<PAGE> 1
As filed with the Securities and Exchange Commission on or about February 27,
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. 6 [X]
-----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 7 [X]
-----
(Check appropriate box or boxes)
STRONG INTERNATIONAL BOND FUND, INC.
(Exact Name of Registrant as Specified in Charter)
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
THOMAS P. LEMKE
STRONG CAPITAL MANAGEMENT, INC.
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Name and Address of Agent for Service)
Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Securities Act of 1933; the Registrant's Rule 24f-2 Notice
for the fiscal year ended October 31, 1996 was filed on or about December 26,
1996.
It is proposed that this filing will become effective (check appropriate
box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on March 1, 1997 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
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<PAGE> 2
STRONG INTERNATIONAL BOND FUND, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
<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; Highlights
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Strong International Income Funds;
Investment Objectives and Policies;
Fundamentals of Fixed Income
Investing; Implementation of Policies
and Risks; About the Funds -
Organization
5. Management of the Fund About the Funds - Management;
Financial Highlights
5A.Management's Discussion of Fund Performance *
6. Capital Stock and Other Securities About the Funds - 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
14. Management of the Fund Directors and Officers of the Fund
Principal Shareholders; Directors and
15. Control Persons and Principal Holders of Officers of the Fund; Investment
Securities Advisor and Distributor
16. Investment Advisory and Other Services Investment Advisor and Distributor;
About the Funds - Management (in
Prospectus); Custodian; Transfer
Agent and Dividend-Disbursing Agent;
Independent Accountants; Legal
Counsel
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- ------------------------------------------------------ --------------------------------------
<S> <C>
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Included in Prospectus under the
heading About the Funds -
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; Investment
Advisor and Distributor; and
Determination of Net Asset Value
20. Tax Status Included in Prospectus under the
heading About the Funds -
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 Financial Statements
</TABLE>
* Complete answer to Item is contained in Registrant's Annual Report.
** Complete answer to Item is contained in the Registrant's Prospectus.
<PAGE> 4
STRONG INTERNATIONAL FUNDS
<TABLE>
<S> <C>
STRONG SHORT-TERM GLOBAL BOND FUND STRONG FUNDS
STRONG INTERNATIONAL BOND FUND P.O. Box 2936
STRONG INTERNATIONAL STOCK FUND Milwaukee, Wisconsin 53201
STRONG ASIA PACIFIC FUND Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
Device for the
Hearing-Impaired:
(800) 999-2780
</TABLE>
The Strong Family of Funds ("Strong Funds") is a family of more than
twenty-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 International Funds are described
in this Prospectus.
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 Funds, dated March 1, 1997, 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 Funds and
other related materials.
============================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------
March 1, 1997
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PROSPECTUS PAGE I-1
<PAGE> 5
STRONG INTERNATIONAL FUNDS
The Strong Short-Term Global Bond Fund, Inc. and Strong International Bond
Fund, Inc. (collectively, the "Bond Funds") are separately incorporated,
non-diversified, open-end management investment companies. The Strong
International Stock Fund, Inc. and Strong Asia Pacific Fund, Inc. (collectively,
the "Stock Funds") are separately incorporated, diversified, open-end management
investment companies.
STRONG SHORT-TERM GLOBAL BOND FUND (the "Short-Term Global Bond Fund") seeks
total return by investing for a high level of income with a low degree of
share-price fluctuation. The Fund invests primarily in investment-grade debt
obligations of U.S. and foreign issuers. It will normally pay dividends
quarterly and have an average portfolio maturity of three years or less.
STRONG INTERNATIONAL BOND FUND (the "International Bond Fund") seeks high
total return by investing for both income and capital appreciation. The Fund
invests primarily in investment-grade debt obligations of foreign issuers. It
will normally pay dividends quarterly and is currently expected to have an
average portfolio maturity of four to nine years.
STRONG INTERNATIONAL STOCK FUND (the "International Stock Fund") seeks
capital growth. The Fund invests primarily in the equity securities of issuers
located outside the United States.
STRONG ASIA PACIFIC FUND (the "Asia Pacific Fund") seeks capital growth. The
Fund invests primarily in the equity securities of issuers located in Asia or
the Pacific Basin.
---------------------
PROSPECTUS PAGE I-2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
EXPENSES................................. I-4
FINANCIAL HIGHLIGHTS..................... I-5
HIGHLIGHTS............................... I-8
INVESTMENT OBJECTIVES AND POLICIES....... I-9
Comparing the Funds............ I-10
Strong Short-Term Global Bond
Fund......................... I-11
Strong International Bond
Fund......................... I-12
Strong International Stock
Fund......................... I-12
Strong Asia Pacific Fund....... I-13
FUNDAMENTALS OF FIXED INCOME INVESTING... I-14
IMPLEMENTATION OF POLICIES AND RISKS..... I-18
ABOUT THE FUNDS.......................... I-27
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 Funds.
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-3
<PAGE> 7
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Funds, 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 Funds. Additionally,
purchases and redemptions may also be made through broker-dealers or other
financial intermediaries who may charge a commission or other transaction fee
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>
Short-Term Global Bond 0.625% 0.885% NONE 1.51%
International Bond 0.70 1.15 NONE 1.85
International Stock 1.00 0.71 NONE 1.71
Asia Pacific 1.00 1.34 NONE 2.34
</TABLE>
From time to time, the Funds' investment advisor, Strong Capital Management,
Inc. (the "Advisor"), may voluntarily waive its management fee and/or absorb
certain expenses for a Fund. The expenses specified in the table above for the
Funds are based on actual expenses incurred during the fiscal year ended October
31, 1996.
During the fiscal year ended October 31, 1996, the Advisor waived its
management fee and absorbed certain expenses for the Short-Term Global Bond and
International Bond Funds. The actual total operating expenses incurred for such
fiscal year by the Short-Term Global Bond and International Bond Funds after
waivers and absorptions were 0% and 0%, respectively. (See "Financial
Highlights.") Therefore, the expenses specified in the table above for these
Funds have been restated for the fiscal year ended October 31, 1996
---------------------
PROSPECTUS PAGE I-4
<PAGE> 8
to include such management fees and expenses. For additional information
concerning fees and expenses, see "About the Funds - 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 5 10
<S> <C> <C> <C> <C>
Short-Term Global Bond $11 $34 $ 60 $132
International Bond 18 54 94 204
International Stock 17 54 93 202
Asia Pacific 24 73 125 268
</TABLE>
- ----------------------------------------------------------------------------
The Example is based on each 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 a Fund's shares.
FINANCIAL HIGHLIGHTS
The following Financial Highlights for each of the Funds has been audited by
Coopers & Lybrand L.L.P., independent certified public accountants. Their report
for the International Funds for the fiscal year ended October 31, 1996 is
included in the Annual Report of the International Funds that is contained in
the Funds' Statement of Additional Information. The Financial Highlights for the
Funds should be read in conjunction with the Financial Statements and related
notes included in the Funds' Annual Report. Additional information about each
Fund's performance is contained in the Funds' Annual Report, which may be
obtained without charge by calling or writing Strong Funds. The following
presents information relating to a share of common stock of each of the Funds,
outstanding for the entire period ended as indicated.
---------------------
PROSPECTUS PAGE I-5
<PAGE> 9
<TABLE>
<CAPTION>
STRONG SHORT-TERM STRONG INTERNATIONAL
GLOBAL BOND FUND BOND FUND
10-31-96 10-31-95(1) 12-31-94(2) 10-31-96 10-31-95(1) 12-31-94(2)
-------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 10.46 $ 10.15 $ 10.00 $ 11.48 $ 10.36 10.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.71 0.65 0.35 0.80 0.78 0.46
Net Realized and
Unrealized Gains
on Investments 0.34 0.20 0.16 0.15 1.00 0.40
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 1.05 0.85 0.51 0.95 1.78 0.86
LESS DISTRIBUTIONS
From Net Investment
Income (0.77) (0.54) (0.35) (0.50) (0.66) (0.46)
In Excess of Net
Investment Income -- -- -- -- -- (0.02)
From Net Realized Gains -- -- -- (0.06) -- --
In Excess of Net Realized
Gains -- -- (0.01) -- -- (0.02)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.77) (0.54) (0.36) (0.56) (0.66) (0.50)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 10.74 $ 10.46 $ 10.15 $ 11.87 $ 11.48 $ 10.36
======== ======== ======== ======== ======== ========
TOTAL RETURN +10.4% +8.5% +5.1% +8.6% +17.3% +8.7%
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(In Thousands) $70,873 $ 25,171 $ 19,682 $31,099 $ 21,335 $ 9,946
Ratio of Expenses to
Average Net Assets 0.0% 0.0%* 0.0%* 0.0% 0.0%* 0.0%*
Ratio of Expenses to
Average Net Assets
Without Waivers and
Absorptions 1.5% 2.0%* 1.7%* 1.8% 2.0%* 2.0%*
Ratio of Net Investment
Income to Average Net
Assets 7.4% 8.2%* 7.7%* 7.4% 3.3%* 7.9%*
Portfolio Turnover Rate 179.7% 437.3% 287.8% 258.3% 473.3% 679.3%
</TABLE>
*
Calculated on an annualized basis.
(1)
Total return and portfolio turnover rate are not annualized.
(2)
Inception date is March 31, 1994. Total return and portfolio turnover rate are
not annualized.
---------------------
PROSPECTUS PAGE I-6
<PAGE> 10
<TABLE>
<CAPTION>
STRONG INTERNATIONAL STOCK FUND
10-31-96 10-31-95(1) 12-31-94 12-31-93 12-31-92(2)
-------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.03 $ 12.65 $ 14.18 $ 9.77 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.17 0.08 0.06 -- 0.05
Net Realized and Unrealized Gains
(Losses) on Investments 1.11 0.37 (0.27) 4.66 (0.23)
-------- -------- -------- -------- -------
Total from Investment Operations 1.28 0.45 (0.21) 4.66 (0.18)
LESS DISTRIBUTIONS
From Net Investment Income (0.18) (0.07) (0.01) -- (0.05)
In Excess of Net Investment Income (0.38) -- -- (0.02) --
From Net Realized Gains -- -- (1.25) (0.23) --
In Excess of Net Realized Gains -- -- (0.06) -- --
-------- -------- -------- -------- -------
Total Distributions (0.56) (0.07) (1.32) (0.25) (0.05)
-------- -------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 13.75 $ 13.03 $ 12.65 $ 14.18 $ 9.77
======== ======== ======== ======== =======
TOTAL RETURN +9.8% +3.6% -1.6% +47.8% -1.8%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (In Thousands) $303,897 $211,405 $257,830 $128,445 $12,723
Ratio of Expenses to Average Net Assets 1.7% 1.8%* 1.7% 1.9% 2.0%*
Ratio of Net Investment Income to Average
Net Assets 0.6% 0.8%* 0.3% (0.3%) 0.8%*
Portfolio Turnover Rate 108.6% 102.0% 136.5% 139.9% 20.8%
Average Commission Rate Paid(3) $ 0.0166
<CAPTION>
STRONG ASIA PACIFIC FUND
10-31-96 10-31-95(1) 12-31-94
-------- ----------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.55 $ 9.35 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.06 0.04 0.06
Net Realized and Unrealized Gains
(Losses) on Investments 0.31 0.20 (0.57)
------- ------- -------
Total from Investment Operations 0.37 0.24 (0.52)
LESS DISTRIBUTIONS
From Net Investment Income (0.06) (0.03) (0.01)
In Excess of Net Investment Income (0.35) (0.01) --
From Net Realized Gains
In Excess of Net Realized Gains -- -- (0.12)
------- ------- -------
Total Distributions (0.41) (0.04) (0.13)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.51 $ 9.55 $ 9.35
======= ======= =======
TOTAL RETURN +3.8% +2.6% -5.3%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (In Thousands) $72,039 $54,648 $57,724
Ratio of Expenses to Average Net Assets 2.3% 2.0%* 2.0%
Ratio of Net Investment Income to Average
Net Assets 0.2% 0.5%* 0.6%
Portfolio Turnover Rate 91.4% 104.3% 103.3%
Average Commission Rate Paid(3) $0.0104
</TABLE>
*
Calculated on an annualized basis.
(1)
Total return and portfolio turnover rate are not annualized.
(2)
Inception date is March 4, 1992. Total return and portfolio turnover rate are
not annualized.
(3)
Disclosure required, effective for reporting periods beginning after September
1, 1995.
---------------------
PROSPECTUS PAGE I-7
<PAGE> 11
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has distinct investment objectives and policies. The Short-Term
Global Bond and International Bond Funds seek total return consistent with their
investment objectives and policies. The International Stock and Asia Pacific
Funds seek capital growth consistent with their investment objectives and
policies. The investment objective of each Fund is set forth under "Investment
Objectives and Policies."
IMPLEMENTATION OF POLICIES AND RISKS
BOND FUNDS
The Funds will invest in foreign debt obligations and foreign currencies and
may invest in securities of issuers in developing countries. The Funds may
invest in non-investment-grade securities (commonly called "junk bonds") within
specified limits. The Funds also may engage in derivative transactions,
including options, futures, options on futures, forward currency contracts, and
swap agreements. The Funds may also invest in repurchase agreements, when-issued
securities, and illiquid securities and may engage in reverse repurchase
agreements and mortgage dollar roll transactions. The Funds are
"non-diversified" investment companies, which means that they may invest a
larger proportion of their respective assets in the securities of a single
issuer than diversified funds. Each Fund's investment policies may result in
high portfolio turnover rates.
Because of their ability to invest in foreign securities and currencies, each
Fund may offer the potential for greater returns - and may experience greater
share-price volatility - than funds investing only in comparable U.S.
securities. Consistent with the Short-Term Global Bond Fund's goal of capital
preservation, the Advisor will engage in hedging strategies in an effort to
limit the share-price volatility of the Fund. In seeking to achieve the
objective of high total return, the International Bond Fund will remain
primarily unhedged against its exposure to foreign currency risk. (See
"Fundamentals of Fixed Income Investing - Credit Quality - High-Yield
(High-Risk) Securities" and "Implementation of Policies and Risks.")
STOCK FUNDS
Subject to certain limitations, each Fund may invest in foreign securities
and engage in foreign currency and derivative transactions, including options,
futures, and options on futures transactions. Each Fund may invest in illiquid
securities, engage in substantial short-term trading, and may invest a
significant portion of its assets in small companies, some of which may be
unseasoned. Each Fund may also invest in repurchase agreements and when-issued
---------------------
PROSPECTUS PAGE I-8
<PAGE> 12
securities. These investment practices and techniques involve risks that are
different in some respects from those associated with similar funds that do not
use them. Because of their ability to invest in foreign securities and
currencies, each Fund may offer the potential for greater returns - and may
experience greater share-price volatility - than funds investing only in
comparable U.S. securities. (See "Implementation of Policies and Risks.")
MANAGEMENT
The Advisor, Strong Capital Management, Inc., serves as investment advisor to
the Funds. The Advisor provides investment management services for mutual funds
and other investment portfolios representing assets of over $24 billion. (See
"About the Funds - Management.")
PURCHASE AND REDEMPTION OF SHARES
You may purchase or redeem shares of a Fund at net asset value. There are no
redemption or 12b-1 charges. The net asset values change daily with the value of
each Fund's portfolio. You can locate the net asset value for a Fund in
newspaper listings of mutual fund prices under the "Strong Funds" heading or at
our site on the World Wide Web at http://www.strong-funds.com. (See "Shareholder
Manual - How to Buy Shares" and "- How to Sell Shares.")
SHAREHOLDER SERVICES
Strong shareholder benefits include: telephone purchase, exchange, and
redemption privileges; professional representatives available 24 hours a day;
automatic investment, automatic dividend reinvestment, payroll direct deposit,
automatic exchange and systematic withdrawal plans; a no-minimum investment
program; and free check writing for the Short-Term Global Bond and International
Bond Funds. (See "Shareholder Manual - Shareholder Services.")
DIVIDENDS AND OTHER DISTRIBUTIONS
The policy of each Fund is to pay dividends from net investment income
quarterly and to distribute substantially all net realized capital gains
annually. The Short-Term Global Bond and International Bond Funds may also
distribute all or a portion of any net realized gains from foreign currency
transactions quarterly. (See "About the Funds - Distributions and Taxes.")
INVESTMENT OBJECTIVES AND POLICIES
The descriptions that follow are designed to help you choose the Fund that
best fits your investment objective. You may want to pursue more than one
objective by investing in more than one of the Funds or by investing in one of
---------------------
PROSPECTUS PAGE I-9
<PAGE> 13
the other Strong Funds, which are described in separate prospectuses. Each
International Fund's investment objective is discussed below in connection with
the Fund's investment policies. Because of the risks inherent in all
investments, there can be no assurance that the Funds will meet their
objectives.
The Short-Term Global Bond and International Bond Funds' 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 International Stock and Asia Pacific Funds each invests a substantial
portion of its assets in equity securities. Accordingly, each Fund's net asset
value will fluctuate based upon changes in the value of the securities in its
portfolio, and each Fund's net asset value is likely to fluctuate more than that
of a fund invested principally in fixed income securities. The International
Stock and Asia Pacific Funds, therefore, are not appropriate for investors'
short-term financial needs.
COMPARING THE FUNDS
The following summary is intended to help distinguish the Funds and help you
determine their suitability for your investments.
BOND FUNDS
<TABLE>
<CAPTION>
SHORT-TERM INTERNATIONAL
GLOBAL BOND BOND
<S> <C> <C>
- -----------------------------------------------------------------------
INVESTMENT OBJECTIVE Total return from a High total return
high level of income from both income and
with a low degree of capital appreciation
share-price
fluctuation
- -----------------------------------------------------------------------
COUNTRY U.S. plus at least 2 At least 3 foreign
DIVERSIFICATION foreign countries countries
- -----------------------------------------------------------------------
QUALITY 65% or more 65% or more
investment grade investment grade
- -----------------------------------------------------------------------
U.S. COMPONENT At least 35% No more than 35%
- -----------------------------------------------------------------------
EXPOSURE TO FOREIGN- Primarily hedged Primarily unhedged
CURRENCY RISK
- -----------------------------------------------------------------------
AVERAGE PORTFOLIO 3 years or less Unconstrained, but
MATURITY currently expect 4 to
9 years
- -----------------------------------------------------------------------
</TABLE>
----------------------
PROSPECTUS PAGE I-10
<PAGE> 14
STOCK FUNDS
<TABLE>
<CAPTION>
INTERNATIONAL ASIA
STOCK PACIFIC
<S> <C> <C>
- -------------------------------------------------------------------------
INVESTMENT OBJECTIVE Capital growth Capital growth
- -------------------------------------------------------------------------
COUNTRY DIVERSIFICATION At least 3 foreign At least 3 foreign
countries countries
- -------------------------------------------------------------------------
ANTICIPATED EQUITY EXPOSURE 90-100% 65-100%
- -------------------------------------------------------------------------
MAXIMUM DEBT EXPOSURE 35% 35%
- -------------------------------------------------------------------------
INVESTMENT FOCUS Non U.S. Far East
- -------------------------------------------------------------------------
</TABLE>
Each Fund has adopted certain fundamental investment restrictions that are
set forth in the Funds' Statement of Additional Information ("SAI"). Those
restrictions, each Fund's investment objective, and any other investment
policies identified as "fundamental" cannot be changed without shareholder
approval. To further guide investment activities, each 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 a
Fund's Board of Directors without shareholder approval, a Fund will promptly
notify shareholders of any material change in operating policies.
Except as limited below, the Funds 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 Funds' investment
objectives.
When the Advisor determines market conditions warrant a temporary defensive
position, each Fund may invest without limitation in cash (U.S. dollars, foreign
currencies, or multi-currency units) and short-term fixed-income securities.
STRONG SHORT-TERM GLOBAL BOND FUND
The Short-Term Global Bond Fund seeks total return by investing for a high
level of income with a low degree of share-price fluctuation.
The Fund is designed for investors who are willing to accept some risk of
principal fluctuation in order to pursue a higher level of income than money-
market securities generally offer, and who are willing to accept the risks of
foreign investing in order to diversify their portfolios to pursue potentially
higher yields than comparable U.S.-only funds. BECAUSE ITS SHARE PRICE WILL
VARY, THE FUND IS NOT AN APPROPRIATE INVESTMENT FOR THOSE WHOSE PRIMARY
OBJECTIVE IS ABSOLUTE PRINCIPAL STABILITY; AND BECAUSE IT NORMALLY PAYS ITS
DIVIDENDS QUARTERLY, THE FUND MAY NOT BE AN APPROPRIATE INVESTMENT FOR THOSE
WHOSE PRIMARY OBJECTIVE IS A STEADY STREAM OF MONTHLY INCOME.
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<PAGE> 15
The Fund invests primarily in investment-grade debt obligations of U.S. and
foreign issuers. Although there are no maturity restrictions on the individual
securities in the portfolio, the Fund will normally maintain an average
portfolio maturity of three years or less. Under normal market conditions, the
Fund will invest in at least three different countries, including at least 35%
of its total assets in securities of U.S. issuers. 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.")
STRONG INTERNATIONAL BOND FUND
The International Bond Fund seeks high total return by investing for both
income and capital appreciation.
The Fund is designed for long-term investors who are willing to accept the
risk of fluctuation in principal associated with longer-term securities in order
to pursue higher income than shorter-term securities generally provide, and who
are willing to accept the risks of foreign investing in order to diversify their
portfolios to pursue potentially higher yields than comparable U.S.-only funds.
The Fund invests primarily in investment-grade debt obligations of foreign
issuers. Under normal market conditions, the Fund will invest at least 65% of
its total assets in securities of issuers in at least three foreign countries.
Although there are no maturity limitations on the Fund's portfolio, it is
currently anticipated that the Fund will maintain an average portfolio maturity
of between four and nine years.
STRONG INTERNATIONAL STOCK FUND
The International Stock Fund seeks capital growth. The Fund invests primarily
in the equity securities of issuers located outside the United States.
The Fund will invest at least 65% of its total assets in foreign equity
securities, including common stocks, preferred stocks, and securities that are
convertible into common or preferred stocks, such as warrants and convertible
bonds, that are issued by companies whose principal headquarters are located
outside the United States.
Under normal market conditions, the Fund expects to invest at least 90% of
its net assets in foreign equity securities. The Fund may, however, invest up to
35% of its total assets in equity securities of U.S. issuers or debt
obligations, including debt obligations of U.S. issuers or foreign-government
entities. Although the debt obligations in which it invests will be primarily
investment grade, the Fund may invest up to 5% of its net assets in
non-investment-grade debt obligations. (See "Fundamentals of Fixed Income
Investing - Credit Quality - High-Yield (High-Risk) Securities" and
"Implementation of Policies and Risk.")
The Fund will normally invest in securities of issuers located in at least
three foreign countries. As market and global conditions change, the Fund will
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<PAGE> 16
change its allocations among the countries of the world, and nothing herein
will limit the Fund's ability to invest in or avoid any particular countries or
regions. In allocating the Fund's assets among various countries, the Advisor
will seek economic and market environments favorable for capital appreciation
and, with respect to developing countries, economic, political, and stock-market
environments that show signs of stabilizing or improving. (See "Implementation
of Policies and Risks - Foreign Securities and Currencies" for a discussion of
the special risks involved in investing in foreign securities.)
In analyzing foreign companies for investment, the Advisor will ordinarily
look for one or more of the following characteristics in relation to the
company's prevailing stock price:
- - prospects for above-average sales and earnings growth and high return on
invested capital;
- - overall financial strength, including sound financial and accounting policies
and a strong balance sheet;
- - significant competitive advantages, including innovative products and
efficient service;
- - effective research, product development, and marketing;
- - stable, capable management; and
- - other general operating characteristics that will enable the company to
compete successfully in its marketplace.
STRONG ASIA PACIFIC FUND
The Asia Pacific Fund seeks capital growth. The Fund invests primarily in the
equity securities of issuers located in Asia or the Pacific Basin.
The Fund will invest at least 65% of its total assets in equity securities,
including common stocks, preferred stocks, and securities that are convertible
into common or preferred stocks, such as warrants and convertible bonds, that
are issued by companies in Asia or the Pacific Basin. This region includes, but
is not limited to, the following countries: Australia, Bangladesh, Cambodia,
Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, the
People's Republic of China, the Philippines, Singapore, South Korea, Sri Lanka,
Taiwan, Thailand, and Vietnam. Under normal market conditions, the Fund will
invest in issuers located in at least three foreign countries. The Advisor will
consider an issuer to be located in Asia or the Pacific Basin if it meets one of
the following criteria:
(i) it is organized under the laws of a country in Asia or the Pacific Basin
and has a principal office in a country in Asia or the Pacific Basin;
(ii) it derives 50% or more of its total revenues from business in Asia or
the Pacific Basin; or
(iii) its equity securities are traded principally on a securities exchange
in Asia or the Pacific Basin.
The Fund intends to be as fully invested in Asia and the Pacific Basin as is
practicable in light of economic and market conditions and the Fund's cash
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PROSPECTUS PAGE I-13
<PAGE> 17
flow. The Fund may invest up to 35% of its total assets in equity or debt
securities of issuers located outside the Asia Pacific region, including the
United States. Although the debt obligations in which it invests will be
primarily investment grade, the Fund may invest up to 5% of its net assets in
non-investment-grade debt obligations. (See "Implementation of Policies and
Risks - Debt Obligations.")
The Fund may invest where the Advisor believes the potential for capital
growth exists. The Fund may invest in the securities of all types of issuers,
large or small, whose earnings are believed to be in a relatively strong growth
trend, and, to a lesser extent, in companies in which significant further growth
is not anticipated but whose market value is thought to be undervalued.
In analyzing foreign companies for investment, the Advisor will ordinarily
look for one or more of the following characteristics in relation to the
company's prevailing stock price:
- - prospects for above-average sales and earnings growth;
- - high return on invested capital;
- - overall financial strength, including sound financial and accounting policies
and a strong balance sheet;
- - competitive advantages, including innovative products and service;
- - effective research, product development, and marketing;
- - stable, capable management; and
- - other general operating characteristics that will enable the company to
compete successfully in its marketplace.
FUNDAMENTALS OF FIXED
INCOME INVESTING
The securities in which each 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 Funds 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
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PROSPECTUS PAGE I-14
<PAGE> 18
result, a 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 each Fund is expected to fluctuate, the
Advisor actively manages each Fund's portfolio and, in the case of the Bond
Funds, 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 a Fund's net asset value.
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 Funds may invest in debt
obligations which are subject to demand or other features which may be used by
the Funds 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
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<PAGE> 19
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 Funds'
SAI for a more detailed description of the ratings of the NRSROs.
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. Debt obligations in which the Funds may
invest will be primarily investment-grade debt obligations, although the
Short-Term Global Bond and International Bond Funds may invest up to 35% of
their net assets, and the International Stock and Asia Pacific Funds may invest
up to 5% of their net assets, in non-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);
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<PAGE> 20
- - 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, a 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.
HIGH-YIELD (HIGH-RISK) SECURITIES. High-yield (high-risk) securities, also
referred to as "junk bonds," are those securities that are rated lower than
investment grade and unrated securities of comparable quality. Although these
securities generally offer higher yields than investment-grade securities with
similar maturities, lower-quality securities involve greater risks, including
the possibility of default or bankruptcy. In general, they are regarded to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Other potential risks associated with investing in
high-yield securities include:
- - substantial market-price volatility resulting from changes in interest rates,
changes in or uncertainty about economic conditions, and changes in the actual
or perceived ability of the issuer to meet its obligations;
- - greater sensitivity of highly-leveraged issuers to adverse economic changes
and individual-issuer developments;
- - subordination to the prior claims of other creditors;
- - additional Congressional attempts to restrict the use or limit the tax and
other advantages of these securities; and
- - adverse publicity and changing investor perceptions about these securities.
As with any other asset in a Fund's portfolio, any reduction in the value of
such securities as a result of the factors listed above would be reflected in
the Fund's net asset value. In addition, a Fund that invests in lower-quality
securities may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal and 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
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PROSPECTUS PAGE I-17
<PAGE> 21
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 Funds' Board of Directors. Judgment may,
therefore, play a greater role in valuing these securities. The lack of a liquid
secondary market may have an adverse effect on market price and a Fund's ability
to sell particular securities.
See the Appendix for information concerning the credit quality of each Bond
Fund's investments for the fiscal year ended October 31, 1996.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to
certain restrictions described below), the Funds 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 Funds' SAI.
FOREIGN SECURITIES AND CURRENCIES
The Funds may invest in foreign securities either directly or indirectly
through the use of depositary receipts. Depositary receipts are generally issued
by banks or trust companies and evidence ownership of underlying foreign
securities.
Foreign investments involve special risks, including:
- - expropriation, confiscatory taxation, and withholding taxes on dividends and
interest;
- - less extensive regulation of foreign brokers, securities markets, and issuers;
- - less publicly available information and different accounting standards;
- - costs incurred in conversions between currencies, possible delays in
settlement in foreign securities markets, limitations on the use or transfer
of assets (including suspension of the ability to transfer currency from a
given country), and difficulty of enforcing obligations in other countries;
and
- - diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy
in various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance-of-payments positions. Many foreign securities may
be less liquid and their prices more volatile than comparable U.S. securities.
Although the Funds generally invest only in securities that are regularly traded
on recognized exchanges or in over-the-counter markets, from time to time
foreign securities may be difficult to liquidate rapidly without adverse price
effects.
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<PAGE> 22
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 Funds
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 a Fund's loss of its entire investment in that
market; and
- - less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes,
and other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
The Advisor will actively manage the allocation of each 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 Funds could be affected by changes in foreign
currency exchange rates to some extent. The value of a Fund's assets denominated
in foreign currencies will increase or decrease in response to fluctuations in
the value of those foreign currencies relative to the U.S. dollar. Currency
exchange rates can be volatile at times in response to supply and demand in the
currency exchange markets, international balances of payments, governmental
intervention, speculation, and other political and economic conditions.
The Funds may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options, and futures
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PROSPECTUS PAGE I-19
<PAGE> 23
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 Funds.
The International Bond Fund generally does not engage in foreign currency
hedging. (See "Derivative Instruments.")
DERIVATIVE INSTRUMENTS
A 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.
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PROSPECTUS PAGE I-20
<PAGE> 24
Derivative instruments may include (i) options; (ii) futures; (iii) options
on futures; (iv) short sales against the box, in which a 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, a Fund will set aside permissible liquid assets in a
segregated account to secure its obligations under the derivative.
The successful use of derivatives by a Fund is dependent upon a variety of
factors, particularly 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, a Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between a Fund's derivative transactions and the instruments being hedged. To
the extent that the Fund is engaging in derivative transactions for risk
management, the Fund's successful use of such transactions is more dependent
upon 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 a 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 a Fund's investment
objective and permitted by the Fund's investment limitations, operating
policies, and applicable regulatory authorities.
ILLIQUID SECURITIES
Each 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
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PROSPECTUS PAGE I-21
<PAGE> 25
investors pursuant to Rule 144A under the Securities Act of 1933 and Section
4(2) commercial paper may be determined to be liquid under guidelines adopted by
each Fund's Board of Directors.
WHEN-ISSUED SECURITIES
Each 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 a Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when a Fund purchases a when-issued security, it immediately assumes the risk of
ownership, including the risk of price fluctuation.
The greater a Fund's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although a Fund may be
able to sell these securities prior to the delivery date, it will purchase
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, a 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
Each 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, a Fund will set aside permissible
liquid assets in a segregated account to secure its obligation to repurchase the
security.
Each Fund may also enter into mortgage dollar rolls, in which the Fund would
sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid on
the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sale price and the lower price
for
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<PAGE> 26
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 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 Funds.
The mortgage dollar rolls and reverse repurchase agreements entered into by
the Funds may be used as arbitrage transactions in which a Fund will maintain an
offsetting position in investment-grade debt obligations or repurchase
agreements that mature on or before the settlement date of the related mortgage
dollar roll or reverse repurchase agreement. Since a Fund will receive interest
on the securities or repurchase agreements in which it invests the transaction
proceeds, such transactions may involve leverage. However, since such securities
or repurchase agreements will be high quality and will mature on or before the
settlement date of the mortgage dollar roll or reverse repurchase agreement, the
Advisor believes that such arbitrage transactions do not present the risks to
the Funds that are associated with other types of leverage.
SOVEREIGN DEBT (BOND FUNDS)
Each 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 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 Funds may have limited legal recourse in the event of default. Neither
Fund will invest more than 25% of its total assets in securities issued by any
single foreign government, but each Fund may invest more than 25% of its total
assets in securities of issuers in a single foreign country.
U.S. GOVERNMENT SECURITIES (BOND FUNDS)
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.
----------------------
PROSPECTUS PAGE I-23
<PAGE> 27
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.
DIVERSIFICATION (BOND FUNDS)
Each of the Bond Funds is non-diversified. Because each Fund may invest a
larger portion of its assets in the securities of a single issuer than
diversified funds, an investment in the Funds may be subject to greater
fluctuations in value than an investment in a diversified fund.
MORTGAGE- AND ASSET-BACKED SECURITIES (BOND FUNDS)
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.
----------------------
PROSPECTUS PAGE I-24
<PAGE> 28
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first-lien mortgage
loans or interests therein; rather, they include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal and
interest on asset-backed securities may be supported by non-governmental credit
enhancements similar to those utilized in connection with mortgage-backed
securities.
The yield characteristics of mortgage- and asset-backed securities differ
from those of traditional debt obligations. Among the principal differences are
that interest and principal payments are made more frequently on mortgage-and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if a Fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government-sponsored mortgage-backed securities.
The Funds may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases the market
value may be extremely volatile. With respect to certain stripped securities,
such as interest-only ("IO") and principal-only ("PO") classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
(BOND FUNDS)
The Bond Funds may invest in zero-coupon, step-coupon, and pay-in-kind
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon securities are sold at a deep
discount to their face value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because such securities do not pay current
cash income, the price of these securities can be volatile when interest rates
----------------------
PROSPECTUS PAGE I-25
<PAGE> 29
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.
FOREIGN INVESTMENT COMPANIES (STOCK FUNDS)
The Stock Funds may invest, to a limited extent, in foreign investment
companies. Some of the countries in which the Funds invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may be
less expensive and more expedient for a Fund to invest in a foreign investment
company in a country which permits direct foreign investment. Investing through
such vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the Investment Company Act of 1940 (the "1940 Act").
Neither Fund intends 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.
SMALL AND MEDIUM COMPANIES (STOCK FUNDS)
The Stock Funds may invest a substantial portion of their assets in small and
medium companies. While small and medium companies generally have potential for
rapid growth, investments in small and medium companies often involve greater
risks than investments in larger, more established companies because small and
medium companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In
addition, in many instances the securities of small and medium companies are
traded only over-the-counter or on a regional securities exchange, and the
frequency and volume of their trading is substantially less than is typical of
larger companies. Therefore, the securities of small and medium companies may be
subject to greater and more abrupt price fluctuations. When making large sales,
a Fund may have to sell portfolio holdings at discounts from quoted prices or
may have to make a series of small sales over an extended period of time due to
the trading volume of small and medium company securities. Investors should be
aware that, based on the foregoing factors, an investment in the Funds may be
subject to greater price fluctuations than an investment in a fund that invests
primarily in larger, more established companies. The Advisor's research efforts
may also play a greater role in
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PROSPECTUS PAGE I-26
<PAGE> 30
selecting securities for the Funds than in a fund that invests in larger, more
established companies.
CASH MANAGEMENT
Each 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
Each Fund's historical portfolio turnover rates are listed under "Financial
Highlights." The annual portfolio turnover rate indicates changes in a Fund's
portfolio. The turnover rate may vary from year to year, as well as within a
year. It may also be affected by sales of portfolio securities necessary to meet
cash requirements for redemption of shares. High portfolio turnover in any year
will result in the payment by a 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 Asia Pacific Fund will not generally
trade in securities for short-term profits, but when the Advisor determines that
circumstances warrant, securities may be purchased and sold without regard to
the length of time held.
ABOUT THE FUNDS
MANAGEMENT
The Board of Directors of each Fund is responsible for managing its business
and affairs. Each of the Funds has entered into an investment advisory agreement
(collectively the "Advisory Agreements") with Strong Capital Management, Inc.
(the "Advisor"). Except for the management fee arrangements, the Advisory
Agreements are identical. Under the terms of these agreements, the Advisor
manages each Fund's investments and business affairs subject to the supervision
of each 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
----------------------
PROSPECTUS PAGE I-27
<PAGE> 31
each of the mutual funds within the Strong Family of Funds. As of February 1,
1997, the Advisor had over $24 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 each Fund, is the controlling shareholder
of the Advisor.
As compensation for its services, each Fund pays the Advisor a monthly
management fee based on a percentage of each Fund's average daily net asset
value. The annual rates are as follows: Short-Term Global Bond Fund, .625%;
International Bond Fund, .70%; and International Stock and Asia Pacific Funds,
1.0%. 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 a Fund's overall expense
ratio and increase a Fund's overall return to investors.
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 four Strong International Funds.
STRONG SHORT-TERM GLOBAL BOND FUND
STRONG INTERNATIONAL BOND 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.
STRONG INTERNATIONAL STOCK FUND
STRONG ASIA PACIFIC FUND
ANTHONY L.T. CRAGG. Mr. Cragg joined the Advisor in April 1993 to develop the
Advisor's international investment activities. During the prior seven years,
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PROSPECTUS PAGE I-28
<PAGE> 32
he helped establish Dillon, Read International Asset Management, where he was in
charge of Japanese, Asian, and Australian investments. A graduate of Christ
Church, Oxford University, Mr. Cragg began his investment career in 1980 at
Gartmore, Ltd., as an international investment manager, where his tenure
included assignments in London, Hong Kong, and Tokyo. He has managed the Strong
International Stock Fund since he joined the Advisor and has managed the Strong
Asia Pacific Fund since its inception in December 1993.
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 Agreements between the Advisor and the Funds.
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
Funds.
ORGANIZATION
SHAREHOLDER RIGHTS. Each Fund is a Wisconsin corporation that is authorized
to issue an indefinite number of shares of common stock and series and classes
of series of shares of common stock. Each share of the Funds 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 Funds will not hold an annual meeting of shareholders unless required by the
1940 Act.
SHAREHOLDER PRIVILEGES. The shareholders of each Fund may benefit from the
privileges described in the "Shareholder Manual" (see page II-1). However, each
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
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PROSPECTUS PAGE I-29
<PAGE> 33
dividends and capital gain distributions from a 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, a 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 each Fund is to pay dividends from net investment income
quarterly. The Bond Funds each may (but is not required to) distribute with its
quarterly dividends all or a portion of any net realized gains from foreign
currency transactions. Each Fund also distributes substantially all its net
realized capital gains and gains from foreign currency transactions annually.
Each Fund may make additional distributions if necessary to avoid imposition of
a 4% excise tax on undistributed income and gains.
Each Fund anticipates that a quarterly 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 a Fund's
quarterly net income. Undistributed income will be reflected in a Fund's net
asset value, and correspondingly, distributions from undistributed income will
reduce the Fund's net asset value. The dividend rate on a Fund's shares will be
adjusted from time to time by its Board of Directors and will vary as a result
of its performance.
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 a Fund, are taxable to you as long-term capital gains,
regardless of how long you have held your Fund shares. The Funds' 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.
- - BOND FUNDS. 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 a
Fund's income that is derived from U.S. government securities. While neither
Fund intends to declare, in any year, aggregate quarterly
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PROSPECTUS PAGE I-30
<PAGE> 34
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.
- - STOCK FUNDS. If a Fund's distributions exceed its investment company taxable
income and net capital gain in any year, as a result of currency-related
losses or otherwise, all or a portion of those distributions may be treated as
a return of capital to shareholders for tax purposes.
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 Fund shares 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 a 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 a 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 a 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 FUNDS. Each 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.
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PROSPECTUS PAGE I-31
<PAGE> 35
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effects on the Funds and investors therein. See
the SAI for a further discussion. There may be other federal, state, or local
tax considerations applicable to a particular investor. You are therefore urged
to consult your own tax adviser.
PERFORMANCE INFORMATION
Each Fund may advertise a variety of types of performance information,
including "average annual total return," "total return," and "cumulative total
return." The Bond Funds may also advertise "yield." Each of these figures is
based upon historical results and does not represent the future performance of a
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 a Fund assuming
the reinvestment of all dividends and distributions. Total return figures are
not annualized and simply represent the aggregate change of a Fund's investments
over a specified period of time.
Yield is an annualized figure, which means that it is assumed that a Fund
generates the same level of net investment income over a one-year period. A
Fund's yield is a measure of the net investment income per share earned by a
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.
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PROSPECTUS PAGE I-32
<PAGE> 36
SHAREHOLDER MANUAL
<TABLE>
<S> <C>
HOW TO BUY SHARES...................... II-1
DETERMINING YOUR SHARE PRICE........... II-4
HOW TO SELL SHARES..................... II-6
SHAREHOLDER SERVICES................... II-9
REGULAR INVESTMENT PLANS............... II-11
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 Funds' 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.
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PROSPECTUS PAGE II-1
<PAGE> 37
-----------------------------------------------------------------------------
<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, 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 a 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>
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PROSPECTUS PAGE II-2
<PAGE> 38
- ------------------------------------------------------------------------------
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 a 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> 39
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 a Fund.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - A Fund reserves the right to decline to accept your purchase order upon
receipt for any reason.
- - Minimum Investment Requirements:
- ----------------------------------------------------------------------------
To open a regular account...........................................$1,000
To open an IRA, Defined Contribution, or UGMA/UTMA account............$250
To open a 401(k) or 403(b) retirement account...................No Minimum
To add to an existing account..........................................$50
The Funds offer a No-Minimum Investment Program that waives the minimum
initial investment requirements for investors who participate in the Strong
Automatic Investment Plan (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 a Fund's minimum initial investment), each
Fund reserves the right to close your account. Before taking such action, a 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.
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 each Fund is normally determined as of 3:00 p.m. Central
Time ("CT") each day the Exchange is open. The Funds reserve the right to change
the time at which purchases, redemptions, and exchanges are priced if the
Exchange closes at a time other than 3:00 p.m. CT or if an emergency exists.
Each Fund's NAV is calculated by taking the fair
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PROSPECTUS PAGE II-4
<PAGE> 40
value of a 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 each
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 Funds value their 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 trading on the Exchange. Such events would not normally be reflected in a
calculation of a Fund's NAV on that day. If events that materially affect the
value of a 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.
The International Stock and Asia Pacific Funds' portfolio securities, from time
to time, may be listed primarily on foreign exchanges that trade on other days
than those on which the Exchange is open for business, (e.g., Saturday). As a
result, the NAV of those Funds may be significantly affected by such trading on
days when shareholders cannot effect transactions on their accounts.
----------------------
PROSPECTUS PAGE II-5
<PAGE> 41
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> 42
-----------------------------------------------------------------------------
<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
(SHORT-TERM GLOBAL your account. To add check writing to an existing
BOND AND INTERNATIONAL account or to order additional checks, call
BOND FUNDS ONLY) 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
others
who may charge a commission or other transaction fee.
</TABLE>
----------------------
PROSPECTUS PAGE II-7
<PAGE> 43
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 a 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, with respect to the Bond Funds, the
satisfaction of redemption checks) 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 a 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 Funds reserve the right to refuse a telephone redemption if they believe
it advisable to do so.
- - Once you place your telephone redemption request, it cannot be canceled or
modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Funds and their transfer
agent employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. The Funds 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.
----------------------
PROSPECTUS PAGE II-8
<PAGE> 44
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 that you
establish.
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, each 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> 45
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
More complete information regarding each 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> 46
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 Funds, each Fund reserves the right to discontinue the
exchange privilege of any shareholder who makes more than five exchanges in a
year or three exchanges in a calendar quarter.
CHECK-WRITING PRIVILEGES. You may also redeem shares of the Bond Funds 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
Funds do 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> 47
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in a 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 each 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 a Fund's minimum initial
investment requirement, you may purchase additional Fund shares through the
Payroll Direct Deposit Plan. Through this Plan, periodic investments (minimum
$50) are made automatically from your payroll check into your existing Fund
account. By enrolling in the Plan, you authorize your employer or its agents to
deposit a specified amount from your payroll check into the Fund's bank account.
In most cases, your Fund account will be credited the day after the amount is
received by the Fund's bank. In order to participate in the Plan, your employer
must have direct deposit capabilities through the Automated Clearing House
available to its employees. The Plan may be used for other direct deposits, such
as social security checks, military allotments, and annuity payments.
To establish a Direct Deposit for your account, call 1-800-368-3863 to obtain
an Authorization for Payroll Direct Deposit to a Strong Funds Account 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
a 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 participa-
-----------------------
PROSPECTUS PAGE II-12
<PAGE> 48
tion in the Plan will be terminated. You may also terminate the Plan at any time
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.
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 Funds. Until a valid corporate
resolution or Certification of Authorized Individuals is received by the Fund,
services such as telephone redemption, wire redemption, and, for the Bond Funds,
check writing, will not be established.
If you are investing as a trustee, 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, for the Bond Funds, 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. Broker-dealers, financial institutions, and other
financial intermediaries that have entered into agreements with the Distributor
may enter purchase or redemption orders on behalf of their customers. If you
-----------------------
PROSPECTUS PAGE II-13
<PAGE> 49
purchase or redeem shares of a Fund through a financial intermediary, certain
features of the Fund relating to such transactions may not be available or may
be modified in accordance with the terms of the intermediaries' agreement with
the Distributor. In addition, certain operational policies of a 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, a Fund may pay, directly or indirectly through
arrangements with the Advisor, amounts to financial intermediaries that provide
transfer agent and/or other administrative services relating to the Fund 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 a commission or other transaction fee for their services. You will
not be charged for such fees if you purchase or redeem your Fund shares directly
from a Fund without the intervention of a financial intermediary.
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you and
the Funds against fraudulent transactions by unauthorized persons. In the
following instances, the Funds 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 $25,000;
- - 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> 50
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> 51
ASSET COMPOSITION
For the fiscal year ended October 31, 1996, the following Funds' assets were
invested in the credit categories shown below. Percentages are computed on a
dollar-weighted basis and are an average of twelve monthly calculations.
<TABLE>
<CAPTION>
Short-Term Global Bond Fund International Bond Fund
--------------------------------------- ---------------------------------------
Percentage of Advisor's Assessment of Percentage of Advisor's Assessment of
Rating Investments* Unrated Securities Investments* Unrated Securities
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA 46.1 % 0.2 % 57.1 % 0.2 %
AA 15.6 0.5 13.7 0.2
A 11.9 -- 4.5 --
BBB 5.6 -- 5.8 --
BB 15.5 0.3 15.1 0.6
B 3.9 0.3 2.4 0.4
CCC 0.1 -- -- --
CC -- -- -- --
C -- -- -- --
D -- -- -- --
Unrated 1.3 1.4
Total 100.0 % 1.3 % 100.0 % 1.4 %
- ------------------------------------------------------------------------------------------
</TABLE>
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are
substantially similar to those used in this chart (see the preceding table for
the rating categories of the six NRSROs).
----------------------
PROSPECTUS PAGE A-2
<PAGE> 52
STATEMENT OF ADDITIONAL INFORMATION
STRONG SHORT-TERM GLOBAL BOND FUND
STRONG INTERNATIONAL BOND FUND
STRONG INTERNATIONAL STOCK FUND
STRONG ASIA PACIFIC FUND
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
This Statement of Additional Information is not a Prospectus and should
be read in conjunction with the Prospectus of Strong Short-Term Global Bond
Fund, Inc. (the "Short-Term Global Bond Fund"), Strong International Bond Fund,
Inc. (the "International Bond Fund"), Strong International Stock Fund, Inc. (the
"International Stock Fund"), and Strong Asia Pacific Fund, Inc. (the "Asia
Pacific Fund") (individually, a "Fund" and collectively, the "Funds") dated
March 1, 1997. Requests for copies of the Prospectus should be made by calling
one of the numbers listed above. The financial statements appearing in the
Funds' Annual Report, which accompanies this Statement of Additional
Information, are incorporated herein by reference.
This Statement of Additional Information is dated March 1, 1997.
<PAGE> 53
STRONG INTERNATIONAL FUNDS
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS.................................................. 3
INVESTMENT POLICIES AND TECHNIQUES....................................... 4
Borrowing............................................................. 5
Convertible Securities................................................ 5
Debt Obligations...................................................... 5
Depositary Receipts................................................... 6
Derivative Instruments................................................ 7
Foreign Investment Companies......................................... 16
Foreign Securities................................................... 16
High-Yield (High-Risk) Securities.................................... 17
Illiquid Securities.................................................. 18
Lending of Portfolio Securities...................................... 19
Loan Interests....................................................... 19
Maturity............................................................. 20
Mortgage- and Asset-Backed Securities................................ 21
Mortgage Dollar Rolls and Reverse Repurchase Agreements.............. 22
Municipal Obligations................................................ 22
Repurchase Agreements................................................ 23
Short Sales Against the Box.......................................... 23
Small and Medium Companies........................................... 23
Sovereign Debt....................................................... 24
Temporary Defensive Position......................................... 26
Variable- or Floating-Rate Securities................................ 26
Warrants............................................................. 27
When-Issued Securities............................................... 27
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities.................. 27
DIRECTORS AND OFFICERS OF THE FUNDS..................................... 28
PRINCIPAL SHAREHOLDERS.................................................. 31
INVESTMENT ADVISOR AND DISTRIBUTOR...................................... 31
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................... 34
CUSTODIAN............................................................... 38
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT............................ 38
TAXES................................................................... 39
DETERMINATION OF NET ASSET VALUE........................................ 42
ADDITIONAL SHAREHOLDER INFORMATION...................................... 42
FUND ORGANIZATION....................................................... 43
SHAREHOLDER MEETINGS.................................................... 44
PERFORMANCE INFORMATION................................................. 44
GENERAL INFORMATION..................................................... 51
PORTFOLIO MANAGEMENT.................................................... 54
INDEPENDENT ACCOUNTANTS................................................. 55
LEGAL COUNSEL........................................................... 55
FINANCIAL STATEMENTS.................................................... 55
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 March 1, 1997, and if given or made, such
information or representations may not be relied upon as having been authorized
by the Funds.
This Statement of Additional Information does not constitute an
offer to sell securities.
<PAGE> 54
INVESTMENT RESTRICTIONS
The investment objective of the Short-Term Global Bond Fund is to seek
total return by investing for a high level of income with a low degree of share
price fluctuation. The investment objective of the International Bond Fund is to
seek high total return by investing for both income and capital appreciation.
The investment objective of the International Stock and Asia Pacific Funds is to
seek capital growth. The Funds' investment objectives and policies are described
in detail in the Prospectus under the caption "Investment Objectives and
Policies." The following are the Funds' fundamental investment limitations,
which cannot be changed without shareholder approval.
With respect to the International Stock and Asia Pacific Funds, each Fund:
1. May not with respect to 75% of its total assets, purchase the
securities of any issuer (except securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities) if, as a result,
(i) more than 5% of the Fund's total assets would be invested in the
securities of that issuer, or (ii) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
With respect to the International Funds, each Fund:
2. 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.
3. May not issue senior securities, except as permitted under the 1940
Act.
4. May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase
and sale of portfolio securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's
total assets would be lent to other persons, except through (i)
purchases of debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Fund's total assets would be invested in the securities
of issuers, the principal business activities of which are in the same
industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prohibit the Fund from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objective, policies, and restrictions as the
Fund.
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The following are the Funds' non-fundamental operating policies which
may be changed by each Fund's Board of Directors without shareholder approval.
Each 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 each
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 a 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 a Fund's
assets (i.e., due to cash inflows or redemptions) or in market value of the
investment or a Fund's assets will not constitute a violation of that
restriction.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds'
investment objectives, policies, and techniques that are described in detail in
the Prospectus under the captions "Investment Objectives and Policies" and
"Implementation of Policies and Risks."
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BORROWING
(ALL FUNDS)
A 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, a Fund may not purchase
securities when bank borrowings exceed 5% of a Fund's total assets. Presently,
the Funds only intend to borrow from banks for temporary or emergency purposes.
The Funds have 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 a Fund
within sixty days and is not extended or renewed. The Funds intend to use the
LOC to meet large or unexpected redemptions that would otherwise force a Fund to
liquidate securities under circumstances which are unfavorable to a Fund's
remaining shareholders. The Funds pay a commitment fee to the banks for the LOC.
CONVERTIBLE SECURITIES
(ALL FUNDS)
A 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 a Fund is called for redemption, a
Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
DEBT OBLIGATIONS
(INTERNATIONAL STOCK AND ASIA PACIFIC FUNDS)
Each Fund may invest a portion of its assets in debt obligations.
Issuers of debt obligations have a contractual obligation to pay interest at a
specified rate on specified dates and to repay principal on a specified maturity
date. Certain debt obligations (usually intermediate- and long-term bonds) have
provisions that allow the issuer to redeem or "call" a bond before its maturity.
Issuers are most likely to call such securities during periods of falling
interest rates and a Fund may have to replace such securities with lower
yielding securities, which could result in a lower return for the Fund.
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PRICE VOLATILITY. The market value of debt obligations is affected
primarily by changes in prevailing interest rates. The market value of a debt
obligation generally reacts inversely to interest-rate changes, meaning, when
prevailing interest rates decline, an obligation's price usually rises, and when
prevailing interest rates rise, an obligation's price usually declines.
MATURITY. In general, the longer the maturity of a debt obligation, the
higher its yield and the greater its sensitivity to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. Commercial paper is generally considered the shortest form of
debt obligation.
CREDIT QUALITY. The values of debt obligations may also be affected by
changes in the credit rating or financial condition of their issuers. Generally,
the lower the quality rating of a security, the higher the degree of risk as to
the payment of interest and return of principal. To compensate investors for
taking on such increased risk, those issuers deemed to be less creditworthy
generally must offer their investors higher interest rates than do issuers with
better credit ratings.
In conducting its credit research and analysis, the Advisor considers
both qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings compiled
by a number of Nationally Recognized Statistical Rating Organizations
("NRSROs"). Refer to the Appendix for a discussion of securities ratings.
DEPOSITARY RECEIPTS
(ALL FUNDS)
The Funds 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 a 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
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
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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
(ALL FUNDS)
IN GENERAL. A 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.
HEDGING. A 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
a 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. A 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 a 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 a 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.
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RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments
involves risks and special considerations as described below. Risks pertaining
to particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as the
risk of the underlying assets, namely that the value of the underlying asset may
go up or down. Adverse movements in the value of an underlying asset can expose
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. A 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, a 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. A Fund will enter into transactions in derivative instruments only
with counterparties that the Advisor reasonably believes are capable of
performing under the contract.
(3) CORRELATION RISK. When a derivative transaction is used to
completely hedge another position, changes in the market value of the combined
position (the derivative instrument plus the position being hedged) result from
an imperfect correlation between the price movements of the two instruments.
With a perfect hedge, the value of the combined position remains unchanged for
any change in the price of the underlying asset. With an imperfect hedge, the
values of the derivative instrument and its hedge are not perfectly correlated.
Correlation risk is the risk that there might be imperfect correlation, or even
no correlation, between price movements of an instrument and price movements of
investments being hedged. For example, if the value of a derivative instruments
used in a short hedge (such as writing a call option, buying a put option, or
selling a futures contract) increased by less than the decline in value of the
hedged investments, the hedge would not be perfectly correlated. Such a lack of
correlation might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in which
these instruments are traded. The effectiveness of hedges using instruments on
indices will depend, in part, on the degree of correlation between price
movements in the index and price movements in the investments being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity risk.
Liquidity risk is the risk that a derivative instrument cannot be sold, closed
out, or replaced quickly at or very close to its fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. A 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 a 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 a 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. A 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 a Fund.
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(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, a Fund's ability to use derivative instruments may be
limited by certain tax considerations. For a discussion of the federal income
tax treatment of a Fund's derivative instruments, see "Taxes - Derivative
Instruments."
Each 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 a 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
a 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 a Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of a Fund's assets, as defined under the 1940 Act, the SEC
has stated that a Fund may use coverage or the segregation of a Fund's assets.
To the extent required by SEC guidelines, a 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 a 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 Funds 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 a 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 a 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 a 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. A 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
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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. A Fund may buy or write (sell) put and call
options on assets, such as securities, currencies, 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 Funds 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.
Each 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 a 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 a 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
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.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a 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, a 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 a Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.
The Funds 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 a Fund and the other party to the transaction ("counter
party") (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a 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.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. Each 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 each
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 Funds 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, a Fund might be unable to close out an OTC option position at any time
prior to its expiration. If a 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 Funds 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.
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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. A Fund may use spread transactions for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk. A 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 a 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 a 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 a 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. A Fund may use futures contracts for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk. A Fund may enter into futures contracts, including interest rate,
index, and currency futures. Each Fund may also purchase put and call options,
and write covered put and call options, on futures in which it is allowed to
invest. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing covered call options on futures contracts can serve as
a limited short hedge, and writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar to that used for writing
covered options in securities. The Funds' 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 Funds 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 Funds will engage in this
strategy only when the Advisor believes it is more advantageous to the Funds
than is purchasing the futures contract.
To the extent required by regulatory authorities, the Funds only enter
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 a Fund's exposure to market, currency, or interest rate fluctuations, a
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, a Fund realizes a gain; if
it is more, a Fund realizes a loss. Conversely, if the offsetting sale price is
more than the original purchase price, a Fund realizes a gain; if it is less, a
Fund realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that a Fund will be able to
enter into an offsetting transaction with respect to a particular futures
contract at a particular time. If a 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 a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, a 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
or other appropriate liquid assets in an amount generally equal to 10% or less
of the contract value. High grade securities include securities rated "A" or
better by an NRSRO. Margin must also be deposited when writing a call or put
option on a futures contract, in accordance with applicable exchange rules.
Unlike margin
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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 a Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a 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 a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a 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 a 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 Funds intend to enter into
futures transactions only on exchanges or boards of trade where there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist for a particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a 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 Funds 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 Funds 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 Funds' use of
currency-related derivative instruments will be directly related to a Fund's
current or anticipated portfolio securities, and the Funds 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.
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For example, a 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. A 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, a 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, a 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, a 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 a Fund owns securities denominated in a foreign currency
and the Advisor believes that currency will decline, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in a second foreign currency that the Advisor believes
would better protect the Fund against the decline in the first security than
would a U.S. dollar exposure. Hedging transactions that use two foreign
currencies are sometimes referred to as "cross hedges." The effective use of
currency-related derivative instruments by a 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.
A 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 a 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, a 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, a 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
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U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
When a 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 Funds 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 a 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 a Fund. In addition, in the event of insolvency of the
counterparty, a 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, a Fund
will be able to close the position out only on an exchange which provides a
market for the instruments. The ability to establish and close out positions on
an exchange is subject to the maintenance of a liquid market, and there can be
no assurance that a liquid market will exist for any instrument at any specific
time. In the case of a privately-negotiated instrument, a 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 a 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 a 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, a 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 Funds 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 a 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. A 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 a 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 Funds will set aside
permissible liquid assets in segregated accounts or otherwise cover their
respective potential obligations under currency-related derivatives instruments.
To the extent a 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.
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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, a 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 Funds' dealing in currency-related derivative instruments will
generally be limited to the transactions described above. However, the Funds
reserve the right to use currency-related derivatives instruments for different
purposes and under different circumstances. Of course, the Funds are 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
Funds' securities that are attributable to other (i.e., non-currency related)
causes. Moreover, while the use of currency-related derivatives instruments may
reduce the risk of loss due to a decline in the value of a hedged currency, at
the same time the use of these instruments tends to limit any potential gain
which may result from an increase in the value of that currency.
SWAP AGREEMENTS. The Funds may enter into interest rate, securities
index, commodity, or security and currency exchange rate swap agreements for any
lawful purpose consistent with each 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. A 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 a Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, a 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").
A 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 a 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, a 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
Funds by the Internal Revenue Code may limit the Funds' ability to use swap
agreements. The swaps market is largely unregulated.
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The Funds 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, a 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 Funds'
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 a Fund's investment objective and permitted by the Fund's investment
limitations, operating policies, and applicable regulatory authorities.
FOREIGN INVESTMENT COMPANIES
(ALL FUNDS)
The Funds may invest, to a limited extent, in foreign investment
companies. Some of the countries in which the Funds invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may be
less expensive and more expedient for a Fund to invest in a foreign investment
company in a country which permits direct foreign investment. Investing through
such vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the 1940 Act. Under the 1940 Act, a 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.
Each Fund does not intend to invest in such investment companies unless, in the
judgment of the Advisor, the potential benefits of such investments justify the
payment of any associated fees and expenses.
FOREIGN SECURITIES
(ALL FUNDS)
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 Funds 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 Funds 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 a Fund are uninvested and no return is earned
thereon. The inability of a 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
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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
(ALL FUNDS)
IN GENERAL. The International Bond and Short-Term Global Bond Funds
have the authority to invest up to but not including 35% of its total assets in
non-investment grade debt securities. The International Stock and Asia Pacific
Funds have the authority to invest up to 5% of its net assets 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 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, a 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 a 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 a Fund's net asset value. If a 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), a 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, a 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
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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. A 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 Funds
anticipate 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, a 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.
ILLIQUID SECURITIES
(ALL FUNDS)
The Funds may invest in illiquid securities (i.e., securities that are
not readily marketable). However, a 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 each 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 Funds' Board of Directors.
The Board of Directors of each 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 a Fund's foreign holdings, a
foreign security may be considered liquid by the Advisor (despite its
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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,
a 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, a Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Board of Directors of the Fund. If through the
appreciation of restricted securities or the depreciation of unrestricted
securities, a 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.
Each 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
(ALL FUNDS)
Each 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 Funds are authorized to lend, the Funds do not presently intend to
engage in lending. In determining whether to lend securities to a particular
broker-dealer or institutional investor, the Advisor will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. The Funds will retain authority
to terminate any loans at any time. The Funds 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 Funds 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 Funds
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 a Fund's
interest.
LOAN INTERESTS
(INTERNATIONAL BOND AND SHORT-TERM GLOBAL BOND FUNDS)
Each 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. A Fund may also acquire Loan
Interests under which the Fund derives its rights directly from the borrower.
Such Loan Interests are separately enforceable by a Fund against the borrower
and all payments of interest and principal are typically made directly to a Fund
from the borrower. In the event that a 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
Funds may not act as an Agent, a Collateral Bank, a guarantor or sole negotiator
or structurer with respect to a loan.
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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. A 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 a 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, a Fund will perform such tasks on its own behalf,
although a Collateral Bank will typically hold any collateral on behalf of the
Fund and the other lenders pursuant to the applicable loan agreement.
A financial institution's appointment as Agent may usually be
terminated in the event that it fails to observe the requisite standard of care
or becomes insolvent, enters Federal Deposit Insurance Corporation ("FDIC")
receivership, or, if not FDIC insured, enters into bankruptcy proceedings. A
successor Agent would generally be appointed to replace the terminated Agent,
and assets held by the Agent under the loan agreement should remain available to
holders of Loan Interests. However, if assets held by the Agent for the benefit
of the Fund were determined to be subject to the claims of the Agent's general
creditors, the Fund might incur certain costs and delays in realizing payment on
a loan interest, or suffer a loss of principal and/or interest.
In situations involving Intermediate Participants similar risks may arise.
Purchasers of Loan Interests depend primarily upon the creditworthiness
of the borrower for payment of principal and interest. If a 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
(SHORT-TERM GLOBAL BOND AND INTERNATIONAL BOND FUNDS)
A Fund's average portfolio maturity represents an average based on the
actual stated maturity dates of the debt securities in a 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 a
Fund is dollar-weighted based upon the market value of a Fund's securities at
the time of the calculation.
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MORTGAGE- AND ASSET-BACKED SECURITIES
(ALL FUNDS)
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 a Fund
purchases these securities at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing the yield to maturity.
Conversely, if a Fund purchases these securities at a discount, a prepayment
rate that is faster than expected will increase yield to maturity, while a
prepayment rate that is slower than expected will reduce yield to maturity.
Amounts available for reinvestment by a 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 a Fund at a premium also
impose a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is prepaid in full. The market for privately
issued mortgage- and asset-backed securities is 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.
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The Funds 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 a 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. A Fund may invest in such securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of a Fund.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
(ALL FUNDS)
The Funds may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, a
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing. (See "Borrowing".) When required by guidelines of the
SEC, a Fund will set aside permissible liquid assets in a segregated account to
secure its obligations to repurchase the security.
Each Fund may also enter into mortgage dollar rolls, in which the Fund
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid on
the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current 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 Funds. (See "Borrowing".)
The mortgage dollar rolls and reverse repurchase agreements entered
into by the Funds may be used as arbitrage transactions in which a Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar roll or reverse repurchase agreements. Since a Fund will
receive interest on the securities or repurchase agreements in which it invests
the transaction proceeds, such transactions may involve leverage. However, since
such securities or repurchase agreements will be high quality and will mature on
or before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, the Advisor believes that such arbitrage transactions do not present
the risks to the Funds that are associated with other types of leverage.
MUNICIPAL OBLIGATIONS
(SHORT-TERM GLOBAL BOND AND INTERNATIONAL BOND FUNDS)
General obligation bonds are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of interest and principal.
Revenue bonds are payable only from the revenues derived from a project or
facility or from the proceeds of a specified revenue source. Industrial
development bonds are generally revenue bonds secured by payments from and the
credit of private users. Municipal notes are issued to meet the short-term
funding requirements of state, regional, and local governments. Municipal notes
include tax anticipation notes, bond anticipation notes, revenue anticipation
notes, tax and revenue anticipation notes, construction loan notes, short-term
discount notes, tax-exempt commercial paper, demand notes, and similar
instruments. Municipal obligations include obligations, the interest on which is
exempt from federal income tax, that may become available in the future as long
as the Board of Directors of a Fund determines that an investment in any such
type of obligation is consistent with that Fund's investment objective.
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
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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
(ALL FUNDS)
Each Fund may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement, a Fund buys a security at one
price, and at the time of sale, the seller agrees to repurchase the obligation
at a mutually agreed upon time and price (usually within seven days). The
repurchase agreement, 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 a 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 Funds enter into repurchase
agreements to evaluate those risks. A Fund may, under certain circumstances,
deem repurchase agreements collateralized by U.S. government securities to be
investments in U.S. government securities.
In addition, the Short-Term Global Bond and International Bond Funds
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.
SHORT SALES AGAINST THE BOX
(ALL FUNDS)
Each Fund may sell securities short against the box to hedge unrealized
gains on portfolio securities. Selling securities short against the box involves
selling a security that a Fund owns or has the right to acquire, for delivery at
a specified date in the future. If a Fund sells securities short against the
box, it may protect unrealized gains, but will lose the opportunity to profit on
such securities if the price rises.
SMALL AND MEDIUM COMPANIES
(INTERNATIONAL STOCK AND ASIA PACIFIC FUNDS)
The Funds may invest a substantial portion of their assets in small and
medium companies. While small and medium companies generally have the potential
for rapid growth, investments in small and medium companies often involve
greater risks than investments in larger, more established companies because
small and medium companies may lack the management experience, financial
resources, product diversification, and competitive strengths of larger
companies. In addition, in many instances the securities of small and medium
companies are traded only over-the-counter or on a regional securities exchange,
and the frequency and volume of their trading is substantially less than is
typical of larger companies. Therefore, the securities of small and medium
companies may be subject to greater and more abrupt price fluctuations. When
making large sales, the Fund may have to sell portfolio holdings at discounts
from quoted prices or may have to make a series of small sales over an extended
period of time due to the trading volume of small and medium
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company securities. Investors should be aware that, based on the foregoing
factors, an investment in the Fund may be subject to greater price fluctuations
than an investment in a fund that invests primarily in larger, more established
companies. The Advisor's research efforts may also play a greater role in
selecting securities for the Fund than in a fund that invests in larger, more
established companies.
SOVEREIGN DEBT
(SHORT-TERM GLOBAL BOND AND INTERNATIONAL BOND FUNDS)
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 Funds. 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.
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,
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<PAGE> 76
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
(ALL FUNDS)
When the Advisor determines that market conditions warrant a temporary
defensive position, the Funds 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
(SHORT-TERM GLOBAL BOND AND INTERNATIONAL BOND FUNDS)
The Funds 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, each 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 a Fund to invest fluctuating amounts, which may change
daily without penalty, pursuant to direct arrangements between a 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, a 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 Funds 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 Funds may invest. The Advisor, on
behalf of the Funds, will consider on an ongoing basis the creditworthiness of
the issuers of the floating- and variable-rate demand obligations in the Funds'
portfolio.
Each 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 a 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 a Fund's weighted average portfolio maturity, a 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
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equal to the longer of (a) the next readjustment in the interest rate or (b) the
period remaining until the principal can be recovered through 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
(ALL FUNDS)
Each 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
acquired by a Fund in units or attached to securities are not subject to these
restrictions. 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
(ALL FUNDS)
Each Fund may from time to time 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 a 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 Funds intend to purchase such securities with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time a 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 Funds do not
believe that their net asset values will be adversely affected by purchases of
securities on a when-issued basis.
To the extent required by the SEC, the Funds 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, a 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
(ALL FUNDS)
The Funds may invest in zero-coupon, step-coupon, and pay-in-kind
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon securities are sold at a deep
discount to their face value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because such securities do not pay current
cash income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, federal income
tax law requires the holders of zero-coupon, step-coupon, and pay-in-kind
securities to include in income each year the portion of the original issue
discount (or deemed discount) and other non-cash income on such securities
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, 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.
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DIRECTORS AND OFFICERS OF THE FUNDS
Directors and officers of the Funds, 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 38 mutual funds, which are managed by the
Advisor (the "Strong Funds"). The Strong Funds, in the aggregate, 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
Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the
Advisor, which he founded in 1974. Since August 1985, Mr. Strong has been a
Security Analyst and Portfolio Manager of the Advisor. In October 1991, Mr.
Strong also became the Chairman of the Advisor. Mr. Strong is a Director of the
Advisor. Mr. Strong has been in the investment management business since 1967.
Mr. Strong has served the Funds as follows:
DIRECTOR - International Stock Fund (since December 1990); Asia Pacific
Fund (since December 1990); International Bond Fund (since January
1994); and Short-Term Global Bond Fund (since January 1994).
CHAIRMAN - International Stock Fund (since January 1992); Asia Pacific
Fund (since October 1993); International Bond Fund (since January
1994); and Short-Term Global Bond Fund (since January 1994).
MARVIN E. NEVINS (DOB 7/19/18), Director of the Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of
Wisconsin Centrifugal Inc., a foundry. From July 1983 to December 1986, he was
Chairman of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins is
a former Chairman of the Wisconsin Association of Manufacturers & Commerce. He
was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin. Mr. Nevins has served the
Funds as follows:
DIRECTOR - International Stock Fund (since December 1990); Asia Pacific
Fund (since December 1990); International Bond Fund (since January
1994); and Short-Term Global Bond Fund (since January 1994).
WILLIE D. DAVIS (DOB 7/24/34), Director of the Funds.
Mr. Davis has been director of Alliance Bank since 1980, Sara Lee
Corporation (a food/consumer products company) since 1983, KMart Corporation (a
discount consumer products company) since 1985, 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 Funds as follows:
DIRECTOR - International Stock Fund (since July 1994); Asia Pacific
Fund (since July 1994); International Bond Fund (since July 1994); and
Short-Term Global Bond Fund (since July 1994).
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*JOHN DRAGISIC (DOB 11/26/40), President and Director of the Funds.
Mr. Dragisic has been President of the Advisor since October 1995, and
a Director of the Advisor since July 1994. Mr. Dragisic served as Vice Chairman
of the Advisor from July 1994 until October 1995. Mr. Dragisic was the President
and Chief Executive Officer of Grunau Company, Inc. (a mechanical contracting
and engineering firm), Milwaukee, Wisconsin from 1987 until July 1994. From 1981
to 1987, he was an Executive Vice President with Grunau Company, Inc. From 1969
until 1973, Mr. Dragisic worked for the Inter American Development Bank. Mr.
Dragisic received his Ph.D. in Economics in 1971 from the University of
Wisconsin-Madison, and his B.A. degree in Economics in 1962 from Lake Forest
College. Mr. Dragisic has served the Funds as follows:
DIRECTOR - International Stock Fund (January 1992 until July 1994, and
since April 1995); Asia Pacific Fund (January 1992 until July 1994, and
since April 1995); International Bond Fund (January 1994 until July
1994, and since April 1995); and Short-Term Global Bond Fund (January
1994 until July 1994, and since April 1995).
VICE CHAIRMAN - International Stock Fund (July 1994 until October
1995); Asia Pacific Fund (July 1994 until October 1995); International
Bond Fund (July 1994 until October 1995); and Short-Term Global Bond
Fund (July 1994 until October 1995).
PRESIDENT - International Stock Fund (since October 1995); Asia Pacific
Fund (since October 1995); International Bond Fund since October 1995);
and Short-Term Global Bond Fund (since October 1995).
STANLEY KRITZIK (DOB 1/9/30), Director of the Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since 1962, a
Director of Aurora Health Care since 1987, and Health Network Ventures, Inc.
since 1992. Mr. Kritzik has served the Funds as follows:
DIRECTOR - International Stock Fund (since April 1995); Asia Pacific
Fund (since April 1995); International Bond Fund (since April 1995);
and Short-Term Global Bond Fund (since April 1995).
WILLIAM F. VOGT (DOB 7/19/47), Director of the Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc.
since 1990. From 1982 until 1990, he served as Executive Director of University
Physicians of the University of Colorado. Mr. Vogt is the Past President of the
Medical Group Management Association and a Fellow of the American College of
Medical Practice Executives. Mr. Vogt has served the Funds as follows:
DIRECTOR - International Stock Fund (since April 1995); Asia Pacific
Fund (since April 1995); International Bond Fund (since April 1995);
and Short-Term Global Bond Fund (since April 1995).
LAWRENCE A. TOTSKY (DOB 5/6/59), C.P.A., Vice President of the Funds.
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 Funds as follows:
VICE PRESIDENT - International Stock Fund (since May 1993); Asia
Pacific Fund (since October 1993); International Bond Fund (since
January 1994); and Short-Term Global Bond Fund (since January 1994).
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<PAGE> 81
THOMAS P. LEMKE (DOB 7/30/54), Vice President of the Funds.
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 Funds as follows:
VICE PRESIDENT - International Stock Fund (since October 1994); Asia
Pacific Fund (since October 1994); International Bond Fund (since
October 1994); and Short-Term Global Bond Fund (since October 1994).
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the Funds.
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 Funds as follows:
VICE PRESIDENT - International Stock Fund (since April 1996); Asia
Pacific Fund (since April 1996); International Bond Fund (since April
1996); and Short-Term Global Bond Fund (since April 1996).
SECRETARY - International Stock Fund (since October 1996); Asia Pacific
Fund (since October 1996); International Bond Fund (since October
1996); and Short-Term Global Bond Fund (since October 1996).
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Funds.
Mr. Weitzer has been an Associate Counsel of the Advisor since July
1993. Mr. Weitzer has served the Funds as follows:
VICE PRESIDENT - International Stock Fund (since January 1996); Asia
Pacific Fund (since January 1996); International Bond Fund (since
January 1996); and Short-Term Global Bond Fund (since January 1996).
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:
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<PAGE> 82
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).
JOHN DRAGISIC:
PRESIDENT AND A DIRECTOR - Holdings (since December 1995 and July 1994,
respectively); Distributors (since September 1996 and July 1994,
respectively); Heritage (since May 1994 and August 1994, respectively);
and SSC (since November 1995).
VICE CHAIRMAN AND A MEMBER OF THE MANAGING BOARD - Real Estate and
Fussville Development (since December 1995 and August 1994,
respectively); and Sherwood (since October 1994).
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 January 31, 1997, the officers and directors of the Funds in the
aggregate beneficially owned less than 1% of each Fund's then outstanding
shares.
PRINCIPAL SHAREHOLDERS
As of January 31, 1997, no persons owned of record or are known by the
International Bond, International Stock, or Asia Pacific Funds to own of record
or beneficially, more than 5% of each Fund's outstanding shares. As of January
31, 1997, UBATCO & Co., Omaha, Nebraska, owned 528,367 (8.03%) of the Short-Term
Global Bond Fund's then outstanding shares.
INVESTMENT ADVISOR AND DISTRIBUTOR
The Advisor to the Funds is Strong Capital Management, Inc. Mr. Richard
S. Strong controls the Advisor. Mr. Strong is the Chairman and a Director of the
Advisor, Mr. Dragisic is the President 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. 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 each
Fund's investment advisory agreement ("Advisory Agreement") is set forth in the
Prospectus under "About the Funds - Management."
Each Fund's Advisory Agreement, dated May 1, 1995, was last approved by
shareholders at the annual meeting of shareholders held on April 13, 1995. Each
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. Each 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.
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<PAGE> 83
Under the terms of each Advisory Agreement, the Advisor manages a
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
financial statements to existing shareholders; charges of custodians, transfer
agent fees (including the printing and mailing of reports and notices to
shareholders), fees of registrars, fees for auditing and legal services, fees
for 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 Short-Term Global Bond Fund pays
to the Advisor a monthly management fee at the annual rate of .625% of the
Fund's average daily net assets, the International Bond Fund pays to the Advisor
a monthly management fee at the annual rate of .70% of the Fund's average daily
net assets, and the International Stock and Asia Pacific Funds pay to the
Advisor a monthly management fee at the annual rate of 1.00% of the average
daily net asset value of each 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 a Fund. The organizational
expenses of the Short-Term Global Bond, International Bond, International Stock,
and Asia Pacific Funds, which were $81,832; $79,834; $101,429; and $37,209,
respectively, were advanced by the Advisor and will be reimbursed by each Fund
over a period of not more than 60 months from each Fund's date of inception.
The following table sets forth certain information concerning management fees
for each Fund for the fiscal year ended October 31, 1996, the ten-month fiscal
year ended October 31, 1995, and for the fiscal years ended December 31, 1994
and December 31, 1993.
<TABLE>
<CAPTION>
Management Fee
Incurred Management Fee Management Fee
by Fund Waiver Paid by Fund
------- ------ ------------
<S> <C> <C> <C> <C>
Short-Term Global Bond Fund(1)
1994 $ 46,721 $ 46,721 $ 0
1995* $ 92,605 $ 92,605 $ 0
1996 $ 231,291 $231,291 $ 0
---------------------------------------------------------------------
International Bond Fund(1)
1994 $ 36,200 $ 36,200 $ 0
1995* $ 83,484 $ 83,484 $ 0
1996 $ 189,233 $189,233 $ 0
---------------------------------------------------------------------
</TABLE>
32
<PAGE> 84
<TABLE>
<S> <C> <C> <C> <C>
International Stock Fund
1993 $ 442,908 $ 0 $ 442,908
1994 $ 2,517,498 $ 0 $ 2,517,498
1995* $ 1,899,806 $ 0 $ 1,899,806
1996 $ 2,965,504 $ 0 $ 2,965,504
---------------------------------------------------------------------
Asia Pacific Fund(2)
1994 $ 513,781 $ 0 $ 513,781
1995* $ 470,598 $ 0 $ 470,598
1996 $ 978,527 $ 0 $ 978,527
---------------------------------------------------------------------
</TABLE>
- ----------
(1) Commenced operations on March 31, 1994.
(2) Commenced operations on December 31, 1993.
* For the ten-month fiscal year ended October 31, 1995.
Each Advisory Agreement requires the Advisor to reimburse a 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 a 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 a 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 Funds 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 Funds, 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 Funds and the Advisor's other
clients ahead of their own.
33
<PAGE> 85
The Code requires Access Persons (other than Access Persons who are
independent directors of the investment companies managed by the Advisor,
including the Funds) 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 Funds), 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 Funds
according to its Statement of General Proxy Voting Policy ("Proxy Voting
Policy"). The general principal of the Proxy Voting Policy is to vote any
beneficial interest in an equity security prudently and solely in the best
long-term economic interest of the Fund and its beneficiaries considering all
relevant factors and without undue influence from individuals or groups who may
have an economic interest in the outcome of a proxy vote. Shareholders may
obtain a copy of the Proxy Voting Policy upon request from the Advisor.
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 Distribution Agreements dated March 3, 1994, with the
International Bond and Short-Term Global Bond Funds; December 1, 1993, with the
International Stock Fund; and December 20, 1993, with the Asia Pacific Fund
(collectively, the "Distribution Agreements"), Strong Funds Distributors, Inc.
("Distributor"), a subsidiary of the Advisor, acts as underwriter of each Funds'
shares. Each Distribution Agreement provides that the Distributor will use its
best efforts to distribute the Funds' shares. Since the Funds are "no-load"
funds, no sales commissions are charged on the purchase of a Fund's shares. Each
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 Funds' shares. The Distributor is an indirect subsidiary of
the Advisor and controlled by the Advisor and Richard S. Strong. Each
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 a
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 Funds and for the placement of the Funds' 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 Funds. 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 Funds means the best net price without regard to the mix
between purchase or sale price and commission, if any. In
34
<PAGE> 86
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 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 Agreements, the Advisor
may cause the Funds 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
Agreements provide that such higher commissions will not be paid by the Funds
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 Agreements; and (c) in the opinion of the Advisor, the total
commissions paid by a Fund will be reasonable in relation to the benefits to a
Fund over the long term. The investment management fees paid by the Funds under
the Advisory Agreements are 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
Funds and other advisory clients.
35
<PAGE> 87
From time to time, the Advisor may purchase new issues of securities
for a 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 Funds 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 Funds 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.
The Advisor may direct the purchase of securities on behalf of the
Funds and other advisory clients in secondary market transactions, in public
offerings directly from an underwriter, or in privately negotiated transactions
with an issuer. When the Advisor believes the circumstances so warrant,
securities purchased in public offerings may be resold shortly after acquisition
in the immediate aftermarket for the security in order to take advantage of
price appreciation from the public offering price or for other reasons.
Short-term trading of securities acquired in public offerings, or otherwise, may
result in higher portfolio turnover and associated brokerage expenses.
With respect to the International Stock and Asia Pacific Funds, the
Advisor is responsible for selecting brokers in connection with foreign
securities transactions. The fixed commissions paid in connection with most
foreign stock transactions are usually higher than negotiated commissions on
U.S. stock transactions. Foreign stock exchanges and brokers are subject to less
government supervision and regulation as compared with the U.S. exchanges and
brokers. In addition, foreign security settlements may in some instances be
subject to delays and related administrative uncertainties.
The Advisor places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Advisor. Research services furnished
by firms through which the Funds effect 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 Funds. 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 Funds will not be disproportionate
to the benefits received by the Funds on a continuing basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by each 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 a Fund. In making
such allocations between a 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.
36
<PAGE> 88
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.
Transactions in futures contracts are executed through futures
commission merchants ("FCMs"). The Funds' procedures in selecting FCMs to
execute the Funds' transactions in futures contracts are similar to those in
effect with respect to brokerage transactions in securities.
The following table sets forth certain information concerning brokerage
commissions paid by each Fund for the fiscal year ended October 31, 1996, the
ten-month fiscal year ended October 31, 1995, and for the fiscal years ended
December 31, 1994 and December 31, 1993.
<TABLE>
<CAPTION>
Short-Term Global Bond Fund (1) Brokerage Commissions
------------------------------- ---------------------
<S> <C>
1994 $ 1,000
1995* $ 0
1996 $ 0
International Bond Fund (1)
1994 $ 1,000
1995* $ 0
1996 $ 0
International Stock Fund
1993 $ 592,000
1994 $2,405,000
1995* $2,114,000
1996 $3,212,759
Asia Pacific Fund (2)
1994 $ 657,000
1995* $ 549,000
1996 $ 830,527
</TABLE>
- ----------
(1) Commenced operations on March 31, 1994.
37
<PAGE> 89
(2) Commenced operations on December 31, 1993.
* For the ten-month fiscal year ended October 31, 1995.
For the ten-month fiscal period ended October 31, 1995, the Short-Term
Global Bond Fund's portfolio turnover rate was 437.3%. For the fiscal period
ended October 31, 1996, the ten-month fiscal period ended October 31, 1995, and
the fiscal year ended December 31, 1994, the International Bond Fund's portfolio
turnover rates were 258.3%, 473.3%, and 679.3%, respectively. The above listed
portfolio turnover rates for the respective Funds were higher than anticipated
primarily because each Fund employed a trading strategy to take advantage of
yield opportunities to help enhance the Fund's total return.
CUSTODIAN
As custodian of the Funds' assets, Brown Brothers Harriman & Co., 40
Water Street, Boston, Massachusetts 02109, has custody of all securities and
cash of the Funds, 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 Funds. The custodian
is in no way responsible for any of the investment policies or decisions of the
Funds. In addition, the Funds, 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 Funds.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
The Advisor acts as dividend-disbursing agent and transfer agent for
the Funds. The Advisor is compensated based on an annual fee per open account of
$31.50 for the International Bond and Short-Term Global Bond Funds and $21.75
for the International Stock and Asia Pacific Funds, 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 each 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
Agreements. In addition, the Advisor provides certain printing and mailing
services for the Funds, such as printing and mailing of shareholder account
statements, checks and tax forms.
38
<PAGE> 90
The following table sets forth certain information concerning amounts
paid by the Funds for transfer agency and dividend disbursing and printing and
mailing services for the fiscal year ended October 31, 1996, the ten-month
fiscal year ended October 31, 1995, and for the fiscal years ended December 31,
1994 and December 31, 1993:
<TABLE>
<CAPTION>
Transfer Agency and Dividend Disbursement Services Charges Incurred
------------------------------------------------------------------------------
Per Printing and Amounts Net Amount
Account Out-of-Pocket Mailing Absorbed By Paid By
Fund Charges Expenses Services Advisor Fund
---- ------- -------- -------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Short-Term Global Bond Fund
1994 $ 12,752 $ 6,945 $ 401 $ 20,098 $ 0
1995* $ 35,710 $ 9,306 $ 1,872 $ 46,888 $ 0
1996 $ 79,178 $ 10,160 $ 884 $ 90,223 $ 0
International Bond Fund
1994 $ 5,991 $ 6,255 $ 252 $ 12,498 $ 0
1995* $ 25,070 $ 8,837 $ 1,933 $ 34,990 $ 0
1996 $ 85,427 $ 8,924 $ 1,020 $ 93,371 $ 0
International Stock Fund
1993 $134,884 $ 44,319 $ 5,731 $ 0 $ 184,934
1994 $749,157 $154,218 $ 18,947 $ 0 $ 922,322
1995* $ 669,687 $ 78,972 $ 13,567 $ 0 $ 762,226
1996 $ 790,025 $ 77,125 $ 15,706 $ 0 $ 882,856
Asia Pacific Fund
1994 $ 217,293 $ 45,741 $ 5,778 $ 0 $ 268,812
1995* $217,628 $ 25,363 $ 4,546 $ 0 $ 247,537
1996 $295,177 $ 30,846 $ 5,800 $ 0 $ 331,823
</TABLE>
- ----------
* For the ten-month fiscal year ended October 31, 1995.
From time to time, the Funds, 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 Funds to persons who beneficially own interests in the Funds, 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 Funds, transmitting, on behalf of the Funds, proxy statements,
annual reports, updated Prospectuses, other communications regarding the Funds,
and related services as the Funds or beneficial owners may reasonably request.
In such cases, the Funds 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 Funds - Distributions and Taxes" in the
Prospectus, each 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 Funds' management practices or policies.
In order to qualify for treatment as a RIC under the Code, each 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 each 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
39
<PAGE> 91
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. 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.
Each 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 a 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 a
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, a 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. Each 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.
Each 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 a 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 a 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, a 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).
Each 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, a 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
40
<PAGE> 92
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If a Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) -- which probably would have to be distributed
to its shareholders to satisfy the Distribution Requirement and avoid imposition
of the Excise Tax -- even if those earnings and gain were not received by the
Fund. In most instances it will be very difficult, if not impossible, to make
this election because of certain requirements thereof.
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of the gains and losses the Funds realize 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
a 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 a 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 a 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. Each 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 a 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, each 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 a 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 a 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
Each Fund may acquire zero-coupon, step-coupon, or other securities
issued with original issue discount. As a holder of those securities, a 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, a Fund must include in its
income securities it receives as "interest" on pay-in-kind securities. Because a
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. A 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.
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<PAGE> 93
The foregoing federal tax discussion as well as the tax discussion
contained within the Prospectus under "About the Funds - 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 each Fund's current ability to pass-through earnings
without taxation at the Fund level, or otherwise materially changes a Fund's tax
treatment, could adversely affect the value of a shareholder's investment in a
Fund. Because each Fund's taxes are a complex matter, you should consult your
tax adviser for more detailed information concerning the taxation of a Fund and
the federal, state, and local tax consequences to shareholders of an investment
in a 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 a 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 Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds 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 Funds have elected to be governed by Rule 18f-1 under the 1940 Act,
which obligates each 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.
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<PAGE> 94
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.
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 $6,000, on a pre-tax basis, to a SIMPLE-IRA account.
The employer is required to make annual contributions to eligible employees'
accounts. All contributions grow tax-deferred.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans, money
purchase pension plans, and paired plans (a combination of a profit-sharing plan
and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
403(b)(7) Plan: A tax-sheltered custodial account designed to qualify under
section 403(b)(7) of the Code is available for use by employees of certain
educational, non-profit, hospital, and charitable organizations.
FUND ORGANIZATION
Each Fund is a Wisconsin corporation organized on the following dates
and currently has the following authorized shares of capital stock:
<TABLE>
<CAPTION>
Incorporation Authorized
Fund Date Shares Par Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Strong Short-Term Global Bond Fund, Inc. January 5, 1994 Indefinite .01
Strong International Bond Fund, Inc. January 5, 1994 Indefinite .01
Strong International Stock Fund, Inc. December 28, 1990 Indefinite .00001
Strong Asia Pacific Fund, Inc. December 28, 1990 Indefinite .00001
</TABLE>
Each Fund is a Wisconsin corporation that is authorized to offer
separate series of shares representing interests in separate portfolios of
securities, each with differing investment objectives. The shares in any one
portfolio may, in turn, be offered in separate classes, each with differing
preferences, limitations or relative rights. However, the Articles of
Incorporation for each of the Funds provides that if additional classes of
shares are issued by a Fund, such new classes of shares may not affect the
preferences, limitations or relative rights of the Fund's outstanding shares. In
addition, the Board of Directors of each Fund 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 a Fund 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 Funds have no
preemptive, conversion, or subscription rights. Each Fund currently has only one
series of common stock outstanding. If a Fund 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.
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<PAGE> 95
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered investment
companies, such as the Funds, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the 1940 Act. Each Fund has adopted the appropriate provisions in their
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.
Each 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.
PERFORMANCE INFORMATION
As described under "About the Funds -- Performance Information" in the
Prospectus, each Fund's historical performance or return may be shown in the
form of "average annual total return," "total return," and "cumulative total
return." The International Bond and Short-Term Global Bond Funds may also show
historical performance or return in the form of "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 each Fund. Without these
waivers and absorption of expenses, the performance results for the
International Bond and Short-Term Global Bond Funds noted herein would have been
lower. All performance and returns noted herein are historical and do not
represent the future performance of a Fund.
YIELD
Each 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 a Fund is based on a one month or 30-day period. Each 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 th
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the 30-day period ended October 31, 1996, the Short-Term Global
Bond Fund's yield was 7.34% and the International Bond Fund's yield was 7.94%.
For this period, the Advisor absorbed expenses of .605% and waived management
fees of .625% for the Short-Term Global Bond Fund and absorbed expenses of 1.10%
and waived management fees of .70% for the International Bond Fund. Without
these waivers and absorptions, the Funds' yields would have been 6.11% and
6.14%, respectively. In computing their yield, the Funds follow certain
standardized accounting practices specified by SEC rules. These practices are
not necessarily consistent with those that the Funds use to prepare annual and
interim financial statements in conformity with generally accepted accounting
principles.
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<PAGE> 96
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 premium income from option writing and
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 a 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 Funds' 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 a
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 a 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.
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.
Each Fund's performance figures are based upon historical results and
do not represent future performance. A Fund's shares are sold at net asset value
per share. The Funds' returns and net asset value will fluctuate and shares are
redeemable at the then current net asset value of each 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.
The figures below show performance information for various periods
ended October 31, 1996. No adjustment has been made for taxes, if any, payable
on dividends. The periods indicated were ones of fluctuating securities prices.
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<PAGE> 97
SHORT-TERM GLOBAL BOND FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ --------------
Initial Ending Value
$10,000 October 31, Percentage Percentage
Investment 1996 Increase Increase
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $12,597 25.97% 9.35%
One Year $10,000 $11,043 10.43% 10.43%
</TABLE>
- ----------
(1) Commenced operations on March 31, 1994.
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
-------- --------------
Initial Ending Value
$10,000 October 31, Percentage Percentage
Investment 1996 Increase Increase
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $13,834 38.34% 13.39%
One Year $10,000 $10,855 8.55% 8.55%
</TABLE>
- ----------
(1) Commenced operations on March 31, 1994.
INTERNATIONAL STOCK FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
-------- --------------
Initial Ending Value
$10,000 October 31, Percentage Percentage
Investment 1996 Increase Increase
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $16,252 62.52% 10.99%
One Year $10,000 $10,983 9.83% 9.83%
</TABLE>
- ----------
(1) Commenced operations on March 4, 1992.
ASIA PACIFIC FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------- -------------
Initial Ending Value
$10,000 October 31, Percentage Percentage
Investment 1996 Increase Increase
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $10,087 0.87% 0.30%
One Year $10,000 $10,376 3.76% 3.76%
</TABLE>
- ----------
(1) Commenced operations on December 31, 1993.
The Short-Term Global Bond, International Bond, International Stock,
and Asia Pacific Funds' total returns for the three months ending January 31,
1997 were 2.46%, -2.65%, 5.14%, and 1.80%, respectively.
46
<PAGE> 98
COMPARISONS
(1) U.S. TREASURY BILLS, NOTES, OR BONDS
Investors may want to compare the performance of a 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 a 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 International Bond and Short-Term
Global Bond Funds 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 a 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, a 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 Funds 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.
A 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 a Fund, including reprints of, or selections
from, editorials or articles about a Fund, especially those with similar
objectives. Sources for Fund performance information and articles about a 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
Each Fund may compare its performance to a wide variety of indices
including the following:
(a) The Consumer Price Index.
(b) The CDA U.S. Treasury Bill Index.
(c) The JP Morgan Global Short-Term Government Bond Index.
(d) The JP Morgan Non-Dollar Government Bond Index.
(e) The Salomon Brothers Non-U.S. Dollar World Government Bond
Index (Currency Unhedged).
(f) The Salomon Brothers Broad Investment Grade Bond Index.
(g) The Salomon Brothers 1-3 Year World Government Bond Index
(Currency Hedged).
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<PAGE> 99
(h) The Lehman Brothers Intermediate Government Corporate Index.
(i) The Merrill Lynch 1-3 Year Government Corporate Index.
(j) Dow Jones Average of 30 Industrials.
(k) Standard & Poor's 500 Stock Index
(l) Morgan Stanley Capital International EAFE(R) Index (Net
Dividend, Gross Dividend, and Price-Only). In addition, a Fund
may compare its performance to certain other indices that
measure stock market performance in geographic areas in which
the Fund may invest. The market prices and yields of the
stocks in these indexes will fluctuate. A Fund may also
compare its portfolio weighting to the EAFE Index weighting,
which represents the relative capitalization of the major
overseas markets on a dollar-adjusted basis.
(m) Morgan Stanley Capital International World Index.
(n) Morgan Stanley Capital International Combined Far East
Ex-Japan Free Index.
There are differences and similarities between the investments which a
Fund may purchase for its portfolio and the investments measured by the indices
which are noted herein. The market prices and yields of taxable and tax-exempt
bonds will fluctuate. 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 Funds' investments primarily are denominated in foreign
currencies, the strength or weakness of the U.S. dollar against these currencies
may account for part of a 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 Funds. 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 Funds 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.
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<PAGE> 100
(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 Funds' 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 Fund Federally tax-exempt current income, a stable share-price, and daily 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 Bond Fund Total return by investing for a high level of federally tax-exempt 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 Fund Total return by investing for a high level of income with a low degree
of share-price fluctuation.
- -----------------------------------------------------------------------------------------------------------------------
Strong Government Securities Fund Total return by investing for a high level of current income with a
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.
- -----------------------------------------------------------------------------------------------------------------------
Strong High-Yield Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
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 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 Schafer Value Fund Long-term capital appreciation principally through investment in common
stocks and other equity securities. Current income is a secondary
objective.
- -----------------------------------------------------------------------------------------------------------------------
Strong Value Fund Capital growth.
- -----------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund Capital growth.
- -----------------------------------------------------------------------------------------------------------------------
Strong Growth Fund Capital growth.
- -----------------------------------------------------------------------------------------------------------------------
Strong Common Stock Fund* Capital growth.
- -----------------------------------------------------------------------------------------------------------------------
Strong Mid Cap Fund Capital growth.
- -----------------------------------------------------------------------------------------------------------------------
Strong Small Cap Fund Capital growth.
- -----------------------------------------------------------------------------------------------------------------------
Strong Discovery 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.
49
<PAGE> 101
Each 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 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, they are
described in the same Prospectus.
(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 Total Return Fund
Heritage Money Fund Municipal Advantage Fund Municipal Bond Fund Opportunity Fund
Municipal Money Market Fund Corporate Bond Fund Growth Fund
2 TO 4 YEARS International Bond Fund Common Stock Fund*
------------
Short-Term Bond Fund High-Yield Municipal Bond Discovery Fund
Short-Term Municipal Bond Fund International Stock Fund
Fund Asset Allocation Fund Asia Pacific Fund
Short-Term Global Bond Fund American Utilities Fund Value Fund
High-Yield Bond Fund Small Cap Fund
Equity Income Fund Growth and Income Fund
Mid Cap Fund
Schafer Value 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 (INTERNATIONAL BOND AND SHORT-TERM GLOBAL BOND FUNDS ONLY)
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 Funds, you can
estimate the effect of interest rates on a Fund's share price. Simply multiply
the Fund's duration by an expected change in interest rates. For example, the
price of a Fund with a duration of two years would be expected to fall
approximately two percent if market interest rates rose by one percentage point.
50
<PAGE> 102
(2) PORTFOLIO CHARACTERISTICS
In order to present a more complete picture of a 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 the sum of (xi - xm)(2)
---------------
n-1
where (Sigma) = "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 a 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.
51
<PAGE> 103
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their
impact on the Funds 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.
52
<PAGE> 104
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.
53
<PAGE> 105
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
Each 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.
INTERNATIONAL BOND AND SHORT-TERM GLOBAL BOND FUNDS
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.
INTERNATIONAL STOCK AND ASIA PACIFIC FUNDS
The Advisor's investment philosophy is that (i) active management with
focused security and country selection can generate superior returns over
passive benchmarks; (ii) local knowledge and local contacts are essential for
effective international investing; (iii) application of U.S. and non-U.S.
financial analysis techniques can be used to value certain international
securities; (iv) attractive investment opportunities exist in all
areas-established and developing markets, large and small companies; (v) seeking
out under-researched and undervalued companies is as valid in international
investing as in domestic investing; and (vi) risk can be reduced by
underweighting the least attractive markets, not overweighting volatile markets,
and making bold allocations to attractive markets and securities.
The Advisor's investment process includes (i) global market analysis to
determine which countries/currencies to emphasize and avoid; (ii) combining U.S.
and non-U.S. fundamental research techniques where possible; (iii) utilizing
local knowledge and local contacts to closely monitor companies and unearth new
candidates for investment opportunities; (iv) focusing on stock selection in
moderately attractive markets; (v) focusing on sector/industry weightings in the
most attractive markets; (vi) emphasizing growth companies in smaller and
emerging markets; (vii) emphasizing value plays and turnaround situations in
more mature equity markets; and (viii) utilizing hedging of foreign currency
risk on an opportunistic basis.
The Advisor considers selling a stock when there is a high price/cash
flow or price/earnings multiple relative to the country and/or industry,
deterioration in country policies towards investors, or deterioration in company
fundamentals and management.
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<PAGE> 106
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 411 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, are the independent accountants for the Funds, 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 Funds.
FINANCIAL STATEMENTS
The Annual Report that is attached hereto contains the following
financial information for each Fund:
(a) Schedule of Investments in Securities.
(b) Statement of Operations.
(c) Statement of Assets and Liabilities.
(d) Statement of Changes in Net Assets.
(e) Notes to Financial Statements.
(f) Financial Highlights.
(g) Reports of Independent Accountants.
55
<PAGE> 107
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.
A-1
<PAGE> 108
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.
A-2
<PAGE> 109
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
A-3
<PAGE> 110
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.
A-4
<PAGE> 111
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.
AA Risk is modest, but may vary slightly from time to
AA- time because of economic conditions.
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate.
A However, risk factors are more variable and greater
A- in periods of economic stress.
- --------------------------------------------------------------------------------
BBB+ Below-average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this
category.
- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
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>
A-5
<PAGE> 112
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.
A-6
<PAGE> 113
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.
A-7
<PAGE> 114
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.
A-8
<PAGE> 115
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.
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
A-9
<PAGE> 116
D-1+ Highest certainty of timely payment. Short-Term
liquidity, including internal operating factors
and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing
requirements, access to capital markets is good. Risk
factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt
service. Operating factors and market access may be
subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
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.
A-10
<PAGE> 117
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.
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> 118
ANNUAL REPORT
STRONG INTERNATIONAL BOND FUND
Incorporated by Reference to the Registrant's Annual Report filed on Form
N-30D (File No. 33-74578), which was filed with the Securities and Exchange
Commission on or about December 27, 1996 (Edgar Reference No.
0000918399-96-000017).
<PAGE> 119
STRONG INTERNATIONAL BOND FUND, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (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
(b) Exhibits
(1) Articles of Incorporation dated July 31, 1996
(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
(9) Shareholder Servicing Agent Agreement(2)
(10) Inapplicable
(11) Consent of Auditor
(12) Inapplicable
(13) Inapplicable
(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
(15) Inapplicable
(16) Computation of Performance Figures
(17) Financial Data Schedule
(18) Inapplicable
(19) Power of Attorney dated February 25, 1997
(20) Letter of Representation
(21.1) Code of Ethics for Access Persons dated October 18,
1996
(21.2) Code of Ethics for Non-Access Persons dated October 18,
1996
(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 Registrant filed on or about
February 28, 1996.
C-1
<PAGE> 120
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
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of January 31, 1997
---------------------------- ------------------------
<S> <C>
Common Stock, $.01 par value 1,704
</TABLE>
Item 27. Indemnification
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Group, First State
Insurance Company, Chubb Group, and Gulf Insurance Companies in the aggregate
amount of $40,000,000, subject to certain deductions. Pursuant to the
authority of the Wisconsin Business Corporation Law ("WBCL"), Article VIII of
Registrant's Bylaws provides as follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01. Mandatory Indemnification. The Corporation shall
indemnify, to the full extent permitted by the WBCL, as in effect from
time to time, the persons described in Sections 180.0850 through 180.0859
(or any successor provisions) of the WBCL or other provisions of the law
of the State of Wisconsin relating to indemnification of directors and
officers, as in effect from time to time. The indemnification afforded
such persons by this section shall not be exclusive of other rights to
which they may be entitled as a matter of law.
SECTION 7.02. Permissive Supplementary Benefits. The Corporation
may, but shall not be required to, supplement the right of
indemnification under Section 7.01 by (a) the purchase of insurance on
behalf of any one or more of such persons, whether or not the Corporation
would be obligated to indemnify such person under Section 7.01; (b)
individual or group indemnification agreements with any one or more of
such persons; and (c) advances for related expenses of such a person.
SECTION 7.03. Amendment. This Article VII may be amended or
repealed only by a vote of the shareholders and not by a vote of the
Board of Directors.
SECTION 7.04. Investment Company Act. In no event shall the
Corporation indemnify any person hereunder in contravention of any
provision of the Investment Company Act.
Item 28. Business and Other Connections of Investment Advisor
The information contained under "About the 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.
C-2
<PAGE> 121
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 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 Special Fund II, Inc.;
Strong Total Return Fund, Inc.; and Strong Variable Insurance Funds, Inc.
(b) 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.
(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.
Item 32. Undertakings
Registrant undertakes to call a special meeting of shareholders for
the purpose of voting upon the question of removal of any director, when
requested to do so in writing by the record holders of not less than ten percent
(10%) of the registrant's outstanding shares and further, to assist in
communications with other shareholders as required by Section 16(c) of the
Investment Company Act of 1940.
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered, upon request and without charge, a copy of the
Registrant's latest annual report to shareholders.
C-3
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
all of the requirements for effectiveness of this Post-Effective Amendment No.
6 to the Registration Statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this Post-Effective Amendment No. 6 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Village of Menomonee Falls, and State of Wisconsin on
the 26th day of February, 1997.
STRONG INTERNATIONAL BOND FUND, INC.
(Registrant)
By: /s/ John Dragisic
------------------------
John Dragisic, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------- ------------------------------------ -----------------
<S> <C> <C>
President (Principal Executive
Officer and acting Principal
Financial and Accounting Officer)
/s/ John Dragisic and a Director February 26, 1997
- ---------------------
John Dragisic
/s/ Richard S. Strong Chairman of the Board and a Director February 26, 1997
- ---------------------
Richard S. Strong
Director February 26, 1997
- ---------------------
Marvin E. Nevins*
Director February 26, 1997
- ---------------------
Willie D. Davis*
Director February 26, 1997
- ---------------------
William F. Vogt*
Director February 26, 1997
- ---------------------
Stanley Kritzik*
</TABLE>
* 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> 123
EXHIBIT INDEX
<TABLE>
<CAPTION>
EDGAR
Exhibit No. Exhibit Exhibit No.
- ----------- ------------------------------------- ------------
<S> <C> <C>
(1) Articles of Incorporation EX-99.B1
(8.1) Amendment to Custody Agreement EX-99.B8.1
(11) Consent of Auditor EX-99.B11
(14.4) Simplified Employee Pension Plan EX-99.B14.4
(16) Computation of Performance Figures EX-99.B16
(17) Financial Data Schedule EX-27.CLASSA
(19) Power of Attorney EX-99.B19
(20) Letter of Representation EX-99.B20
(21.1) Code of Ethics for Access Persons EX-99.B21.1
(21.2) Code of Ethics for Non-Access Persons EX-99.B21.2
</TABLE>
<PAGE> 1
EXHIBIT-99.B1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF STRONG INTERNATIONAL BOND FUND, INC.
These Amended and Restated Articles of Incorporation shall supersede and
replace the heretofore existing Articles of Incorporation of Strong
International Bond Fund, Inc., as amended to date, a corporation organized
under Chapter 180 of the Wisconsin Statutes:
ARTICLE I
The name of the corporation (hereinafter, the "Corporation") is:
Strong International Bond Fund, Inc.
ARTICLE II
The period of existence of the Corporation shall be perpetual.
ARTICLE III
The purpose for which the Corporation is organized is, without limitation,
to act as a registered management investment company under 15 USC 80a-1 to
80a-64, as amended from time to time (the "Investment Company Act"), and for
any other purposes for which corporations may be organized under Chapter 180 of
the Wisconsin Statutes, as amended from time to time (the "WBCL").
ARTICLE IV
A. The Corporation shall have the authority to issue an indefinite number
of shares with a par value of $.01 per share, initially consisting of a single
class designated as Common Stock. Prior to the reclassification of any unissued
shares of the Corporation's Common Stock, such Common Stock shall have
unlimited voting rights as provided by the WBCL, shall be entitled to receive
the net assets of the Corporation upon liquidation and shall be entitled to
such dividends or distributions, in shares or in cash or in both, as may be
declared from time to time by the Board of Directors. The Board of Directors
shall have the authority to redesignate the outstanding Common Stock upon the
reclassification of any unissued shares of Common Stock into different classes
and series of classes, provided the redesignation does not affect the
preferences, limitations, and relative rights of outstanding shares of Common
Stock (or such other designation for such Common Stock as is determined by the
Board of Directors pursuant to this sentence) and upon such redesignation and
reclassification, outstanding shares shall be subject to subparagraphs 1-7 of
paragraph B of this Article IV. Thereafter, the Corporation's Common Stock
shall consist of such classes and series as is designated by the Board of
Directors in accordance with paragraph B of this Article IV.
B. The Board of Directors is authorized to classify or to reclassify (i.e.
into classes and series of classes), from time to time, any unissued shares of
the Corporation by setting, changing, or eliminating the distinguishing
designation and the preferences, limitations, and relative rights, in whole or
in part, to the fullest extent permissible under the WBCL.
Unless otherwise provided by the Board of Directors prior to the issuance
of shares, the shares of any and all classes and series shall be subject to the
following:
1. The Board of Directors may redesignate a class or series whether or not
shares of such class or series are issued and outstanding, provided that such
redesignation does not affect the preferences, limitations, and relative
rights, in whole or in part, of such class or series.
<PAGE> 2
2. The assets and liabilities and the income and expenses for each class
shall be attributable to that class. The assets and liabilities and the income
and expenses of each series within a class shall be determined separately and,
accordingly, the net asset value of shares may vary from series to series
within a class. The income or gain and the expense or liabilities of the
Corporation shall be allocated to each class or series as determined by or
under the direction of the Board of Directors.
3. Shares of each class or series shall be entitled to such dividends or
distributions, in shares or in cash or both, as may be declared from time to
time by the Board of Directors with respect to such class or series. Dividends
or distributions shall be paid on shares of a class or series only out of the
assets belonging to that class or series.
4. Any shares redeemed by the Corporation shall be deemed to be canceled
and restored to the status of authorized but unissued shares of the particular
class or series.
5. In the event of the liquidation or dissolution of the Corporation, the
holders of a class or series shall be entitled to receive, as a class or
series, out of the assets of the Corporation available for distribution to
shareholders, the assets belonging to that class or series less the liabilities
allocated to that class or series. The assets so distributable to the holders
of a class or series shall be distributed among such holders in proportion to
the number of shares of that class or series held by them and recorded on the
books of the Corporation. In the event that there are any assets available for
distribution that are not attributable to any particular class or series, such
assets shall be allocated to all classes or series in proportion to the net
asset value of the respective class or series.
6. All holders of shares shall vote as a single class and series except
with respect to any matter which affects only one or more series or class of
shares, in which case only the holders of shares of the class or series
affected shall be entitled to vote.
7. For purposes of the Corporation's Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940, including all prospectuses and Statements of
Additional Information, and other reports filed under the Investment Company
Act of 1940, references therein to "classes" of the Corporation's common stock
shall mean "series", as used in these Articles of Incorporation and the WBCL,
and references therein to "series" shall mean "classes", as used in these
Articles of Incorporation and the WBCL.
C. The Corporation may issue fractional shares. Any fractional shares
shall carry proportionately all the rights of whole shares, including, without
limitation, the right to vote and the right to receive dividends and
distributions.
D. The Board of Directors of the Corporation may authorize the issuance
and sale of any class or series of shares from time to time in such amount and
on such terms and conditions, for such purposes and for such amounts or kind of
consideration as the Board of Directors shall determine, subject to any limits
required by then applicable law. Nothing in this paragraph shall be construed
in any way as limiting the Board of Directors authority to issue the
Corporation's shares in connection with a share dividend under the WBCL.
E. Subject to the suspension of the right of redemption or postponement of
the date of payment or satisfaction upon redemption in accordance with the
Investment Company Act, each holder of any class or series of the Common Stock
of the Corporation, upon request and after complying with the redemption
procedures established by or under the supervision of the Board of Directors,
shall be entitled to require the Corporation to redeem out of legally available
funds all or any part of the Common Stock standing in the name of such holder
on the books of the Corporation at the net asset value (as determined in
accordance with the Investment Company Act) of such shares (less any applicable
redemption fee). Any such redeemed shares shall be canceled and restored to the
status of authorized but unissued shares.
2
<PAGE> 3
F. The Board of Directors may authorize the Corporation, at its option and
to the extent permitted by and in accordance with the Investment Company Act,
to redeem any shares of Common Stock of any class or series of the Corporation
owned by any shareholder under circumstances deemed appropriate by the Board of
Directors in its sole discretion from time to time, including without
limitation the failure to maintain ownership of a specified minimum number or
value of shares of Common Stock of any class or series of the Corporation, at
the net asset value (as determined in accordance with the Investment Company
Act) of such shares (less any applicable redemption fee).
G. The Board of Directors of the Corporation may, upon reasonable notice
to the holders of Common Stock of any class or series of the Corporation,
impose a fee for the redemption of shares, such fee to be not in excess of the
amount set forth in the Corporation's then existing Bylaws and to apply in the
case of such redemptions and under such terms and conditions as the Board of
Directors shall determine. The Board of Directors shall have the authority to
rescind imposition of any such fee in its discretion and to reimpose the
redemption fee from time to time upon reasonable notice.
H. No holder of the Common Stock of any class or series of the Corporation
shall, as such holder, have any right to purchase or subscribe for any shares
of the Common Stock of any class or series of the Corporation which it may
issue or sell other than such right, if any, as the Board of Directors, in its
sole discretion, may determine.
I. With respect to any class or series, the Board of Directors may adopt
provisions to seek to maintain a stable net asset value per share. Without
limiting the foregoing, the Board of Directors may determine that the net asset
value per share of any class or series should be maintained at a designated
constant value and may establish procedures, not inconsistent with applicable
law, to accomplish that result. Such procedures may include a requirement, in
the event of a net loss with respect to the particular class or series from
time to time, for automatic pro rata capital contributions from each
shareholder of that class or series in amounts sufficient to maintain the
designated constant share value.
ARTICLE V
The number of directors shall be fixed by the Bylaws of the Corporation.
ARTICLE VI
The Corporation reserves the right to enter into, from time to time,
investment advisory agreements providing for the management and supervision of
the investments of the Corporation, the furnishing of advice to the Corporation
with respect to the desirability of investing in, purchasing or selling
securities or other assets and the furnishing of clerical and administrative
services to the Corporation. Such agreements shall contain such other terms,
provisions and conditions as the Board of Directors of the Corporation may deem
advisable and as are permitted by the Investment Company Act.
The Corporation may, without limitation, designate distributors,
custodians, transfer agents, registrars and/or disbursing agents for the stock
and assets of the Corporation and employ and fix the powers, rights, duties,
responsibilities and compensation of each such distributor, custodian, transfer
agent, registrar and/or disbursing agent.
ARTICLE VII
If the Board of Directors redesignate the outstanding Common Stock in
accordance with paragraph A of Article IV, the Board of Directors shall
designate the corporation with a generic name that is consistent with the name
of the first series and any subsequent series.
3
<PAGE> 4
ARTICLE VIII
The registered office of the Corporation is located at 100 Heritage
Reserve, in the Village of Menomonee Falls, Waukesha County, Wisconsin 53051
and the name of the registered agent at such address is Thomas P. Lemke.
This instrument was drafted by:
John S. Weitzer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
4
<PAGE> 1
EXHIBIT-99.B8.1
AMENDMENT TO THE CUSTODIAN AGREEMENT
AMENDMENT entered into as of this 26th day of August, 1996 to the
Custodian Agreement among STRONG INTERNATIONAL BOND FUND, INC. (the "Fund") and
BROWN BROTHERS HARRIMAN & CO. (the "Custodian") dated as of March 2,1994 (the
"Agreement").
In consideration of the Custodian's offering subcustodial services to the
Funds in Russia, the Funds and the Custodian agree that the Agreement is hereby
amended as follows:
1. Section 2. I., Safekeeping, is amended by the addition of the
following phrase at the end of said Section:
"provided, however, that the Custodian's responsibility for safekeeping
equity securities of Russian issuers ("Russian Equities") hereunder shall
be limited to the safekeeping of relevant share extracts from the share
registration books maintained by the entities providing share registration
services to issuers of Russian Equities (each a "Registrar") indicating an
investor's ownership of such securities (each a "Share Extract")."
2. Section 2.3, Registration, is amended by the addition of the
following at the end of said Section:
"However, with respect to Russian Equities, the Custodian shall instruct a
Subcustodian to ensure that registration thereof shall be reflected on the
books of the issuer's Registrar, subject to the following conditions, but
shall in no event be liable for losses or costs incurred as a result
of delays or failures in the registration process, including without
limitation the inability to obtain or enforce relevant Share Extracts,
unless such delays or failures are due to the Custodian's or
Subcustodian's negligence, fraud, or willful default. Such registration
may be in the name of a nominee of a Subcustodian. In the event
registration is in the name of a Fund, such Fund hereby acknowledges that
only the Custodian or Subcustodian may give instructions to the Registrar
to transfer or engage in other transactions involving the Russian Equities
so registered.
A Subcustodian may from time to time enter into contracts
with Registrars with respect to the registration of Russian Equities
("Registrar Contracts"). The Custodian shall provide the Funds with a list
of the Russian Equities with respect to which
1
<PAGE> 2
the Subcustodian has entered into a Registrar Contract, and will promptly
provide the Funds with updates to that list whenever the Subcustodian
enters into any new Registrar Contracts. Such Registrar Contracts will
include (i) regular share confirmations by the Subcustodian, (ii)
reregistrations within set timefratnes, (iii) use of a Subcustodian's
nominee name, (iv) direct access by auditors of the Subcustodian or its
clients to share registers, and (v) specification of the Registrar's
responsibilities and liabilities. It is hereby acknowledged and agreed
that the Custodian does not represent or warrant that such Registrar
Contracts are enforceable. If a Fund instructs the Custodian to settle a
purchase of a Russian Equity, the Custodian will instruct a Subcustodian to
use reasonable efforts to reregister the Russian Equity and obtain a Share
Extract in a timely manner. After completion of reregistration of a Russian
Equity in respect of which a Subcustodian has entered into a Registrar
Contract, the Custodian shall instruct the Subcustodian to monitor such
registrar using reasonable efforts and to promptly notify the Custodian
upon the Subcustodian's obtaining knowledge of the occurrence of any of the
following events ("Registrar Events"): (i) a Registrar has eliminated a
shareholder from the register or has altered registration records; (ii) a
Registrar has refused to register securities in the name of a particular
purchaser and the purchaser or seller has alleged that the registrar's
refusal to so register was unlawful; (iii) a Registrar holds for its own
account shares of an issuer for which it serves as registrar; (iv) if a
Registrar Contract is in effect with a Registrar, and the Registrar
notifies the Subcustodian that it will no longer be able materially to
comply with the terms of the Registrar Contract; or the Subcustodian has
actual knowledge that a registrar has engaged in conduct that indicates it
will not materially comply with the provisions. or (v) if the Registrar has
materially breached such Contract. The Custodian shall promptly inforin the
Fund of the occurrence of a Registrar Event provided the Subcustodian has
actual notice of the Registrar Event. It shall be the sole responsibility
of each Fund to promptly contact the Custodian prior to executing any
transaction in a Russian Equity to determine whether a Registrar Contract
exists in respect of an issuer not included on the list provided to the
Fund. If a Fund instructs the Custodian by Proper Instruction to settle a
purchase of a Russian Equity in respect of which the Subcustodian has not
entered into a Registrar Contract, then the Custodian shall instruct the
Subcustodian to endeavor to settle such transaction in accordance with the
Proper Instruction and with the provisions of Section 2.4 of this
Agreement, notwithstanding the absence of any such Registrar Contract and
subject to the requirement that the Custodian provide and promptly update
the Registrar Contract list with the respect to Russian Equities and
without the Custodian being required to notify the Fund that no such
Registrar Contract is then in effect, and it being understood that neither
the Custodian nor the Subcustodian shall be required to follow the
procedure set forth in the second preceding paragraph."
3. Section 2.4, Purchases is amended by the addition of the following
at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of purchases of
securities in Russia. Unless otherwise instructed by Proper Instructions
acceptable to the Custodian, the Custodian shall only authorize a
Subcustodian to make payment for purchases of Russian Equities upon
receipt of the relevant Share Extract in respect of the Fund's purchases.
With respect to securities other than Russian Equities, settlement of
purchases shall be made in
2
<PAGE> 3
accordance with securities processing or settlement practices which the
Custodian in its discretion determines to be a market practice. Subject
to the exercise of reasonable care, the Custodian shall only be
responsible for securities purchased upon actual receipt of such
securities at the premises of its Subcustodian, provided that the
Custodian's responsibility for securities represented by Share Extracts
shall be limited to the safekeeping of the relevant Share Extract upon
actual receipt of such Share Extract at the premises of the Subcustodian."
4. Section 2.5, Exchanges, is amended by inserting after the word
"exchange" in the second line thereof, the following phrase:
", in accordance with the registration procedures described in Section
2.3, of this Agreement,"
5.. Section 2.6 Sales of Securities, is amended by the addition of
the following at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of sales of securities
in Russia. Unless otherwise expressly instructed by Proper Instructions
acceptable to the Custodian, settlement of sales of securities shall be
made in accordance with securities processing or settlement practices
which the Custodian in its discretion determines to be a market practice.
Each Fund hereby expressly acknowledges that such market practice might
require delivery of securities prior to receipt of payment and that the
Fund bears the risk of payment in instances where delivery of securities
is made prior to receipt of payment therefor in accordance with Proper
Instructions received by the Custodian or pursuant to the Custodian's
determination in its discretion that such delivery is in accordance with
market practice. Subject to the exercise of reasonable care, the
Custodian shall not be responsible for any securities delivered from the
premises of the Subcustodian from the time they leave such premises."
6. Section 2 .8, Exercise of Rights; Tender Offers, is replaced in
its entirety with the following:
Section 2.8, Exercise of Rights Tender Offers -- Upon timely
receipt of Proper Instructions, to use reasonable efforts to take any
action required by the terms of a rights offer, tender offer, put, call,
merger, consolidation, reorganization or other corporate action affecting
securities held on behalf of a Fund. The Custodian shall use reasonable
3
<PAGE> 4
efforts to act on such Proper Instructions but will not be held liable for
any losses or costs incurred as a result of such actions or as a result of
the Custodian's inability for reasons beyond its control to take the
actions requested by such Proper Instructions, provided however, that
the Custodian or Subeustodian was not negligent in performing its duties
under this section. The Custodian shall promptly inform the Fund whenever
it is unable to take any actions requested by Proper Instructions."
7. Section 2.9, Stock Dividends, Rights, Etc., is modified by the
addition of the following paragraph at the end of said Section:
"With respect to Russian Equities, to request a Subcustodian to
obtain a Share Extract with respect to all Russian Equities issued by
reason of a stock dividend, bonus issue or other distribution resulting
from a corporate action not requiring instructions from the shareholder of
the security, provided that the Custodian shall not be responsible for its
inability to obtain any such Share Extract or for the failure of a
Registrar or any agent thereof to record the Fund's ownership on the
issuer's records, unless such inability is due to the negligence, fraud,
or willful default of the Custodian or Subcustodian or Agent selected by
the Custodian or Subcustodian"
8. Section 3, Powers and Duties of the Custodian with Respect to the
Appointment of Subcustodians, is modified by the insertion of the following at
the end of the first paragraph of Section 3:
"With respect to Russia, each Fund hereby expressly acknowledges
that a Subcustodian for Russian securities may utilize the services of
Rosvneshtorgbank (also called Vneshtorgbank RF) ("VTB") which, as of the
date of this amendment, meets the requirements of Rule 17f-5 under the
Investment Company Act of 1940. Each Fund acknowledges that the rights of
the Subcustodian against the VTB may consist only of a contractual claim.
Neither the Custodian nor the Subcustodian shall be responsible or liable
to a Fund or its shareholders for the acts or omissions of the VTB unless
any loss results from the negligence, fraud or willful default of the
Custodian or Subcustodian. In the event of a loss of securities or cash
held on behalf of a Fund through the VTB, the Custodian shall not be
responsible to a Fund or its shareholders unless and to the extent it in
fact recovers from the Subcustodian."
4
<PAGE> 5
9. Section 6.2,Liability of the Custodian with Respect to Use of
Securities Systems and Foreign Depositories, is amended by the insertion of the
following at the end of said Section:
"Notwithstanding anything in this Agreement to the contrary, neither the
Custodian nor the Subcustodian shall be responsible or liable to a Fund or
its shareholders for the acts or omissions of a Foreign Depository in
Russia, and in addition, neither the Custodian nor a Subcustodian
shall be responsible or liable to a Fund or its shareholders for the
failure of the Custodian or Subcustodian to assert rights effectively
against any such Foreign Depository unless due to the negligence, fraud,
or willful default of the Custodian or Subcustodian."
10. The first paragraph of Section 6.4, Standard of Care, Liabilily;
Indemnification, is replaced in its entirety with the following:
"The Custodian shall be held only to the exercise of reasonable
care in carrying out the provisions of this Agreement, provided that
the Custodian shall not thereby be required to take any action which is in
contravention of any applicable law, rule or regulation or any order or
judgment of any court of competent jurisdiction. With respect to
securities issued by Russian issuers or settlement in Russia of securities
transactions, reasonable care shall mean reasonable practices under the
circumstances as measured by prevailing custodial practices among
international financial institutions in Russia, and negligence as used
herein shall mean the failure to exercise reasonable care as defined in
this sentence. The Custodian shall in no event be liable for
consequential or indirect losses or from loss of goodwill.
"Notwithstanding the foregoing, the Custodian shall have no
liability in respect of any loss, damage or expense suffered by a Fund or
any shareholder of a Fund insofar as such loss, damage or expense arises
from investment risk inherent in investing in capital markets or in
holding assets in a particular country or jurisdiction, including without
limitation, (i) political, legal, economic, settlement and custody
infrastructure, and currency and exchange rate risks; (ii) investment and
repatriation restrictions; (iii) a Fund's inability to protect and enforce
any local legal rights including rights of title and beneficial ownership;
(iv) corruption and crime in the local market; (v) unreliable information
which emanates from the local market; (vi) volatility of banking and
financial systems and infrastructure; (vii) bankruptcy and insolvency
risks of any and all local banking agents, counterparties to cash and
securities transactions or registrars or transfer agents; and (vii) risk
of issuer insolvency or default.
"It is understood that no Registrar, whether or not any such
Registrar has entered into a contract or other arrangement with a
Subcustodian or Foreign Depository, is or shall be considered or deemed to
be a Foreign Depository or an agent of the Custodian or any Subcustodian,
and accordingly neither the Custodian nor the Subcustodian shall be
responsible for or liable to a Fund or to the shareholders of a Fund for
the acts or omissions of any such Registrar unless such acts or omissions
result from the negligence, fraud or willful default of the Custodian or
Subcustodian. It is also agreed that each
5
<PAGE> 6
Fund shall be responsible for preparation and filing of tax retums,
reports and other documents on any activities it undertakes in Russia
which are to be filed with any relevant governmental or other authority
and for the payment of any taxes, levies, duties or similar liability the
Fund incurs in respect of property held or sold in Russia or of payments
or distributions received in respect thereof in Russia. Accordingly, each
Fund hereby agrees to indemnify and hold harmless the Custodian from any
loss, cost or expense resulting from the imposition or assessment of any
such tax, duty, levy or liability or any expenses related thereto."
11. A new Section 15., Risk Disclosure Acknowledement, is added at the
end of the present Section 14:
"Each Fund hereby acknowledges that it has received, has read and
has understood the Custodian's Risk Disclosure Statement, a copy of
which is attached hereto and is incorporated herein by reference. Each
Fund further acknowledges that the Risk Disclosure Statement is not
comprehensive, and warrants and represents to the Custodian that it has
undertaken its own review of the risks associated with investment in
Russia and has concluded that such investment is appropriate for the Fund
and in no way conflicts with the Fund's constitutive documents, investment
objective, duties to its shareholders or with any regulatory requirements
applicable to the Fund."
12. A new Section 16., Registrar System Reports, is added at the end of
the new section
15:
"Credit Suisse (Moscow) Ltd. will prepare for distribution to the
Board of Directors a quarterly report identifying any concems Credit
Suisse (Moscow) Ltd. has regarding the Russian share registration system
that should be brought to the Board of Directors' attention. This report
will include detailed information regarding the steps Credit Suisse
(Moscow) Ltd. has taken during the reporting period to ensure that the
Fund's interests continue to be appropriately recorded. This duty to
report will commence upon Board of Director approval of investment in
Russia. The first quarterly report will be submitted to the Board of
Directors after the first full quarter of the fund's investment in Russia.
Each report will contain only new information from the date of the last
quarterly report."
Except as amended above, all the provisions of the Agreement as heretofore
in effect shall remain in full force and effect.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
STRONG INTERNATIONAL BROWN BROTHERS HARRIMAN & CO.
BOND FUND, INC
/s/ John S. Weitzer /s/ Stokley P. Towles
- --------------------- -----------------------
Name: John S. Weitzer Name: Stokley P. Towles
Title: Vice President Title: Partner
7
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Strong International Bond Fund, Inc.
We consent to the incorporation by reference in Post-Effective Amendment No. 6
to the Registration Statement of Strong International Bond Fund, Inc. on Form
N-1A of our report dated December 4, 1996 on our audit of the financial
statements and financial highlights of Strong International Bond Fund, Inc.,
which report is included in the Annual Report to Shareholders for the year ended
October 31, 1996, which is also incorporated by reference in the Registration
Statement. We also consent to the reference to our Firm under the caption
"Independent Accountants" in the Statement of Additional
Information.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
February 26, 1997
<PAGE> 1
BASIC PLAN DOCUMENT
UNIVERSAL SIMPLIFIED EMPLOYEE PENSION PLAN
EXHIBIT 14.4
[STRONG FUNDS LOGO]
STRONG FUNDS
1 ESTABLISHMENT AND PURPOSE OF PLAN
1.01 PURPOSE The purpose of this Plan is to provide, in accordance with
its provisions, a Simplified Employee Pension Plan providing benefits
upon retirement for the individuals who are eligible to participate
hereunder.
1.02 INTENT TO QUALIFY It is the intent of the Employer that this Plan shall
be for the exclusive benefit of its Employees and shall qualify for
approval under Section 408(k) of the Internal Revenue Code, as
amended from time to time (for corresponding provisions of any
subsequent Federal law at that time in effect). In case of any
ambiguity, it shall be interpreted to accomplish such result. It is
further intended, that it comply with the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA) as amended from time to
time.
1.03 WHO MAY ADOPT An employer who has ever maintained a defined benefit
plan which is now terminated may not participate in this prototype
Simplified Employee Pension Plan. If, subsequent to adopting this
Plan, any defined benefit plan of the Employer terminates, the
employer will no longer participate in this prototype plan and will
be considered to have an individually designed plan.
1.04 USE WITH IRA This prototype Simplified Employee Pension Plan must be
used with an Internal Revenue Service model IRA (Form 5305 or Form
5305-A) or an Internal Revenue Service approved master or prototype
IRA.
1.05 FOR MORE INFORMATION To obtain more information concerning the rules
governing this Plan, contact the Prototype Sponsor listed in Section
5 of the Adoption Agreement.
<PAGE> 2
2 DEFINITIONS
2.01 ADOPTION AGREEMENT Means the document executed by the Employer
through which it adopts the Plan and thereby agrees to be bound by
all terms and conditions of the Plan.
2.02 CODE Means the Internal Revenue Code of 1986 as amended.
2.03 COMPENSATION Compensation for the purposes of the $300 limit of
Section 408(k)(2)(C) of the Code shall be defined as Section 414(q)(7)
Compensation.
For all other purposes, Compensation shall mean all of a Participant's
wages as defined in Section 3401(a) of the Code for the purposes of
income tax withholding at the source (that is, W-2 wages) but
determined without regard to any rules that limit the remuneration
included in wages based on the nature or location of the employment or
the services performed (such as the exception for agricultural labor
in Section 3401(a)(2) of the Code).
For any Self-Employed Individual covered under the Plan, Compensation
will mean Earned Income.
Compensation shall include only that Compensation which is actually
paid to the Participant during the Plan Year.
Compensation shall include any amount which is contributed by the
Employer pursuant to a salary reduction agreement and which is not
includible in the gross income of the Employee under Sections
125,402(a)(8), 402(h) or 403(b) of the Code.
The annual Compensation of each Participant taken into account under
the Plan for any year shall not exceed $200,000. This limitation
shall be adjusted by the Secretary at the same time and in the same
manner as under Section 415(d) of the Code, except the dollar
increase in effect on January 1 of any calendar year is effective for
years beginning in such calendar year and the first adjustment to the
$200,000 limitation is effected on January 1, 1990. If a Plan
determines Compensation on a period of time that contains fewer than
12 calendar months, then the annual Compensation limit is an amount
equal to the annual Compensation limit for the calendar year in which
the compensation period begins multiplied by the ratio obtained by
dividing the number of full months in the period by 12.
In determining the Compensation of a Participant the rules of Section
414(q)(6) of the Code shall apply, except in applying such rules, the
term "family" shall include only the spouse of the Participant and
any lineal descendants of the Participant who have not attained age
19 before the close of the year. If, as a result of the application
of such rules the adjusted $200,000 limitation is exceeded, then
(except for purposes of determining the portion of Compensation up to
the integration level if this Plan provides for permitted disparity),
the limitation shall be prorated among the affected individuals in
proportion to each such individual's Compensation as determined under
this section prior to the application of this limitation.
In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the contrary,
for Plan Years beginning on or after January 1, 1994, the annual
Compensation of each Employee taken into account under the Plan shall
not exceed the OBRA '93 annual Compensation limit. The OBRA '93
annual Compensation limit is $150,000, as adjusted by the
Commissioner for increases in the cost of living in accordance with
Section 401(a)(17)(B) of the Internal Revenue Code. The
cost-of-living adjustment in effect for a calendar year applies to any
period, not exceeding 12 months, over which Compensation is determined
(determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93
annual Compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination
period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference
in this Plan to the limitation under Section 401(a)(17) of the Code
shall mean the OBRA '93 annual Compensation limit set forth in this
provision.
<PAGE> 3
2.04 EARNED INCOME Means the net earnings from self-employment in
the trade or business with respect to which the Plan is
established, for which personal services of the individual
are a material income-producing factor. Net earnings will be
determined without regard to items not included in gross
income and the deductions allocable to such items. Net
earnings are reduced by contributions by the Employer to
a qualified plan or to a Simplified Employee Pension Plan
to the extent deductible under Section 404 of the Code.
Net earnings shall be determined with regard to the
deduction allowed to the Employer by Section 164(f)
of the Code for taxable years beginning after
December 31, 1989.
2.05 EFFECTIVE DATE Means the date the Plan becomes
effective as indicated in the Adoption Agreement.
2.06 EMPLOYEE Means any person who is a natural person
employed by the Employer as a common law employee
and if the Employer is a sole proprietorship or
partnership, any Self-Employed Individual who performs
services with respect to the trade or business of the
Employer. Further, any employee of any other employer
required to be aggregated under Section 414(b), (c), (m),
or (o) of the Code and any leased employee required to be
treated as an employee of the Employer under Section 414(n)
of the Code shall also be considered an Employee.
2.07 EMPLOYER Means any corporation, partnership or sole
proprietorship named in the Adoption Agreement and any
successor who by merger, consolidation, purchase or
otherwise assumes the obligations of the Plan. A partnership
is considered to be the Employer of each of the partners and
a sole proprietorship is considered to be the Employer of
the sole proprietor.
2.08 EMPLOYER CONTRIBUTION Means the amount contributed
by the Employer to this Plan.
2.09 IRA Means the designated Individual Retirement
Account or Individual Retirement Annuity, which satisfies
the requirements of Section 408 of the Code, and which is
maintained by a Participant with the Prototype Sponsor
(unless the Prototype Sponsor allows Participants to
maintain their IRAs with other organizations).
2.10 PARTICIPANT Means any Employee who has met the
participation requirements of Section 3.01 and who is or
may become eligible to receive an Employer Contribution.
2.11 PLAN Means this plan document plus the corresponding
Adoption Agreement as completed and signed by the Employer.
2.12 PLAN YEAR Means the calendar year or the 12 consecutive month
period which coincides with the Employer's taxable year.
2.13 PRIOR PLAN Means a plan which was amended or replaced by
adoption of this plan document, as indicated in the Adoption
Agreement.
2.14 PROTOTYPE SPONSOR Means the entity specified in the
Adoption Agreement which sponsors this prototype Plan.
2.15 SELF-EMPLOYED INDIVIDUAL Means an individual who
has Earned Income for a Plan Year from the trade or business
for which the Plan is established; also, an individual who
would have had Earned Income but for the fact that the trade
or business had no net profits for the Plan Year.
2.16 SERVICE Means the performance of duties by an Employee for
the Employer, for any period of time, however
short, for which the Employee is paid or entitled to payment.
When the Employer maintains the Plan of a predecessor
employer, an Employee's Service will include his or her
service for such predecessor employer.
2.17 TAXABLE WAGE BASE Means the maximum amount of earnings which
may be considered wages for a year under Section 312(a)(1) of
the Code in effect as of the beginning of the Plan Year.
<PAGE> 4
3. ELIGIBILITY AND PARTICIPATION
3.01 ELIGIBILITY REQUIREMENTS Except for those Employees excluded
pursuant to Section 3.02, each Employee of the Employer who fulfills the
eligibility requirements specified in the Adoption Agreement shall, as
a condition for further employment, become a participant. Each
Participant must establish an IRA with the Prototype Sponsor to which
Employer Contributions under this Plan will be made.
3.03 ADMITTANCE AS A PARTICIPANT
A. Prior Plan If this Plan is an amendment or continuation of a Prior
Plan, each Employee of the Employer who immediately before the
Effective Date was a participant in said Prior Plan shall be a
Participant in this Plan as of said date.
B. Notification of Eligibility The Employer shall notify each
Employee who becomes a Participant of his or her status as a
Participant in the Plan and of his or her duty to establish an IRA
with the Prototype Sponsor to which Employer Contributions may be
made.
C. Establishment of an IRA If a Participant fails to establish an
IRA for whatever reason, the Employer may execute any necessary
documents to establish an IRA on behalf of the Participant.
3.02 EXCLUSION OF CERTAIN EMPLOYEES If the Employer has so indicated in the
Adoption Agreement, the following Employees shall not be eligible to
become a participant in the Plan: (a) Those Employees included in a unit
of Employees covered by the terms of a collective bargaining agreement,
provided retirement benefits were the subject of good faith bargaining;
and (b) those Employees who are nonresident aliens, who have received no
earned income from the Employer which constitutes earned income from
sources within the United States.
3.04 DETERMINATIONS UNDER THIS SECTION The Employer shall determine the
eligibility of each Employee to be a Participant. This determination
shall be conclusive and binding upon all persons except as otherwise
provided herein or by law.
3.05 LIMITATION RESPECTING EMPLOYMENT Neither the fact of the establishment
of the Plan nor the fact that a common-law employee has become a
Participant shall give to that common-law employee any right to
continued employment; nor shall either fact limit the right of the
Employer to discharge or to deal otherwise with a common-law employee
without regard to the effect such treatment may have upon the Employee's
rights under the Plan.
<PAGE> 5
4. CONTRIBUTIONS AND ALLOCATIONS
4.01 EMPLOYER CONTRIBUTIONS
A. Allocation Formula Employer Contributions shall be allocated in
accordance with the allocation formula selected in the Adoption
Agreement. Each Employee who has satisfied the eligibility
requirements pursuant to Section 3.01 (thereby becoming a
Participant) will share in such allocation.
If the Employer has selected the pro rata allocation formula in
the Adoption Agreement, then Employer Contributions for each
Plan Year shall be allocated to the IRA of each Participant in the
same proportion as such Participant's Compensation (not in excess
of $200,000, indexed for cost of living increases in accordance
with Section 408(k)(8) of the Code) for the Plan Year bears to the
total Compensation of all Participants for such year.
Employer Contributions made for a Plan Year on behalf of any
Participant shall not exceed the lesser of 15% of Compensation or
the limitation in effect under Code Section 415(c)(1)(A)(indexed
for cost of living increases in accordance with Code Section
415(d)).
B. Integrated Allocation Formula If the Employer has selected the
integrated allocation formula in the Adoption Agreement, then
Employer Contributions for the Plan Year will be allocated to
Participants' IRA as follows:
Step 1 Employer Contributions will be allocated to each
Participant's IRA in the ratio that each Participant's
total Compensation bears to all Participants' total
Compensation, but not in excess of 3% of each
Participant's Compensation.
Step 2 Any Employer Contributions remaining after the allocation
in Step 1 will be allocated to each Participant's IRA
in the ratio that each Participant's Compensation for the
Plan Year in excess of the integration level bears to the
Compensation of all Participants' in excess of the
integration level, but not in excess of 3%.
Step 3 Any Employer Contributions remaining after the allocation
in Step 2 will be allocated to each Participant's IRA
in the ratio that the sum of each Participant's total
Compensation and Compensation in excess of the integration
level bears to the sum of all Participants' total
Compensation and Compensation in excess of the integration
level, but not in excess of the maximum disparity rate
described in the following table.
Step 4 Any Employer Contributions remaining after the allocation
in Step 3 will be allocated to each Participant's IRA
in the ratio that each Participant's total Compensation
for the Plan Year bears to all Participants' total
Compensation for that Plan Year.
The integration level shall be equal to the Taxable Wage
Base or such lesser amount elected by the Employer in the
Adoption Agreement.
<TABLE>
<CAPTION>
Integration Level Maximum Disparity Rate
- --------------------------------------------------------------------------------
<S> <C>
Taxable Wage Base (TWB) 2.7%
More than $0 but not more than X* 2.7%
More than X* of TWB but not more than 80% of TWB 1.3%
More than 80% of TWB but not more than TWB 2.4%
</TABLE>
*X means the greater of $10,000 or 20% of TWB.
C. Timing of Employer Contribution Employer Contributions, if any,
made on behalf of Participants for a Plan Year shall be
allocated and deposited to the IRA of each Participant no later
than the due date for filing the Employer's tax return (including
extensions).
4.02 DEDUCTIBILITY OF CONTRIBUTIONS Contributions to the Plan are
deductible by the Employer for the taxable year with or within
which the Plan Year of the Plan ends. Contributions made for a
particular taxable year and contributed by the due date of the
Employer's income tax return, including extensions, are deemed made in
that taxable year.
4.03 VESTING, WITHDRAWAL RIGHTS TO CONTRIBUTIONS All Employer Contributions
made under the Plan on behalf of Employees shall be fully
vested and nonforfeitable at all times. Each Employee shall have an
unrestricted right to withdraw at any time all or a portion of the
Employer Contributions made on his or her behalf. However,
withdrawals taken are subject to the same taxation and penalty
provisions of the Code which are applicable to IRA distributions.
4.04 SIMPLIFIED EMPLOYER REPORTS The Employer shall furnish reports,
relating to contributions made under the Plan, in the time and
manner and containing the information prescribed by the Secretary of
the Treasury, to Participants. Such reports shall be furnished at
least annually and shall disclose the amount of the contribution made
under the Plan to the Participant's IRA.
<PAGE> 6
5 AMENDMENT OR TERMINATION OF PLAN
5.01 AMENDMENT BY EMPLOYER The Employer reserves the right to amend
the elections made or not made on the Adoption Agreement by
executing a new Adoption Agreement and delivering a copy of the
same to the Prototype Sponsor. The Employer shall not have the
right to amend any nonelective provision of the Adoption Agreement
nor the right to amend provisions of this plan document. If the
Employer adopts an amendment to the Adoption Agreement or plan
document in violation of the preceding sentence, the Plan will be
deemed to be an individually designed plan and may no longer
participate in this prototype Plan.
5.02 AMENDMENT BY PROTOTYPE SPONSOR By adopting this Plan, the
Employer delegates to the Prototype Sponsor the power to amend or
replace the Adoption Agreement of the Plan to conform them to the
provisions of any law, regulations or administrative rulings
pertaining to Simplified Employee Pensions and to make such other
changes to the Plan, which, in the judgement of the Prototype
Sponsor, are necessary or appropriate. The Employer shall be
deemed to have consented to all such amendments, provided however,
that no changes may be made without the consent of the Employer if
the effect would be to substantially change the costs or benefits
under the Plan. The Prototype Sponsor shall not have the
obligation to exercise or not to exercise the power delegated to
it nor shall the Prototype Sponsor incur liability of any nature
for any act done or failed to be done by the Prototype Sponsor in
good faith in the exercise or nonexercise of the power delegated
hereunder. The Prototype Sponsor shall notify the Employer should
it discontinue sponsorship of the Plan.
5.03 LIMITATIONS ON POWER TO AMEND No amendment by either the Employer
or the Prototype Sponsor shall reduce or otherwise adversely
affect any benefits of a Participant or Beneficiary acquired
prior to such amendment unless it is required to maintain
compliance with any law, regulation or administrative ruling
pertaining to Simplified Employee Pensions.
5.04 TERMINATION While the Employer expects to continue the Plan
indefinitely, the Employer shall not be under any obligation or
liability to continue contributions or to maintain the Plan for
any given length of time. The Employer may terminate this Plan at
any time by appropriate action of its managing body. This Plan
shall terminate on the occurrence of any of the following events:
A. Delivery to the Prototype Sponsor of a notice of termination
executed by the Employer specifying the effective date of the
Plan's termination.
B. Adjudication of the Employer as bankrupt or the liquidation or
dissolution of the Employer.
5.05 NOTICE OF AMENDMENT, TERMINATION Any amendment or termination
shall be communicated by the Employer to all appropriate parties
as required by law. Amendments made by the Prototype Sponsor shall
be furnished to the Employer and communicated by the Employer to
all appropriate parties as required by law. Any filings required
by the Internal Revenue Service or any other regulatory body
relating to the amendment or termination of the Plan shall be
made by the Employer.
5.06 CONTINUANCE OF PLAN BY SUCCESSOR EMPLOYER A successor of the
Employer may continue the Plan and be substituted in the place of
the present Employer. The successor and present Employer (or if
deceased, the executor of the estate of a deceased Self-Employed
Individual who was the Employer) must execute a written instrument
authorizing such substitution and the successor must complete and
sign a new Adoption Agreement.
<PAGE> 7
6 SALARY DEFERRAL SEP PROVISIONS
In addition to Sections 1 through 5, the provisions of this
Section 6 shall apply if the Employer is an Eligible Employer and
has adopted a salary deferral Simplified Employee Pension Plan by
indicating in the Adoption Agreement that Retirement Savings
Contributions are permitted.
If the Employer has so indicated in the Adoption Agreement, the
Employer agrees to permit Retirement Savings Contributions to be
made which will be contributed by the Employer to the IRA
established by or on behalf of each Contributing Participant. This
arrangement is intended to qualify as a salary reduction
simplified employee pension ("SARSEP") under Section 480(k)(6) of
the Code and the regulations thereunder.
The SARSEP portion of this Plan shall be effective upon adoption.
No Retirement Savings Contributions may be based on Compensation
an Employee could have received before adoption of the SARSEP and
execution by the Employee of a Retirement Savings Agreement.
6.100 DEFINITIONS
6.101 COMPENSATION Means Compensation as defined in Section 2.03 of
the Plan and shall include any amount which is contributed by the
Employer as a Retirement Savings Contribution pursuant to a
Retirement Savings Agreement which is not includible in the gross
income of the Employee under Section 402(h) of the Code.
6.102 CONTRIBUTING PARTICIPANT Means a person who has met the
participation requirements and who has enrolled as a Contributing
Participant pursuant to Section 6.201 and on whose behalf the
Employer is contributing Retirement Savings Contributions.
6.103 ELIGIBLE EMPLOYER Means an Employer which: (a) has no more than
25 Employees who are eligible to participate in the Plan (or would
have been eligible to participate if this Plan had been
maintained) at any time during the preceding Plan Year; (b) has no
leased employees within the meaning of Section 414(n)(2) of the
Code; (c) is not a state or local government or political
subdivision thereof, or any agency or instrumentality thereof, or
an organization exempt from tax under Subtitle A of the Code; and
(d) does not currently maintain or has not maintained a defined
benefit plan, even if now terminated.
6.104 ENROLLMENT DATE Means the first day of any Plan Year, the first
day of the seventh month of any Plan Year and any more frequent
dates as the Employer may designate in a uniform and
nondiscriminatory manner.
6.105 EXCESS CONTRIBUTION Means the amount of each Highly Compensated
Employee's Retirement Savings Contributions that exceeds the
actual deferral percentage test limits described in Section
6.303(B) of the Plan for a Plan Year.
6.106 HIGHLY COMPENSATED EMPLOYEE Means a Participant described in
Section 414(q) of the Code who during the current or preceding
year; (a) was a 5% owner of the Employer as defined in Section
416(i)(1)(B)(i) of the Code; (b) received Compensation in excess
of $50,000, as adjusted pursuant to Section 415(d), and was in the
top-paid group (the top 20% of Employees, by Compensation); (c)
received Compensation in excess of $75,000, as adjusted pursuant
to section 415(d); or (d) was an officer and received Compensation
in excess of 50% of the dollar limit under Section 415 of the Code
for defined benefit plans.
6.107 KEY EMPLOYEE Means any Employee or former Employee or
beneficiaries of these Employees who at any time during the Plan
Year or the four preceding Plan Years is or was: (a) an officer of
the Employer (if the Employee's annual Compensation exceeds 50% of
the dollar limitation under Section 415(b)(1)(A) of the Code); (b)
an owner of one of the 10 largest interests in the Employer (if
the Employee's annual Compensation exceeds 100% of the dollar
limitation under Section 415(c)(1)(A) of the Code); (c) a 5% owner
of the Employer as defined in Section 416(i)(1)(B)(i) of the Code;
or (d) a 1% owner of Employer (if the Employee has annual
Compensation in excess of $150,000).
6.108 RETIREMENT SAVINGS AGREEMENT Means an agreement, on a form
provided by the Employer pursuant to which a Contributing
Participant may elect to have his or her Compensation reduced and
paid as a Retirement Savings Contribution to his or her IRA by the
Employer.
6.109 RETIREMENT SAVINGS CONTRIBUTIONS Means contributions made by the
Employer on behalf of the Contributing Participant pursuant to
Section 6.301. Retirement Savings Contributions shall be deemed to
be Employer Contributions for purposes of (a) the contribution
limits described in Section 4.01(A) of the Plan; (b) the vesting
and withdrawal rights described in Section 4.03 of the Plan; and
(c) determining whether this Plan is a Top-Heavy Plan.
6.110 TOP-HEAVY PLAN This Plan is a Top-Heavy Plan for any Plan Year
if, as of the last day of the previous Plan Year (or current Plan
Year if this is the first year of the Plan) the total of the
Employer Contributions made on behalf of Key Employees for all the
years this Plan has been in existence exceeds 60% of such
contributions for all Employees. If the Employer maintains (or
maintained within the prior five years) any other SEP or defined
contribution plan in which a Key Employee participates (or
participated), the contributions or account balances, whichever is
applicable, must be aggregated with the contributions made to the
Plan. The contributions (and account balances, if applicable) of
an Employee who ceases to be a Key Employee or of an individual
who has not been in the employ of the Employer for the previous
five years shall be disregarded. The identification of Key
Employees and the top-heavy calculation shall be determined in
accordance with Section 416 of the Code and the regulations
thereunder.
<PAGE> 8
6.200 CONTRIBUTING PARTICIPANT
6.201 REQUIREMENTS TO ENROLL AS A CONTRIBUTING PARTICIPANT
A. Enrollment Each Employee who becomes a Participant may enroll
as a Contributing Participant. A Participant shall be eligible
to enroll as a Contributing Participant on any Enrollment
Date.
B. Initial Enrollment Notwithstanding the time set forth in
Section 6.201(A) as of which a Participant may enroll as a
Contributing Participant, the Employer shall have the
authority to designate, in a uniform and nondiscriminatory
manner, additional Enrollment Dates during the twelve month
period beginning on the Effective Date in order that an
orderly first enrollment might be completed.
6.202 MODIFICATION OF RETIREMENT SAVINGS AGREEMENT A Contributing
Participant may modify his or her Retirement Savings Agreement to
increase or decrease (within the limits placed on Retirement
Savings Contributions in the Adoption Agreement) the amount of his
or her Compensation deferred into his or her IRA under the Plan.
Such modification may only be prospectively made effective as of
an Enrollment Date, or as of any other more frequent date(s) if
the Employer so permits in a uniform and nondiscriminatory manner.
A Contributing Participant who desires to make such a modification
shall complete, sign and file a new Retirement Savings Agreement
with the Employer at least 30 days (or such lesser period of days
as the Employer shall permit in a uniform and nondiscriminatory
manner) before the modification is to become effective.
6.203 WITHDRAWAL AS A CONTRIBUTING PARTICIPANT A Participant may
withdraw as a Contributing Participant as of the last date
preceding any Enrollment Date (or as of any other date if the
Employer so permits in a uniform and nondiscriminatory manner) by
revoking his or her authorization to the Employer to make
Retirement Savings Contributions on his or her behalf. A
Participant who desires to withdraw as a Contributing Participant
shall give written notice of withdrawal to the Employer at least
30 days (or such lesser period of days as the Employer shall
permit in a uniform and nondiscriminatory manner) before the
effective date of withdrawal. A Participant shall cease to be a
Contributing Participant upon his or her termination of
employment, or on account of termination of the Plan.
6.204 RETURN AS CONTRIBUTING PARTICIPANT AFTER WITHDRAWAL A Participant
who has withdrawn as a Contributing Participant under Section
6.203 may not again become a Contributing Participant until the
first day of the first Plan Year following the effective date of
his or her withdrawal as Contributing Participant.
6.300 RETIREMENT SAVINGS CONTRIBUTIONS
6.301 SALARY DEFERRAL ARRANGEMENT The Employer shall contribute
Retirement Savings Contributions on behalf of all Contributing
Participants for each Plan Year that the following requirements
are satisfied:
A. The Employer is an Eligible Employer; and
B. Not less than 50% of the Employees eligible to participate
elect to have Retirement Savings Contributions contributed to
the Plan on their behalf.
Subject to the limits described in Section 6.303, the amount of
Retirement Savings Contributions so contributed shall be the
amount required by the Retirement Savings Agreements of
Contributing Participants.
No Retirement Savings Contribution may be based on Compensation a
Participant received, or had a right to receive, before execution
of a Retirement Savings Agreement by the Participant.
6.302 FAILURE TO SATISFY 50% PARTICIPATION REQUIREMENT If the 50%
participation requirement described in Section 6.301(B) is not
satisfied as of the end of any Plan Year, all the Retirement
Savings Contributions made by Employees for the Plan Year shall be
considered "Disallowed Deferrals," i.e., IRA contributions that
are not SEP-IRA contributions. The Employer shall notify each
affected Employee, within 2-1/2 months after the end of the Plan
Year to which the Disallowed Deferrals relate, that the deferrals
are no longer considered SEP-IRA contributions. Such notification
shall specify the amount of the Disallowed Deferrals and the
calendar year of the Employee in which they are includible in
income and must provide an explanation of applicable penalties if
the Disallowed Deferrals are not withdrawn in a timely fashion.
The notice to each affected Employee must state specifically; (a)
the amount of the Disallowed Deferrals; (b) that the Disallowed
Deferrals are includible in the Employee's gross income for the
calendar year or years in which the amounts deferred would have
been received by the Employee in cash had he or she not made an
election to defer and that the income allocable to such Disallowed
Deferrals is includible in the year withdrawn from the IRA; and
(c) that the Employee must withdraw the Disallowed Deferrals (and
allocable income) from the SEP-IRA by April 15 following the
calendar year of notification by the Employer. Those Disallowed
Deferrals not withdrawn by April 15 following the year of
notification will be subject to the IRA contribution limitations
of Sections 219 and 408 of the Code and thus may be considered an
excess contribution to the Employee's IRA. Disallowed Deferrals
may be subject to the 6% tax on excess contributions under Section
4973 of the Code. If income allocable to a Disallowed Deferral is
not withdrawn by April 15 following the year of notification by
the Employer, the income may be subject to the 10% tax on early
distributions under Section 72(t) of the Code when withdrawn.
Disallowed Deferrals are reported in the same manner as are Excess
Contributions.
<PAGE> 9
6.303 LIMITS ON RETIREMENT SAVINGS CONTRIBUTIONS
A. Maximum Amount No Contributing Participant shall be permitted
to have Retirement Savings Contributions made under this Plan
during any calendar year in excess of $7,000 (as indexed
pursuant to Code Section 402(g)(5)). The $7,000 (indexed)
limit applies to the total elective deferrals the Contributing
Participant makes for the calendar year under this Plan and
under any cash or deferred arrangement described in Section
401(k) of the Code and any salary reduction arrangement
described in Section 403(b) of the Code. The limit may be
increased to $9,500 if the Contributing Participant makes
elective deferrals to a salary reduction arrangement under
Section 403(b) of the Code.
Under no circumstances may an Employee's Retirement Savings
Contributions in any calendar year exceed the lesser of: (1)
the limitation under Section 402(g) of the Code based on all
of the plans of the Employer; or (2) 15% of his or her
Compensation (less any amount contributed by the Employer as a
Retirement Savings Contribution). Compute the amount of this
15% limit by using the following formula:
Compensation (before subtracting Retirement Savings
Contributions) X 13.0435%.
If an Employer maintains any other SEP plan to which
non-elective SEP Employer Contributions are made for a Plan
Year, or any qualified plan to which contributions are made
for such Plan Year, then an Employee's Retirement Savings
Contribution may be limited to the extent necessary to satisfy
the maximum contribution limitation under Section 415(c)(1)(A)
of the Code.
In addition to the dollar limitation of Section 415(c)(1)(A),
which is $30,000 in 1991, Employer Contributions to this Plan,
when aggregated with contributions to all other SEP plans and
qualified plans of the Employer, generally may not exceed 15%
of Compensation (less any amount contributed by the Employer
as a Retirement Savings Contribution) for any Employee. If
these limits are exceeded on behalf of any Employee for a
particular Plan Year, that Employee's Retirement Savings
Contributions for that year must be reduced to the extent of
the excess.
B. Actual Deferred Percentage (ADP) Test Limits Retirement
Savings Contributions by a Highly Compensated Employee must
satisfy the actual deferral percentage (hereinafter "ADP")
limitation under Section 408(k)(6) of the Code. Amounts in
excess of the ADP limitation will be deemed Excess
Contributions on behalf of the affected Highly Compensated
Employee or Employees. The ADP of any Highly Compensated
Employee who is eligible to be a Contributing Participant
shall not be more than the product obtained by multiplying the
average of the ADPs of all non-Highly Compensated Employees
who are eligible to be Contributing Participants by 1.25. For
purposes of this Section 6.303, an Employee's ADP is the ratio
(expressed as a percentage) of his or her Retirement Savings
Contributions for the Plan Year to his or her Compensation for
the Plan Year. The ADP of an Employee who is eligible to be a
Contributing Participant, but who does not make Retirement
Savings Contributions during the Plan Year is zero. The
determination of the ADP for any Employee is to be made in
accordance with Section 408(k)(6) of the Code and should
satisfy such other requirements as may be provided by the
Secretary of the Treasury.
C. Special Rule for Family Members For purposes of determining
the ADP of a Highly Compensated Employee, the Retirement
Savings Contributions and Compensation of the Employee will
also include the Retirement Savings Contribution and
Compensation of any family member. This special rule applies
only if the Highly Compensated Employee is in one of the
following groups: (a) a more than 5% owner of the Employer; or
(b) one of a group of the 10 most Highly Compensated
Employees.
The Retirement Savings Contributions and Compensation of
family members used in this special rule do not count in
computing the average of the ADPs of non-Highly Compensated
Employees.
For purposes of this special rule, a family member is an
individual who is related to a Highly Compensated Employee as
a spouse, or as a lineal ascendent or descendent or the
spouses of such lineal ascendents or descendents in accordance
with Section 414(q) of the Code and the regulations
thereunder.
6.304 DISTRIBUTION OF EXCESS RETIREMENT SAVINGS CONTRIBUTIONS To the
extent that a Contributing Participant's Retirement Savings
Contributions for a calendar year exceed the limit described in
Section 6.303(A) (i.e., the $7,000 (indexed) limit), the
Contributing Participant must withdraw the excess Retirement
Savings Contributions (and any income allocable to such amount) by
April 15 following the year of the deferral.
6.305 DISTRIBUTION OF EXCESS CONTRIBUTIONS The Employer shall notify
each Employee, no later than 2-1/2 months following the close of
the Plan Year of the amount, if any, of any Excess Contribution to
that Employee's IRA for such Plan Year. If the Employer does not
so notify Employees by such date, the Employer must pay a tax
equal to 10% of the Excess Contributions for the Plan Year
pursuant to Section 4979 of the Code. If the Employer fails to
notify Employees by the end of the Plan Year following the Plan
Year of the Excess Contributions, the SEP no longer will be
considered to meet the requirements of Section 408(k)(6) of the
Code. This means that the earnings on the SEP are subject to tax
immediately, that no more Retirement Savings Contributions may be
made under the SEP, and
<PAGE> 10
that Retirement Savings Contributions of all Employees with
uncorrected Excess Contributions must be included in their income
in that year. If the SEP no longer meets the requirements of
Section 408(k)(6), then any contribution to an Employee's IRA will
be subject to the IRA contribution limitations of Section 219 and
408 of the Code and thus may be considered an excess contribution
to the Employee's IRA.
The Employer's notification to each affected Employee of the
Excess Contributions must specifically state in a manner
calculated to be understood by the average Plan Participant: (a)
the amount of the Excess Contributions attributable to that
Employee's Retirement Savings Contributions; (b) the Plan Year for
which the Excess Contributions were made; (c) that the Excess
Contributions are includible in the affected Employee's gross
income for the calendar year in which such Excess Contributions
were made; and (d) that the Employee must withdraw the Excess
Contributions (and allocable income) from the IRA by April 15
following the year of notification by the Employer. Those Excess
Contributions not withdrawn by April 15 following the year of
notification will be subject to the IRA contribution limitations
of Sections 219 and 408 of the Code for the preceding calendar
year and thus may be considered an excess contribution to the
Employee's IRA. Such excess contributions may be subject to the 6%
tax on excess contributions under Section 4973 of the Code. If
income allocable to an Excess Contribution is not withdrawn by
April 15 following the year of notification by the Employer, the
income may be subject to the 10% tax on early distributions under
Section 72(t) of the Code when withdrawn. However, if the Excess
Contributions (not including allocable income) total less than
$100, then the Excess Contributions are includible in the
Employee's gross income in the year of notification. Income
allocable to the Excess Contributions is includible in the year of
withdrawal from the IRA.
6.306 DETERMINATION OF INCOME For purposes of Sections 6.302, 6.304 and
6.305, the income allocable to Disallowed Deferrals, excess
Retirement Savings Contributions or Excess Contributions for a
year shall be determined by multiplying the income earned on the
IRA for the period which begins on the first day of such year and
ends on the date of distribution from the IRA by a fraction, the
numerator of which is the Disallowed Deferral, excess Retirement
Savings Contribution or Excess Contribution for such year and the
denominator of which is the sum of the account balance of the IRA
as of the beginning of such year and the total contributions made
to the IRA for such year.
6.307 RESTRICTION ON TRANSFERS AND WITHDRAWALS The Employer shall
notify each Contributing Participant that, until the earlier of
2-1/2 months after the end of a particular Plan Year or the date
the Employer notifies its employees that the actual deferral
percentage limitations have been calculated, any transfer or
distribution from the Contributing Participant's IRA of Retirement
Savings Contributions (or income on these contributions)
attributable to Retirement Savings Contributions made during that
Plan Year will be includible in income for purposes of Sections
72(t) and 408(d)(1) of the Code.
6.308 ALLOCATION OF RETIREMENT SAVINGS CONTRIBUTIONS Retirement Savings
Contributions made on behalf of Contributing Participants for a
Plan Year shall be allocated and deposited to the IRA of each
Contributing Participant by the Employer as soon as is
administratively feasible.
6.400 SPECIAL RULES FOR TOP-HEAVY PLANS
6.401 MINIMUM ALLOCATION The following mandatory minimum allocation
applies when this Plan is a Top-Heavy Plan:
Unless another plan of the Employer is designated in the space
below to satisfy the top-heavy requirements of Section 416 of the
Code, each year this Plan is a Top-Heavy Plan, the Employer will
make a minimum contribution to the IRA of each Participant who is
not a Key Employee, which, in combination with other non-elective
contributions, if any, is equal to the lesser of 3% of such
Participant's Compensation or a percentage of Compensation equal
to the percentage of Compensation at which elective and non-
elective contributions are made under the Plan for the Plan Year
for the Key Employee for whom such percentage is the largest.
The top-heavy minimum will be met in the following plan:
________________________________________________________________
_________________________________________________________________
_________________________________________________________________
(If applicable, name the plan other than this Plan in which the
minimum top-heavy contribution will be made).
6.402 RETIREMENT SAVINGS CONTRIBUTIONS CANNOT BE USED FOR MINIMUM
ALLOCATION For purposes of satisfying the minimum allocation
requirement of Section 416 of the Code, Retirement Savings
Contributions contributed for the benefit of Employees who are not
Key Employees may not be used to satisfy the minimum allocation
requirement.
<PAGE> 1
Strong International Bond Fund, Inc.
EXHIBIT 16
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. CURRENT ANNUALIZED YIELD: 30 days ended October 31, 1996
A. Formula
a-b 6
YIELD = 2[(----------- + 1) - 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.
d = the maximum offering price per share on the
last day of the period.
B. Calculation
193,861.05 - 203.82 6
YIELD = 2[(------------------- + 1) - 1]
2,507,564.447 x 11.87
YIELD = 7.94%
II. AVERAGE ANNUAL TOTAL RETURN
A. Formula
n n ____
P (1 + T) = ERV or T = \ /ERV/P - 1
Where: 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 periods.
<PAGE> 2
B. Calculation
n______
T = \/ERV/P-1
1. One-year period 10-31-95 through 10-31-96
1 _____________
8.55% = \ /10,855/10,000-1
2. Since inception 03-31-94 through 10-31-96
2.583_______________
13.39% = \ / 13,834/10,000-1
III. TOTAL RETURN
A. Formula
EV-IV
_____
IV = TR
Where: EV = Value at the end of the periods,
including reinvestment of all
dividends and capital gains
distributions
IV = Initial value of a hypothetical
investment at the net asset
value
TR = Total Return
B. Calculation
EV-IV
_____
IV = TR
One-year period ended October 31, 1996
10.855-10,000
_____________
10,000 = 8.55%
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 31795
<INVESTMENTS-AT-VALUE> 32787
<RECEIVABLES> 621
<ASSETS-OTHER> 121
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 33529
<PAYABLE-FOR-SECURITIES> 2361
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 69
<TOTAL-LIABILITIES> 2430
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29190
<SHARES-COMMON-STOCK> 2619
<SHARES-COMMON-PRIOR> 1859
<ACCUMULATED-NII-CURRENT> 1216
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (199)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 892
<NET-ASSETS> 31099
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2021
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 2021
<REALIZED-GAINS-CURRENT> (213)
<APPREC-INCREASE-CURRENT> 444
<NET-CHANGE-FROM-OPS> 2252
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,116)
<DISTRIBUTIONS-OF-GAINS> (137)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2700
<NUMBER-OF-SHARES-REDEEMED> (2,045)
<SHARES-REINVESTED> 105
<NET-CHANGE-IN-ASSETS> 9764
<ACCUMULATED-NII-PRIOR> 311
<ACCUMULATED-GAINS-PRIOR> 151
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 189
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 504
<AVERAGE-NET-ASSETS> 20740
<PER-SHARE-NAV-BEGIN> 11.48
<PER-SHARE-NII> 0.8
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> (0.5)
<PER-SHARE-DISTRIBUTIONS> (0.06)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.87
<EXPENSE-RATIO> 0<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Expense ratio without Waivers and Absorptions is 1.8.
</FN>
</TABLE>
<PAGE> 1
STRONG INTERNATIONAL BOND FUND, INC.
(Registrant)
POWER OF ATTORNEY
Each person whose signature appears below, constitutes and appoints
John Dragisic, Thomas P. Lemke, Lawrence A. Totsky, Stephen J. Shenkenberg and
John S. Weitzer, and each of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign this Registration
Statement on Form N-1A, and any and all amendments thereto, and to file the
same, with all exhibits, and any other documents in connection therewith, with
the Securities and Exchange Commission and any other regulatory body granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to
all intents and purposes, as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
NAME TITLE DATE
----- ------ ----
President of the Board (Principal
Officer and acting Principal
/s/ John Dragisic Financial Accounting Officer)
- ---------------------- and a Director February 25, 1997
John Dragisic
/s/ Richard S. Strong Chairman of the Board and a
- ---------------------- Director
Richard S. Strong February 25, 1997
/s/ Marvin E. Nevins
- ---------------------- Director
Marvin E. Nevins February 25, 1997
/s/ Willie D. Davis
- ----------------------
Willie D. Davis Director February 25, 1997
/s/ William F. Vogt
- ---------------------- Director February 25, 1997
William F. Vogt
/s/ Stanley Krizik Director February 25, 1997
- ----------------------
Stanley Krizik
<PAGE> 1
EXHIBIT-99.B20
[GODFREY & KAHN, S.C. LETTERHEAD]
February 25, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Strong International Bond Fund, Inc.
Gentlemen:
We represent Strong International Bond Fund, Inc. (the "Company"),
in connection with its filing of Post-Effective Amendment No. 6 (the
"Post-Effective Amendment") to the Company's Registration Statement
(Registration Nos. 33-74578; 811-8318) on Form N-1A under the Securities Act of
1933 (the "Securities Act") and the Investment Company Act of 1940. The
Post-Effective Amendment is being filed pursuant to Rule 485(b) under the
Securities Act.
We have reviewed the Post-Effective Amendment and, in accordance with Rule
485(b)(4) under the Securities Act, hereby represent that the Post-Effective
Amendment does not contain disclosures which would render it ineligible to
become effective pursuant to Rule 485(b).
Very truly yours,
GODFREY & KAHN, S.C.
/s/ Scott A. Moehrke
Scott A. Moehrke
<PAGE> 1
EXHIBIT 99.B21.1
CODE OF ETHICS
FOR ACCESS PERSONS OF
THE STRONG FAMILY OF MUTUAL FUNDS,
STRONG CAPITAL MANAGEMENT, INC.,
AND STRONG FUNDS DISTRIBUTORS, INC.
[STRONG FUNDS LOGO]
STRONG CAPITAL MANAGEMENT, INC.
October 18, 1996
<PAGE> 2
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
Table of Contents
I. INTRODUCTION ..............................................................1
A. Fiduciary Duty ............................................................1
1. Place the interests of Advisory Clients first .............................1
2. Avoid taking inappropriate advantage of their position ....................1
3. Conduct all Personal Securities Transactions in full compliance with
this Code including both the preclearance and reporting requirements ......1
B. Appendices to the Code ....................................................2
1. Definitions ...............................................................2
2. Contact Persons ...........................................................2
3. Disclosure of Personal Holdings in Securities .............................2
4. Acknowledgment of Receipt of Code of Ethics and Limited Power of Attorney..2
5. Preclearance Request for Access Persons ...................................2
6. Annual Code of Ethics Questionnaire .......................................2
7. List of Broad-Based Indices ...............................................2
8. Form Letter to Broker or Bank .............................................2
9. Gift Policy ...............................................................2
C. Application of the Code to Independent Fund Directors .....................2
D. Application of the Code to Funds Subadvised by SCM ........................2
II. PERSONAL SECURITIES TRANSACTIONS ..........................................2
A. Annual Disclosure of Personal Holdings by Access Persons ..................2
B. Preclearance Requirements for Access Persons ..............................3
1. General Requirement .......................................................3
2. Transactions Exempt from Preclearance Requirements ........................3
a. Mutual Funds ..............................................................3
b. No Knowledge ..............................................................3
c. Certain Corporate Actions .................................................3
d. Rights ....................................................................3
e. Miscellaneous .............................................................3
3. Application to Commodities, Futures, Options on Futures and Options
on Broad-Based Indices ....................................................4
C. Preclearance Requests .....................................................4
1. Trade Authorization Request Forms .........................................4
2. Review of Form ............................................................4
3. Access Person Designees ...................................................4
D. Prohibited Transactions ...................................................5
1. Prohibited Securities Transactions ........................................5
i
<PAGE> 3
a. Initial Public Offerings ..................................................5
b. Pending Buy or Sell Orders ................................................5
c. Seven Day Blackout ........................................................5
d. Intention to Buy or Sell for Advisory Client ..............................5
e. 60-Day Blackout ...........................................................6
2. Always Prohibited Securities Transactions .................................6
a. Inside Information ........................................................6
b. Market Manipulation .......................................................6
c. Large Positions in Non-Strong Funds .......................................6
d. Others ....................................................................6
3. Private Placements ........................................................6
4. No Explanation Required for Refusals ......................................6
E. Execution of Personal Securities Transactions .............................7
F. Length of Trade Authorization Approval ....................................7
G. Trade Reporting Requirements ..............................................7
1. Reporting Requirement .....................................................7
2. Disclaimers ...............................................................8
3. Quarterly Review ..........................................................8
4. Availability of Reports ...................................................8
5. Record Retention ..........................................................8
III. FIDUCIARY DUTIES ........................................................9
A. Confidentiality ...........................................................9
B. Gifts .....................................................................9
1. Accepting Gifts ...........................................................9
2. Solicitation of Gifts .....................................................9
3. Giving Gifts ..............................................................9
C. Payments to Advisory Clients ..............................................9
D. Corporate Opportunities ...................................................9
E. Undue Influence ...........................................................9
F. Service as a Director ....................................................10
G. Involvement in Criminal Matters or Investment-Related Civil Proceedings ..10
IV. COMPLIANCE WITH THIS CODE OF ETHICS .....................................10
A. Code of Ethics Review Committee ..........................................10
1. Membership, Voting, and Quorum ...........................................10
2. Investigating Violations of the Code .....................................10
3. Annual Reports ...........................................................11
B. Remedies .................................................................11
1. Sanctions ................................................................11
2. Sole Authority ...........................................................11
3. Review ...................................................................11
C. Exceptions to the Code ...................................................12
D. Compliance Certification .................................................12
E. Inquiries Regarding the Code .............................................12
ii
<PAGE> 4
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
Table of Appendices
Appendix 1 (Definitions) ....................................................13
Appendix 2 (Contact Persons) ................................................16
Appendix 3 (Disclosure of Personal Holdings in Securities)...................17
Appendix 4 (Acknowledgment of Receipt of Code of Ethics and
Limited Power of Attorney) .................................................18
Appendix 5 (Preclearance Request for Access Persons) ........................19
Appendix 6 (Annual Code of Ethics Questionnaire) ............................20
Appendix 7 (List of Broad-Based Indices) ....................................23
Appendix 8 (Form Letter to Broker or Bank) ..................................24
Appendix 9 (Gift Policy) ....................................................25
iii
<PAGE> 5
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
I. INTRODUCTION
A. Fiduciary Duty. This Code of Ethics is based upon the principle that
directors, officers, and employees of Strong Capital Management, Inc. ("SCM"),
Strong Funds Distributors, Inc. ("the Distributor"), and the Strong Family of
Mutual Funds ("the Strong Funds") have a fiduciary duty to place the interests
of clients ahead of their own. The Code applies to all Access Persons and
focuses principally on preclearance and reporting of personal transactions in
securities. Capitalized words are defined in Appendix 1. Access Persons must
avoid activities, interests, and relationships that might interfere with making
decisions in the best interests of the Advisory Clients of SCM.
As fiduciaries, Access Persons must at all times:
1. Place the interests of Advisory Clients first. Access Persons
must scrupulously avoid serving their own personal interests ahead of the
interests of the Advisory Clients of SCM. An Access Person may not
induce or cause an Advisory Client to take action, or not to take action,
for personal benefit, rather than for the benefit of the Advisory Client.
For example, an Access Person would violate this Code by causing an
Advisory Client to purchase a Security he or she owned for the purpose of
increasing the price of that Security.
2. Avoid taking inappropriate advantage of their position. The
receipt of investment opportunities, perquisites, or gifts from persons
seeking business with the Strong Funds, SCM, the Distributor, or their
clients could call into question the exercise of an Access Person's
independent judgment. Access persons may not, for example, use their
knowledge of portfolio transactions to profit by the market effect of
such transactions.
3. Conduct all Personal Securities Transactions in full compliance
with this Code including both the preclearance and reporting
requirements.
Doubtful situations should be resolved in favor of Advisory Clients.
Technical compliance with the Code's procedures will not automatically insulate
from scrutiny any trades that indicate an abuse of fiduciary duties.
1
<PAGE> 6
B. Appendices to the Code. The appendices to this Code are attached
hereto and are a part of the Code, and include the following:
1. Definitions--capitalized words as defined in the Code--(Appendix
1),
2. Contact Persons, including the Preclearance Officer designees,
and the Code of Ethics Review Committee (Appendix 2),
3. Disclosure of Personal Holdings in Securities (Appendix 3),
4. Acknowledgment of Receipt of Code of Ethics and Limited Power of
Attorney (Appendix 4),
5. Preclearance Request for Access Persons (Appendix 5),
6. Annual Code of Ethics Questionnaire (Appendix 6),
7. List of Broad-Based Indices (Appendix 7),
8. Form Letter to Broker or Bank (Appendix 8), and
9. Gift Policy (Appendix 9).
C. Application of the Code to Independent Fund Directors. This Code
applies to Independent Fund Directors, and requires Independent Fund Directors
and their Immediate Families to report Securities Transactions to the
Compliance Department in accordance with Section II.G. However, provisions of
the Code requiring the disclosure of personal holdings (Section II.A.),
preclearance of trades (Section II.B.), prohibited transactions (II.D.1.),
private placements (Section II.D.3.), restrictions on serving as a director of
a publicly-traded company (Section III.F.), and receipt of gifts (Section
III.B.) do not apply to Independent Fund Directors.
D. Application of the Code to Funds Subadvised by SCM. This Code does
not apply to the directors, officers, and general partners of Funds for which
SCM serves as a subadviser.
II. PERSONAL SECURITIES TRANSACTIONS
A. Annual Disclosure of Personal Holdings by Access Persons. Upon
designation as an Access Person, and thereafter on an annual basis, all Access
Persons must disclose on the Disclosure of Personal Holdings In Securities Form
(Appendix 3) (or a substantially similar form) all Securities in which they
have a Beneficial Interest and all Securities in non-client accounts for which
they make investment decisions (previously reported holdings need not be
reported). This provision does not apply to Independent Fund Directors.
2
<PAGE> 7
B. Preclearance Requirements for Access Persons.
1. General Requirement. Except for the transactions set forth in
Section II.B.2., all Securities Transactions in which an Access Person or
a member of his or her Immediate Family has a Beneficial Interest must be
precleared with the Preclearance Officer or his designee. This provision
does not apply to transactions of Independent Fund Directors and their
Immediate Families.
2. Transactions Exempt from Preclearance Requirements. The
following Securities Transactions are exempt from the preclearance
requirements set forth in Section II.B.1. of this Code:
a. Mutual Funds. Securities issued by any registered open-end
investment companies (including but not limited to the Strong
Funds);
b. No Knowledge. Securities Transactions where neither SCM,
the Access Person nor an Immediate Family member knows of the
transaction before it is completed (for example, Securities
Transactions effected for an Access Person by a trustee of a blind
trust or discretionary trades involving an investment partnership
or investment club in which the Access Person is neither consulted
nor advised of the trade before it is executed);
c. Certain Corporate Actions. Any acquisition of Securities
through stock dividends, dividend reinvestments, stock splits,
reverse stock splits, mergers, consolidations, spin-offs, or other
similar corporate reorganizations or distributions generally
applicable to all holders of the same class of Securities;
d. Rights. Any acquisition of Securities through the exercise
of rights issued by an issuer pro rata to all holders of a class of
its Securities, to the extent the rights were acquired in the
issue; and
e. Miscellaneous. Any transaction in the following: (1)
bankers acceptances, (2) bank certificates of deposit ("CDs"), (3)
commercial paper, (4) repurchase agreements, (5) Securities that
are direct obligations of the U.S. government, (6) equity
securities held in dividend reinvestment plans ("DRIPs"), (7)
Securities of the employer of a member of the Access Person's
Immediate Family if such securities are beneficially owned through
participation by the Immediate Family member in a Profit Sharing
plan, 401(k) plan, ESOP, or other similar plan, and (8) other
Securities as may from time to time be designated in writing by the
Code of Ethics Review Committee on the grounds that the risk of
abuse is minimal or non-existent.
THE SECURITIES TRANSACTIONS LISTED ABOVE ARE NOT EXEMPT FROM THE
REPORTING REQUIREMENTS SET FORTH IN SECTION II.G.
3
<PAGE> 8
3. Application to Commodities, Futures, Options on Futures and
Options on Broad-Based Indices. Commodities, futures (including currency
futures and futures on securities comprising part of a broad-based,
publicly traded market based index of stocks), options on futures,
options on currencies, and options on certain indices designated by the
Compliance Department as broad-based are not subject to the preclearance,
seven day black out, 60-day profit disgorgement, and prohibited
transaction provisions of Section II.D.I of the Code, but are subject to
transaction reporting. The options on indices designated by the
Compliance Department as broad-based may be changed from time to time and
are listed in Appendix 7. The options on indices that are not designated
as broad-based are subject to the preclearance, seven-day blackout,
60-day profit disgorgement, prohibited transaction, and reporting
provisions of the Code.
C. Preclearance Requests.
1. Trade Authorization Request Forms. Prior to entering an order
for a Securities Transaction that requires preclearance, the Access
Person must complete, IN WRITING, a Preclearance Request For Access
Persons Form as set forth in Appendix 5 and submit the completed form to
the Preclearance Officer (or his designee). The Preclearance Request For
Access Persons Form requires Access Persons to provide certain
information and to make certain representations. Proposed Securities
Transactions of the Preclearance Officer that require preclearance must
be submitted to his designee.
2. Review of Form. After receiving the completed Preclearance
Request For Access Persons Form, the Preclearance Officer (or his
designee) will (a) review the information set forth in the form, (b)
independently confirm whether the Securities are held by any Funds or
other accounts managed by SCM and whether there are any unexecuted orders
to purchase or sell the Securities by any Fund or accounts managed by
SCM, and (c) as soon as reasonably practicable, determine whether to
clear the proposed Securities Transaction. The authorization, date, and
time of the authorization must be reflected on the Preclearance Request
For Access Persons Form. The Preclearance Officer (or his designee) will
keep one copy of the completed form for the Compliance Department, send
one copy to the Access Person seeking authorization, and send the third
copy to the Trading Department, which will cause the transaction to be
executed.
No order for a securities transaction for which preclearance
authorization is sought may be placed prior to the receipt of written
authorization of the transaction by the preclearance officer (or his
designee). Verbal approvals are not permitted.
3. Access Person Designees. If an Access Person is away from SCM's
principal office and desires to effect a personal Securities Transaction
prior to his or her return, such Access Person may designate an
individual at SCM to complete and submit
4
<PAGE> 9
for preclearance on his or her behalf a Preclearance Request for Access
Persons Form provided the following requirements are satisfied:
a. The Access Person communicates the details of the trade and
affirms the accuracy of the representations and warranties
contained on the Form directly to such designated person; and
b. The designated person completes the Preclearance Request
For Access Persons Form on behalf of the Access Person in
accordance with the requirements of the Code and then executes the
Access Person Designee Certification contained in the Form. The
Access Person does not need to sign the Form so long as the
foregoing certification is provided.
D. Prohibited Transactions.
1. Prohibited Securities Transactions. The following Securities
Transactions for accounts in which an Access Person or a member of his or
her Immediate Family have a Beneficial Interest, to the extent they
require preclearance under Section II.B. above, are prohibited and will
not be authorized by the Preclearance Officer (or his designee) absent
exceptional circumstances:
a. Initial Public Offerings. Any purchase of Securities in an
initial public offering (other than a new offering of a registered
open-end investment company);
b. Pending Buy or Sell Orders. Any purchase or sale of
Securities on any day during which any Advisory Client has a
pending "buy" or "sell" order in the same Security (or Equivalent
Security) until that order is executed or withdrawn;
c. Seven Day Blackout. Purchases or sales of Securities by a
Portfolio Manager within seven calendar days of a purchase or sale
of the same Securities (or Equivalent Securities) by an Advisory
Client managed by that Portfolio Manager, unless the purchase or
sale is a Program Trade. For example, if a Fund trades in a
Security on day one, day eight is the first day the Portfolio
Manager may trade that Security for an account in which he or she
has a beneficial interest;
d. Intention to Buy or Sell for Advisory Client. Purchases or
sales of Securities at a time when that Access Person intends, or
knows of another's intention, to purchase or sell that Security (or
an Equivalent Security) on behalf of an Advisory Client. This
prohibition applies whether the Securities Transaction is in the
same (e.g., two purchases) or the opposite (a purchase and sale)
direction of the transaction of the Advisory Client; and
5
<PAGE> 10
e. 60-Day Blackout. (1) Purchases of a Security in which an
Access Person acquires a Beneficial Interest within 60 days of the
sale of the Security (or an Equivalent Security) in which the same
Access Person had a Beneficial Interest, and (2) sales of a
Security in which an Access Person had a Beneficial Interest within
60 days of the purchase of the Security (or an Equivalent Security)
in which the same Access Person has a Beneficial Interest, unless,
in each case, the Access Person agrees to give up all profits on
the transaction to a charitable organization specified in
accordance with Section IV.B.1.
2. Always Prohibited Securities Transactions. The following
Securities Transactions are prohibited and will not be authorized under
any circumstances:
a. Inside Information. Any transaction in a Security while in
possession of material nonpublic information regarding the Security
or the issuer of the Security;
b. Market Manipulation. Transactions intended to raise,
lower, or maintain the price of any Security or to create a false
appearance of active trading;
c. Large Positions in Non-Strong Funds. Transactions in a
registered investment company (other than the Strong Funds) which
result in the Access Person owning five percent or more of any
class of securities in such investment company; and
d. Others. Any other transactions deemed by the Preclearance
Officer (or his designee) to involve a conflict of interest,
possible diversion of corporate opportunity, or an appearance of
impropriety.
3. Private Placements. Acquisitions of Beneficial Interests in
Securities in a private placement by an Access Person is strongly
discouraged. The Preclearance Officer (or his designee) will give
permission only after considering, among other facts, whether the
investment opportunity should be reserved for Advisory Clients and
whether the opportunity is being offered to an Access Person by virtue of
his or her position as an Access Person. Access Persons who have been
authorized to acquire and have acquired securities in a private placement
are required to disclose that investment to the Compliance Department
when they play a part in any subsequent consideration of an investment in
the issuer by an Advisory Client and the decision to purchase securities
of the issuer by an Advisory Client must be independently authorized by a
Portfolio Manager with no personal interest in the issuer. This
provision does not apply to Independent Fund Directors.
4. No Explanation Required for Refusals. In some cases, the
Preclearance Officer (or his designee) may refuse to authorize a
Securities Transaction for a reason that
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<PAGE> 11
is confidential. The Preclearance Officer is not required to give an
explanation for refusing to authorize any Securities Transaction.
E. Execution of Personal Securities Transactions. Unless an exception
is provided in writing by the Compliance Department, all transactions in
Securities subject to the preclearance requirements for which an Access Person
or a member of his or her Immediate Family has a Beneficial Interest shall be
executed by the Trading Department. IN ALL INSTANCES, THE TRADING DEPARTMENT
MUST GIVE PRIORITY TO CLIENT TRADES OVER ACCESS PERSON TRADES.
F. Length of Trade Authorization Approval. The authorization provided
by the Preclearance Officer (or his designee) is effective until the earlier of
(1) its revocation, (2) the close of business on the second trading day after
the authorization is granted (for example, if authorization is provided on a
Monday, it is effective until the close of business on Wednesday), or (3) the
Access Person learns that the information in the Trade Authorization Request
Form is not accurate. If the order for the Securities Transaction is not
placed within that period, a new advance authorization must be obtained before
the Securities Transaction is placed. If the Securities Transaction is placed
but has not been executed within two trading days after the day the
authorization is granted (as, for example, in the case of a limit order or a
not held order), no new authorization is necessary unless the person placing
the original order for the Securities Transaction amends it in any way.
G. Trade Reporting Requirements.
1. Reporting Requirement. EVERY ACCESS PERSON AND MEMBERS OF HIS OR
HER IMMEDIATE FAMILY (INCLUDING INDEPENDENT FUND DIRECTORS AND THEIR
IMMEDIATE FAMILIES) MUST ARRANGE FOR THE COMPLIANCE DEPARTMENT TO RECEIVE
DIRECTLY FROM ANY BROKER, DEALER, OR BANK THAT EFFECTS ANY SECURITIES
TRANSACTION, DUPLICATE COPIES OF EACH CONFIRMATION FOR EACH SUCH
TRANSACTION AND PERIODIC STATEMENTS FOR EACH BROKERAGE ACCOUNT IN WHICH
SUCH ACCESS PERSON HAS A BENEFICIAL INTEREST. Attached hereto as
Appendix 8 is a form letter that may be used to request such documents
from such entities. An Access Person must arrange to have duplicate
confirmations and periodic statements sent within 30 days of the sooner
of (1) designation as an Access Person, or (2) the establishment of the
account at the broker, dealer or bank. If the Access Person is unable to
arrange for the above, the Access Person must immediately notify the
Compliance Department. THE FOREGOING DOES NOT APPLY TO TRANSACTIONS AND
HOLDINGS IN (1) OPEN-END INVESTMENT COMPANIES INCLUDING BUT NOT LIMITED
TO THE STRONG FUNDS, (2) BANK CERTIFICATES OF DEPOSIT ("CDS"), (3)
EQUITY SECURITIES HELD IN DIVIDEND REINVESTMENT PLANS ("DRIPS"), OR (4)
SECURITIES OF THE EMPLOYER OF A MEMBER OF THE ACCESS PERSON'S IMMEDIATE
FAMILY IF SUCH SECURITIES ARE BENEFICIALLY OWNED THROUGH PARTICIPATION BY
THE IMMEDIATE FAMILY MEMBER IN A PROFIT SHARING PLAN, 401(K) PLAN, ESOP,
OR OTHER SIMILAR PLAN.
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<PAGE> 12
2. Disclaimers. Any report of a Securities Transaction for the
benefit of a person other than the individual in whose account the
transaction is placed may contain a statement that the report should not
be construed as an admission by the person making the report that he or
she has any direct or indirect beneficial ownership in the Security to
which the report relates.
3. Quarterly Review. At least quarterly, for Securities
Transactions requiring preclearance under this Code, the Preclearance
Officer (or his designee) shall compare the confirmations and periodic
statements provided pursuant to Section II.G.1. above, to the approved
Trade Authorization Request Forms. Such review shall include:
a. Whether the Securities Transaction complied with this Code;
b. Whether the Securities Transaction was authorized in
advance of its placement;
c. Whether the Securities Transaction was executed within two
full trading days of when it was authorized;
d. Whether any Fund or accounts managed by SCM owned the
Securities at the time of the Securities Transaction, and;
e. Whether any Fund or separate accounts managed by SCM
purchased or sold the Securities in the Securities Transaction
within at least 10 days of the Securities Transaction.
4. Availability of Reports. All information supplied pursuant to
this Code will be available for inspection by the Boards of Directors of
SCM and SFDI, the Board of Directors of each Strong Fund, the Code of
Ethics Review Committee, the Compliance Department, the Access Person's
department manager (or designee), any party to which any investigation is
referred by any of the foregoing, the SEC, any self-regulatory
organization of which the Strong Funds, SCM or the Distributor is a
member, and any state securities commission, as well as any attorney or
agent of the foregoing, the Strong Funds, SCM, or the Distributor.
5. Record Retention. SCM shall keep and maintain for at least six
years records of the procedures it follows in connection with the
preclearance and reporting requirements of this Code and, for each
Securities Transaction, the information relied on by the Preclearance
Officer (or his designee) in authorizing the Securities Transaction and
making the post-Securities Transaction determination of Section II.G.3.
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<PAGE> 13
III. FIDUCIARY DUTIES
A. Confidentiality. Access Persons are prohibited from revealing
information relating to the investment intentions, activities or portfolios of
Advisory Clients except to persons whose responsibilities require knowledge of
the information.
B. Gifts. The following provisions on gifts apply only to employees of
SCM and the Distributor.
1. Accepting Gifts. On occasion, because of their position with
SCM, the Distributor, or the Strong Funds, employees may be offered, or
may receive without notice, gifts from clients, brokers, vendors, or
other persons not affiliated with such entities. Acceptance of
extraordinary or extravagant gifts is not permissible. Any such gifts
must be declined or returned in order to protect the reputation and
integrity of SCM, the Distributor, and the Strong Funds. Gifts of a
nominal value (i.e., gifts whose reasonable value is no more than $100 a
year), and customary business meals, entertainment (e.g., sporting
events), and promotional items (e.g., pens, mugs, T-shirts) may be
accepted. Please see the Gift Policy Reminder memorandum dated December
1, 1994 (Appendix 9) for additional information.
If an employee receives any gift that might be prohibited under this
Code, the employee must inform the Compliance Department.
2. Solicitation of Gifts. Employees of SCM or the Distributor may
not solicit gifts or gratuities.
3. Giving Gifts. Employees of SCM or the Distributor may not give
any gift with a value in excess of $100 per year to persons associated
with securities or financial organizations, including exchanges, other
member organizations, commodity firms, news media, or clients of the
firm. Please see the Gift Policy Reminder memorandum dated December 1,
1994 (Appendix 9) for additional information.
C. Payments to Advisory Clients. Access Persons may not make any payments
to Advisory Clients in order to resolve any type of Advisory Client complaint.
All such matters must be handled by the Legal Department.
D. Corporate Opportunities. Access Persons may not take personal
advantage of any opportunity properly belonging to any Advisory Client, SCM, or
the Distributor. This includes, but is not limited to, acquiring Securities
for one's own account that would otherwise be acquired for an Advisory Client.
E. Undue Influence. Access Persons may not cause or attempt to cause any
Advisory Client to purchase, sell, or hold any Security in a manner calculated
to create any personal benefit to the Access Person. If an Access Person or
Immediate Family Member stands
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<PAGE> 14
to materially benefit from an investment decision for an Advisory
Client that the Access Person is recommending or participating in, the Access
Person must disclose to those persons with authority to make investment
decisions for the Advisory Client (or to the Compliance Department if the
Access Person in question is a person with authority to make investment
decisions for the Advisory Client), any Beneficial Interest that the Access
Person (or Immediate Family) has in that Security or an Equivalent Security, or
in the issuer thereof, where the decision could create a material benefit to
the Access Person (or Immediate Family) or the appearance of impropriety. The
person to whom the Access Person reports the interest, in consultation with the
Compliance Department, must determine whether the Access Person will be
restricted in making investment decisions.
F. Service as a Director. No Access Person, other than an Independent
Fund Director, may serve on the board of directors of a publicly-held company
not affiliated with SCM, the Distributor, or the Strong Funds absent prior
written authorization by the Code of Ethics Review Committee. This
authorization will rarely, if ever, be granted and, if granted, will normally
require that the affected Access Person be isolated, through "Chinese Wall" or
other procedures, from those making investment decisions related to the issuer
on whose board the Access Person sits.
G. Involvement in Criminal Matters or Investment-Related Civil
Proceedings. Each Access Person must notify the Compliance Department, as soon
as reasonably practical, if arrested, arraigned, indicted, or pleads no contest
to, any criminal offense (other than minor traffic violations), or if named as
a defendant in any Investment-Related civil proceedings, or any administrative
or disciplinary action.
IV. COMPLIANCE WITH THIS CODE OF ETHICS
A. Code of Ethics Review Committee.
1. Membership, Voting, and Quorum. The Code of Ethics Review
Committee shall initially consist of the General Counsel, President, and
Chief Financial Officer of SCM. The Committee shall vote by majority
vote with two members serving as a quorum. Vacancies may be filled and,
in the case of extended absences or periods of unavailability, alternates
may be selected, by the majority vote of the remaining members of the
Committee; provided, however, in the event that the General Counsel is
unavailable, at least one member of the Committee shall also be a member
of the Compliance Department.
2. Investigating Violations of the Code. The General Counsel or his
or her designee is responsible for investigating any suspected violation
of the Code and shall report the results of each investigation to the
Code of Ethics Review Committee. The Code of Ethics Review Committee is
responsible for reviewing the results of any investigation of any
reported or suspected violation of the Code. Any material violation of
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<PAGE> 15
the Code by an employee of SCM or the Distributor for which significant
remedial action was taken will be reported to the Boards of Directors of
the Strong Funds not later than the next regularly scheduled quarterly
Board meeting.
3. Annual Reports. The Code of Ethics Review Committee will review
the Code at least once a year, in light of legal and business
developments and experience in implementing the Code, and will prepare an
annual report to the Boards of Directors of SCM, the Distributor, and
each Strong Fund that:
a. Summarizes existing procedures concerning personal
investing and any changes in the procedures made during the past
year;
b. Identifies any violation requiring significant remedial
action during the past year, and
c. Identifies any recommended changes in existing restrictions
or procedures based on its experience under the Code, evolving
industry practices, or developments in applicable laws or
regulations.
B. Remedies.
1. Sanctions. If the Code of Ethics Review Committee determines
that an Access Person has committed a violation of the Code, the
Committee may impose sanctions and take other actions as it deems
appropriate, including a letter of caution or warning, suspension of
personal trading rights, suspension of employment (with or without
compensation), fine, civil referral to the SEC, criminal referral, and
termination of the employment of the violator for cause. The Code of
Ethics Review Committee may also require the Access Person to reverse the
trade(s) in question and forfeit any profit or absorb any loss derived
therefrom. The amount of profit shall be calculated by the Code of
Ethics Review Committee and shall be forwarded to a charitable
organization. No member of the Code of Ethics Review Committee may review
his or her own transaction.
2. Sole Authority. The Code of Ethics Review Committee has sole
authority, subject to the review set forth in Section IV.B.3. below, to
determine the remedy for any violation of the Code, including appropriate
disposition of any moneys forfeited pursuant to this provision. Failure
to promptly abide by a directive to reverse a trade or forfeit profits
may result in the imposition of additional sanctions.
3. Review. Whenever the Code of Ethics Review Committee determines
that an Access Person has committed a violation of this Code that merits
significant remedial action, it will report promptly to the Boards of
Directors of SCM and/or the Distributor (as appropriate), and no less
frequently than the quarterly meeting to the Boards of Directors of the
applicable Strong Funds, information relating to the investigation of the
violation, including any sanctions imposed. The Boards of Directors of
SCM, the
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<PAGE> 16
Distributor, and the Strong Funds may modify such sanctions as they deem
appropriate. Such Boards shall have access to all information considered
by the Code of Ethics Review Committee in relation to the case. The Code
of Ethics Review Committee may determine whether to delay the imposition
of any sanctions pending review by the applicable Boards of Directors.
C. Exceptions to the Code. Although exceptions to the Code will rarely,
if ever, be granted, the General Counsel of SCM may grant exceptions to the
requirements of the Code on a case by case basis if he finds that the proposed
conduct involves negligible opportunity for abuse. All material exceptions
must be in writing and must be reported as soon as practicable to the Code of
Ethics Review Committee and to the Boards of Directors of the SCM Funds at
their next regularly scheduled meeting after the exception is granted.
D. Compliance Certification. At least annually, all Access Persons will
be required to certify on the Annual Code of Ethics Questionnaire set forth in
Appendix 6 or on a document substantially in the form of Appendix 6 that they
have complied with the Code in all respects.
E. Inquiries Regarding the Code. The Compliance Department will answer
any questions about this Code or any other compliance-related matters.
October 18, 1996
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<PAGE> 17
Appendix 1
DEFINITIONS
"Access Person" means (1) every director, officer, and general partner of
SCM, the Distributor and the Strong Funds; (2) every employee of SCM and the
Distributor who, in connection with his or her regular functions, makes,
participates in, or obtains information regarding the purchase or sale of a
security by an Advisory Client's account; (3) every employee of SCM and the
Distributor who is involved in making purchase or sale recommendations for an
Advisory Client's account; (4) every employee of SCM and the Distributor who
obtains information concerning such recommendations prior to their
dissemination, and (5) such agents of SCM, the Distributor, or the Funds as the
Compliance Department shall designate who may be deemed an Access Person if
they were an employee of the foregoing. Any uncertainty as to whether an
individual is an Access Person should be brought to the attention of the
Compliance Department. Such questions will be resolved in accordance with, and
this definition shall be subject to, the definition of "Access Person" found in
Rule 17j-1(e)(1) promulgated under the Investment Company Act of 1940.
"Advisory Client" means any client (including both investment companies
and managed accounts) for which SCM serves as an investment adviser or
subadviser, renders investment advice, or makes investment decisions.
"Beneficial Interest" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise,
to profit, or share in any profit derived from, a transaction in the subject
Securities. An Access Person is deemed to have a Beneficial Interest in
Securities owned by members of his or her Immediate Family. Common examples of
Beneficial Interest include joint accounts, spousal accounts, UTMA accounts,
partnerships, trusts, and controlling interests in corporations. Any
uncertainty as to whether an Access Person has a Beneficial Interest in a
Security should be brought to the attention of the Compliance Department. Such
questions will be resolved by reference to the principles set forth in the
definition of "beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated
under the Securities Exchange Act of 1934.
"Code" means this Code of Ethics.
"Compliance Department" means the designated persons in the SCM Legal
Department listed on Appendix 2, as such Appendix shall be amended from time to
time.
"The Distributor" means Strong Funds Distributors, Inc.
"Equivalent Security" means any Security issued by the same entity as the
issuer of a subject Security that is convertible into the equity Security of
the issuer. Examples include options, rights, stock appreciation rights,
warrants, and convertible bonds.
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<PAGE> 18
"Fund" means an investment company registered under the Investment Company
Act of 1940 (or a portfolio or series thereof, as the case may be) for which
SCM serves as an adviser or subadviser.
"Immediate Family" of an Access Person means any of the following persons
who reside in the same household as the Access Person:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the General Counsel determines could
lead to the possible conflicts of interest, diversions of corporate
opportunity, or appearances of impropriety which this Code is intended to
prevent.
"Independent Fund Director" means an independent director of an investment
company for which SCM serves as the advisor.
"Legal Department" means the SCM Legal Department.
"Portfolio Manager" means a person who has or shares principal day-to-day
responsibility for managing the portfolio of an Advisory Client.
"Preclearance Officer" means the person designated as the Preclearance
Officer in Appendix 2 hereof.
"Program Trade" means where a Portfolio Manager directs a trader to do
trades in, at a minimum, 25-30% of the Securities in an account. Program
Trades, generally, arise in three situations: (1) cash or other assets are
being added to an account and the Portfolio Manager instructs the trader that
new securities are to be bought in a manner that maintains the account's
existing allocations; (2) cash is being withdrawn from an account and the
Portfolio Manager instructs the trader that securities are to be sold in a
manner that maintains the account's current securities allocations; and (3) a
new account is established and the Portfolio Manager instructs the trader to
buy specific securities in the same allocation percentages as are held by other
client accounts.
"SEC" means the Securities and Exchange Commission.
"Security" includes stock, notes, bonds, debentures, and other evidences
of indebtedness (including loan participations and assignments), limited
partnership interests, investment contracts, and all derivative instruments of
the foregoing, such as options and warrants. Security
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<PAGE> 19
does not include futures, options on futures, or options on currencies, but the
purchase and sale of such instruments are nevertheless subject to the reporting
requirements of the Code.
"Securities Transaction" means a purchase or sale of Securities in which
an Access Person or a members of his or her Immediate Family has or acquires a
Beneficial Interest.
"SCM" means Strong Capital Management, Inc.
"Strong Funds" means the investment companies comprising the Strong Family
of Mutual Funds.
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Appendix 2
CONTACT PERSONS
PRECLEARANCE OFFICER
1. Thomas P. Lemke, General Counsel of SCM
DESIGNEES OF PRECLEARANCE OFFICER
1. Jeffrey C. Nellessen
2. Stephen J. Shenkenberg
COMPLIANCE DEPARTMENT
1. Thomas P. Lemke
2. Jeffrey C. Nellessen
3. Stephen J. Shenkenberg
4. Jeffery A. Arnson
5. Donna J. Lelinski
CODE OF ETHICS REVIEW COMMITTEE
1. John Dragisic, President of SCM
2. Chief Financial Officer of SCM
3. Thomas P. Lemke, General Counsel of SCM
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Appendix 3
PERSONAL HOLDINGS IN SECURITIES
In accordance with Section II.A. of the Code of Ethics, please provide a
list of all Securities (other than open-end investment companies) in which each
Access Person has a Beneficial Interest, including those in accounts of the
Immediate Family of the Access Person and all Securities in non-client accounts
for which the Access Person makes investment decisions.
(1) Name of Access Person: _________________________
(2) If different than (1), name of the person
in whose name the account is held: _________________________
(3) Relationship of (2) to (1): _________________________
(4) Broker at which Account is maintained: _________________________
(5) Account Number: _________________________
(6) Contact person at Broker and phone number _________________________
(7) For each account, attach the most recent account statement listing
Securities in that account. If the Access Person owns Beneficial
Interests in Securities that are not listed in an attached account
statement, list them below:
Name of Security Quantity Value Custodian
---------------- -------- ----- ---------
1. ____________________________________________________________________________
2. ____________________________________________________________________________
3. ____________________________________________________________________________
4. ____________________________________________________________________________
5. ____________________________________________________________________________
6. ____________________________________________________________________________
(ATTACH SEPARATE SHEET IF NECESSARY.)
I certify that this form and the attached statements (if any) constitute
all of the Securities in which I have a Beneficial Interest, including those
held in accounts of my Immediate Family.
________________________
Access Person Signature
Dated: _____________ ________________________
Print Name
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<PAGE> 22
Appendix 4
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
AND LIMITED POWER OF ATTORNEY
I acknowledge that I have received the Code of Ethics dated October 18,
1996, and represent that:
1. In accordance with Section II.A. of the Code of Ethics, I
will fully disclose the Securities holdings in which I have, or a
member of my Immediate Family has, a Beneficial Interest.*
2. In accordance with Section II.B.1. of the Code of Ethics,
I will obtain prior authorization for all Securities Transactions
in which I have, or a member of my Immediate Family has, a
Beneficial Interest except for transactions exempt from
preclearance under Section II.B. 2. of the Code of Ethics.*
3. In accordance with Section II.G.1 of the Code of Ethics, I
will report all Securities Transactions in which I have, or a
member of my Immediate Family has, a Beneficial Interest, except
for transactions exempt from reporting under Section II.G.1. of
the Code of Ethics.
4. I will comply with the Code of Ethics in all other
respects.
5. I agree to disgorge and forfeit any profits on prohibited
transactions in accordance with the requirements of the Code.*
I hereby appoint Strong Capital Management, Inc. as my attorney-in-fact
for the purpose of placing orders for and on my behalf to buy, sell, tender,
exchange, covert, and otherwise effectuate transactions in any and all stocks,
bonds, options, and other securities. I agree that Strong Capital Management,
Inc. shall not be liable for the consequences of any errors made by the
executing brokers in connection with such transactions.*
__________________________
Access Person Signature
__________________________
Print Name
Dated: __________
* Representations (1), (2) and (5) and the Limited Power of Attorney do
not apply to Independent Fund Directors.
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Ctrl. No:_________________________ Appendix 5
STRONG CAPITAL MANAGEMENT, INC.
PRECLEARANCE REQUEST FOR ACCESS PERSONS
1. Name of Access Person (and trading entity, if different): __________________
2. Name and symbol of Security: _______________________________________________
3. Maximum quantity to be purchased or sold: __________________________________
4. Name and phone number of broker to effect transaction: _____________________
<TABLE>
<S> <C> <C> <C>
5. Check if applicable: Purchase ____ Market Order ____
Sale ____ Limit Order ____ (Limit Order Price: ___________)
Not Held Order ____
</TABLE>
6. In connection with the foregoing transaction, I hereby make the foregoing
representations and warranties:
(a) I do not possess any material nonpublic information regarding the
Security or the issuer of the Security.
(b) To my knowledge:
(1) The Securities or "equivalent" securities (i.e., securities
issued by the same issuer) [ ARE / ARE NOT ] (circle one) held by
any investment companies or other accounts managed by SCM;
(2) There are no outstanding purchase or sell orders for this
Security (or any equivalent security) by any investment companies or
other accounts managed by SCM; and
(3) None of the Securities (or equivalent securities) are actively
being considered for purchase or sale by any investment companies or
other accounts managed by SCM.
(c) The Securities are not being acquired in an initial public offering.
(d) The Securities are not being acquired in a private placement or, if
they are, I have reviewed Section II.D.3. of the Code and have attached
hereto a written explanation of such transaction.
(e) If I am a Portfolio Manager, none of the accounts I manage purchased
or sold these Securities (or equivalent securities) within the past
seven calendar days and I do not expect any such client accounts to
purchase or sell these Securities (or equivalent securities) within
seven calendar days of my purchase or sale.
(f) If I am purchasing these Securities, I have not directly or
indirectly (through any member of my Immediate Family, any account in
which I have a Beneficial Interest or otherwise) sold these Securities
(or equivalent securities) in the prior 60 days.
(g) If I am selling these Securities, I have not directly or indirectly
(through any member of my Immediate Family, any account in which I have
a beneficial Interest or otherwise) purchased these Securities (or
equivalent securities) in the prior 60 days.
(h) I have read the SCM Code of Ethics within the prior 12 months and
believe that the proposed trade fully complies with the requirements of
the Code.
______________________________ ______________________________
Access Person Print Name
CERTIFICATION OF ACCESS PERSON DESIGNEE
The undersigned hereby certifies that the above Access Person (a) directly
instructed me to complete this Form on his or her behalf, (b) to the best of my
knowledge, was out of the office at the time of such instruction and has not
returned, and (c) confirmed to me that the representations and warranties
contained in this form are accurate.
________________________________ ______________________________
Access Person Designee Print Name
AUTHORIZATION
Authorized By: _____________________ Date: _____________ Time: _____________
PLACEMENT
Trader:____________________ Date:___________ Time:_____________ Qty:_________
EXECUTION
Trader:____________________ Date:___________ Time:_____________
Qty:____________ Price:________________________
(Original to Compliance Department, Yellow copy to Trading
Department, Pink copy to Access Person)
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<PAGE> 24
Confidential Appendix 6
ANNUAL CODE OF ETHICS QUESTIONNAIRE (1)
For ACCESS PERSONS of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
September 18, 1996
Associate: ____________________________
I. Introduction
Access Persons (2) are required to answer all of the questions below for the
year September 1, 1995, through August 31, 1996, and then sign and return the
questionnaire by FRIDAY, SEPTEMBER 27 to Jeff Nellessen in the Legal
Department. ANSWERS OF "NO" TO ANY OF THE QUESTIONS MUST BE EXPLAINED ON THE
"ATTACHMENT" ON PAGE 3. All information provided is kept confidential to the
maximum extent possible. If you have any questions, please contact Jeff
Nellessen at extension 3514.
II. Annual certification of compliance with the Code of Ethics
A. Have you, in accordance with Section II.B.1. of the Code of Ethics,
obtained preclearance for all Securities (3) Transactions in which you
have, or a member of your Immediate Family has, a Beneficial Interest,
except for transactions exempt from preclearance under Section II.B.2.
of the Code of Ethics? (If there have been no Securities Transactions,
circle "Yes".)
YES NO (CIRCLE ONE)
B. Have you, in accordance with Section II.G.1. of the Code of Ethics,
reported all Securities Transactions in which you have, or a member of
your Immediate Family has, a Beneficial Interest, except for
transactions exempt from reporting under Section II.G.1. of the Code of
Ethics? In particular, have you arranged for the Legal Department to
receive directly from your broker duplicate transaction confirmations
and duplicate periodic statements for each brokerage account in which
you have, or a member of your Immediate Family has, a Beneficial
Interest? (4) (If there are no brokerage accounts, circle "Yes".)
YES NO (CIRCLE ONE)
- -------------------------
1 All definitions used in this questionnaire have the same meaning as those in
the Code of Ethics.
2 Independent Fund Directors of the Strong Funds must complete a separate
questionnaire.
3 Security, as defined, does NOT include open-end investment companies,
including the Strong Funds.
4 Please contact Jeff Nellessen (extension 3514) if you are uncertain as to
what confirmations and statements you have arranged for the Legal Department to
receive.
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<PAGE> 25
C. Have you complied with the Code of Ethics in all other respects,
including the gift policy (Section III.B.)?
YES NO (CIRCLE ONE)
LIST ON THE ATTACHMENT ALL REPORTABLE5 GIFTS6 GIVEN OR RECEIVED FOR THE
YEAR SEPTEMBER 1, 1995, THROUGH AUGUST 31, 1996, NOTING THE MONTH,
"COUNTERPARTY," GIFT DESCRIPTION, AND ESTIMATED VALUE. IF NONE, SO STATE.
III. Annual certification of compliance with Insider Trading Policy
Have you complied in all respects with the Insider Trading Policy (dated
October 20, 1995)?
YES NO (CIRCLE ONE)
IV. Disclosure of directorships statement
A. I am not, nor is any member of my Immediate Family, a director and/or
an officer of any for-profit, privately held companies.7 (If you are
NOT, answer YES.)
YES NO (CIRCLE ONE)
If "NO", please list on the Attachment each company for which you are, or
a member of your Immediate Family is, a director.
B. If the response to A. is "NO", is there a reasonable expectation that
any of the companies for which you are, or a member of your Immediate
Family is, a director and/or an officer, will go public or be acquired
within the next 12 months?
YES NO (CIRCLE ONE)
(If the answer is "YES", please be prepared to discuss this matter with a
member of the Legal Department in the near future.)
ANSWERS OF "NO" TO ANY OF THE ABOVE QUESTIONS MUST BE EXPLAINED ON THE
"ATTACHMENT" ON PAGE 3.
I hereby represent that, to the best of my knowledge, the foregoing responses
are true and complete. I understand that any untrue or incomplete response may
be subject to disciplinary action by the firm.
___________________________________
Access Person Signature
Dated: _________________________
Print Name ________________________
____________________________
5 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
6 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
7 Per Section III.F. of the Code of Ethics, no Access Person, other than an
Independent Fund Director, may serve on the board of directors of a publicly
held company.
21
<PAGE> 26
ATTACHMENT TO
ANNUAL CODE OF ETHICS QUESTIONNAIRE
(to explain all "NO" answers and to list reportable(8) gifts(9) )
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
GIFTS(8),(9) for the year September 1, 1995, through August 31, 1996.
(If NONE, so state):
Month Gift Giver / Receiver Gift Description Estimated Value
----- --------------------- ---------------- ---------------
1. _____________________________________________________________________________
2. _____________________________________________________________________________
3. _____________________________________________________________________________
4. _____________________________________________________________________________
5. _____________________________________________________________________________
6. _____________________________________________________________________________
7. _____________________________________________________________________________
8. _____________________________________________________________________________
9. _____________________________________________________________________________
10._____________________________________________________________________________
(CONTINUE ON AN ADDITIONAL SHEET IF NECESSARY.)
__________________
8 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
9 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
22
<PAGE> 27
Appendix 7
LIST OF BROAD-BASED INDICES
Listed below are the broad-based indices as designated by the Compliance
Department. See Section II.B.3. for additional information.
- -------------------------------------------------
DESCRIPTION OF OPTION SYMBOL EXCHANGE
- -------------------------------------------------
Computer Technology XCI AMEX
- -------------------------------------------------
Eurotop 100 ERT AMEX
- -------------------------------------------------
Hong Kong Option Index HKO AMEX
- -------------------------------------------------
Inter@ctive Wk. Internet Index INX CBOE
- -------------------------------------------------
Japan Index JPN AMEX
- -------------------------------------------------
Major Market Index * XMI AMEX
- -------------------------------------------------
Morgan Stanley High Tech Index MSH AMEX
- -------------------------------------------------
NASDAQ-100 NDX CBOE
- -------------------------------------------------
Pacific High Tech Index XPI PSE
- -------------------------------------------------
Russell 2000 * RUT CBOE
- -------------------------------------------------
Semiconductor Sector SOX PHLX
- -------------------------------------------------
S & P 100 * OEX CBOE
- -------------------------------------------------
S & P 500 * SPX CBOE
- -------------------------------------------------
Technology Index TXX CBOE
- -------------------------------------------------
Value Line Index * VLE PHLX
- -------------------------------------------------
Wilshire Small Cap Index WSX PSE
- -------------------------------------------------
- -------------------------------------------------
* Includes LEAPS.
- -------------------------------------------------
23
<PAGE> 28
Appendix 8
FORM LETTER TO BROKER OR BANK
[DATE]
<Broker Name>
<Broker Address>
<Broker City, State and Zip>
Subject: Account Number_____________________
Account Registration_______________
Dear ____________:
Strong Capital Management, Inc. ("SCM"), my employer, is a registered
investment adviser as well as the indirect parent of an NASD member firm. The
Code of Ethics of SCM requires that I have certain personal securities
transactions placed on my behalf by the trading desk of SCM. Accordingly,
please send me the necessary forms or instructions that you will require in
order to enable the securities traders of SCM to place orders on my behalf.
In addition, you are requested to send duplicate confirmations of individual
transactions as well as duplicate periodic statements for the referenced
account to SCM. Please address the confirmations and statements directly to:
Confidential
Chief Compliance Officer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Your cooperation is most appreciated. If you have any questions regarding these
requests, please contact me or Mr. Jeffrey C. Nellessen of Strong at (414)
359-3400.
Sincerely,
<Name of Access Person>
Copy: Mr. Jeffrey C. Nellessen
24
<PAGE> 29
Appendix 9
GIFT POLICY
MEMORANDUM
TO: All Associates
FROM: Thomas P. Lemke
DATE: December 1, 1994
SUBJECT: Gift Policy Reminder
With the Holiday season upon us, I wanted to remind you of our firm's gift
policy, which covers both GIVING GIFTS TO and ACCEPTING GIFTS FROM clients,
brokers, persons with whom we do business, or others (collectively, "vendors").
It is based on the applicable requirements of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. ("NASD") and is included
as part of the firm's Codes of Ethics.
Under our policy, associates may not give gifts to or accept gifts from
vendors with a value in excess of $100 per person per year and must report to
the firm annually if they accept certain types of gifts. The NASD defines a
"gift" to include any kind of gratuity. Since giving or receiving any gifts in
a business setting may give rise to an appearance of impropriety or may raise a
potential conflict of interest, we are relying on your professional attitude
and good judgment to ensure that our policy is observed to the fullest extent
possible. The discussion below is designed to assist you in this regard.
If you have any questions about the appropriateness of any gift, contact
Legal.
1. GIFTS GIVEN BY ASSOCIATES
Under applicable NASD rules, an associate may not give any gift with a
value in excess of $100 per year to any person associated with a securities or
financial organization, including exchanges, broker-dealers, commodity firms,
the news media, or clients of the firm. Please note, however, that the firm
may not take a tax deduction for any gift with a value exceeding $25.
This memorandum is not intended to authorize any associate to give a gift
to a vendor -- appropriate supervisory approval must be obtained before giving
any gifts.
2. GIFTS ACCEPTED BY ASSOCIATES
On occasion, because of their position within the firm, associates may
be offered, or may receive without notice, gifts from vendors. Associates may
not accept any gift or form of entertainment from vendors (e.g., tickets to the
theater or a sporting event where the vendor does not
25
<PAGE> 30
accompany the associate) other than gifts of NOMINAL VALUE, which the
NASD defines as under $100 in total from any vendor in any year (managers may,
if they deem it appropriate for their department, adopt a lower dollar
ceiling). Any gift accepted by an associate must be reported to the firm,
subject to certain exceptions (see heading 4 below). In addition, note that
our gift policy does not apply to normal and customary business entertainment
or to personal gifts (see heading 3 below).
Associates may not accept a gift of cash or a cash equivalent (e.g., gift
certificates) in ANY amount, and under no circumstances may an associate
solicit a gift from a vendor.
Associates may wish to have gifts from vendors donated to charity,
particularly where it might be awkward or impolite for an associate to decline
a gift not permitted by our policy. In such case, the gift should be forwarded
to Mary Beitzel in Legal, who will arrange for it to be donated to charity.
Similarly, associates may wish to suggest to vendors that, in lieu of an annual
gift, the vendors make a donation to charity. In either situation discussed
in this paragraph, an associate would not need to report the gift to the firm
(see heading 4 below).
3. EXCLUSION FOR BUSINESS ENTERTAINMENT/PERSONAL GIFTS
Our gift policy does not apply to normal and customary business meals and
entertainment with vendors. For example, if an associate has a business meal
and attends a sporting event or show with a vendor, that activity would not be
subject to our gift policy, provided the vendor is present. If, on the other
hand, a vendor gives an associate tickets to a sporting event and the associate
attends the event without the vendor also being present, the tickets would be
subject to the dollar limitation and reporting requirements of our gift policy.
Under no circumstances may associates accept business entertainment that is
extraordinary or extravagant in nature.
In addition, our gift policy does not apply to usual and customary gifts
given to or received from vendors based on a personal relationship (e.g., gifts
between an associate and a vendor where the vendor is a family member or
personal friend).
4. REPORTING
The NASD requires gifts to be reported to the firm. Except as noted
below, associates must report annually all gifts given to or accepted from
vendors (Legal will distribute the appropriate reporting form to associates).
Associates are NOT required to report the following: (i) usual and
customary promotional items given to or received from vendors (e.g., hats,
pens, T-shirts, and similar items marked with a firm's logo), (ii) items
donated to charity through Mary Beitzel in Legal, or (iii) food items consumed
on the firm's premises (e.g., candy, popcorn, etc.).
26
<PAGE> 1
EXHIBIT 99.B21.2
CODE OF ETHICS
FOR NON-ACCESS PERSONS OF
STRONG CAPITAL MANAGEMENT, INC.,
STRONG FUNDS DISTRIBUTORS, INC., AND
HERITAGE RESERVE DEVELOPMENT
CORPORATION, INC.
[STRONG FUNDS LOGO]
STRONG CAPITAL MANAGEMENT, INC.
October 18, 1996
<PAGE> 2
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
Table of Contents
I. INTRODUCTION .............................................................1
A. Fiduciary Duty ...........................................................1
1. Place the interests of clients first .....................................1
2. Avoid taking inappropriate advantage of their position ...................1
3. Conduct all personal Securities Transactions in full compliance with this
Code including the reporting requirements ....................................1
B. Appendices to the Code ...................................................1
1. Definitions ..............................................................1
2. Acknowledgment of Receipt of Code of Ethics ..............................2
3. Annual Code of Ethics Questionnaire ......................................2
4. Form Letter to Broker or Bank ............................................2
5. Gift Policy ..............................................................2
II. TRADE REPORTING REQUIREMENTS .............................................2
A. Reporting Requirement ....................................................2
B. Disclaimers ..............................................................2
C. Availability of Reports ..................................................2
D. Record Retention .........................................................2
III. FIDUCIARY DUTIES .......................................................3
A. Confidentiality ..........................................................3
B. Gifts To or From Employees ...............................................3
1. Accepting Gifts ..........................................................3
2. Solicatation of Gifts ....................................................3
3. Giving Gifts .............................................................3
C. Payments to Advisory Clients or Shareholders .............................3
D. Corporate Opportunities ..................................................3
E. Service as a Director ....................................................3
F. Involvement in Criminal Matters or Investment-Related Civil Proceedings ..4
IV. COMPLIANCE WITH THIS CODE OF ETHICS .....................................4
A. Code of Ethics Review Committee ..........................................4
1. Membership, Voting, and Quorum ...........................................4
2. Investigating Violations of the Code .....................................4
B. Remedies .................................................................4
C. Compliance Certification .................................................4
D. Inquiries Regarding the Code .............................................4
i
<PAGE> 3
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
Table of Appendices
Appendix 1 (Definitions).................................................... 5
Appendix 2 (Acknowledgment of Receipt of Code of Ethics) ................... 7
Appendix 3 (Annual Code of Ethics Questionnaire) ........................... 8
Appendix 4 (Form Letter to Broker or Bank) .................................11
Appendix 5 (Gift Policy)....................................................12
ii
<PAGE> 4
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
I. INTRODUCTION
A. Fiduciary Duty. This Code of Ethics is based upon the principle that
employees of Strong Capital Management, Inc. ("SCM"), Strong Funds
Distributors, Inc. ("the Distributor"), Heritage Reserve Development
Corporation, Inc. ("HRDC"), and such other affiliated entities of the foregoing
that may from time to time adopt this Code (each of which is individually
referred to herein as a "Company") have a fiduciary duty to place the interests
of clients ahead of their own. Employees must avoid activities, interests, and
relationships that might interfere with making decisions in the best interests
of each Company and its clients.
As fiduciaries, employees must at all times:
1. Place the interests of clients first. Employees must
scrupulously avoid serving their own personal interests ahead of the
interests of the clients of each Company. An employee may not induce or
cause a client to take action, or not to take action, for personal
benefit, rather than for the benefit of the client.
2. Avoid taking inappropriate advantage of their position. The
receipt of investment opportunities, perquisites, or gifts from persons
seeking business with the Strong Funds, any of the Companies, or their
clients could call into question the exercise of an employee's
independent judgment. Employees may not, for example, use their
knowledge of portfolio transactions to profit by the market effect of
such transactions.
3. Conduct all personal Securities Transactions in full compliance
with this Code including the reporting requirements.
Doubtful situations should be resolved in favor of clients and each
Company. Technical compliance with the Code's procedures will not
automatically insulate from scrutiny any personal Securities Transactions that
indicate an abuse of fiduciary duties.
B. Appendices to the Code. The appendices to this Code, including the
definitions set forth in Appendix 1, are attached to and are a part of the
Code. The appendices include the following:
1. Definitions (capitalized terms in the Code are defined in
Appendix 1),
1
<PAGE> 5
2. Acknowledgment of Receipt of Code of Ethics (Appendix 2),
3. Annual Code of Ethics Questionnaire (Appendix 3),
4. Form Letter to Broker or Bank (Appendix 4), and
5. Gift Policy (Appendix 5)
II. TRADE REPORTING REQUIREMENTS
A. Reporting Requirement. EVERY EMPLOYEE AND MEMBERS OF HIS OR HER
IMMEDIATE FAMILY MUST ARRANGE FOR THE COMPLIANCE DEPARTMENT TO RECEIVE DIRECTLY
FROM ANY BROKER, DEALER, OR BANK THAT EFFECTS ANY SECURITIES TRANSACTION, A
DUPLICATE COPY OF EACH CONFIRMATION FOR EACH SUCH TRANSACTION AND PERIODIC
STATEMENTS FOR EACH BROKERAGE ACCOUNT IN WHICH SUCH EMPLOYEE HAS A BENEFICIAL
INTEREST. Attached hereto as Appendix 4 is a form letter that may be used to
request such documents from such entities. An employee must arrange to have
duplicate confirmations and periodic statements sent within 30 days. If unable
to make such arrangements, the employee must immediately notify the Compliance
Department. THE FOREGOING DOES NOT APPLY TO TRANSACTIONS AND HOLDINGS IN (1)
MUTUAL FUNDS (INCLUDING BUT NOT LIMITED TO THE STRONG FUNDS), (2) BANK
CERTIFICATES OF DEPOSIT ("CDS"), (3) EQUITY SECURITIES HELD IN DIVIDEND
REINVESTMENT PLANS ("DRIPS"), OR (4) SECURITIES OF THE EMPLOYER OF A MEMBER OF
THE EMPLOYEE'S IMMEDIATE FAMILY IF SUCH SECURITIES ARE BENEFICIALLY OWNED
THROUGH PARTICIPATION BY THE IMMEDIATE FAMILY MEMBER IN A PROFIT SHARING PLAN,
401(K) PLAN, ESOP, OR OTHER SIMILAR PLAN.
B. Disclaimers. Any employee who files a report of a Securities
Transaction for the benefit of a person other than the employee may include in
such report a statement that the report should not be construed as an admission
by the employee making the report that he or she has any direct or indirect
beneficial ownership in the Security to which the report relates.
C. Availability of Reports. All information supplied pursuant to this
Code will be available for inspection by the Boards of Directors of SCM and
SFDI, the Board of Directors of each Strong Fund, the Code of Ethics Review
Committee, the Compliance Department, the employees department manager (or
designee), any party to which any investigation is referred by any of the
foregoing, the SEC, any self-regulatory organization of which the Strong Funds,
SCM, or the Distributor is a member, any state securities commission, as well
as any attorney or agent of the foregoing, the Strong Funds, SCM, or the
Distributor.
D. Record Retention. The Company shall keep and maintain for at least six
years records of the procedures it follows in connection with the reporting
requirements of this Code.
2
<PAGE> 6
III. FIDUCIARY DUTIES
A. Confidentiality. Employees are prohibited from revealing information
relating to the investment intentions, activities, or portfolios of Advisory
Clients except to persons whose responsibilities require knowledge of the
information.
B. Gifts To or From Employees.
1. Accepting Gifts. On occasion, because of their relationship with
the Company and its affiliates, employees thereof may be offered, or may
receive without notice, gifts from clients, brokers, vendors, or other
persons not affiliated with the Company. Acceptance of extraordinary or
extravagant gifts is not permissible. Any such gifts must be declined or
returned in order to protect the reputation and integrity of the Company.
Gifts of a nominal value (i.e., gifts whose reasonable value is no more
than $100 a year), and customary business meals, entertainment (e.g.,
sporting events), and promotional items (e.g., pens, mugs, T-shirts) may
be accepted. Please see the Gift Policy Reminder memorandum dated
December 1, 1994 (Appendix 5) for additional information.
If an employee receives any gift that might be prohibited under this
Code, the employee must inform the Compliance Department immediately.
2. Solicitation of Gifts. Employees may not solicit gifts or
gratuities from clients, brokers, vendors, or other persons with which
the Company has a relationship.
3. Giving Gifts. Employees may not give any gift with a value in
excess of $100 per year to persons associated with securities or
financial organizations, including exchanges, other member organizations,
commodity firms, news media, or clients of the Company. Please see the
Gift Policy Reminder memorandum dated December 1, 1994 (Appendix 5) for
additional information.
C. Payments to Advisory Clients or Shareholders. Employees may not make
any payments to Advisory Clients or Shareholders in order to resolve any type
of Advisory Client or Shareholder complaint. All such matters must be handled
by the Legal Department.
D. Corporate Opportunities. Employees may not take personal advantage of
any opportunity properly belonging to any client or Company.
E. Service as a Director. No employee may serve on the board of directors
of a publicly-held company not affiliated with a Company or the Strong Funds
absent prior written authorization by the Code of Ethics Review Committee.
This authorization will rarely, if ever, be granted and, if granted, will
normally require that the affected employee be isolated, through "Chinese Wall"
or other procedures, from those making investment decisions related to the
issuer on whose board the employee sits.
3
<PAGE> 7
F. Involvement in Criminal Matters or Investment-Related Civil
Proceedings. Each Non-Access Person must notify the Compliance Department, as
soon as reasonably practical, if arrested, arraigned, indicted, or pleads no
contest to, any criminal offense (other than minor traffic violations), or if
named as a defendant in any Investment-Related civil proceedings, or any
administrative or disciplinary action.
IV. COMPLIANCE WITH THIS CODE OF ETHICS
A. Code of Ethics Review Committee.
1. Membership, Voting, and Quorum. The Code of Ethics Review
Committee shall initially consist of the General Counsel, President, and
Chief Financial Officer of SCM. The Committee shall vote by majority
vote with two members serving as a quorum. Vacancies may be filled and,
in the case of extended absences or periods of unavailability, alternates
may be selected, by the majority vote of the remaining members of the
Committee; provided, however, in the event that the General Counsel is
unavailable, at least one member of the Committee shall also be a member
of the Compliance Department.
2. Investigating Violations of the Code. The General Counsel or his
or her designee is responsible for investigating any suspected violation
of the Code and shall report the results of each investigation to the
Code of Ethics Review Committee. The Code of Ethics Review Committee is
responsible for reviewing the results of any investigation of any
reported or suspected violation of the Code.
B. Remedies. If the Code of Ethics Review Committee determines that an
employee has committed a violation of the Code, the Committee may impose
sanctions and take other actions as it deems appropriate, including, but not
limited to, suspension of employment (with or without compensation) and
termination of the employment of the violator for cause. The Code of Ethics
Review Committee may also require the employee to reverse the trade(s) in
question and forfeit any profit or absorb any loss derived therefrom. Any
profit shall be forwarded to a charitable organization.
C. Compliance Certification. At least annually, all employees will be
required to certify on the Annual Code of Ethics Questionnaire set forth in
Appendix 2 or on a document substantially in the form of Appendix 2 that they
have complied with the Code in all respects.
D. Inquiries Regarding the Code. The Compliance Department will answer
any questions about this Code or any other compliance-related matters.
October 18, 1996
4
<PAGE> 8
Appendix 1
DEFINITIONS
"Advisory Client" means any client (including both investment companies
and managed accounts) for which SCM serves as an investment adviser or
subadviser, renders investment advice, or makes investment decisions.
"Beneficial Interest" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise,
to profit, or share in any profit derived from, a transaction in the subject
Securities. An employee is deemed to have a Beneficial Interest in Securities
owned by members of his or her Immediate Family. Common examples of Beneficial
Interest include joint accounts, spousal accounts, UTMA accounts, partnerships,
trusts, and controlling interests in corporations. Any uncertainty as to
whether an employee has a Beneficial Interest in a Security should be brought
to the attention of the Compliance Department. Such questions will be resolved
in accordance with, and this definition shall be subject to, the definition of
"beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated under the
Securities Exchange Act of 1934.
"Company" means "SCM", "the Distributor", "HRDC", and such other
affiliated entities of the foregoing that may from time to time adopt this
Code.
"Code" means this Code of Ethics.
"Compliance Department" means the designated persons in the Strong Legal
Department.
"Distributor" means Strong Funds Distributors, Inc.
"HRDC" means Heritage Reserve Development Corporation, Inc.
"Immediate Family" of an employee means any of the following persons who
reside in the same household as the employee:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the General Counsel determines could
lead to the possible conflicts of interest, diversions of corporate
opportunity, or appearances of impropriety which this Code is intended to
prevent.
"Legal Department" means the SCM Legal Department.
5
<PAGE> 9
"SEC" means the Securities and Exchange Commission.
"Security" includes stock, notes, bonds, debentures, and other evidences
of indebtedness (including loan participations and assignments), limited
partnership interests, investment contracts, and all derivative instruments of
the foregoing, such as options and warrants. Security does not include
futures, options on futures, or options on currencies, but the purchase and
sale of such instruments are nevertheless subject to the reporting requirements
of the Code.
"Securities Transaction" means a purchase or sale of Securities in which
an employee or a members of his or her Immediate Family has or acquires a
Beneficial Interest.
"Shareholder" means a shareholder in any of the Strong Funds.
"SCM" means Strong Capital Management, Inc.
"Strong Funds" means the investment companies comprising the Strong Family
of Mutual Funds.
6
<PAGE> 10
Appendix 2
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
I acknowledge that I have received and read the Code of Ethics dated
October 18, 1996, and represent that:
1. I will report all Securities Transactions in which I have, or a
member of my Immediate Family has, a Beneficial Interest, except for
transactions and holdings in (1) mutual funds (including but not limited
to the Strong Funds), (2) bank certificates of deposit ("CDs"), (3)
equity securities held in dividend reinvestment plans ("DRIPs"), or (4)
securities of the employer of a member of the employee's Immediate Family
if such securities are beneficially owned through participation by the
Immediate Family member in a Profit Sharing plan, 401(k) plan, ESOP, or
other similar plan.
2. I will comply with the Code of Ethics in all other respects.
_________________________________
Employee Signature
_________________________________
Print Name
Dated: ________________________________
7
<PAGE> 11
Confidential Appendix 3
ANNUAL CODE OF ETHICS QUESTIONNAIRE (1)
For NON-ACCESS PERSONS (2) of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc.,
and Heritage Reserve Development Corporation.
September 18, 1996
Associate: ____________________________
I. Introduction
Non-Access Persons are required to answer all of the questions below for the
year September 1, 1995, through August 31, 1996, sign the questionnaire and
return it to the Legal Department (an intra-office mail slip is copied on the
back of the last page) by FRIDAY, SEPTEMBER 27. ANSWERS OF "NO" TO ANY OF
THE QUESTIONS MUST BE EXPLAINED ON THE "ATTACHMENT" ON PAGE 3. If you have
any questions, please contact Jeffery Arnson (x3590) or Donna Lelinski
(x3362) in the Legal Department.
II. Annual certification of compliance with the Code of Ethics
A. Have you, in accordance with Section II.A. of the Code of Ethics,
reported all Securities Transactions in which you have, or a member of
your Immediate Family has, a Beneficial Interest, except for
transactions in mutual funds (including the Strong Funds), dividend
reinvestment plans ("DRIPs"), and certificates of deposit (CDs"). (If
there are no brokerage accounts, circle "Yes".)
YES NO (CIRCLE ONE)
B. Have you complied with the Code of Ethics in all other respects,
including the gift policy (Section III.B.)?
YES NO (CIRCLE ONE)
LIST ON THE ATTACHMENT ALL REPORTABLE (3) GIFTS (4) GIVEN OR RECEIVED FOR
THE YEAR SEPTEMBER 1, 1995, THROUGH AUGUST 31, 1996, NOTING THE MONTH,
"COUNTERPARTY," GIFT DESCRIPTION, AND ESTIMATED VALUE. IF NONE, SO STATE.
________________________
1 All definitions used in this questionnaire have the same meaning as those in
the Code of Ethics.
2 Access Persons must complete a separate questionnaire.
3 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
4 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
8
<PAGE> 12
III. Annual certification of compliance with Insider Trading Policy
Have you complied in all respects with the Insider Trading Policy (dated
October 20, 1995)?
YES NO (CIRCLE ONE)
IV. Disclosure of directorships statement
A. I am not, nor is any member of my Immediate Family, a director and/or
an officer of any for-profit, privately held companies.(5) (If you are
NOT, answer YES.)
YES NO (CIRCLE ONE)
If "NO", please list on the Attachment each company for which you are,
or a member of your Immediate Family is, a director.
B. If the response to A. is "NO", is there a reasonable expectation that
any of the companies for which you are, or a member of your Immediate
Family is, a director and/or an officer, will go public or be acquired
within the next 12 months?
YES NO (CIRCLE ONE)
(If the answer is "YES", please be prepared to discuss this matter
with a member of the Legal Department in the near future.)
**********************
ANSWERS OF "NO" TO ANY OF THE ABOVE QUESTIONS MUST BE
EXPLAINED ON THE "ATTACHMENT" ON PAGE 3.
**********************
I hereby represent that, to the best of my knowledge, the foregoing responses
are true and complete. I understand that any untrue or incomplete response may
be subject to disciplinary action by the firm.
_____________________________
Non-Access Person Signature
Dated: ________________ _____________________________
Print Name
_________________________
(5) Per Section III.E. of the Code of Ethics, no associate may serve on the
board of directors of a publicly held company.
9
<PAGE> 13
ATTACHMENT TO
ANNUAL CODE OF ETHICS QUESTIONNAIRE
(to explain all "NO" answers and to list reportable(6) gifts(7) )
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
______________GIFTS(6),(7) for the year September 1, 1995, through August 31,
1996. (If NONE, so state):
Month Gift Giver / Receiver Gift Description Estimated Value
----- --------------------- ---------------- ---------------
1. _____________________________________________________________________________
2. _____________________________________________________________________________
3. _____________________________________________________________________________
4. _____________________________________________________________________________
5. _____________________________________________________________________________
6. _____________________________________________________________________________
7. _____________________________________________________________________________
8. _____________________________________________________________________________
9. _____________________________________________________________________________
10._____________________________________________________________________________
(CONTINUE ON AN ADDITIONAL SHEET IF NECESSARY.)
___________________________
(6) Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
(7) Entertainment -- i.e., a meal or activity with the vendor present -- does
not have to be reported.
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Appendix 4
FORM LETTER TO BROKER OR BANK
[DATE]
<Broker Name>
<Broker Address>
<Broker City, State and Zip>
Subject: Account Number____________________
Account Registration______________
Dear ____________:
Please send duplicate confirmations of individual transactions as well as
duplicate periodic statements for the referenced account to:
Confidential
------------
Chief Compliance Officer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Your cooperation is most appreciated. If you have any questions regarding this
request, please contact me or the Compliance Department of Strong Capital
Management at (414) 359-3400.
Sincerely,
<Name of Employee>
copy: Chief Compliance Officer
Strong Capital Management, Inc.
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Appendix 5
GIFT POLICY
MEMORANDUM
----------
TO: All Associates
FROM: Thomas P. Lemke
DATE: December 1, 1994
SUBJECT: Gift Policy Reminder
With the Holiday season upon us, I wanted to remind you of our firm's gift
policy, which covers both GIVING GIFTS TO and ACCEPTING GIFTS FROM clients,
brokers, persons with whom we do business, or others (collectively, "vendors").
It is based on the applicable requirements of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. ("NASD") and is included
as part of the firm's Codes of Ethics.
Under our policy, associates may not give gifts to or accept gifts from
vendors with a value in excess of $100 per person per year and must report to
the firm annually if they accept certain types of gifts. The NASD defines a
"gift" to include any kind of gratuity. Since giving or receiving any gifts in
a business setting may give rise to an appearance of impropriety or may raise a
potential conflict of interest, we are relying on your professional attitude
and good judgment to ensure that our policy is observed to the fullest extent
possible. The discussion below is designed to assist you in this regard.
If you have any questions about the appropriateness of any gift, contact
Legal.
1. GIFTS GIVEN BY ASSOCIATES
Under applicable NASD rules, an associate may not give any gift with a
value in excess of $100 per year to any person associated with a securities or
financial organization, including exchanges, broker-dealers, commodity firms,
the news media, or clients of the firm. Please note, however, that the firm
may not take a tax deduction for any gift with a value exceeding $25.
This memorandum is not intended to authorize any associate to give a gift
to a vendor -- appropriate supervisory approval must be obtained before giving
any gifts.
2. GIFTS ACCEPTED BY ASSOCIATES
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On occasion, because of their position within the firm, associates may
be offered, or may receive without notice, gifts from vendors. Associates may
not accept any gift or form of entertainment from vendors (e.g., tickets to the
theater or a sporting event where the vendor does not accompany the associate)
other than gifts of NOMINAL VALUE, which the NASD defines as under $100 in
total from any vendor in any year (managers may, if they deem it appropriate
for their department, adopt a lower dollar ceiling). Any gift accepted by an
associate must be reported to the firm, subject to certain exceptions (see
heading 4 below). In addition, note that our gift policy does not apply to
normal and customary business entertainment or to personal gifts (see heading 3
below).
Associates may not accept a gift of cash or a cash equivalent (e.g., gift
certificates) in ANY amount, and under no circumstances may an associate
solicit a gift from a vendor.
Associates may wish to have gifts from vendors donated to charity,
particularly where it might be awkward or impolite for an associate to decline
a gift not permitted by our policy. In such case, the gift should be forwarded
to Mary Beitzel in Legal, who will arrange for it to be donated to charity.
Similarly, associates may wish to suggest to vendors that, in lieu of an annual
gift, the vendors make a donation to charity. In either situation discussed
in this paragraph, an associate would not need to report the gift to the firm
(see heading 4 below).
3. EXCLUSION FOR BUSINESS ENTERTAINMENT/PERSONAL GIFTS
Our gift policy does not apply to normal and customary business meals and
entertainment with vendors. For example, if an associate has a business meal
and attends a sporting event or show with a vendor, that activity would not be
subject to our gift policy, provided the vendor is present. If, on the other
hand, a vendor gives an associate tickets to a sporting event and the associate
attends the event without the vendor also being present, the tickets would be
subject to the dollar limitation and reporting requirements of our gift policy.
Under no circumstances may associates accept business entertainment that is
extraordinary or extravagant in nature.
In addition, our gift policy does not apply to usual and customary gifts
given to or received from vendors based on a personal relationship (e.g., gifts
between an associate and a vendor where the vendor is a family member or
personal friend).
4. REPORTING
The NASD requires gifts to be reported to the firm. Except as noted
below, associates must report annually all gifts given to or accepted from
vendors (Legal will distribute the appropriate reporting form to associates).
Associates are NOT required to report the following: (i) usual and
customary promotional items given to or received from vendors (e.g., hats,
pens, T-shirts, and similar items marked with a firm's logo), (ii) items
donated to charity through Mary Beitzel in Legal, or (iii) food items consumed
on the firm's premises (e.g., candy, popcorn, etc.).
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