, Wisconsin 53202
Phone: (414) 273-3500 Fax: (414) 273-5198
April 28, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: STRONG OPPORTUNITY FUND II, INC.
Gentlemen:
We represent Strong Opportunity Fund II, Inc. (the "Company"), in
connection with its filing of Post-Effective Amendment No. 11 (the
"Post-Effective Amendment") to the Company's Registration Statement
(Registration Nos. 33-45320; 811-6552) on Form N-1A under the Securities Act of
1933 (the "Securities Act") and the Investment Company Act of 1940. The
Post-Effective Amendment is being filed pursuant to Rule 485(b) under the
Securities Act.
We have reviewed the Post-Effective Amendment and, in accordance with
Rule 485(b)(4) under the Securities Act, hereby represent that the
Post-Effective Amendment does not contain disclosures which would render it
ineligible to become effective pursuant to Rule 485(b).
Very truly yours,
GODFREY & KAHN, S.C.
/s/ Pamela M. Krill
Pamela M. Krill
MW1-118218-1
1
<PAGE>
