<PAGE> 1
As filed with the Securities and Exchange Commission on or about
November 17, 1997
Securities Act Registration No. 33-74578
Investment Company Act Registration No. 811-8318
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. 7 [X]
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 8 [X]
---
(Check appropriate box or boxes)
STRONG INTERNATIONAL INCOME FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
FORMERLY KNOWN AS STRONG INTERNATIONAL BOND FUND, INC.
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
[ ] on (date) 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
[X] on January 31, 1998 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.
<PAGE> 2
STRONG INTERNATIONAL INCOME FUNDS, INC.
CROSS REFERENCE SHEET
This Post-Effective Amendment to the Registration Statement of Strong
International Income Funds, Inc., which is currently comprised of one fund,
relates only to Strong Global High-Yield Bond Fund, which is being added to
Strong International Income Funds, Inc. through this Amendment. This
Post-Effective Amendment does not relate to, amend, supersede, or otherwise
affect the Prospectus and Statement of Additional Information contained in
Post-Effective Amendment Nos. 6.
For Strong Global High-Yield Bond Fund
(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.)
<TABLE>
<CAPTION>
Caption or Subheading in Prospectus or
Item No. on Form N-1A Statement of Additional Information
- ------------------------------------------------------ --------------------------------------
<S> <C>
PART A - Information Required in Prospectus
1. Cover Page Cover Page
2. Synopsis Expenses
3. Condensed Financial Information Inapplicable
4. General Description of Registrant Investment Objective and Policies;
Fundamentals of Fixed Income
Investing; Implementation of Policies
and Risks; About the Fund -
Organization
5. Management of the Fund About the Fund - Management
5A. Management's Discussion of Fund Performance Inapplicable
6. Capital Stock and Other Securities About the Fund - Organization, -
Distributions and Taxes; Shareholders
Manual - Shareholder Services
7. Purchase of Securities Being Offered Shareholder Manual - How to Buy
Shares, - Determining Your Share
Price, - Shareholder Services
8. Redemption or Repurchase Shareholder Manual - How to Sell
Shares, - Determining Your Share
Price, - Shareholder Services
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
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Caption or Subheading in Prospectus or
Item No. on Form N-1A Statement of Additional Information
- ------------------------------------------------------ --------------------------------------
<S> <C>
14. Management of the Fund Directors and Officers of the Fund
15. Control Persons and Principal Holders of Principal Shareholders; Directors and
Securities Officers of the Fund; Investment
Advisor and Distributor
16. Investment Advisory and Other Services Investment Advisor and Distributor;
About the Fund - 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 About the Fund - Organization
and in the Statement of Additional
Information under the heading
Shareholder Meetings
19. Purchase, Redemption and Pricing of Securities Included in Prospectus under the
Being Offered headings: Shareholder Manual - How
to Buy Shares, - Determining Your
Share Price, - How to Sell Shares, -
Shareholder Services; and in the
Statement of Additional Information
under the headings: Additional
Shareholder Information; and
Determination of Net Asset Value
20. Tax Status Included in Prospectus under the
heading About the Fund -
Distributions and Taxes; and in the
Statement of Additional Information
under the heading Taxes
21. Underwriters Investment Advisor and Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Inapplicable
</TABLE>
* Complete answer to Item is contained in Fund's Prospectus.
<PAGE> 4
INFORMATION CONTAINED HEREIN PERTAINING TO THE STRONG GLOBAL HIGH-YIELD
BOND FUND IS SUBJECT TO COMPLETION OR AMENDMENT. A POST-EFFECTIVE
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO, AMONG OTHER THINGS,
SECURITIES OF THE STRONG GLOBAL HIGH-YIELD BOND FUND HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. SECURITIES OF THE STRONG GLOBAL
HIGH-YIELD BOND FUND MAY NOT BE SOLD NOR MAY OFFERS TO BUY SECURITIES OF
THE STRONG GLOBAL HIGH-YIELD BOND FUND BE ACCEPTED PRIOR TO THE TIME THE
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF SECURITIES OF THE
STRONG GLOBAL HIGH-YIELD BOND FUND IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATE OF ISSUANCE: JANUARY 1
STRONG GLOBAL HIGH-YIELD BOND FUND
STRONG FUNDS
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
Device for the
Hearing-Impaired:
(800) 999-2780
www.strong-funds.com
The Strong Family of Funds ("Strong Funds") is a family of more than
thirty-five diversified and non-diversified mutual funds. All of the Strong
Funds are no-load funds, meaning that you may purchase, redeem, or exchange
shares without paying a sales charge. Strong Funds include growth funds,
conservative equity funds, income funds, municipal income funds, international
funds, and cash management funds. The Strong Global High-Yield Bond Fund (the
"Fund") is described in this Prospectus. The Fund seeks total return by
investing for a high level of current income capital growth. The Fund is a
non-diversified series of Strong International Income Funds, Inc., an open-end
management company.
This Prospectus contains information you should consider before you invest.
Please read it carefully and keep it for future reference. A Statement of
Additional Information for the Fund, dated January 31, 1998, which contains
further information, is incorporated by reference into this Prospectus, and has
been filed with the Securities and Exchange Commission ("SEC"). That Statement,
which may be revised from time to time, is available without charge upon request
to the above-noted address or telephone number. If you would like to
electronically access additional information about the Funds after reading the
prospectus, you may do so by accessing the SEC's World Wide Web site (at
http://www.sec.gov) that contains the Statement of Additional Information
regarding the Fund and other related materials.
============================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN LOWER-RATED BONDS,
COMMONLY KNOWN AS "JUNK BONDS." BONDS OF THIS TYPE ARE SUBJECT TO GREATER RISKS
WITH REGARD TO PAYMENT OF INTEREST AND RETURN OF PRINCIPAL, THAN ARE
HIGHER-RATED BONDS. INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED
WITH AN INVESTMENT IN THE FUND. (SEE THE PROSPECTUS SECTION ENTITLED
"FUNDAMENTALS OF FIXED INCOME INVESTING - CREDIT QUALITY - HIGH-YIELD
(HIGH-RISK) SECURITIES.")
January 31, 1998
PROSPECTUS PAGE I-1
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXPENSES................................. I-3
INVESTMENT OBJECTIVE AND POLICIES........ I-4
FUNDAMENTALS OF FIXED INCOME INVESTING... I-5
IMPLEMENTATION OF POLICIES AND RISKS..... I-9
ABOUT THE FUND........................... I-17
SHAREHOLDER MANUAL....................... II-1
APPENDIX................................. A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the Statement
of Additional Information, 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 in any state or
jurisdiction in which such offering may not lawfully be made.
PROSPECTUS PAGE I-2
<PAGE> 6
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Fund, will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............. NONE
Sales Load Imposed on Reinvested
Dividends................................. NONE
Deferred Sales Load......................... NONE
Redemption Fees............................. NONE
Exchange Fees............................... NONE
</TABLE>
There are certain charges associated with retirement accounts and with
certain other special shareholder services offered by the Fund. Additionally,
purchases and redemptions may also be made through broker-dealers or other
financial intermediaries who may charge fees for their services. (See
"Shareholder Manual - How to Buy Shares" and "- How to Sell Shares.")
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Management Other 12b-1 Operating
Fund Fees Expenses Fees Expenses
<S> <C> <C> <C> <C>
Global High-Yield Bond Fund 0.70% --% NONE --%
</TABLE>
From time to time, the Fund's investment advisor, Strong Capital Management,
Inc. (the "Advisor"), may voluntarily waive its management fee and/or absorb
certain expenses for the Fund. Since the Fund is new and did not begin
operations until January 31, 1998, the Other Expenses have been estimated. For
additional information concerning fees and expenses, see "About the
Fund - Management."
EXAMPLE. You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period (in years)
Fund 1 3
<S> <C> <C>
Global High-Yield Bond
Fund $__ $__
</TABLE>
- ----------------------------------------------------------------------------
PROSPECTUS PAGE I-3
<PAGE> 7
The Example is based on the Fund's "Total Fund Operating Expenses" before any
waivers and absorptions, described above. PLEASE REMEMBER THAT THE EXAMPLE
SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE EXPENSES AND THAT
ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. The assumption in the
Example of a 5% annual return is required by regulations of the SEC applicable
to all mutual funds. The assumed 5% annual return is not a prediction of, and
does not represent, the projected or actual performance of the Fund's shares.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's risk and return potential depends in part on the maturity and
credit-quality characteristics of the underlying investments in their
portfolios. In general, longer-maturity debt obligations carry higher yields and
greater price volatility than shorter-term debt obligations. Similarly,
securities issued by less creditworthy entities tend to carry higher yields than
those with higher credit ratings. (See "Fundamentals of Fixed Income Investing"
for a more detailed discussion of the principles and risks associated with debt
obligations.)
The Fund has adopted certain fundamental investment restrictions that are set
forth in the Fund's Statement of Additional Information ("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 operating 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.
Except as limited below, the Fund may invest in a diversified portfolio of
securities without regard to objective investment criteria, such as company
size, exchange listing, earnings history, or other factors. When selecting
securities, the Advisor will, except as otherwise limited below, be limited only
by its best judgment as to what will help achieve the Fund's investment
objectives.
When the Advisor determines market conditions warrant a temporary defensive
position, the Fund may invest without limitation in cash (U.S. dollars, foreign
currencies, or multi-currency units) and short-term fixed-income securities.
STRONG GLOBAL HIGH-YIELD BOND FUND
The Fund seeks total return by investing for a high level of current income
and capital growth.
The Fund invests primarily in medium- and lower-quality debt obligations of
U.S. and foreign issuers. Under normal market conditions the Fund invests at
least 80% of its net assets in medium- and lower-quality debt obligations.
Medium-quality debt obligations are those rated in the fourth-highest category
(e.g., bonds rated BBB by S&P) or obligations determined by the Advisor to be
PROSPECTUS PAGE I-4
<PAGE> 8
of comparable quality. Medium-quality debt obligations, although considered
investment grade, have some speculative characteristics. Lower-quality bonds,
also commonly referred to as "non-investment-grade" bonds or "junk" bonds, are
those rated below the fourth-highest category (e.g., those bonds rated as low as
C by S&P) or bonds of comparable quality. The Fund also may invest in debt
obligations that are in default, but such obligations are not expected to exceed
10% of the Fund's net assets. (See "Fundamentals of Fixed Income
Investing - Credit Quality - High-Yield (High-Risk) Securities" for further
information on the risks associated with investing in medium- and lower-quality
debt obligations.) The Fund may also invest up to 20% of its net assets in
common stocks and securities that are convertible into common stocks, such as
warrants.
Under normal market conditions, the Fund will invest in at least three
different countries, including the U.S. To attempt to limit the Fund's exposure
to foreign-currency risk, the Advisor intends to employ hedging strategies. (See
"Implementation of Policies and Risks - Derivative Instruments.")
FUNDAMENTALS OF FIXED
INCOME INVESTING
The securities in which the Fund may invest, subject to their investment
objectives and policies, include fixed- and variable-rate obligations,
debentures, notes, certificates of deposit, commercial paper, repurchase
agreements, banker's acceptances, other short-term fixed-income securities,
structured investments such as mortgage- and asset-backed securities, loan
participations and assignments, and convertible debt issued by governmental or
non-governmental issuers located in the U.S. or in foreign countries or by
supranational issuers, such as the World Bank, the Asian Development Bank, the
European Investment Bank and the European Economic Community. The Fund may also
invest in warrants and preferred stock. Such securities may be denominated in
U.S. dollars, in foreign currencies or in multinational currencies, such as the
European Currency Unit.
Issuers of debt obligations have a contractual obligation to pay interest at
a specified rate ("coupon rate") on specified dates and to repay principal
("face value" or "par value") on a specified maturity date. Certain debt
obligations (usually intermediate- and long-term obligations) have provisions
that allow the issuer to redeem or "call" the obligation before its maturity.
Issuers are most likely to call debt obligations during periods of falling
interest rates. As a result, the Fund may be required to invest the
unanticipated proceeds of the called obligation at lower interest rates, which
may cause the Fund's income to decline.
Although the net asset value of the Fund is expected to fluctuate, the
Advisor actively manages the Fund's portfolio and, adjusts its average effective
portfolio maturity according to the Advisor's interest rate outlook while
seeking to avoid or reduce, to the extent possible, any negative change in the
Fund's net asset value.
PROSPECTUS PAGE I-5
<PAGE> 9
PRICE VOLATILITY
The market value of debt obligations is affected by changes in prevailing
interest rates. The market value of a debt obligation generally reacts inversely
to interest-rate changes, meaning, when prevailing interest rates decline, an
obligation's price usually rises, and when prevailing interest rates rise, an
obligation's price usually declines. A fund portfolio consisting primarily of
debt obligations will react similarly to changes in interest rates.
MATURITY
In general, the longer the maturity of a debt obligation, the higher its
yield and the greater its sensitivity to changes in interest rates. Conversely,
the shorter the maturity, the lower the yield but the greater the price
stability. Commercial paper is generally considered the shortest form of debt
obligation. Notes, whose original maturities are two years or less, are
considered short-term obligations. The term "bond" generally refers to
securities with maturities longer than two years. Bonds with maturities of three
years or less are considered short-term, bonds with maturities between three and
seven years are considered intermediate-term, and bonds with maturities greater
than seven years are considered long-term. The Fund may invest in debt
obligations which are subject to demand or other features which may be used by
the Fund to shorten the maturity of the obligation.
CREDIT QUALITY
The values of debt obligations may also be affected by changes in the credit
rating or financial condition of their issuers. Generally, the lower the quality
rating of an obligation, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings.
In conducting its credit research and analysis, the Advisor considers both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings compiled
by a number of nationally recognized statistical rating organizations, which
include Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service,
Inc., Fitch Investors Service, Inc., Duff & Phelps Rating Co., Thomson
BankWatch, Inc., and IBCA, Inc., (the "NRSROs"). "Appendix - Ratings of Debt
Obligations" presents the ratings of these organizations. Please refer to the
Appendix in the Fund's SAI for a more detailed description of the ratings of the
NRSROs.
PROSPECTUS PAGE I-6
<PAGE> 10
TYPES OF OBLIGATIONS. Debt obligations include (i) corporate debt securities,
including bonds, debentures, and notes; (ii) bank obligations, such as
certificates of deposit, banker's acceptances, and time deposits of domestic and
foreign banks and their subsidiaries and branches, and domestic savings and loan
associations (in amounts in excess of the insurance coverage (currently $100,000
per account) provided by the Federal Deposit Insurance Corporation); (iii)
commercial paper (including variable-amount master demand notes); (iv)
repurchase agreements; (v) loan interests; (vi) foreign debt obligations issued
by foreign issuers traded either in foreign markets or in domestic markets
through depositary receipts; (vii) convertible securities - debt obligations of
corporations convertible into or exchangeable for equity securities or debt
obligations that carry with them the right to acquire equity securities, as
evidenced by warrants attached to such securities, or acquired as part of units
of the securities; (viii) preferred stocks - securities that represent an
ownership interest in a corporation and that give the owner a prior claim over
common stock on the company's earnings or assets; (ix) trust preferred
securities - certain obligations which have characteristics of both debt and
preferred stocks; (x) U.S. government securities; (xi) mortgage-backed
securities, collateralized mortgage obligations, and similar securities; and
(xii) municipal obligations.
INVESTMENT-GRADE DEBT OBLIGATIONS. Investment-grade debt obligations include
the following:
- - U.S. government securities (See "Implementation of Policies and Risks -
Government Securities" below);
- - bonds or bank obligations rated in one of the four highest rating categories
(e.g., BBB or higher by 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.,
A-3 or higher by S&P);
- - unrated debt obligations 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 NRSRO.
PROSPECTUS PAGE I-7
<PAGE> 11
HIGH-YIELD (HIGH-RISK) SECURITIES. High-yield (high-risk) securities, also
referred to as "junk bonds," are those securities that are rated lower than
investment grade and unrated securities of comparable quality. Although these
securities generally offer higher yields than investment-grade securities with
similar maturities, lower-quality securities involve greater risks, including
the possibility of default or bankruptcy. In general, they are regarded to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Other potential risks associated with investing in
high-yield securities include:
- - substantial market-price volatility resulting from changes in interest rates,
changes in or uncertainty about economic conditions, and changes in the actual
or perceived ability of the issuer to meet its obligations;
- - greater sensitivity of highly-leveraged issuers to adverse economic changes
and individual-issuer developments;
- - subordination to the prior claims of other creditors;
- - additional Congressional attempts to restrict the use or limit the tax and
other advantages of these securities; and
- - adverse publicity and changing investor perceptions about these securities.
As with any other asset in the Fund's portfolio, any reduction in the value
of such securities as a result of the factors listed above would be reflected in
the Fund's net asset value. In addition, the Fund that invests in lower-quality
securities may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal and interest on its
holdings. As a result of the associated risks, successful investments in
high-yield (high-risk) securities will be more dependent on the Advisor's credit
analysis than generally would be the case with investments in investment-grade
securities.
It is uncertain how the high-yield market will perform during a prolonged
period of rising interest rates. A prolonged economic downturn or a prolonged
period of rising interest rates could adversely affect the market for these
securities, increase their volatility, and reduce their value and liquidity. In
addition, lower-quality securities tend to be less liquid than higher-quality
securities because the market for them is not as broad or active. If market
quotations are not available, these securities will be valued in accordance with
procedures established by the Fund's Board of Directors. Judgment may,
therefore, play a greater role in valuing these securities. The lack of a liquid
secondary market may have an adverse effect on market price and the Fund's
ability to sell particular securities.
PROSPECTUS PAGE I-8
<PAGE> 12
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to
certain restrictions described below), the Fund may invest in some or all of the
following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of certain of these securities and investment techniques and
their associated risks is contained in the Fund's 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 markets, from time to time
foreign securities may be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign investing, such as custody
charges and brokerage costs, may be higher than those attributable to domestic
investing.
The risks of investing in foreign markets generally are greater for
investments in developing or emerging markets and economies in which the Fund
may invest. Risks of investing in such markets include:
- - less social, political, and economic stability;
- - smaller securities markets and lower trading volumes, which may result in a
lack of liquidity and in greater price volatility;
- - certain national policies that may restrict a Fund's investment opportunities,
including restrictions on investments in issuers or industries deemed
sensitive to national interests, or expropriation or confiscation of assets or
property, which could result in the Fund's loss of its entire investment in
that market; and
PROSPECTUS PAGE I-9
<PAGE> 13
- - less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes,
and other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
The Advisor will actively manage the allocation of the Fund's investments
among countries, geographic regions, and currencies to attempt to achieve the
Fund's investment objective. In doing so, the Advisor will consider such factors
as the historical and prospective relationships among currencies, current and
anticipated interest rates, inflation levels within various countries, prospects
for economic growth, government policies influencing currency exchange rates and
business conditions, as well as other macroeconomic, social and political
factors. In assessing investments in developing countries, the Advisor will
consider, among other things, whether the economic, political and interest rate
environments in such countries show signs of stabilizing or improving.
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 consistent with its investment
objective, including transaction hedging, anticipatory hedging, and cross
hedging. Successful use of currency instruments will depend on the Advisor's
skill in analyzing and predicting currency values, and there is no assurance
that the use of these instruments will be advantageous to the Fund. The Fund
generally does not engage in foreign currency hedging. (See "Derivative
Instruments.")
SOVEREIGN DEBT
The Fund may invest in debt obligations issued or guaranteed by foreign
governments or their agencies, instrumentalities or political subdivisions, or
by supranational issuers (collectively, "sovereign debt"). Investment in
sovereign debt involves special risks. Certain foreign countries, particularly
developing countries, have experienced, and may continue to experience, high
rates of
PROSPECTUS PAGE I-10
<PAGE> 14
inflation and high interest rates; exchange-rate fluctuations; large amounts of
external debt, balance-of-payments, and trade difficulties; and extreme poverty
and unemployment. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or interest when due in accordance with the terms of such debt, and the Fund may
have limited legal recourse in the event of default. The Fund will not invest
more than 25% of its total assets in securities issued by any single foreign
government, but the Fund may invest more than 25% of its total assets in
securities of issuers in a single foreign country.
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, 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 (the "premium") to the "writer" (the seller) to obtain the right, but not
the obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time. The
holder pays the premium at inception and has no further financial obligation.
The holder of an option-based derivative generally will benefit from favorable
movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses due to changes in the value of the
underlying asset.
A forward is a sales contract between a buyer (holding the "long" position)
and a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed future
date and the seller agrees to deliver the asset. The seller hopes that the
market price on the delivery date is less than the agreed upon price, while the
buyer hopes for the contrary. The change in value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset.
PROSPECTUS PAGE I-11
<PAGE> 15
Derivative instruments may include (i) options; (ii) futures; (iii) options
on futures; (iv) short sales against the box, in which the Fund sells a security
it owns for delivery at a future date; (v) swaps, in which two parties agree to
exchange a series of cash flows in the future, such as interest-rate payments;
(vi) interest-rate caps, under which, in return for a premium, one party agrees
to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; (vii) interest-rate floors, under which, in return for
a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; (viii) forward currency
contracts and foreign currency exchange-related securities; and (ix) structured
instruments which combine the foregoing in different ways.
Derivatives may be exchange-traded or traded in OTC transactions between
private parties. OTC transactions are subject to additional risks, such as the
credit risk of the counterparty to the instrument and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other 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 in 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.
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 that mature 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)
PROSPECTUS PAGE I-12
<PAGE> 16
commercial paper may be determined to be liquid under guidelines adopted by the
Fund's Board of Directors.
WHEN-ISSUED SECURITIES
The Fund may invest without limitation 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,
generally within 45 days. Purchasing when-issued securities allows the Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when the Fund purchases a when-issued security, 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 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 when-issued securities 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 when-issued securities.
MORTGAGE DOLLAR ROLLS AND
REVERSE REPURCHASE AGREEMENTS
The Fund may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions discussed below. In a reverse repurchase agreement, a Fund would
sell a security and enter into an agreement to repurchase the security at a
specified future date and price. The Fund generally retains the right to
interest and principal payments on the security. Since the Fund receives cash
upon entering into a reverse repurchase agreement, it may be considered a
borrowing. When required by SEC guidelines, the Fund will set aside permissible
liquid assets in a segregated account to secure its obligation 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 sale price and the lower price
for the future purchase as well as by any interest earned on the proceeds of the
initial sale. The Fund also could be compensated through the receipt of fee
income equivalent to a lower forward price. At the time that the Fund
PROSPECTUS PAGE I-13
<PAGE> 17
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 of the related mortgage
dollar roll or reverse repurchase agreement. 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.
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 or guaranteed 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.
PROSPECTUS PAGE I-14
<PAGE> 18
DIVERSIFICATION
The Fund is non-diversified. Because the Fund may invest a larger portion of
its assets in the securities of a single issuer than diversified funds, an
investment in the Fund may be subject to greater fluctuations in value than an
investment in a diversified fund.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators in mortgage loans, including savings associations, mortgage bankers,
commercial banks, investment bankers, and special purpose entities
(collectively, "private lenders"). Mortgage-backed securities issued by private
lenders may be supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by the U.S. government
or one of its agencies or instrumentalities, or they may be issued without any
governmental guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first-lien mortgage
loans or interests therein; rather, they include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal and
interest on asset-backed securities may be supported by non-governmental credit
enhancements similar to those utilized in connection with mortgage-backed
securities.
The yield characteristics of mortgage- and asset-backed securities differ
from those of traditional debt obligations. Among the principal differences are
that interest and principal payments are made more frequently on mortgage-and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if 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. 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
PROSPECTUS PAGE I-15
<PAGE> 19
asset-backed securities is smaller and less liquid than the market for
government-sponsored mortgage-backed securities.
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 the market
value may be extremely volatile. With respect to certain stripped securities,
such as interest-only ("IO") and principal-only ("PO") classes, a rate of
prepayment that is faster or slower than anticipated may result in the Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
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 accrued during
that year. In order to continue to qualify as a "regulated investment company"
under the Internal Revenue Code and avoid a certain excise tax, each Fund may be
required to distribute a portion of such discount and income and may be required
to dispose of other portfolio securities, which may occur in periods of adverse
market prices, in order to generate cash to meet these distribution
requirements.
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, the "Strong Money Funds"). The Strong Money Funds
seek current income, a stable share price of $1.00, and daily liquidity. All
money market instruments can change in value when interest rates or an issuer's
creditworthiness change dramatically. The Strong Money Funds cannot guarantee
that they will always be able to maintain a stable net asset value of $1.00 per
share.
PORTFOLIO TURNOVER
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
PROSPECTUS PAGE I-16
<PAGE> 20
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
and could result in the payment by shareholders of above-average amounts of
taxes on realized investment gains. The annual portfolio turnover rate for the
Fund is expected to be between 200% and 300%. However, the Fund's portfolio
turnover rate may exceed 300% when the Advisor believes the anticipated benefits
of short-term investing outweigh any increase in transaction costs or increase
in capital gains.
ABOUT THE FUND
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
(collectively the "Advisory Agreement") with Strong Capital Management, Inc.
(the "Advisor"). Under the terms of the agreement, the Advisor manages the
Fund's investments and business affairs subject to the supervision of the Fund's
Board of Directors.
ADVISOR. 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. The Advisor also acts as investment advisor for
each of the mutual funds within the Strong Family of Funds. As of December 31,
1997, the Advisor had over $__ 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 based on a percentage of the Fund's average daily net asset
value. The annual rate is .70% of the Fund's average daily net asset value. From
time to time, the Advisor may voluntarily waive all or a portion of its
management fee and/or absorb certain Fund expenses without further notification
of the commencement or termination of such waiver or absorption. Any such waiver
or absorption will temporarily lower the Fund's overall expense ratio and
increase the Fund's overall return to investors.
Except for expenses assumed by the Advisor or Strong Funds Distributors,
Inc., 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 of printing and distribution of prospectuses to existing shareholders;
charges of custodians (including fees as custodian for keeping books and
PROSPECTUS PAGE I-17
<PAGE> 21
similar services for the Fund), transfer agents (including the printing and
mailing of reports and notices to shareholders), registrars, auditing and legal
services, and clerical services related to recordkeeping and shareholder
relations; printing of stock certificates; fees for directors who are not
"interested persons" of the Advisor; expenses of indemnification; extraordinary
expenses; and costs of shareholder and director meetings.
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.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Fund.
MR. SHIRISH MALEKAR. Mr. Malekar joined the Advisor in January 1994. He was
an international bond portfolio manager at Pacific Investment Management Company
in California for the previous three years. Prior to that, he was a bond trader
at Harris Bank in Chicago for one year and a bond trader at PaineWebber
Incorporated in New York and Tokyo for more than two years. He has an M.S. in
Management from the Massachusetts Institute of Technology, an M.S. in Petroleum
Engineering from the University of Pittsburgh, and a B.S. in Chemical
Engineering from the University of Bombay, India. He has co-managed the Fund
since its inception in January 1998.
JOHN T. BENDER. Mr. Bender began his career with the Advisor in 1987 as an
intern in the mutual fund accounting department. After receiving his bachelor's
degree from Marquette University in 1988, he became an accountant in Strong's
shareholder and accounting compliance department. He subsequently joined the
investment team as an equity trader, and later became a fixed income research
analyst and trader. He is both a Chartered Financial Analyst and a Certified
Public Accountant. Mr. Bender has co-managed the Corporate Bond Fund since
January 1996 and the Government Securities Fund since March 1997. He has
co-managed the Fund since its inception in January 1998.
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin 53201, also acts as
dividend-disbursing agent and transfer agent for the Funds. The Advisor is
compensated for its services based on an annual fee per account plus certain
out-of-pocket expenses. The fees received and the services provided as transfer
agent and dividend-disbursing agent are in addition to those received and
provided for under the Advisory Agreement between the Advisor and the Fund.
PROSPECTUS PAGE I-18
<PAGE> 22
DISTRIBUTOR
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.
ORGANIZATION
SHAREHOLDER RIGHTS. The Fund is a series of common stock of Strong
International Income Funds, Inc., a Wisconsin corporation that is authorized to
issue an indefinite number of shares of common stock and series and classes of
series of shares of common stock. Each share of the Fund has one vote, and all
shares participate equally in dividends and other capital gains distributions by
the respective Fund and in the residual assets of the respective Fund in the
event of liquidation. Certificates will be issued for shares held in your
account only upon your written request. You will, however, have full shareholder
rights whether or not you request certificates. Generally, the Fund will not
hold an annual meeting of shareholders unless required by the Investment Company
Act of 1940 (the "1940 Act").
SHAREHOLDER PRIVILEGES. The shareholders of the Fund may benefit from the
privileges described in the "Shareholder Manual" (see page II-1). However, the
Fund reserves the right, at any time and without prior notice, to suspend,
limit, modify, or terminate any of these privileges or their use in any manner
by any person or class.
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. Unless you choose otherwise,
all your dividends and capital gains distributions will be automatically
reinvested in additional Fund shares. Or, you may elect to have all your
dividends and capital gain distributions from the Fund automatically invested in
additional shares of another Strong Fund. Shares are purchased at the net asset
value determined on the payment date. If you request in writing that your
dividends and other distributions be paid in cash, the Fund will credit your
bank account by Electronic Funds Transfer ("EFT") or issue a check to you within
five business days of the payment date. You may change your election at any time
by calling or writing Strong Funds. Strong Funds must receive any such change 7
days (15 days for EFT) prior to a dividend or capital gain distribution payment
date in order for the change to be effective for that payment.
The policy of the Fund is to pay dividends from net investment income monthly
and to distribute substantially all net realized capital gains, and gains from
foreign currency transactions, if any, annually. The Fund may make additional
distributions if necessary to avoid imposition of a 4% excise tax on
undistributed income and gains. The Fund declares dividends on each day its net
asset value is calculated, except for bank holidays. Income earned on
PROSPECTUS PAGE I-19
<PAGE> 23
weekends, holidays (including bank holidays), and days on which net asset value
is not calculated is declared as a dividend on the day on which the Fund's net
asset value was most recently calculated.
EFFECTS OF FOREIGN CURRENCY ON DISTRIBUTIONS. The Fund may (but is not
required to) distribute with its monthly dividends all or a portion of any net
realized gains from foreign currency transactions. The Fund anticipates that a
monthly dividend may, from time to time, represent more or less than the amount
of net investment income earned by the Fund in the period to which the dividend
relates. Any undistributed net investment income and net realized gains from
foreign currency transactions ("undistributed income") would be available to
supplement future dividends, which might otherwise have been reduced by reason
of a decrease in the Fund's net asset value or net realized losses from foreign
currency transactions. Distributions from undistributed income will reduce the
Fund's net asset value.
If the Fund's dividends exceed its taxable income in any year, which is
sometimes the result of foreign currency related losses, all or a portion of the
Fund's dividends may be treated as a return of capital to shareholders for tax
purposes. To minimize the risk of return of capital, the Fund may adjust its
dividends to take currency fluctuations into account, which may cause the
dividends to vary or to be suspended. Any return of capital will reduce the cost
basis of your shares.
TAX STATUS OF DIVIDENDS AND OTHER DISTRIBUTIONS. You are subject to federal
income tax at ordinary income tax rates on any dividends you receive that are
derived from investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if any). Distributions of net capital gain (the
excess of net long-term capital gain over net short-term capital loss), when
designated as such by the Fund, are taxable to you as long-term capital gains,
regardless of how long you have held your Fund shares. The Fund's distributions
are taxable in the year they are paid, whether they are taken in cash or
reinvested in additional shares, except that certain distributions declared in
the last three months of the year and paid in January are taxable as if paid on
December 31.
Most state laws provide a pass-through to mutual fund shareholders of the
state and local income tax exemption afforded owners of direct U.S. government
obligations. You will be notified annually of the percentage of the Fund's
income that is derived from U.S. government securities. While the Fund does not
intend to declare, in any year, aggregate quarterly dividends and other
distributions in excess of its investment company taxable income and net capital
gain for that year, it is possible that net losses from foreign currency
transactions late in the year could convert a portion of those distributions to
a non-taxable return of capital.
PROSPECTUS PAGE I-20
<PAGE> 24
YEAR-END TAX REPORTING. After the end of each calendar year, you will receive
a statement (Form 1099) of the federal income tax status of all dividends and
other distributions paid (or deemed paid) during the year.
SHARES SOLD OR EXCHANGED. Your redemption of shares of the Fund may result in
taxable gain or loss to you, depending upon whether the redemption proceeds
payable to you are more or less than your adjusted cost basis for the redeemed
shares. Similar tax consequences generally will result from an exchange of Fund
shares for shares of another Strong Fund. If you purchase shares of the Fund
within thirty days before or after redeeming shares of that Fund at a loss, a
portion or all of that loss will not be deductible and will increase the cost
basis of the newly purchased shares. If you redeem shares out of a non-IRA
retirement account, you will be subject to withholding for federal income tax
purposes unless you transfer the distribution directly to an "eligible
retirement plan."
BUYING A DISTRIBUTION. A distribution paid shortly after you have purchased
shares in the Fund will reduce the net asset value of the shares by the amount
of the distribution, which nevertheless will be taxable to you even though it
represents a return of a portion of your investment.
BACKUP WITHHOLDING. If you are an individual or certain other noncorporate
shareholder and do not furnish the Fund with a correct taxpayer identification
number, the Fund is required to withhold federal income tax at a rate of 31%
(backup withholding) from all dividends, capital gain distributions, and
redemption proceeds payable to you. Withholding at that rate from dividends and
capital gain distributions payable to you also is required if you otherwise are
subject to backup withholding. To avoid backup withholding, you must provide a
taxpayer identification number and state that you are not subject to backup
withholding due to the underreporting of your income. This certification is
included as part of your application. Please complete it when you open your
account.
TAX STATUS OF THE FUND. The Fund intends to continue to qualify for treatment
as a regulated investment company under Subchapter M of the Internal Revenue
Code and, if so qualified, will not be liable for federal income tax on earnings
and gains distributed to its shareholders in a timely manner.
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effects on the Fund and investors therein. See
the SAI for a further discussion. There may be other federal, state, or local
tax considerations applicable to a particular investor. You are therefore urged
to consult your own tax adviser.
PROSPECTUS PAGE I-21
<PAGE> 25
PERFORMANCE INFORMATION
The Fund may advertise a variety of types of performance information,
including "average annual total return," "total return," "cumulative total
return," and "yield." 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.
Yield is an annualized figure, which means that it is assumed that the Fund
generates the same level of net investment income over a one-year period. The
Fund's yield is a measure of the net investment income per share earned by the
Fund over a specific 30-day period and is shown as a percentage of the net asset
value of the Fund's shares at the end of the period.
PROSPECTUS PAGE I-22
<PAGE> 26
SHAREHOLDER MANUAL
<TABLE>
<S> <C>
HOW TO BUY SHARES...................... II-1
DETERMINING YOUR SHARE PRICE........... II-5
HOW TO SELL SHARES..................... II-6
SHAREHOLDER SERVICES................... II-9
REGULAR INVESTMENT PLANS............... II-11
RETIREMENT PLAN SERVICES............... II-13
SPECIAL SITUATIONS..................... II-13
</TABLE>
HOW TO BUY SHARES
All the Strong Funds are 100% no-load, meaning you may purchase, redeem, or
exchange shares directly at net asset value without paying a sales charge.
Because the Fund's net asset value changes daily, your purchase price will be
the next net asset value determined after Strong receives and accepts your
purchase order.
Whether you are opening a new account or adding to an existing one, Strong
Funds provides you with several methods to buy Fund shares.
----------------------
PROSPECTUS PAGE II-1
<PAGE> 27
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<TABLE>
<S> <C>
TO OPEN A NEW ACCOUNT
- ----------------------------------------------------------------------------
MAIL BY CHECK
- Complete and sign the application. Make your check
or money order payable to "Strong Funds."
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to Strong Funds, 900 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- Call 1-800-368-3863 for instructions on
establishing an account with an exchange by mail.
- ----------------------------------------------------------------------------
TELEPHONE BY EXCHANGE
- Call 1-800-368-3863 to establish a new account by
1-800-368-3863 exchanging funds from an existing Strong Funds
24 HOURS A DAY, account.
7 DAYS A WEEK - Sign up for telephone exchange services when you
open your account. To add the telephone exchange
option to your account, call 1-800-368-3863 for a
Telephone Exchange Form.
- Please note that your accounts must be identically
registered and that you must exchange enough into the
new account to meet the minimum initial investment.
Or use Strong DirectSM, Strong Funds' automated
telephone response system. Call 1-800-368-7550.
- ----------------------------------------------------------------------------
IN PERSON - Stop by our Investor Center in Menomonee Falls,
Wisconsin.
Call 1-800-368-3863 for hours and directions.
- The Investor Center can only accept checks or money
orders.
- ----------------------------------------------------------------------------
WIRE Call 1-800-368-3863 for instructions on opening an
account
by wire.
- ----------------------------------------------------------------------------
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM."
- If you sign up for Strong's Automatic Investment
Plan when you open your account and contribute
monthly, Strong Funds will waive the Fund's minimum
initial investment (see chart on page II-4).
- Complete the Automatic Investment Plan section on
the account application.
- Mail to address indicated on the application.
- ----------------------------------------------------------------------------
BROKER-DEALER - You may purchase shares in the Fund through a
broker-
dealer or other institution that may charge a
transaction fee.
- Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account
from the broker-dealer.
</TABLE>
----------------------
PROSPECTUS PAGE II-2
<PAGE> 28
- ------------------------------------------------------------------------------
TO ADD TO AN EXISTING ACCOUNT
- --------------------------------------------------------------------------------
BY CHECK
- - Complete an Additional Investment Form provided at the bottom of your account
statement, or write a note indicating your fund account number and
registration. Make your check or money order payable to "Strong Funds."
- - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
using an express delivery service, send to Strong Funds, 900 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- - Call 1-800-368-3863 for instructions on exchanging by mail.
- --------------------------------------------------------------------------------
BY EXCHANGE
- - Add to an account by exchanging funds from another Strong Funds account.
- - Sign up for telephone exchange services when you open your account. To add the
telephone exchange option to your account, call 1-800-368-3863 for a Telephone
Exchange Form.
- - Please note that the accounts must be identically registered and that the
minimum exchange is $50 or the balance of your account, whichever is less.
BY TELEPHONE PURCHASE
- - Sign up for telephone purchase when you open your account to make additional
investments from $50 to $25,000 into your Strong Funds account by telephone.
To add this option to your account, call 1-800-368-3863 for a Telephone
Purchase Form.
Or use Strong DirectSM, Strong Funds' automated telephone response system. Call
1-800-368-7550.
- --------------------------------------------------------------------------------
- - Stop by our Investor Center in Menomonee Falls, Wisconsin. Call 1-800-368-3863
for hours and directions.
- - The Investor Center can only accept checks or money orders.
- --------------------------------------------------------------------------------
Call 1-800-368-3863 for instructions on adding to an account by wire.
- --------------------------------------------------------------------------------
USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS. Sign up for these services
when you open your account, or call 1-800-368-3863 for instructions on how to
add them to your existing account.
- - AUTOMATIC INVESTMENT PLAN. Make regular, systematic investments (minimum $50)
into your Strong Funds account from your bank checking or NOW account.
Complete the Automatic Investment Plan section on the account application.
- - AUTOMATIC EXCHANGE PLAN. Make regular, systematic exchanges (minimum $50) from
one Strong Funds account to another. Call 1-800-368-3863 for an application.
- - PAYROLL DIRECT DEPOSIT. Have a specified amount (minimum $50) regularly
deducted from your paycheck, social security check, military allotment, or
annuity payment invested directly into your Strong Funds account. Call
1-800-368-3863 for an application.
- - AUTOMATIC DIVIDEND REINVESTMENT. Unless you choose otherwise, all your
dividends and capital gain distributions will be automatically reinvested in
additional Fund shares. Or, you may elect to have your dividends and capital
gain distributions automatically invested in shares of another Strong Fund.
- --------------------------------------------------------------------------------
- - You may purchase additional shares in the Fund through a broker-dealer or
other institution that may charge a transaction fee.
- - Strong Funds may only accept requests to purchase additional shares into a
broker-dealer street name account from the broker-dealer.
----------------------
PROSPECTUS PAGE II-3
<PAGE> 29
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- - Please make all checks or money orders payable to "Strong Funds."
- - We cannot accept third-party checks or checks drawn on banks outside the U.S.
- - You will be charged a $20 service fee for each check, wire, or Electronic
Funds Transfer ("EFT") purchase that is returned unpaid, and you will be
responsible for any resulting losses suffered by the Fund.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - The Fund reserves the right to decline to accept your purchase order upon
receipt for any reason.
- - Minimum Investment Requirements:
- ----------------------------------------------------------------------------
To open a regular account...........................................$1,000
To open an IRA or one-person SEP account..............................$250
To open an UGMA/UTMA account..........................................$250
To open a SIMPLE Plan, SEP-IRA
Keogh, Profit Sharing or Money Purchase
Pension, or 403(b) account..............................the less of $250
or $25 per month
To open a qualified retirement plan account
where the Advisor (or an alliance
partner of the Advisor) provides
administrative services.......................................No Minimum
To add to an existing account..........................................$50
The Fund offers a No-Minimum Investment Program that waives the minimum
initial investment requirements for investors who participate in the Strong
Automatic Investment Plan and invest monthly (described on page II-12). Unless
you participate in the Strong No-Minimum Investment Program, please ensure that
your purchases meet the minimum investment requirements.
Under certain circumstances (for example, if you discontinue a No-Minimum
Investment Program before you reach the Fund's minimum initial investment), the
Fund reserves the right to close your account. Before taking such action, the
Fund will provide you with written notice and at least 60 days in which to
reinstate an investment program or otherwise reach the minimum initial
investment required.
----------------------
PROSPECTUS PAGE II-4
<PAGE> 30
DETERMINING YOUR SHARE PRICE
Generally, when you make any purchases, sales, or exchanges, the price of
your shares will be the net asset value ("NAV") next determined after Strong
Funds receives your request in proper form. If Strong Funds receives such
request prior to the close of the New York Stock Exchange (the "Exchange") on a
day on which the Exchange is open, your share price will be the NAV determined
that day. The NAV for the Fund is normally determined as of 3:00 p.m. Central
Time ("CT") each day the Exchange is open. The Fund reserves the right to change
the time at which purchases, redemptions, and exchanges are priced if the
Exchange closes at a time other than 3:00 p.m. CT or if an emergency exists. The
Fund's NAV is calculated by taking the fair value of the Fund's total assets,
subtracting all its liabilities, and dividing by the total number of shares
outstanding. Expenses are accrued and applied daily when determining the NAV. A
Fund's portfolio securities are valued based on market quotations or at fair
value as determined by the method selected by the Fund's Board of Directors.
Debt securities are valued by a pricing service that utilizes electronic data
processing techniques to determine values for normal institutional size trading
units of debt securities without regard to the existence of sale or bid prices
when such techniques are believed to more accurately reflect the fair market
value of 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 having remaining maturities of 60 days or less are valued by the
amortized cost method when the 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 fluctuating interest rates on the market value of the instrument.
Equity securities traded on a national securities exchange or NASDAQ are
valued at the last sale 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.
Securities quoted in foreign currency are valued daily in U.S. dollars at the
foreign currency exchange rates that are prevailing at the time the daily NAV
per share is determined. Although the Fund values its foreign assets in U.S.
dollars on a daily basis, they do not intend to convert their holdings of
foreign currencies into U.S. dollars on a daily basis. Foreign currency exchange
rates are generally determined prior to the close of trading on the Exchange.
Occasionally, events affecting the value of foreign investments and such
exchange rates occur between the time at which they are determined and the close
of
----------------------
PROSPECTUS PAGE II-5
<PAGE> 31
trading on the Exchange. Such events would not normally be reflected in a
calculation of the Fund's NAV on that day. If events that materially affect the
value of the Fund's foreign investments or the foreign currency exchange rates
occur during such period, the investments will be valued at their fair value as
determined in good faith by or under the direction of the Board of Directors.
HOW TO SELL SHARES
You can access the money in your account at any time by selling (redeeming)
some or all of your shares back to the Fund. Once your redemption request is
received in proper form, Strong will normally mail you the proceeds the next
business day and, in any event, no later than seven days thereafter.
To redeem shares, you may use any of the methods described in the following
chart. However, if you are selling shares in a retirement account, please call
1-800-368-3863 for instructions. Please note that there is a $10.00 fee for
closing an IRA or other retirement account or for transferring assets to another
custodian. For your protection, certain requests may require a signature
guarantee. (See "Special Situations -- Signature Guarantees.")
----------------------
PROSPECTUS PAGE II-6
<PAGE> 32
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO SELL SHARES
- -----------------------------------------------------------------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
- Write a "letter of instruction" that includes the
For Your Protection following information: your account number, the
Certain Redemption dollar amount or number of shares you wish to
Requests May redeem, each owner's name, your street address, and
Require A the signature of each owner as it appears on the
Signature Guarantee. account.
See "Special - Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Situations -- Wisconsin 53201. If you're using an express
Signature delivery service, send to 900 Heritage Reserve,
Guarantees." Menomonee Falls, Wisconsin 53051.
FOR TRUST ACCOUNTS
- Same as above. Please ensure that all trustees sign
the letter of instruction.
FOR OTHER REGISTRATIONS
- Call 1-800-368-3863 for instructions.
- -----------------------------------------------------------------------------
TELEPHONE Sign up for telephone redemption services when you
open
1-800-368-3863 your account by checking the "Yes" box in the
24 HOURS A DAY, appropriate section of the account application. To
7 DAYS A WEEK add the telephone redemption option to your account,
call 1-800-368-3863 for a Telephone Redemption Form.
Once the telephone redemption option is in place, you
may sell shares by phone and arrange to receive the
proceeds in one of three ways:
TO RECEIVE A CHECK BY MAIL
- At no charge, we will mail a check to the address
to which your account is registered.
TO DEPOSIT BY EFT
- At no charge, we will transmit the proceeds by
Electronic Funds Transfer (EFT) to a pre-authorized
bank account. Usually, the funds will arrive at
your bank two banking days after we process your
redemption.
TO DEPOSIT BY WIRE
- For a $10 fee, we will transmit the proceeds by
wire to a pre-authorized bank account. Usually, the
funds will arrive at your bank the next banking day
after we process your redemption.
You may also use Strong Direct SM, Strong Funds'
automated telephone response system. Call
1-800-368-7550.
- -----------------------------------------------------------------------------
CHECK WRITING Sign up for the free check-writing privilege when you
open
your account. To add check-writing to an existing
account or to order additional checks, call
1-800-368-3863.
Please keep in mind that all check redemptions must
be for a minimum of $500 and that you cannot write a
check to close an account.
- -----------------------------------------------------------------------------
AUTOMATICALLY You can set up automatic withdrawals from your
account at
regular intervals. To establish the Systematic
Withdrawal Plan, request a form by calling
1-800-368-3863.
- -----------------------------------------------------------------------------
BROKER-DEALER You may also redeem shares through broker-dealers or
other financial intermediaries who may charge a
transaction fee.
</TABLE>
----------------------
PROSPECTUS PAGE II-7
<PAGE> 33
WHAT YOU SHOULD KNOW ABOUT SELLING SHARES
- - If you have recently purchased shares, please be aware that your redemption
request may not be honored until the purchase check has cleared your bank,
which generally occurs within ten calendar days.
- - You will be charged a $10 service fee for a stop-payment and replacement of a
redemption or dividend check.
- - The right of redemption may be suspended during any period in which (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined by the
SEC exists, making disposal of portfolio securities or valuation of net assets
of the Fund not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must endorse
the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
REDEMPTIONS IN KIND
If the Advisor determines that existing conditions make cash payments
undesirable, redemption payments (including the satisfaction of share drafts)
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.
Shareholders receiving securities or other financial assets on redemption may
realize a gain or loss for tax purposes, and will incur any costs of sale, as
well as the associated inconveniences.
WHAT YOU SHOULD KNOW ABOUT TELEPHONE REDEMPTIONS
- - The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so.
- - Once you place your telephone redemption request, it cannot be canceled or
modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Fund and its transfer agent
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund may incur liability if they do not follow
these procedures.
- - Because of increased telephone volume, you may experience difficulty in
implementing a telephone redemption during periods of dramatic economic or
market changes. In these situations, investors may want to consider using
Strong DirectSM, our automated telephone system, to effect such a transaction
by calling 1-800-368-7550.
----------------------
PROSPECTUS PAGE II-8
<PAGE> 34
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus, or e-mail us at [email protected].
STRONG DIRECTSM AUTOMATED TELEPHONE SYSTEM. Also available 24 hours a day,
the Strong DirectSM automated response system enables you to use a touch-tone
phone to hear fund quotes and returns on any Strong Fund. You may also confirm
account balances, hear records of recent transactions and dividend activity
(1-800-368-5550), and perform purchases, exchanges or redemptions among your
existing Strong accounts (1-800-368-7550). You may also perform an exchange to
open a new Strong account provided that your account has the telephone exchange
option. Please note that your accounts must be identically registered and you
must exchange enough into the new account to meet the minimum initial
investment. Your account information is protected by a personal code.
STRONG NETDIRECTSM. Available 24 hours a day from your personal computer,
Strong netDirectSM allows you to use the Internet to access your Strong Funds
account information. You may access specific account history, view current
account balances, obtain recent dividend activity, and perform purchases,
exchanges, or redemptions among your existing Strong accounts.
To register for netDirect, please visit our website at http://www.strong-
funds.com. Your account information is protected by a personal password and
Internet encryption technology. For more information on this service, please
call 1-800-359-3379 or e-mail us at [email protected].
STATEMENTS AND REPORTS. At a minimum, the Fund will confirm all transactions
for your account on a quarterly basis. We recommend that you file each quarterly
statement - and, especially, each calendar year-end statement - with your other
important financial papers, since you may need to refer to them at a later date
for tax purposes. Should you need additional copies of previous statements, you
may order confirmation statements for the current and preceding year at no
charge. Statements for earlier years are available for $10 each. Call
1-800-368-3863 to order past statements.
Each year, you will also receive a statement confirming the tax status of any
distributions paid to you, as well as a semi-annual report and an annual report
containing audited financial statements.
----------------------
PROSPECTUS PAGE II-9
<PAGE> 35
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
More complete information regarding the Fund's investment policies and
services is contained in its SAI, which you may request by calling or writing
Strong Funds at the phone number and address on the cover of this Prospectus.
CHANGING YOUR ACCOUNT INFORMATION. So that you continue receiving your Strong
correspondence, including any dividend checks and statements, please notify us
in writing as soon as possible if your address changes. You may use the
Additional Investment Form at the bottom of your confirmation statement, or
simply write us a letter of instruction that contains the following information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to an account's registration - such as adding or removing a joint
owner, changing an owner's name, or changing the type of your account - must
also be submitted in writing. Please call 1-800-368-3863 for instructions. For
your protection, some requests may require a signature guarantee.
-----------------------
PROSPECTUS PAGE II-10
<PAGE> 36
TRANSACTION SERVICES
EXCHANGE PRIVILEGE. You may exchange shares between identically registered
Strong Funds accounts, either in writing or by telephone. By establishing the
telephone exchange services, you authorize the Fund and its agents to act upon
your instruction by telephone to exchange shares from any account you specify.
For tax purposes, an exchange is considered a sale and a purchase of Fund
shares. Please obtain and read the appropriate prospectus before investing in
any of the Strong Funds. Since an excessive number of exchanges may be
detrimental to the Fund, the Fund reserves the right to discontinue the exchange
privilege of any shareholder at any time.
CHECK-WRITING PRIVILEGES. You may also redeem shares of the Fund by check in
amounts of $500 or more. There is no charge for this privilege. Redemption by
check cannot be honored if share certificates are outstanding and would need to
be liquidated to honor the check. In addition, a check may not be honored if the
check results in you redeeming more than the lesser of $250,000 or 1% of the
Fund's assets during any 90-day period and the Advisor determines that existing
conditions make cash payments undesirable. Checks are supplied free of charge,
and additional checks will be sent to you upon request. The Fund does not return
the checks you write, although copies are available upon request.
You may place stop-payment requests on checks by calling Strong Funds at
1-800-368-3863. A $10 fee will be charged for each stop-payment request. A stop
payment will remain in effect for two weeks following receipt of oral
instructions (six months following written instructions) by Strong Funds.
If there are insufficient cleared shares in your account to cover the amount
of your redemption by check, the check will be returned, marked "insufficient
funds," and a fee of $10 will be charged to the account.
REGULAR INVESTMENT PLANS
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan, all discussed below, are methods of implementing DOLLAR
COST AVERAGING. Dollar cost averaging is an investment strategy that involves
investing a fixed amount of money at regular time intervals. By always investing
the same set amount, you will be purchasing more shares when the price is low
and fewer shares when the price is high. Ultimately, by using this principle in
conjunction with fluctuations in share price, your average cost per share may be
less than your average transaction price. A program of regular investment cannot
ensure a profit or protect against a loss during declining markets. Since such a
program involves continuous investment regardless of fluctuating share values,
you should consider your ability to continue the program through periods of both
low and high share-price levels.
-----------------------
PROSPECTUS PAGE II-11
<PAGE> 37
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in the Fund from your bank checking or NOW
account. You may choose to make investments on any day of the month in amounts
of $50 or more. You can set up the Automatic Investment Plan with any financial
institution that is a member of the Automated Clearing House. Because the Fund
has the right to close an investor's account for failure to reach the minimum
initial investment, please consider your ability to continue this Plan until you
reach the minimum initial investment. To establish the Plan, complete the
Automatic Investment Plan section on the account application, or call
1-800-368-3863 for an application.
PAYROLL DIRECT DEPOSIT PLAN. Once you meet the Fund's minimum initial
investment requirement, you may purchase additional Fund shares through the
Payroll Direct Deposit Plan. Through this Plan, periodic investments (minimum
$50) are made automatically from your payroll check into your existing Fund
account. By enrolling in the Plan, you authorize your employer or its agents to
deposit a specified amount from your payroll check into the Fund's bank account.
In most cases, your Fund account will be credited the day after the amount is
received by the Fund's bank. In order to participate in the Plan, your employer
must have direct deposit capabilities through the Automated Clearing House
available to its employees. The Plan may be used for other direct deposits, such
as social security checks, military allotments, and annuity payments.
To establish a Direct Deposit for your account, call 1-800-368-3863 to
request a form. Once the Plan is established, you may alter the amount of the
deposit, alter the frequency of the deposit, or terminate your participation in
the program by notifying your employer.
AUTOMATIC EXCHANGE PLAN. The Automatic Exchange Plan allows you to make
regular, systematic exchanges (minimum $50) from one Strong Funds account into
another Strong Funds account. By setting up the Plan, you authorize the Fund and
its agents to redeem a set dollar amount or number of shares from the first
account and purchase shares of a second Strong Fund. In addition, you authorize
the Fund and its agents to accept telephone instructions to change the dollar
amount and frequency of the exchange. An exchange transaction is a sale and
purchase of shares for federal income tax purposes and may result in a capital
gain or loss. To establish the Plan, request a form by calling 1-800-368-3863.
To participate in the Automatic Exchange Plan, you must have an initial
account balance of $2,500 in the first account and at least the minimum initial
investment in the second account. Exchanges may be made on any day or days of
your choice. If the amount remaining in the first account is less than the
exchange amount you requested, then the remaining amount will be exchanged. At
such time as the first account has a zero balance, your participation in the
Plan will be terminated. You may also terminate the Plan at any time
-----------------------
PROSPECTUS PAGE II-12
<PAGE> 38
by calling or writing to the Fund. Once participation in the Plan has been
terminated for any reason, to reinstate the Plan you must do so in writing;
simply investing additional funds will not reinstate the Plan.
SYSTEMATIC WITHDRAWAL PLAN. You can set up automatic withdrawals from your
account at regular intervals. To begin distributions, you must have an initial
balance of $5,000 in your account and withdraw at least $50 per payment. To
establish the Systematic Withdrawal Plan, request a form by calling 1-800-
368-3863. Depending upon the size of the account and the withdrawals requested
(and fluctuations in net asset value of the shares redeemed), redemptions for
the purpose of satisfying such withdrawals may reduce or even exhaust the
account. If the amount remaining in the account is not sufficient to meet a Plan
payment, the remaining amount will be redeemed and the Plan will be terminated.
RETIREMENT PLAN SERVICES
We offer a wide variety of retirement plans for individuals and institutions,
including large and small businesses. For information on IRAs or SEP-IRAs for a
one-person business, call 1-800-368-3863. If you are interested in opening a
401(k) or other company-sponsored retirement plan, (SIMPLES, SEP plans, Keoghs,
403(b)(7) plans, pension and profit sharing plans), call 1-800-368-2882 and a
Strong Retirement Plan Specialist will help you determine which retirement plan
would be best for your company. Complete instructions about how to establish and
maintain your plan and how to open accounts for you and your employees will be
included in the retirement plan kit you receive in the mail.
SPECIAL SITUATIONS
POWER OF ATTORNEY. If you are investing as attorney-in-fact for another
person, please complete the account application in the name of such person and
sign the back of the application in the following form: "[applicant's name] by
[your name], attorney-in-fact." To avoid having to file an affidavit prior to
each transaction, please complete the Power of Attorney form available from
Strong Funds at 1-800-368-3863. However, if you would like to use your own power
of attorney form, please call the same number for instructions.
CORPORATIONS AND TRUSTS. If you are investing for a corporation, please
include with your account application a certified copy of your corporate
resolution indicating which officers are authorized to act on behalf of the
corporation. As an alternative, you may complete a Certification of Authorized
Individuals, which can be obtained from the Fund. Until a valid corporate
resolution or Certification of Authorized Individuals is received by the Fund,
services such as telephone redemption, wire redemption, and check writing, will
not be established.
-----------------------
PROSPECTUS PAGE II-13
<PAGE> 39
If you are investing as a trustee (including trustees of a retirement plan),
please include the date of the trust. All trustees must sign the application. If
they do not, services such as telephone redemption, wire redemption, and check
writing will not be established. All trustees must sign redemption requests
unless proper documentation to the contrary is provided to the Fund. Failure to
provide these documents or signatures as required when you invest may result in
delays in processing redemption requests.
FINANCIAL INTERMEDIARIES. If you purchase or redeem shares of the Fund
through a financial intermediary, certain features of the Fund relating to such
transactions may not be available or may be modified. In addition, certain
operational policies of the Fund, including those related to settlement and
dividend accrual, may vary from those applicable to direct shareholders of the
Fund and may vary among intermediaries. We urge you to consult your financial
intermediary for more information regarding these matters. In addition, the Fund
may pay, directly or indirectly through arrangements with the Advisor, amounts
to financial intermediaries that provide transfer agent type and/or other
administrative services to their customers provided, however, that the Fund will
not pay more for these services through intermediary relationships than it would
if the intermediaries' customers were direct shareholders in the Fund. Certain
financial intermediaries may charge an advisory, transaction, or other fee for
their services. You will not be charged for such fees if you purchase or redeem
your Fund shares directly from the Fund without the intervention of a financial
intermediary.
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you and
the Fund against fraudulent transactions by unauthorized persons. In the
following instances, the Fund will require a signature guarantee for all
authorized owners of an account:
- - when you add the telephone redemption or check-writing options to your
existing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $50,000;
- - when you request to redeem or redeposit shares that have been issued in
certificate form;
- - if you open an account and later decide that you want certificates;
- - when you request that redemption proceeds be sent to a different name or
address than is registered on your account;
- - if you add/change your name or add/remove an owner on your account; and
- - if you add/change the beneficiary on your transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor
institution, as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms, and others. PLEASE NOTE THAT A
NOTARY PUBLIC STAMP OR SEAL IS NOT ACCEPTABLE.
-----------------------
PROSPECTUS PAGE II-14
<PAGE> 40
APPENDIX
RATINGS OF DEBT OBLIGATIONS
<TABLE>
<CAPTION>
Standard & Poor's Moody's Investor Fitch Investors Duff & Phelps Thomsons
Definition Ratings Group Services, Inc. Service, Inc. Rating Co. IBCA, Inc. BankWatch, Inc.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Highest quality AAA Aaa AAA AAA AAA AAA
High quality AA Aa AA AA AA AA
Upper medium grade A A A A A A
Medium grade BBB Baa BBB BBB BBB BBB
Low grade BB Ba BB BB BB BB
Speculative B B B B B B
Submarginal CCC, CC, C Caa, Ca CCC, CC, C CCC CCC, CC CCC, CC
Probably in
default D C DDD, DD, D DD C D
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
----------------------
PROSPECTUS PAGE A-1
<PAGE> 41
STATEMENT OF ADDITIONAL INFORMATION
STRONG GLOBAL HIGH-YIELD BOND FUND
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
www.strong-funds.com
This Statement of Additional Information is not a Prospectus and should be
read in conjunction with the Prospectus of Strong Global High-Yield Bond Fund
(the "Fund"), which is a series of Strong International Income Funds, Inc.,
dated January 31, 1998.
This Statement of Additional Information is dated January 31, 1998.
<PAGE> 42
STRONG GLOBAL HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS 3
INVESTMENT POLICIES AND TECHNIQUES 4
Borrowing 5
Convertible Securities 5
Depositary Receipts 5
Derivative Instruments 6
Foreign Investment Companies 15
Foreign Securities 16
High-Yield (High-Risk) Securities 16
Illiquid Securities 18
Lending of Portfolio Securities 18
Loan Interests 19
Maturity 20
Mortgage- and Asset-Backed Securities 20
Mortgage Dollar Rolls and Reverse Repurchase Agreements 21
Municipal Obligations 22
Repurchase Agreements 22
Short Sales 23
Sovereign Debt 23
Temporary Defensive Position 25
Variable- or Floating-Rate Securities 25
Warrants 26
When-Issued Securities 26
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities 26
DIRECTORS AND OFFICERS OF THE FUND 26
PRINCIPAL SHAREHOLDERS 29
INVESTMENT ADVISOR AND DISTRIBUTOR 29
PORTFOLIO TRANSACTIONS AND BROKERAGE 31
CUSTODIAN 34
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 34
TAXES 34
DETERMINATION OF NET ASSET VALUE 37
ADDITIONAL SHAREHOLDER INFORMATION 37
FUND ORGANIZATION 38
SHAREHOLDER MEETINGS 38
PERFORMANCE INFORMATION 39
GENERAL INFORMATION 44
PORTFOLIO MANAGEMENT 47
INDEPENDENT ACCOUNTANTS 47
LEGAL COUNSEL 47
APPENDIX A-1
</TABLE>
__________________________________________
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated January 31, 1998, and if given or made,
such information or representations may not be relied upon as having been
authorized by the Fund.
This Statement of Additional Information does not constitute an offer to sell
securities.
<PAGE> 43
INVESTMENT RESTRICTIONS
The investment objective of the Fund is to seek high total return by
investing for both income and capital appreciation. The Fund's investment
objectives and policies are described in detail in the Prospectus under the
caption "Investment Objective and Policies." The following are the Fund's
fundamental investment limitations which cannot be changed without shareholder
approval.
The Fund:
1. May (i) borrow money from banks and (ii) make other investments or engage
in other transactions permissible under the Investment Company Act of 1940
(the "1940 Act') which may involve a borrowing, provided that the
combination of (i) and (ii) 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.
2. May not issue senior securities, except as permitted under the 1940 Act.
3. 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.
4. 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).
5. 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 (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
6. 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.
7. 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).
8. 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> 44
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 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% 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 (i) from banks or (ii) 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
(i) purchases of debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
Except for the fundamental investment limitations listed above and the
Fund's investment objective, the other investment policies described in the
Prospectus and this Statement of Additional Information are not fundamental and
may be changed with approval of the Fund's Board of Directors. 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.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in detail in
the Prospectus under the captions "Investment Objective and Policies" and
"Implementation of Policies and Risks."
4
<PAGE> 45
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) as
discussed under "Investment Restrictions." 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 they 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 sixty 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
The Fund may invest in convertible securities, which 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 (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) 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 held by the Fund 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
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. Thus, an ADR or EDR representing
ownership of common stock will be
5
<PAGE> 46
treated as common stock. ADR and EDR 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 acquiescence 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 facilities.
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 thus
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 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, 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 (the "premium") to the "writer" (the seller) to obtain the right, but
not the obligation, to buy from the writer (in a "call") or sell to the writer
(in a "put") a specific asset at an agreed upon price at or before a certain
time. The holder pays the premium at inception and has no further financial
obligation. The holder of an option-based derivative generally will benefit
from favorable movements in the price of the underlying asset but is not
exposed to corresponding losses due to adverse movements in the value of the
underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long"
position) and a seller (holding the "short" position) for an asset with
delivery deferred until a future date. The buyer agrees to pay a fixed price
at the agreed future date and the seller agrees to deliver the asset. The
seller hopes that the market price on the delivery date is less than the agreed
upon price, while the buyer hopes for the contrary. The change in value of a
forward-based derivative generally is roughly proportional to the change in
value of the underlying asset.
6
<PAGE> 47
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, the Fund's portfolio. Derivatives may also be used
by the Fund to "lock-in" the Fund's 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.
MANAGING RISK. The Fund may also use derivative instruments to manage the
risks of the Fund's 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 the Fund's 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, and foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way for the Fund to invest than "traditional" securities
(i.e., stocks or bonds) would.
EXCHANGE OR 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. Over-the-counter 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 a
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 Strong
Capital Management, Inc.'s (the "Advisor") ability 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 the Advisor's
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 by the Fund 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 to the Fund. The Fund will enter into transactions in derivative
instruments only with counterparties that the Advisor reasonably believes are
capable of performing under the contract.
7
<PAGE> 48
(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 Securities and Exchange Commission (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. For a discussion of the federal
income tax treatment of the Fund's derivative instruments, see "Taxes -
Derivative Instruments."
8
<PAGE> 49
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
(the "CEA"), the notice of eligibility for the Fund includes representations
that the Fund will use futures contracts and related options solely for bona
fide hedging purposes within the meaning of CFTC regulations, provided that the
Fund may hold other positions in futures contracts and related options that do
not qualify as a bona fide hedging position if the aggregate initial margin
deposits and premiums required to establish these positions, less the amount by
which any such futures contracts and related options positions are "in the
money," do not exceed 5% of the Fund's net assets. Adherence to these
guidelines does not limit the Fund's risk to 5% of the Fund's assets.
The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging the Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of the Fund's assets, as defined under the 1940 Act, the SEC
has stated that the Fund may use coverage or the segregation of the Fund's
assets. To the extent required by SEC guidelines, the Fund will not enter into
any such transactions unless it owns either: (i) an offsetting ("covered")
position in securities, options, futures, or derivative instruments; or (ii)
cash or liquid securities position 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 the 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
the Fund's investment objective such as hedging or managing risk. An option is
a contract in which the "holder" (the buyer) pays a certain amount (the
"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 (the "strike price" or
"exercise price") at or before a certain time (the "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 call options serves
as a long hedge, and the purchase of put options 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 increases 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
9
<PAGE> 50
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be
obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit the Fund to realize the
profit or limit the loss on an option position prior to its exercise or
expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and the other party to the transaction
("counter party") (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 counter party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counter party 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 counter party, 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 Funds, 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 counter
party, 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 in
general.
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
attempted hedging.
SPREAD TRANSACTIONS. The Fund may use spread transactions for any lawful
purpose consistent with the Fund's 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 relationship 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 the Fund's investment objective such as hedging or
managing risk. The Fund may enter into futures contracts, including interest
rate, index, and currency 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
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a strategy similar to that used for writing covered options in securities. The
Fund's hedging may include purchases of futures as an offset against the effect
of expected increases in currency exchange rates and securities prices and
sales of futures as an offset against the effect of expected declines in
currency exchange rates and securities prices. 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 is purchasing the futures
contract.
To the extent required by regulatory authorities, the Fund only enters
into futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce the Fund's exposure to market, currency, or interest rate fluctuations,
the Fund may be able to hedge its exposure more effectively and perhaps at a
lower cost through using 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) or currency 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, the currency 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
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made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities
markets involving arbitrage, "program trading" and other investment strategies
might result in temporary price distortions.
FOREIGN CURRENCIES. The Fund may purchase and sell foreign currency on a
spot basis, and may use currency-related derivatives instruments such as
options on foreign currencies, futures on foreign currencies, options on
futures on foreign currencies and forward currency contracts (i.e., an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into). The Fund
may use these instruments for hedging or any other lawful purpose consistent
with their respective investment objectives, 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 their portfolio investments. 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
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referred to as "cross hedges." The effective use of currency-related
derivative instruments by the Fund in a cross hedge is dependent upon a
correlation between price movements of the two currency instruments and the
underlying security involved, and the use of two currencies magnifies the risk
that movements in the price of one instrument may not correlate or may
correlate unfavorably with the foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the currency
instruments used or investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
The Fund also might seek to hedge against changes in the value of a
particular currency when no hedging instruments on that currency are available
or such hedging instruments are more expensive than certain other hedging
instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using currency-related derivative
instruments on another foreign currency or a basket of currencies, the values
of which the Advisor believes will have a high degree of positive correlation
to the value of the currency being hedged. The risk that movements in the
price of the hedging instrument will not correlate perfectly with movements in
the price of the currency being hedged is magnified when this strategy is used.
The use of currency-related derivative instruments by the Fund involves a
number of risks. The value of currency-related derivative instruments depends
on the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such derivative
instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots (generally consisting of transactions of greater than $1 million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments
might be required to take place within the country issuing the underlying
currency. Thus, the Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents
and might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When the Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for
exchange-traded instruments is generally less than for privately-negotiated or
OTC currency instruments, since generally a clearing agency, which is the
issuer or counterparty to each instrument, provides a guarantee of performance.
For privately-negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the transaction and possibly other losses to the Fund. The Fund
will enter into transactions in currency-related derivative instruments only
with counterparties that the Advisor reasonably believes are capable of
performing under the contract.
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
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out only on an exchange which provides a market for the instruments. The
ability to establish and close out positions on an exchange is subject to the
maintenance of a liquid market, and there can be no assurance that a liquid
market will exist for any instrument at any specific time. In the case of a
privately-negotiated instrument, the Fund will be able to realize the value of
the instrument only by entering into a closing transaction with the issuer or
finding a third party buyer for the instrument. While the Fund will enter into
privately-negotiated transactions only with entities who are expected to be
capable of entering into a closing transaction, there can be no assurance that
the Fund will in fact be able to enter into such closing transactions.
The precise matching of currency-related derivative instrument amounts and
the value of the portfolio securities involved generally will not be possible
because the value of such securities, measured in the foreign currency, will
change after the currency-related derivative instrument position has been
established. Thus, the Fund might need to purchase or sell foreign currencies
in the spot (cash) market. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded primarily
in the OTC market. Although options on foreign currencies are traded primarily
in the OTC market, the Fund will normally purchase or sell OTC options on
foreign currency only when the Advisor reasonably believes a liquid secondary
market will exist for a particular option at any specific time.
There will be a cost to the Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. The Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to resell that currency to the
dealer.
When required by the SEC guidelines, the Fund will set aside permissible
liquid assets in segregated accounts or otherwise cover their respective
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 a 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.
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SWAP AGREEMENTS. The Fund may enter into interest rate, securities index,
commodity, or security and currency exchange rate swap agreements for any
lawful purpose consistent with the Fund's investment objective, such as for the
purpose of attempting to obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or spread. The Fund also may enter
into swaps in order to protect against an increase in the price of, or the
currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to several years. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized
on particular predetermined investments or instruments. The gross returns to
be exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. Swap
agreements may include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap;" interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified level, or "floor;" and
interest rate collars, under which a party sells a cap and purchases a floor,
or vice versa, in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, the Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "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, or liquid high grade debt obligations.
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 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 Fund's
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.
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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 Securities and Exchange Commission (the "SEC"),
nor will the foreign issuers be subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by the Fund than is available concerning
U.S. companies. Disclosure and regulatory standards in many respects are less
stringent in emerging market countries than in the U.S. and other major
markets. There also may be a lower level of monitoring and regulation of
emerging markets and the activities of investors in such markets, and
enforcement of existing regulations may be extremely limited. Foreign
companies, and in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting, auditing and financial
reporting standards, or to other regulatory requirements comparable to those
applicable to U.S. companies. The Fund's net investment income and capital
gains from its foreign investment activities may be subject to non-U.S.
withholding taxes.
The costs attributable to foreign investing that the Fund must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing.
Costs associated with the exchange of currencies also make foreign investing
more expensive than domestic investing. Investment income on certain foreign
securities in which the Funds may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities.
Tax treaties between the United States and foreign countries, however, may
reduce or eliminate the amount of foreign tax to which the Funds 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 no return is earned thereon.
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 a 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. The Fund has the authority to invest in non-investment grade
debt securities. Non-investment grade debt obligations (hereinafter referred
to as "lower-quality securities") include (i) bonds rated as low as C by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("S&P"), or Fitch Investors Service, Inc. ("Fitch"), or CCC by Duff & Phelps,
Inc. ("D&P"); (ii) commercial paper rated as low as C by S&P, Not Prime by
Moody's, or Fitch 4 by Fitch; and (iii) 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 discussion of 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
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comparable unrated securities may experience financial stress and may not have
sufficient revenues to meet their payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, the issuer's inability to meet specific projected
business forecasts or the unavailability of additional financing. The risk of
loss due to default by an issuer of these securities is significantly greater
than issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, the Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so
will the Fund's net asset value. If the Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), the Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would force the Fund to sell the more liquid
portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, the Fund may
have to replace the securities with a lower yielding security, which would
result in a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully reflect the true risks
of an investment. In addition, credit rating agencies may or may not make
timely changes in a rating to reflect changes in the economy or in the
condition of the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in lower-quality and comparable unrated
obligations will be more dependent on the Advisor's credit analysis than would
be the case with investments in investment-grade debt obligations. The Advisor
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Advisor continually monitors the investments in
each 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 a 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.
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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, they would comprise more than 15% 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 each
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 (the "Securities
Act"), such as securities that may be resold to institutional investors under
Rule 144A under the Securities Act and Section 4(2) commercial paper, may be
considered liquid under guidelines adopted by the Fund's Board of Directors.
The Board of Directors of the Fund has delegated to the Advisor the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. The
Board of Directors has directed the Advisor to look to such factors as (i) the
frequency of trades or quotes for a security, (ii) the number of dealers
willing to purchase or sell the security and number of potential buyers, (iii)
the willingness of dealers to undertake to make a market in the security, (iv)
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, (v) the likelihood that the security's marketability
will be maintained throughout the anticipated holding period, and (vi) any
other relevant factors. The Advisor may determine 4(2) commercial paper to be
liquid if (i) the 4(2) commercial paper is not traded flat or in default as to
principal and interest, (ii) the 4(2) commercial paper is rated in one of the
two highest rating categories by at least two nationally rated statistical
rating organizations ("NRSRO"), or if only one NRSRO rates the security, by
that NRSRO, or is determined by the Advisor to be of equivalent quality, and
(iii) the Advisor considers the trading market for the specific security taking
into account all relevant factors. With respect to the Fund's 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
liquidity.
The Fund may sell over-the-counter ("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
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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.
LOAN INTERESTS
The Fund may acquire a loan interest (a "Loan Interest"). A Loan Interest
is typically originated, negotiated, and structured by a U.S. or foreign
commercial bank, insurance company, finance company, or other financial
institution (the "Agent") for a lending syndicate of financial institutions.
The Agent typically administers and enforces the loan on behalf of the other
lenders in the syndicate. In addition, an institution, typically but not
always the Agent (the "Collateral Bank"), holds collateral (if any) on behalf
of the lenders. These Loan Interests may take the form of participation
interests in, assignments of or novations of a loan during its secondary
distribution, or direct interests during a primary distribution. Such Loan
Interests may be acquired from U.S. or foreign banks, insurance companies,
finance companies, or other financial institutions who have made loans or are
members of a lending syndicate or from other holders of Loan Interests. The
Fund may also acquire Loan Interests under which the Fund derives its rights
directly from the borrower. Such Loan Interests are separately enforceable by
the Fund against the borrower and all payments of interest and principal are
typically made directly to the Fund from the borrower. In the event that the
Fund and other lenders become entitled to take possession of shared collateral,
it is anticipated that such collateral would be held in the custody of a
Collateral Bank for their mutual benefit. The Fund may not act as an Agent, a
Collateral Bank, a guarantor or sole negotiator or structurer with respect to a
loan.
The Advisor will analyze and evaluate the financial condition of the
borrower in connection with the acquisition of any Loan Interest. The Advisor
also analyzes and evaluates the financial condition of the Agent and, in the
case of Loan Interests in which the Fund does not have privity with the
borrower, those institutions from or through whom the Fund derives its rights
in a loan (the "Intermediate Participants").
In a typical loan the Agent administers the terms of the loan agreement.
In such cases, the Agent is normally responsible for the collection of
principal and interest payments from the borrower and the apportionment of
these payments to the credit of all institutions which are parties to the loan
agreement. The Fund will generally rely upon the Agent or an Intermediate
Participant to receive and forward to the Fund its portion of the principal and
interest payments on the loan. Furthermore, unless under the terms of a
participation agreement the Fund has direct recourse against the borrower, the
Fund will rely on the Agent and the other members of the lending syndicate to
use appropriate credit remedies against the borrower. The Agent is typically
responsible for monitoring compliance with covenants contained in the loan
agreement based upon reports prepared by the borrower. The seller of the Loan
Interest usually does, but is often not obligated to, notify holders of Loan
Interests of any failures of compliance. The Agent may monitor the value of
the collateral and, if the value of the collateral declines, may accelerate the
loan, may give the borrower an opportunity to provide additional collateral or
may seek other protection for the benefit of the participants in the loan. The
Agent is compensated by the borrower for providing these services under a loan
agreement, and such compensation may include special fees paid upon structuring
and funding the loan and other fees paid on a continuing basis. With respect
to Loan Interests for which the Agent does not perform such administrative and
enforcement functions, the Fund will perform such tasks on its own behalf,
although a Collateral Bank will typically hold any collateral on behalf of the
Fund and the other lenders pursuant to the applicable loan agreement.
A financial institution's appointment as Agent may usually be terminated
in the event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held
by the Agent under the loan agreement should remain available to holders of
Loan Interests. However, if assets held by the Agent for the benefit of the
Fund were determined to be subject to the claims of the Agent's general
creditors, the Fund might incur certain costs and delays in realizing payment
on a loan interest, or suffer a loss of principal and/or interest. In
situations involving Intermediate Participants similar risks may arise.
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Purchasers of Loan Interests depend primarily upon the creditworthiness of
the borrower for payment of principal and interest. If the Fund does not
receive scheduled interest or principal payments on such indebtedness, the
Fund's share price and yield could be adversely affected. Loans that are fully
secured offer a Fund more protections than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
borrower's obligation, or that the collateral can be liquidated. Indebtedness
of borrowers whose creditworthiness is poor involves substantially greater
risks, and may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a small
fraction of the amount owed. Direct indebtedness of developing countries will
also involve a risk that the governmental entities responsible for the
repayment of the debt may be unable, or unwilling, to pay interest and repay
principal when due.
MATURITY
The Fund's average portfolio maturity represents an average based on the
actual stated maturity dates of the debt securities in the Fund's portfolio,
except that (i) variable-rate securities are deemed to mature at the next
interest-rate adjustment date, (ii) debt securities with put features are
deemed to mature at the next put-exercise date, (iii) the maturity of
mortgage-backed securities is determined on an "expected life" basis as
determined by the Advisor, and (iv) securities being hedged with futures
contracts may be deemed to have a longer maturity, in the case of purchases of
futures contracts, and a shorter maturity, in the case of sales of futures
contracts, than they would otherwise be deemed to have. In addition, a
security that is subject to redemption at the option of the issuer on a
particular date (the "call date"), which is prior to the security's stated
maturity, may be deemed to mature on the call date rather than on its stated
maturity date. The call date of a security will be used to calculate average
portfolio maturity when the Advisor reasonably anticipates, based upon
information available to it, that the issuer will exercise its right to redeem
the security. The average portfolio maturity of the Fund is dollar-weighted
based upon the market value of the Fund's securities at the time of the
calculation.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property,
and include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or 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
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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 a smaller
and less liquid than the market for government-sponsored mortgage-backed
securities.
While many mortgage- and asset-backed securities are issued with only one
class of security, many are issued in more than one class, each with different
payment terms. Multiple class mortgage- and asset-backed securities are issued
for two main reasons. First, multiple classes may be used as a method of
providing credit support. This is accomplished typically through creation of
one or more classes whose right to payments on the security is made subordinate
to the right to such payments of the remaining class or classes. Second,
multiple classes may permit the issuance of securities with payment terms,
interest rates, or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (mortgage - and asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-mortgage-
or asset-backed securities, such as floating interest rates (i.e., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
The Fund may invest in stripped mortgage- or asset-backed securities,
which receive differing proportions of the interest and principal payments from
the underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such
market value may be extremely volatile. With respect to certain stripped
securities, such as interest only and principal only classes, a rate of
prepayment that is faster or slower than anticipated may result in the Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
Mortgage- and asset-backed securities backed by assets, other than as
described above, or in which the payment streams on the underlying assets are
allocated in a manner different than those described above may be issued in the
future. The Fund may invest in such securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of the Fund.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Fund may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, 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. (See "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. (See "Borrowing".)
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.
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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.
MUNICIPAL OBLIGATIONS
General obligation bonds are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of interest and principal.
Revenue bonds are payable only from the revenues derived from a project or
facility or from the proceeds of a specified revenue source. Industrial
development bonds are generally revenue bonds secured by payments from and the
credit of private users. Municipal notes are issued to meet the short-term
funding requirements of state, regional, and local governments. Municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax and revenue anticipation notes, construction loan
notes, short-term discount notes, tax-exempt commercial paper, demand notes,
and similar instruments. Municipal obligations include obligations, the
interest on which is exempt from federal income tax, that may become available
in the future as long as the Board of Directors of the Fund determines that an
investment in any such type of obligation is consistent with that Fund's
investment objective.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities, such as
state and municipal vehicles, telecommunications and computer equipment, and
other capital assets. The Fund may purchase these obligations directly, or it
may purchase participation interests in such obligations. Municipal leases are
generally subject to greater risks than general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet in order to issue municipal obligations. Municipal
leases may contain a covenant by the state or municipality to budget for,
appropriate, and make payments due under the obligation. Certain municipal
leases may, however, contain "non-appropriation" clauses which provide that the
issuer is not obligated to make payments on the obligation in future years
unless funds have been appropriated for this purpose each year. Accordingly,
such obligations are subject to "non-appropriation" risk. While municipal
leases are secured by the underlying capital asset, it may be difficult to
dispose of any such asset in the event of non-appropriation or other default.
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.
In addition, the Fund may invest in foreign repurchase agreements.
Foreign repurchase agreements may include agreements to purchase and sell
foreign securities in exchange for fixed U.S. dollar amounts, or in exchange
for specified amounts of foreign currency. In the event of default by the
counterparty, the Fund may suffer a loss if the value of the security
purchased, i.e., the collateral, in U.S. dollars, is less than the agreed-upon
repurchase price, or if the Fund is unable to successfully assert a claim to
the collateral under foreign laws. As a result, foreign repurchase agreements
may involve greater credit risk than repurchase agreements in U.S. markets, as
well as risks associated with currency fluctuations. Repurchase agreements
with foreign counterparties may have more risk than with U.S. counterparties,
since less financial information may be available about the foreign
counterparties and they may be less creditworthy.
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SHORT SALES
The Fund may sell securities (i) short to hedge unrealized gains on
portfolio securities or (ii) if it covers such short sale with liquid assets as
required by the current rules and positions of the Securities and Exchange
Commission 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.
SOVEREIGN DEBT
Sovereign debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank loans to the same sovereign entity may not
contest payments to the holders of sovereign debt in the event of default under
commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by a variety of factors, including
among others, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. A country
whose exports are concentrated in a few commodities could be vulnerable to a
decline in the international price of such commodities. Increased
protectionism on the part of a country's trading partners, or political changes
in those countries, could also adversely affect its exports. Such events could
diminish a country's trade account surplus, if any, or the credit standing of a
particular local government or agency. Another factor bearing on the ability
of a country to repay sovereign debt is the level of the country's
international reserves. Fluctuations in the level of these reserves can affect
the amount of foreign exchange readily available for external debt payments
and, thus, could have a bearing on the capacity of the country to make payments
on its sovereign debt.
To the extent that a country has a current account deficit (generally when
it exports of merchandise and services are less than its country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it may need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt
obligations can be adversely affected, by a change in international interest
rates since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. At times certain emerging
market countries have declared moratoria on the payment of principal and
interest on external debt.
Certain emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
Holders of sovereign debt, including the Fund, may be requested to participate
in the rescheduling of such debt and to extend further loans to sovereign
debtors, and the interests of holders of sovereign debt could be adversely
affected in the course of restructuring arrangements or by certain other
factors referred to below. Furthermore, some of the participants in the
secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants, such as the Fund.
Obligations arising from past restructuring agreements may affect the economic
performance and political and social stability of certain issuers of sovereign
debt. There is no bankruptcy proceeding by which sovereign debt on which a
sovereign has defaulted may be collected in whole or in part.
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Foreign investment in certain sovereign debt is restricted or controlled
to varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in such sovereign debt and increase the costs and
expenses of the Fund. Certain countries in which the Fund may invest require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular issuer, limit the investment
by foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries, or impose additional taxes on foreign
investors. Certain issuers may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments, the country could impose temporary restrictions
on foreign capital remittances. The Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments. Investing in local markets may require the Fund to adopt special
procedures, seek local government approvals or take other actions, each of
which may involve additional costs to the Fund.
The sovereign debt in which the Fund may invest includes Brady Bonds,
which are securities issued under the framework of the Brady Plan, an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness. In restructuring its external debt
under the Brady Plan framework, a debtor nation negotiates with its existing
bank lenders as well as multilateral institutions such as the International
Monetary Fund ("IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of commercial bank debt for newly issued Brady Bonds.
Brady Bonds may also be issued in respect of new money being advanced by
existing lenders in connection with the debt restructuring. The World Bank and
the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.
There can be no assurance that the circumstances regarding the issuance of
Brady Bonds by these countries will not change. Investors should recognize
that Brady Bonds have been issued only recently, and accordingly do not have a
long payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included
the exchange of outstanding commercial bank debt for bonds issued at 100% of
face value of such debt, which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest
rate which increases over time, and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, the Fund
will purchase Brady Bonds in secondary markets, as described below, in which
the price and yield to the investor reflect market conditions at the time of
purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF,
the World Bank, and the debtor nations' reserves. In the event of a default
with respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1) the
collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments, and (4) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds have speculative
characteristics. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased
and sold in secondary markets through U.S. securities dealers and other
financial institutions and are generally maintained through European
transnational securities depositories.
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TEMPORARY DEFENSIVE POSITION
When the Advisor determines that market conditions warrant a temporary
defensive position, the Fund may invest without limitation in cash (U.S.
dollars, foreign currencies, or multi-currency units) and short-term fixed
income securities, including U.S. government securities, commercial paper,
banker's acceptances, certificates of deposit, and time deposits.
VARIABLE- OR FLOATING-RATE SECURITIES
The Fund may invest in securities which offer a variable- or floating-rate
of interest. Variable-rate securities provide for automatic establishment of a
new interest rate at fixed intervals (e.g., daily, monthly, semi-annually,
etc.). Floating-rate securities generally provide for automatic adjustment of
the interest rate whenever some specified interest rate index changes. The
interest rate on variable- or floating-rate securities is ordinarily determined
by reference to or is a percentage of a bank's prime rate, the 90-day U.S.
Treasury bill rate, the rate of return on commercial paper or bank certificates
of deposit, an index of short-term interest rates, or some other objective
measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on 7 days notice; in
other cases, the demand feature is exercisable at any time on 30 days notice or
on similar notice at intervals of not more than one year. Some securities
which do not have variable or floating interest rates may be accompanied by
puts producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, the Fund may consider that instrument's maturity to be shorter than its
stated maturity.
Variable-rate demand notes include master demand notes which are
obligations that permit the Fund to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the Fund,
as lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded. There generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and, if not so rated, the Fund may
invest in them only if the Advisor determines that at the time of investment
the obligations are of comparable quality to the other obligations in which the
Fund may invest. The Advisor, on behalf of the Fund, will consider on an
ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in the Fund's portfolio.
The Fund will not invest more than 15% of its net assets in variable- and
floating-rate demand obligations that are not readily marketable (a variable-
or floating-rate demand obligation that may be disposed of on not more than
seven days notice will be deemed readily marketable and will not be subject to
this limitation). (See "Illiquid Securities" and "Investment Restrictions.")
In addition, each variable- or floating-rate obligation must meet the credit
quality requirements applicable to all the Fund's investments at the time of
purchase. When determining whether such an obligation meets the Fund's credit
quality requirements, the Fund may look to the credit quality of the financial
guarantor providing a letter of credit or other credit support arrangement.
In determining the Fund's weighted average portfolio maturity, the Fund
will consider a floating or variable rate security to have a maturity equal to
its stated maturity (or redemption date if it has been called for redemption),
except that it may consider (i) variable rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest rate,
unless subject to a demand feature, (ii) variable rate securities subject to a
demand feature to have a remaining maturity equal to the longer of (a) the next
readjustment in the interest rate or (b) the period
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<PAGE> 66
remaining until the principal can be recovered through demand, and (iii)
floating rate securities subject to a demand feature to have a maturity equal
to the period remaining until the principal can be recovered through demand.
Variable and floating rate securities generally are subject to less principal
fluctuation than securities without these attributes since the securities
usually trade at amortized cost following the readjustment in the interest
rate.
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 SECURITIES
The Fund may purchase securities on a "when-issued" basis. The price of
debt obligations purchased on a when-issued basis, 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.
Normally, the settlement date occurs within 45 days of the purchase although in
some cases settlement may take longer. 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 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 a security on a
when-issued basis, 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 purchases of securities on a
when-issued basis.
To the extent required by the SEC, the Fund will maintain cash and
marketable securities equal in value to commitments for when-issued 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
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 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 that year. In order to continue to qualify as a "regulated
investment company" under the Internal Revenue Code 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 OF THE FUNDS
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 25 registered open-end
management investment companies consisting of 44 mutual funds (the "Strong
Funds"). The Strong Funds, in the aggregate,
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pays 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
Fund.
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. Mr. Strong has served the Fund as a Director and Chairman of the Board
since _____________ 1998.
MARVIN E. NEVINS (DOB 7/19/18), Director of the Fund.
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. Mr. Nevins has served
the Fund as a Director since _____________ 1998.
WILLIE D. DAVIS (DOB 7/24/34), Director of the Fund.
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, YMCA Metropolitan - Los Angeles
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,
Marquette University since 1988, and Occidental College since 1990. 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. Mr. Davis has served the Fund as a
Director since _____________ 1998.
STANLEY KRITZIK (DOB 1/9/30), Director of the Fund.
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. Mr. Kritzik has served the Fund as a Director since _____________
1998.
WILLIAM F. VOGT (DOB 7/19/47), Director of the Fund.
Mr. Vogt has been the President of Vogt Management Consulting, Inc. since
1990. From 1982 until 1990, he served as Executive Director of University
Physicians of the University of Colorado. Mr. Vogt is the Past President of
the Medical Group Management Association and a Fellow of the American College
of Medical Practice Executives. Mr. Vogt has served the Fund as a Director
since _____________ 1998.
LAWRENCE A. TOTSKY (DOB 5/6/59), C.P.A., Vice President of the Fund.
Mr. Totsky has been Senior Vice President of the Advisor since September
1994. Mr. Totsky served as Vice President of the Advisor from December 1992 to
September 1994. Mr. Totsky acted as the Advisor's Manager of Shareholder
Accounting and Compliance from June 1987 to June 1991 when he was named
Director of Mutual Fund Administration. Mr. Totsky has served the Fund as a
Vice President since _____________ 1998.
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<PAGE> 68
THOMAS P. LEMKE (DOB 7/30/54), Vice President of the Fund.
Mr. Lemke has been Senior Vice President, Secretary, and General Counsel
of the Advisor since September 1994. 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 Securities and Exchange
Commission, 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). Mr. Lemke has served the Fund as a Vice President since
_____________ 1998.
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the
Fund.
Mr. Shenkenberg has been Deputy General Counsel to the Advisor since
November 1996. From December 1992 until November 1996, Mr. Shenkenberg acted
as Associate Counsel to the Advisor. From June 1987 until December 1992, Mr.
Shenkenberg was an attorney for Godfrey & Kahn, S.C., a Milwaukee law firm.
Mr. Shenkenberg has served the Fund as a Vice President and as Secretary since
_____________ 1998.
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Fund.
Mr. Weitzer has been an Associate Counsel of the Advisor since July 1993.
Mr. Weitzer has served the Fund as a Vice President since _____________ 1998.
JOHN A. FLANAGAN (DOB 6/5/46), Treasurer of the Fund.
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.
Mr. Flanagan has served the Fund as the Treasurer since _____________ 1998.
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.
In addition to the positions listed above, the following individuals also
hold the following positions with Strong Holdings, Inc. ("Holdings"), a
Wisconsin corporation and subsidiary of the Advisor; Strong Funds Distributors,
Inc., the Fund's underwriter ("Distributors"), Heritage Reserve Development
Corporation ("Heritage"), and Strong Service Corporation ("SSC"), each of which
is a Wisconsin corporation and subsidiary of Holdings; Fussville Real Estate
Holdings L.L.C. ("Real Estate Holdings") and Sherwood Development L.L.C.
("Sherwood"), each of which is a Wisconsin Limited Liability Company and
subsidiary of the Advisor and Heritage; and Fussville Development L.L.C.
("Fussville Development"), a Wisconsin Limited Liability Company and subsidiary
of the Advisor and Real Estate Holdings:
RICHARD S. STRONG:
CHAIRMAN AND A DIRECTOR - Holdings and Distributors (since October 1993);
Heritage (since January 1994); and SSC (since November 1995).
CHAIRMAN AND A MEMBER OF THE MANAGING BOARD - Real Estate Holdings and
Fussville Development (since December 1995 and February 1994,
respectively); and Sherwood (since October 1994).
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THOMAS P. LEMKE:
VICE PRESIDENT - Holdings, Heritage, Real Estate Holdings, and Fussville
Development (since December 1995); Distributors (since October 1996);
Sherwood (since October 1994); and SSC (since November 1995).
STEPHEN J. SHENKENBERG:
VICE PRESIDENT AND SECRETARY - Distributors (since December 1995).
SECRETARY - Holdings, Heritage, Fussville Development, Real Estate
Holdings, and Sherwood (since December 1995); and SSC (since November
1995).
As of , 1998, the officers and directors of the Fund did not own any of
the Fund's shares.
PRINCIPAL SHAREHOLDERS
As of , 1998, no one owned of record and beneficially any shares of the
Fund.
INVESTMENT ADVISOR AND DISTRIBUTOR
The Advisor to the Fund is Strong Capital Management, Inc. Mr. Richard S.
Strong controls the Advisor. Mr. Strong is the Chairman and a Director of the
Advisor, Mr. Totsky is a Senior Vice President of the Advisor, Mr. Lemke is 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 Deputy General Counsel of the Advisor, and
Mr. Weitzer is Associate Counsel of the Advisor. A brief description of the
Fund's investment advisory agreement ("Advisory Agreement") is set forth in the
Prospectus under "About the Fund - Management."
The Advisory Agreement for the Fund is dated , 1998, and will remain in
effect for a period of two years. The Advisory Agreement was approved by the
Fund's initial shareholder on its first day of operations. The Advisory
Agreement is required to be approved annually by its Board of Directors or by
vote of a majority of the Fund's outstanding voting securities (as defined in
the 1940 Act). In either case, such 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. In addition, an Advisory Agreement 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. 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 its expense.
Except for expenses assumed by the Advisor, as set forth above, or by the
Distributor as described below 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; organizational 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 distributing
Prospectuses and quarterly and semi-annual financial statements to existing
shareholders; charges of custodians, transfer agent fees (including the
printing and mailing of reports and notices to shareholders), registrars,
auditing and legal services, clerical services related to recordkeeping and
shareholder relations, and printing of stock certificates; and fees for
directors who are not "interested persons" of the Advisor.
As compensation for its services, the Fund pays to the Advisor a monthly
management fee at the annual rate of .70% of the average daily net assets value
of the Fund. (See "Shareholder Manual -- Determining Your Share Price" in the
Prospectus.) From time to time, the Advisor may voluntarily waive all or a
portion of its management fee for the Fund.
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<PAGE> 70
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 Securities and Exchange Commission (the "SEC") filed
an administrative action (the "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 (the "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) (the "Consent
Judgment"). Under the terms of the Consent Judgment, the Advisor agreed to
reimburse the affected accounts a total of $5.9 million. The settlement did
not have any material impact on the Advisor's financial position or operations.
The Fund and the Advisor have adopted a Code of Ethics (the "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.
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
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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.
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 that are or may be deemed to be inconsistent with the actions taken by
such persons.
Under a Distribution Agreement with the Fund dated , 199__, Strong Funds
Distributors, Inc. ("Distributor"), a subsidiary of the Advisor, acts as
underwriter of the Fund's shares. The Distribution Agreement provides that the
Distributor will use its best efforts to distribute the Fund's shares. Since
the Fund is a "no-load" fund, no sales commissions are charged on the purchase
of the Fund's shares. The Distribution Agreement further provides that the
Distributor will bear the additional costs of printing Prospectuses and
shareholder reports which are used for selling purposes, as well as advertising
and other costs attributable to the distribution of the Fund's shares. The
Distributor is controlled by the Advisor and Richard S. Strong. The
Distribution Agreement is subject to the same termination and renewal
provisions as are described above with respect to the Advisory Agreements.
From time to time, the Distributor may hold in-house sales incentive
programs for its associated persons under which these persons may receive
non-cash compensation awards in connection with the sale and distribution of
the Fund's shares. These awards may include items such as, but not limited to,
gifts, merchandise, gift certificates, and payment of travel expenses, meals
and lodging. As required by the National Association of Securities Dealers,
Inc. or NASD's proposed rule amendments in this area, any in-house sales
incentive program will be multi-product oriented, i.e., any incentive will be
based on an associated person's gross production of all securities within a
product type and will not be based on the sales of shares of any specifically
designated mutual fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's portfolio business and the
negotiation of the commissions to be paid on such transactions. It is the
policy of the Advisor to seek the best 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
over-the-counter 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 commission, 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 of sale of the same security for the
Fund, other mutual funds managed by the Advisor, and other advisory clients
(collectively, the "client accounts"). The Advisor will bunch orders when it
deems it to be appropriate and in the best interests 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 clients 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-dealer a commission for effecting a transaction in excess of
the amount of commission another broker-dealer would have charged for effecting
the transaction in recognition of the value of the brokerage
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and research services provided by the broker or dealer. Brokerage and research
services include (a) furnishing advice as to the value of securities, the
advisability of investing, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) 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 (a) 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; (b) such payment is made in
compliance with the provisions of Section 28(e), other applicable state and
federal laws, and the Advisory Agreement; and (c) 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 fees
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 of costs 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.
From time to time, the Advisor may purchase new issues of securities for
the Fund in a fixed 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
National Association of Securities Dealers 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).
Each year, 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 their brokerage and
research services were satisfactory to the Advisor and their execution
capabilities were compatible with the Advisor's policy of seeking best
execution at the best security price available, as discussed above. 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.
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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.
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 their 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 separately measure the benefits
from research services to each of the accounts (including a Fund) 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 (the
"procedures"), summarized below, that reflect the Advisor's overriding policy
that deal 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 of other deals the client has participated in during the
past year.
Where more than one of the Advisor 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 Advisor
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 the 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.
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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.
CUSTODIAN
As custodian of the Fund's assets, Brown Brothers Harriman & Co., 40 Water
Street, Boston, Massachusetts 02109, 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. In
addition, the Fund, with the approval of the Board of Directors and subject to
the rules of the SEC, will have sub-custodians in those foreign countries in
which their respective assets may be invested. The custodian and, if
applicable, the sub-custodian are 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 dividend-disbursing agent and transfer agent for the
Fund. The Advisor is compensated based on an annual fee per open account of
$31.50, plus certain out-of-pocket expenses, such as postage and printing
expenses in connection with shareholder communications. The Advisor also
receives an annual fee per closed account of $4.20 from the Fund, payable
monthly. The fees received and the services provided as transfer agent and
dividend-disbursing agent are in addition to the fees received and services
provided by the Advisor under the Advisory Agreement. In addition, the Advisor
provides certain printing and mailing services for the Fund, such as printing
and mailing of shareholder account statements, checks and tax forms.
From time to time, the Fund, directly or indirectly through arrangements
with the Advisor, and/or the Advisor may pay amounts to third parties that
provide transfer agent and other administrative services relating to the Fund
to persons who beneficially own interests in the Fund, such as participants in
401(k) plans. These services may include, among other things, sub-accounting
services, transfer agent type activities, answering inquiries relating to the
Fund, transmitting, on behalf of the Fund, proxy statements, annual reports,
updated Prospectuses, other communications regarding the Fund, and related
services as the Fund or beneficial owners may reasonably request. In such
cases, the Fund will not pay fees based on the number of beneficial owners at a
rate that is greater than the rate the Funds are currently paying the Advisor
for providing these services to Fund shareholders.
TAXES
GENERAL
As indicated under "About the Fund - Distributions and Taxes" in the
Prospectus, the Fund intends to continue to qualify annually for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended ("Code"). This qualification does not involve government
supervision of the Fund's management practices or policies.
In order to qualify for treatment as a RIC under the Code, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. For the Fund, 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, or other income (including gains from options, futures, or forward
contracts) derived with respect to its business of investing in securities or
those currencies ("Income Requirement"); (2) the Fund must derive less than 30%
of its gross income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three months
- - options or futures (other than those on foreign currencies), or foreign
currencies (or options, futures, or forward contracts thereon) that are not
directly related to the Fund's principal business of investing in securities
(or options and futures with respect to securities) ("30% Limitation"); (3) 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.
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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 (4)
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 Code.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
FOREIGN TRANSACTIONS
Interest and dividends 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 United States 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. Pursuant to the election, 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 him, his proportionate share of those taxes, (2) treat his share of those
taxes and of any dividend paid by the Fund that represents income from foreign
or U.S. possessions sources as his own income from those sources, and (3)
either deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his 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 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 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 nominal 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"). 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.
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DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures and entering into forward currency contracts,
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
(except certain gains therefrom that may be excluded by future regulations),
and income from transactions in options, futures, and forward currency
contracts derived by the Fund with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
Income Requirement. However, income from the disposition of options and
futures (other than those on foreign currencies) will be subject to the 30%
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward contracts
on foreign currencies, that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the 30% Limitation if they are held for
less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
30% Limitation. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. The Fund
intends that, when it engages in hedging strategies, the hedging transactions
will qualify for this treatment, but at the present time it is not clear
whether this treatment will be available for all of the Funds' hedging
transactions. To the extent this treatment is not available or is not elected
by the Fund, it may be forced to defer the closing out of certain options,
futures, or forward currency contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Fund to continue to qualify as a
RIC.
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, and forward currency contracts that are subject to section 1256 of the
Code ("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. Unrealized
gains on Section 1256 Contracts that have been held by the Fund for less than
three months as of the end of its taxable year, and that are recognized for
federal income tax purposes as described above, will not be considered gains on
investments held for less than three months for purposes of the 30% Limitation.
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 and avoid imposition
of the Excise Tax, 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 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. In addition, any such
gains may be realized on the disposition of securities held for less than three
months. Because of the 30% Limitation, any such gains would reduce the Fund's
ability to sell other securities, or certain options, futures, or forward
currency contracts, held for less than three months that it might wish to sell
in the ordinary course of its portfolio management.
The foregoing federal tax discussion as well as the tax discussion
contained within the Prospectus under "About the Fund - Distributions and
Taxes" is intended to provide you with an overview of the impact of federal
income tax provisions on each 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
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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.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "Shareholder Manual --
Determining Your Share Price," the net asset value of the Fund will be
determined as of the close of trading on each day the New York Stock Exchange
(the "NYSE") is open for trading. The NYSE is open for trading Monday through
Friday except New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays fall 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 the yearly accounting period.
ADDITIONAL SHAREHOLDER INFORMATION
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGES
The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Fund may not be liable for losses
due to unauthorized or fraudulent instructions. Such procedures include but
are not limited to requiring a form of personal identification prior to acting
on instructions received by telephone, providing written confirmations of such
transactions to the address of record, and tape recording telephone
instructions.
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. Redemption checks in excess of the lesser of $250,000 or 1% of
the Fund's assets during any 90-day period may not be honored by the Fund if
the Advisor determines that existing conditions make cash payments undesirable.
RETIREMENT PLANS
Individual Retirement Account (IRA): Everyone under age 70 1/2 with earned
income may contribute to a tax-deferred IRA. The Strong Funds offer a prototype
plan for you to establish your own IRA. You are allowed to contribute up to the
lesser of $2,000 or 100% of your earned income each year to your IRA (or up to
$4,000 between your IRA and your non-working spouses' IRA). Under certain
circumstances, your contribution will be deductible.
Direct Rollover IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or Code section
403(b) plan distribution directly into an IRA. The distribution must be
eligible for rollover. The amount of your Direct Rollover IRA contribution
will not be included in your taxable income for the year.
Simplified Employee Pension Plan (SEP-IRA): A SEP-IRA plan allows an employer
to make deductible contributions to separate IRA accounts established for each
eligible employee.
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<PAGE> 78
Salary Reduction Simplified Employee Pension Plan (SAR SEP-IRA): A SAR SEP-IRA
plan is a type of SEP-IRA plan in which an employer may allow employees to
defer part of their salaries and contribute to an IRA account. These deferrals
help lower the employees' taxable income. Please note that you may no longer
open new SAR SEP-IRA plans (since December 31, 1996). However, employers with
SAR SEP-IRA plans that were established prior to January 31, 1997 may still
open accounts for new employees.
Simplified Incentive Match Plan for Employees (SIMPLE-IRA): A SIMPLE-IRA plan
is a retirement savings plan that allows employees to contribute a percentage
of their compensation, up to $6,000, on a pre-tax basis, to a SIMPLE-IRA
account. The employer is required to make annual contributions to eligible
employees' accounts. All contributions grow tax-deferred.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans,
money purchase pension plans, and paired plans (a combination of a
profit-sharing plan and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
403(b)(7) Plan: A tax-sheltered custodial account designed to qualify under
section 403(b)(7) of the Code is available for use by employees of certain
educational, non-profit, hospital, and charitable organizations.
FUND ORGANIZATION
The Fund is a series of common stock of Strong International Income Funds,
Inc. (formerly known as Strong International Bond Fund, Inc.), a Wisconsin
corporation (the "Corporation"). The Corporation was incorporated on January
5, 1994 and is authorized to issue an indefinite number of shares of common
stock and series and classes of series of shares of common stock, with a par
value of .01 per share. The shares in any one portfolio may, in turn, be
offered in separate classes, each with differing preferences, limitations or
relative rights. However, the Corporation's Articles of Incorporation provides
that if additional classes of shares are issued by the Fund, such new classes
of shares may not affect the preferences, limitations or relative rights of the
Fund's outstanding shares. In addition, the Corporation's Board of Directors
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 Fund have no preemptive, conversion, or subscription
rights. The Corporation currently has only one series of common stock
outstanding. 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 their 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 of the Fund 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.
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<PAGE> 79
PERFORMANCE INFORMATION
As described under "About the Fund -- Performance Information" in the
Prospectus, the Fund's historical performance or return may be shown in the
form of "average annual total return," "total return," "cumulative total
return," "yield" and "distribution rate". 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.
YIELD
The Fund's yield is computed in accordance with a standardized method
prescribed by rules of the SEC. Under that method, the current yield quotation
for the Fund is based on a one month or 30-day period. The Fund's yield is
computed by dividing the net investment income per share earned during the
30-day or one month period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[( a-b + 1)6 - 1]
cd
Where a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
DISTRIBUTION RATE
The distribution rate 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. 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 the Fund's yield.
Both the Fund's yield and distribution rate will fluctuate.
AVERAGE ANNUAL TOTAL RETURN
The average annual total return of the Fund is computed by finding the
average annual compounded rates of return over these periods that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
P (1 + T)n = ERV
P = a hypothetical initial payment of $10,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $10,000 payment
made at the beginning of the stated periods at the end of the
stated periods.
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 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.
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<PAGE> 80
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 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.
The Fund's performance figures are based upon historical results and do
not represent future performance. The Fund's shares are sold at net asset
value per share. The Fund's returns and net asset value will fluctuate and
shares are redeemable at the then current net asset value of the Fund, which
may be more or less than original cost. Factors affecting a Fund's performance
include general market conditions, operating expenses and investment
management. Any additional fees charged by a dealer or other financial
services firm would reduce the returns described in this section.
COMPARISONS
(1) 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 United States 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.
(2) 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 represent an alternative (taxable) income-producing
product. 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. The bonds held by the Fund are generally
longer term than most certificates of deposit and may reflect longer term
market interest rate fluctuations.
(3) 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.
(4) 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 fund 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 gain 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. Lipper also issues a monthly yield analysis
for fixed income funds.
(5) 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.
(6) 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.
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<PAGE> 81
Sources for Fund performance information and articles about the Fund may
include publications such as Money, Forbes, Kiplinger's, Smart Money,
Morningstar, Inc., Financial World, Business Week, U.S. News and World Report,
The Wall Street Journal, Barron's and a variety of investment newsletters.
(7) INDICES
The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments which the
Fund may purchase for its portfolio and the investments measured by the
indices. There are important differences among the various investments
included in the indices that should be considered in reviewing this
information.
(8) HISTORICAL INFORMATION
Because the Fund's investments primarily are denominated in foreign
currencies, the strength or weakness of the U.S. dollar against these
currencies may account for part of the Fund's investment performance.
Historical information regarding the value of the dollar versus foreign
currencies may be used from time to time in advertisements concerning the Fund.
Such historical information is not indicative of future fluctuations in the
value of the U.S. dollar against these currencies. Marketing materials may
cite country and economic statistics and historical stock or bond market
performance for any of the countries in which the Fund may invest, including,
but not limited to, the following: population growth, gross domestic product,
inflation rate, average stock market price earnings ratios, selected returns on
stocks or bonds, and the total value of stock or bond markets. Sources of such
statistics may include official publications of various foreign governments,
exchanges, or investment research firms. In addition, marketing materials may
cite the portfolio management's views or interpretations of such statistical
data or historical performance.
(9) 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. Similarly,
international stocks and bonds are generally more volatile than domestic stocks
and bonds, and may also offer greater return potential 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.
(10) STRONG FAMILY OF FUNDS
The Strong Family of Funds offers a comprehensive range of conservative to
aggressive investment options. All of the members of the Strong Family and
their investment objectives are listed below. The Funds are listed in ascending
order of risk and return, as determined by the Fund's Advisor.
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Strong Money Market Fund Current income, a stable share price, and daily liquidity.
- ----------------------------------------------------------------------------------------------------------
Strong Heritage Money Fund Current income, a stable share price, and daily liquidity.
- ----------------------------------------------------------------------------------------------------------
Strong Municipal Money Market Federally tax-exempt current income, a stable share-price, and daily
Fund liquidity.
- ----------------------------------------------------------------------------------------------------------
Strong Municipal Advantage Fund Federally tax-exempt current income with a very low degree of
share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Short-Term Municipal Total return by investing for a high level of federally tax-exempt
Bond Fund current income with a low degree of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low
degree of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Short-Term Global Bond Total return by investing for a high level of income with a low degree
Fund of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Short-Term High Yield Total return by investing for a high level of federally tax-exempt
Municipal Fund current income with a moderate degree of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Short-Term High Yield Total return by investing for a high level of current income with a
Bond Fund moderate degree of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Government Securities Total return by investing for a high level of current income with a
Fund moderate degree of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
Strong Corporate Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 82
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
Strong High-Yield Municipal Total return by investing for a high level of federally tax-exempt
Bond Fund current income.
- ----------------------------------------------------------------------------------------------------------
Strong High-Yield Bond Fund Total return by investing for a high level of current income and
capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong International Bond Fund High total return by investing for both income and capital appreciation.
- ----------------------------------------------------------------------------------------------------------
Strong Asset Allocation Fund High total return consistent with reasonable risk over the long term.
- ----------------------------------------------------------------------------------------------------------
Strong Equity Income Fund Total return by investing for both income and capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong American Utilities Fund Total return by investing for both income and capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Blue Chip 100 Fund Total return by investing for both income and capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Limited Resources Fund Total return by investing for both capital growth and income.
- ----------------------------------------------------------------------------------------------------------
Strong Total Return Fund High total return by investing for capital growth and income.
- ----------------------------------------------------------------------------------------------------------
Strong Growth and Income Fund High total return by investing for capital growth and income.
- ----------------------------------------------------------------------------------------------------------
Strong Index 500 Fund To approximate as closely as practicable (before fees and expenses) the
capitalization-weighted total rate of return of that portion of the
U.S. market for publicly traded common stocks composed of the larger
capitalized companies.
- ----------------------------------------------------------------------------------------------------------
Strong Schafer Balanced Fund Total return by investing for both income and capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Schafer Value Fund Long-term capital appreciation principally through investment in common
stocks and other equity securities. Current income is a secondary
objective.
- ----------------------------------------------------------------------------------------------------------
Strong Dow Theory Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Value Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Opportunity Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Mid Cap Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Common Stock Fund* Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Small Cap Value Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Growth Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Discovery Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Small Cap Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Growth 20 Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong International Stock Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
Strong Asia Pacific Fund Capital growth.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund is closed to new investors, except the Fund may continue to offer
its shares through certain 401(k) plans and similar company-sponsored
retirement plans.
The Advisor also serves as Advisor or Subadvisor to several management
investment companies, some of which fund variable annuity separate accounts of
certain insurance companies.
The Fund may from time to time be compared to the other funds in the
Strong Family of 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 Funds risk/reward continuum or
any Fund's position on the continuum may be described or diagrammed in
marketing materials. The Strong Funds risk/reward continuum positions the risk
and reward potential of each Strong Fund relative to the other Strong Funds,
but is not intended to position any Strong Fund relative to
42
<PAGE> 83
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 Funds to help you reach your financial goals. To help you better
understand the Strong International Funds and determine which Fund or
combination of Funds best meets your personal investment objectives.
(11) TYING TIME FRAMES TO YOUR GOALS
There are many issues to consider as you make your investment decisions,
including analyzing your risk tolerance, investing experience, and asset
allocations. You should start to organize your investments by learning to link
your many financial goals to specific time frames. Then you can begin to
identify the appropriate types of investments to help meet your goals. As a
general rule of thumb, the longer your time horizon, the more price fluctuation
you will be able to tolerate in pursuit of higher returns. For that reason,
many people with longer-term goals select stocks or long-term bonds, and many
people with nearer-term goals match those up with for instance, short-term
bonds. The Advisor developed the following suggested holding periods to help
our investors set realistic expectations for both the risk and reward potential
of our funds. (See table below.) Of course, time is just one element to
consider when making your investment decision.
STRONG FUNDS SUGGESTED MINIMUM HOLDING PERIODS
<TABLE>
<CAPTION>
UNDER 1 YEAR 1 TO 2 YEARS 4 TO 7 YEARS 5 OR MORE YEARS
- -------------------- --------------------------- -------------------------- ------------------------
<S> <C> <C> <C>
MONEY MARKET FUND ADVANTAGE FUND GOVERNMENT SECURITIES FUND ASSET ALLOCATION FUND
HERITAGE MONEY FUND MUNICIPAL ADVANTAGE FUND MUNICIPAL BOND FUND AMERICAN UTILITIES FUND
MUNICIPAL MONEY MARKET FUND CORPORATE BOND FUND INDEX 500 FUND
INTERNATIONAL BOND FUND TOTAL RETURN FUND
2 to 4 Years HIGH-YIELD MUNICIPAL BOND OPPORTUNITY FUND
-------------------- HIGH-YIELD BOND FUND GROWTH FUND
SHORT-TERM BOND FUND LIMITED RESOURCES FUND COMMON STOCK FUND*
SHORT-TERM MUNICIPAL BOND FUND DISCOVERY FUND
SHORT-TERM GLOBAL BOND FUND INTERNATIONAL STOCK FUND
SHORT-TERM HIGH YIELD BOND FUND ASIA PACIFIC FUND
SHORT-TERM HIGH YIELD MUNICIPAL VALUE FUND
FUND SMALL CAP FUND
GROWTH AND INCOME FUND
EQUITY INCOME FUND
MID CAP FUND
SCHAFER VALUE FUND
GROWTH 20 FUND
SMALL CAP VALUE FUND
DOW THEORY FUND
SCHAFER BALANCED FUND
BLUE CHIP 100 FUND
</TABLE>
*This Fund is closed to new investors, except the Fund may continue to offer
its shares through certain 401(k) plans and similar company-sponsored
retirement plans.
ADDITIONAL FUND INFORMATION
(1) DURATION
Duration is a calculation that seeks to measure the price sensitivity of a
bond or a bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes by taking into account the time value of
cash flows generated over the bond's life. Future interest and principal
payments are discounted to reflect their present value and then are multiplied
by the number of years they will be received to produce a value that is
expressed in years. Since duration can also be computed for the Fund, you can
estimate the effect of interest rates on the Fund's share price. Simply
multiply the Fund's duration by an expected change in interest rates. For
example, the price of the Fund with a duration of two years would be expected
to fall approximately two percent if market interest rates rose by one
percentage point.
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<PAGE> 84
(2) 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.
(3) 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 (xi - xm)2
----------
n-1
where = "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.
44
<PAGE> 85
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 Funds include, but are not limited to, changes in interest
rates, political developments, the competitive environment, consumer behavior,
industry trends, technological advances, product development, pending or
enacted legislation, demographic variables, macroeconomic trends, and the
supply and demand of various financial instruments. In addition, marketing
materials may cite the portfolio management's views or interpretations of such
factors.
EIGHT BASIC PRINCIPLES FOR SUCCESSFUL MUTUAL FUND INVESTING
These common sense rules are followed by many successful investors. They
make sense for beginners, too. If you have a question on these principles, or
would like to discuss them with us, please contact us at 1-800-368-3863.
1. Have a plan - even a simple plan can help you take control of your
financial future. Review your plan once a year, or if your circumstances
change.
2. Start investing as soon as possible. Make time a valuable ally. Let it
put the power of compounding to work for you, while helping to reduce your
potential investment risk.
3. Diversify your portfolio. By investing in different asset classes -
stocks, bonds, and cash - you help protect against poor performance in one
type of investment while including investments most likely to help you
achieve your important goals.
4. Invest regularly. Investing is a process, not a one-time event. By
investing regularly over the long term, you reduce the impact of
short-term market gyrations, and you attend to your long-term plan before
you're tempted to spend those assets on short-term needs.
5. Maintain a long-term perspective. For most individuals, the best
discipline is staying invested as market conditions change. Reactive,
emotional investment decisions are all too often a source of regret - and
principal loss.
6. Consider stocks to help achieve major long-term goals. Over time, stocks
have provided the more powerful returns needed to help the value of your
investments stay well ahead of inflation.
7. Keep a comfortable amount of cash in your portfolio. To meet current
needs, including emergencies, use a money market fund or a bank account -
not your long-term investment assets.
8. Know what you're buying. Make sure you understand the potential risks and
rewards associated with each of your investments. Ask questions... request
information...make up your own mind. And choose a fund company that helps
you make informed investment decisions.
STRONG RETIREMENT PLAN SERVICES
Strong Retirement Plan Services offers a full menu of high quality,
affordable retirement plan options, including traditional money purchase
pension and profit sharing plans, 401(k) plans, simplified employee pension
plans, salary reduction plans, Keoghs, and 403(b) plans. Retirement plan
specialists are available to help companies determine which type of retirement
plan may be appropriate for their particular situation.
45
<PAGE> 86
Markets:
The retirement plan services provided by the Advisor focus on four
distinct markets, based on the belief that a retirement plan should fit the
customer's needs, not the other way around.
1. Small company plans. Small company plans are designed for companies with
1-50 plan participants. The objective is to incorporate the features and
benefits typically reserved for large companies, such as sophisticated
recordkeeping systems, outstanding service, and investment expertise, into
a small company plan without administrative hassles or undue expense.
Small company plan sponsors receive a comprehensive plan administration
manual as well as toll-free telephone support.
2. Large company plans. Large company plans are designed for companies with
between 51 and 1,000 plan participants. Each large company plan is
assigned a team of professionals consisting of an account manager, who is
typically an attorney, CPA, or holds a graduate degree in business, a
conversion specialist (if applicable), an accounting manager, a
legal/technical manager, and an education/communications educator.
3. Women-owned businesses.
4. Non-profit and educational organizations (the 403(b) market).
Turnkey approach:
The retirement plans offered by the Advisor are designed to be streamlined
and simple to administer. To this end, the Advisor has invested heavily in the
equipment, systems, and people necessary to adopt or convert a plan, and to
keep it running smoothly. The Advisor provides all aspects of the plan,
including plan design, administration, recordkeeping, and investment
management. To streamline plan design, the Advisor provides customizable
IRS-approved prototype documents. The Advisor's services also include annual
government reporting and testing as well as daily valuation of each
participant's account. This structure is intended to eliminate the confusion
and complication often associated with dealing with multiple vendors. It is
also designed to save plan sponsors time and expense.
The Advisor strives to provide one-stop retirement savings programs that
combine the advantages of proven investment management, flexible plan design,
and a wide range of investment options. The open architecture design of the
plans allow for the use of the family of mutual funds managed by the Advisor as
well as a stable asset value option. Large company plans may supplement these
options with their company stock (if publicly traded) or funds from other
well-known mutual fund families.
Education:
Participant education and communication is key to the success of any
retirement program, and therefore is one of the most important services that
the Advisor provides. The Advisor's goal is twofold: to make sure that plan
participants fully understand their options and to educate them about the
lifelong investment process. To this end, the Advisor provides attractive,
readable print materials that are supplemented with audio and video tapes, and
retirement education programs.
Service:
The Advisor's goal is to provide a world class level of service. One
aspect of that service is an experienced, knowledgeable team that provides
ongoing support for plan sponsors, both at adoption or conversion and
throughout the life of a plan. The Advisor is committed to delivering accurate
and timely information, evidenced by straightforward, complete, and
understandable reports, participant account statements, and plan summaries.
The Advisor has designed both "high-tech" and "high-touch" systems,
providing an automated telephone system as well as personal contact.
Participants can access daily account information, conduct transactions, or
have questions answered in the way that is most comfortable for them.
46
<PAGE> 87
STRONG FINANCIAL ADVISORS GROUP
The Strong Financial Advisors Group is dedicated to helping financial
advisors better serve their clients. Financial advisors receive regular
updates on the mutual funds managed by the Advisor, access to portfolio
managers through special conference calls, consolidated mailings of duplicate
confirmation statements, access to the Advisor's network of regional
representatives, and other specialized services. For more information on the
Strong Financial Advisors Group, call 1-800-368-1683.
PORTFOLIO MANAGEMENT
The portfolio manager 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's investment philosophy includes (i) active management to
deliver a superior total return with low to moderate risk versus benchmarks;
(ii) a long-term outlook; (iii) controlled country and currency exposure; (iv)
duration managed within a narrow band; and (v) value added by use of all
available sectors and instruments. The Advisor also believes that (i) over
time, international diversification may help reduce total portfolio risk and
increase return potential; and (ii) foreign and emerging markets are often
inefficient, providing significant growth opportunities for investors who do
their homework.
The Advisor's investment process generally follows a five-step approach.
The first step is the global "satellite" view. This top-down approach, driven
by a secular outlook, determines duration and blocs. Second, the Advisor takes
a continental "airplane" view. Major continental allocations are based on
global economic cycles and relative values. The third step is the
country/currency "helicopter" view. Country allocations are determined based
on country-specific policies and prospects along with risk management
considerations. Fourth, the Advisor considers the country structure "car" view.
Consideration of each country's economic outlook, combined with an analysis of
the yield curve, determines the portfolio structure and sector composition.
Finally, issue selection is done "by foot". Individual securities are chosen
from alternatives such as sovereigns, corporates, mortgages, futures, and
options. The Advisor's currency risk management approach involves short-,
intermediate-, and long-term analysis. Within each time frame, the Advisor may
utilize various econometric models and trading systems in its analysis of
currency risk.
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
Kirkpatrick & Lockhart, 1800 M Street, N.W., Washington D.C. 20036 acts
as outside legal counsel for the Fund.
47
<PAGE> 88
APPENDIX
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or based on
other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default capacity and willingness of
the obligor as to the timely payment of interest and repayment
of principal 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.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
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B Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments 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 if debt service payments 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.
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.
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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 INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond and preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt or preferred issue in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guaranties unless otherwise indicated.
Bonds and preferred stock carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds and preferred stock considered to be investment grade
and of the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and/or dividends and repay principal,
which is unlikely to be affected by reasonably foreseeable events.
AA Bonds and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds
and preferred stock rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of the issuers is generally rated 'F-1+'.
A Bonds and preferred stock considered to be investment grade
and of high credit quality. The obligor's ability to pay interest
and/or dividends and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic
conditions and circumstances than debt or preferred securities with
higher ratings.
BBB Bonds and preferred stock considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay
interest or dividends and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these securities
and, therefore, impair timely payment. The likelihood that the
ratings of these bonds or preferred will fall below investment grade
is higher than for securities with higher ratings.
Fitch speculative grade bond or preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings ('BB' to 'C') represent Fitch's assessment of the likelihood of
timely payment
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of principal and interest or dividends in accordance with the terms of
obligation for issues not in default. For defaulted bonds or preferred stock,
the rating ('DDD' to 'D') is an assessment of the ultimate recovery value
through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer or possible recovery value in
bankruptcy, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's future financial strength.
Bonds or preferred stock that have the same rating are of similar but not
necessarily identical credit quality since the rating categories cannot fully
reflect the differences in the degrees of credit risk.
BB Bonds or preferred stock are considered speculative. The
obligor's ability to pay interest or dividends and repay principal
may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
B Bonds or preferred stock are considered highly speculative.
While bonds in this class are currently meeting debt service
requirements or paying dividends, the probability of continued
timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue.
CCC Bonds or preferred stock have certain identifiable
characteristics that, if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business and
economic environment.
CC Bonds or preferred stock are minimally protected. Default
in payment of interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal or suspension of preferred stock dividends is imminent.
DDD, DD,
and D Bonds are in default on interest and/or principal payments
or preferred stock dividends are suspended. Such securities are
extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery of
these securities, and 'D' represents the lowest potential for
recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important
to the analysis of a company's operating and financial constraints. From time
to time, Duff & Phelps Credit Rating Co. places issuers or security classes on
Rating Watch. The Rating Watch Status results from a need to notify investors
and the issuer that there are conditions present leading us to re-evaluate the
current rating(s). A listing on Rating Watch, however, does not mean a rating
change is inevitable. The Rating Watch Status can either be resolved quickly
or over a longer period of time, depending on the reasons surrounding the
placement on Rating Watch. The "up" designation means a rating may be
upgraded; the "down" designation means a rating may be downgraded, and the
uncertain designation means a rating may be raised or lowered.
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The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities. Structured finance issues, including real estate,
asset-backed and mortgage-backed financings, use this same rating scale with
minor modification in the definitions. Thus, an investor can compare the
credit quality of investment alternatives across industries and structural
types. A "Cash Flow Rating" (as noted for specific ratings) addresses the
likelihood that aggregate principal and interest will equal or exceed the rated
amount under appropriate stress conditions.
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
- -----------------------------------------------------------------------------------------------------
<S> <C>
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.
- -----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 93
IBCA LONG-TERM DEBT RATINGS
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk, albeit not very significantly.
A - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
BB - Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists,
but is susceptible over time to adverse changes in business, economic or
financial conditions.
B - Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
CCC - Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on favorable
business, economic or financial conditions.
CC - Obligations which are highly speculative or which have a high risk of
default.
C - Obligations which are currently in default.
NOTES: "+" or "-" may be appended to a rating below AAA to denote relative
status within major rating categories. Ratings of BB and below are assigned
where it is considered that speculative characteristics are present.
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 we believe are short-term performance aberrations.
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.
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<PAGE> 94
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 COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments 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 grace period.
STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating.
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<PAGE> 95
The following criteria will be used in making the assessment:
- Amortization schedule - the larger the final maturity
relative to other maturities, the more likely the issue is to be
treated as a note.
- Source of payment - the more the issue depends on the market
for its refinancing, the more likely it is to be treated as a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM 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 INVESTORS SERVICE, INC. SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
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<PAGE> 96
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree
than issues rated 'F-1+'.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the margin
of safety is not as great as for issues assigned 'F-1+' and 'F-1'
ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
used by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those
differences.
From time to time, Duff & Phelps places issuers or security classes on
Rating Watch. The Rating Watch status results from a need to notify investors
and the issuer that there are conditions present leading us to re-evaluate the
current rating(s). A listing on Rating Watch, however, does not mean a rating
change is inevitable.
The Rating Watch status can either be resolved quickly or over a longer
period of time, depending on the reasons surrounding the placement on Rating
Watch. The "up" designation means a rating may be upgraded; the "down"
designation means a rating may be downgraded, and the "uncertain" designation
means a rating may be raised or lowered.
Rating Scale: 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.
A-9
<PAGE> 97
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
The TBW Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. TBW
Short-Term Ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-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 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 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA SHORT-TERM RATINGS
IBCA Short-Term Ratings assess the borrowing characteristics of banks and
corporations, and the capacity for timely repayment of debt obligations. The
Short-Term Ratings relate to debt which has a maturity of less than one year.
A1 Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
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<PAGE> 98
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
C Obligations for which there is a high risk of default or which are
currently in default.
A-11
<PAGE> 99
STRONG INTERNATIONAL INCOME FUNDS, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Strong International Bond Fund (all included or
incorporated by reference in Parts A & B)
Schedules of Investments in Securities
Statements of Operations
Statements of Assets and Liabilities
Statements 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 International Bond
Fund dated October 31, 1997, pursuant to Rule 411
under the Securities Act of 1933.
(File Nos. 33-74578 and 811-8318)
(2) Strong Global High-Yield Bond Fund
Inapplicable
(b) Exhibits
(1) Articles of Incorporation dated July 31, 1996(3)
(1.1) Amendment to Articles of Incorporation
dated _______________*
(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) Amendment to Custody Agreement dated
August 26, 1996(3)
(9) Shareholder Servicing Agent Agreement(2)
(10) Opinion of Counsel (Global High-Yield Bond Fund)*
(11) Inapplicable
(12) Inapplicable
(13) Stock Subscription Agreement (Global High-Yield
Bond Fund)*
(14.1) Prototype Defined Contribution Retirement
Plan - No. 1(2)
(14.1.1) Prototype Defined Contribution Retirement
Plan - No. 2(2)
(14.2) Individual Retirement Custodial Account(2)
(14.3) Section 403(b)(7) Retirement Plan(2)
(14.4) Simplified Employee Pension Plan(3)
(15) Inapplicable
(16) Computation of Performance Figures(3)
(17) Financial Data Schedule(3)
(18) Inapplicable
(19) Power of Attorney dated February 25, 1997(3)
C-1
<PAGE> 100
(20) Inapplicable
(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. 4 to the
Registration Statement on Form N-1A of Registrant filed on or about April
24, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A of the Registrant filed on or about
February 28, 1996.
(3) Incorporated herein by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A of the Registrant filed on or about
February 27, 1997.
* To be filed by Amendment.
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 December 31, 1997
-------------- -------------------------
Common Stock, $.01 par value
Strong International Bond Fund _____
Strong Global High-Yield Bond Fund 0
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 $80,000,000, 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.
C-2
<PAGE> 101
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
International Bond Fund
The information contained under "About the Funds - Management" in the
Prospectus and under "Directors and Officers of the Funds" and "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.
Global High-Yield Bond Fund
The information contained under "About the Fund - Management" in the
Prospectus and under "Directors and Officers of the Fund" and "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 Stock Fund, Inc.; Strong
Money Market Fund, Inc.; Strong Municipal Bond Fund, Inc.; Strong Municipal
Funds, Inc.; Strong Opportunity Fund, Inc.; Strong Opportunity Fund II, Inc.;
Strong Schafer 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) International Bond Fund
The information contained under "About the Funds - Management" in the
Prospectus and under "Directors and Officers of the Funds" and "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.
Global High-Yield Bond Fund
The information contained under "About the Fund - Management" in the
Prospectus and under "Directors and Officers of the Fund" and "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) Inapplicable
Item 30. Location of Accounts and Records
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Vice President,
Thomas P. Lemke, at Registrant's corporate offices, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
Item 31. Management Services
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
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<PAGE> 102
Item 32. Undertakings
(a) Inapplicable
(b) The Registrant undertakes to file a post-effective amendment,
using financial statements which need not be certified, within four to six
months from the effective date of this Registration Statement with respect to
Strong Global High-Yield Bond Fund.
(c) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered, upon request and without charge, a copy of the Strong
International Bond Fund's latest annual report to shareholders.
C-4
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it has
duly caused this Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Menomonee Falls, and State of Wisconsin on the
14th day of November, 1997.
STRONG INTERNATIONAL INCOME FUNDS, 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. 7 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
Name Title Date
- ---------------------- ------------------------------------- -----------------
/s/ Thomas P. Lemke Vice President (Acting Principal
- ---------------------- Executive Officer) November 14, 1997
Thomas P. Lemke
/s/ Richard S. Strong Chairman of the Board and a Director November 14, 1997
- ----------------------
Richard S. Strong
/s/ John A. Flanagan Treasurer (Principal Financial and
- ---------------------- Accounting Officer) November 14, 1997
John A. Flanagan
- ---------------------- Director November 14, 1997
Marvin E. Nevins*
- ---------------------- Director November 14, 1997
Willie D. Davis*
- ---------------------- Director November 14, 1997
William F. Vogt*
- ---------------------- Director November 14, 1997
Stanley Kritzik*
* John S. Weitzer signs this document pursuant to powers of attorney filed with
this Post-Effective Amendment No. 6 to the Registration Statement on
Form N-1A.
By: /s/ John S. Weitzer
-----------------------
John S. Weitzer
<PAGE> 104
EXHIBIT INDEX
EDGAR
Exhibit No. Exhibit Exhibit No.
- ----------- ------- -----------
None
