<PAGE> 1
As filed with the Securities and Exchange Commission on or about
February 24, 1995
Securities Act Registration No. 2-73967
Investment Company Act Registration No. 811-3254
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 18 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 19 [X]
(Check appropriate box or boxes)
STRONG TOTAL RETURN 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)
Copies to
SCOTT A. MOEHRKE
GODFREY & KAHN, S.C.
780 NORTH WATER STREET
MILWAUKEE, WISCONSIN 53202
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 December 31, 1994 was filed on or about
January 27, 1995.
It is proposed that this filing will become effective (check
appropriate box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[X] on May 1, 1995 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.
<PAGE> 2
STRONG TOTAL RETURN 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 Growth and Income Funds; Investment
Objectives and Policies; 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
15. Control Persons and Principal Holders of Securities Principal Shareholder; Directors and Officers of
the Fund Investment 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
</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 Being Included in Prospectus under the headings:
Offered 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:
Shareholder Services; 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 Registrant's Prospectus.
<PAGE> 4
<PAGE> 1
Dated May 1, 1995
STRONG GROWTH AND INCOME FUNDS
STRONG ASSET ALLOCATION FUND, INC. STRONG FUNDS
STRONG AMERICAN UTILITIES FUND, INC. P.O. Box 2936
STRONG TOTAL RETURN FUND, INC. Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
Device for the Hearing-Impaired:
(800) 999-2780
The Strong Family of Funds ("Strong Funds") is a family of twenty-four
separately incorporated, diversified and non-diversified, open-end management
investment companies, commonly called mutual funds. All of the Strong Funds are
no-load funds. There are no sales charges, redemption fees, or 12b-1 fees. The
Strong Funds include growth funds, growth and income funds, income funds,
municipal income funds, and money market funds. Three of these Funds, the
"Strong Growth and Income Funds," are described in this Prospectus.
- -----------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------
This Prospectus contains information you should consider before investing.
Please read it carefully and keep it for future reference. A Statement of
Additional Information for each Fund dated May 1, 1995, which contain further
information and are incorporated by reference into this Prospectus, have been
filed with the Securities and Exchange Commission ("SEC"). These Statements,
which may be revised from time to time, are available without charge upon
request to the above-noted address or telephone number.
<PAGE> 2
STRONG GROWTH AND INCOME FUNDS
Strong Asset Allocation Fund, Inc., Strong American Utilities Fund, Inc., and
Strong Total Return Fund, Inc. (collectively the "Funds" or the "Growth and
Income Funds" and individually sometimes referred to as a "Fund") are
separately incorporated, diversified and non-diversified, open-end management
investment companies.
STRONG ASSET ALLOCATION FUND (formerly known as Strong Investment Fund, Inc.)
(the "Asset Allocation Fund") seeks high total return consistent with
reasonable risk over the long term. The Fund allocates its assets globally
among a diversified portfolio of equity securities, bonds, and short-term,
fixed income securities.
STRONG AMERICAN UTILITIES FUND (the "American Utilities Fund") seeks total
return by investing for both income and capital growth. The Fund invests
primarily in the equity securities of public utility companies headquartered in
the United States.
STRONG TOTAL RETURN FUND (the "Total Return Fund") seeks high total return by
investing for capital growth and income. While the Fund normally emphasizes
equity investments, it may also invest in bonds and short-term fixed income
securities.
<PAGE> 3
TABLE OF CONTENTS PAGE
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . 0
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . 0
Comparing the Funds . . . . . . . . . . . . . . . 0
Strong Asset Allocation Fund . . . . . . . . . . 0
Strong American Utilities Fund . . . . . . . . . 0
Strong Total Return Fund . . . . . . . . . . . . 0
IMPLEMENTATION OF POLICIES AND RISKS . . . . . . . . . . . . . . . 0
ABOUT THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . 0
TRANSFER AND DIVIDEND-DISBURSING AGENT . . . . . . . . . . . . . . 0
DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
DISTRIBUTION AND TAXES . . . . . . . . . . . . . . . . . . . . . . 0
SHAREHOLDER MANUAL . . . . . . . . . . . . . . . . . . . . . . . . 0
------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the
Statements of Additional Information, and if given or made, such information or
representations may not be relied upon as having been authorized by the Strong
Growth and Income 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.
<PAGE> 4
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
Sales Load Imposed on Purchases NONE
Sales Load Imposed on Reinvested Dividends NONE
Deferred Sales Load NONE
Redemption Fees NONE
Exchange Fees NONE
There are certain charges associated with retirement accounts and with certain
services offered by the Funds. Purchases and redemptions may also be made
through broker-dealers or others who may charge a commission or other
transaction fee for their services.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER 12B-1 OPERATING
FEES EXPENSES FEES EXPENSES
<S> <C> <C> <C> <C>
Asset Allocation Fund .81% %* NONE %
American Utilities Fund .75 NONE
Total Return Fund .80 * NONE
</TABLE>
- --------------
* The Fund may use brokerage commission credits to pay certain expenses that
otherwise would require cash payments by the Fund. In all cases, such
credits have been immaterial in amount. The Advisor believes that this
practice has not resulted in any increase in the level of commissions paid
by the Funds.
From time to time, the Funds' investment advisor, Strong Capital Management,
Inc. (formerly known as Strong/Corneliuson Capital Management, Inc.) (the
"Advisor"), may voluntarily waive its management fee and/or absorb certain
expenses for any of the Funds. The expenses specified in the table above are
based on actual expenses incurred for the year ended December 31, 1994. 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)
1 3 5 10
<S> <C> <C> <C> <C>
Asset Allocation Fund $ $ $ $
American Utilities Fund
Total Return Fund
</TABLE>
I-3
<PAGE> 5
The Example is based on the "Total Operating Expenses" 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 annual Financial Highlights for each of the Strong Growth and
Income Funds has been audited by Coopers & Lybrand L.L.P., independent
certified public accountants. Their report for the fiscal year ended December
31, 1994 is included in the Annual Report of the Growth and Income Funds that
is contained the each Fund's 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.
<TABLE>
<CAPTION>
STRONG ASSET ALLOCATION FUND
1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.49 $ 19.68 $ 17.50 $ 18.41 $ 17.57 $ 17.60 $ 22.18
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.82 0.87 0.94 1.12 1.22 1.39 0.85
Net Realized and Unrealized Gains
(Losses) on Investments 1.81 (0.25) 2.41 (0.65) 0.73 0.19 (0.70)
------- ------- -------- -------- --------- ------- --------
TOTAL FROM INVESTMENT OPERATIONS 2.63 0.62 3.35 0.47 1.95 1.58 0.15
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.82) (0.87) (0.97) (1.38) (0.97) (1.38) (1.78)
Distributions from Net Realized Gains (1.24) (0.94) (0.20) -- (0.14) -- (2.95)
Returns of Capital -- -- -- -- -- (0.23)
------- ------- -------- -------- --------- ------- --------
TOTAL DISTRIBUTIONS (2.06) (1.81) (1.17) (1.38) (1.11) (1.61) (4.73)
------- ------- -------- -------- --------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 19.06 $ 18.49 $ 19.68 $ 17.50 $ 18.41 $ 17.57 $ 17.60
======= ======= ======== ======== ========= ======== ========
Total Return +14.5% +3.2% +19.6% +2.8% +11.2% +9.2% -0.3%
Net Assets, End of Period (In Thousands) $254,439 $208,368 $214,951 $203,562 $240,549 $256,089 $272,899
Ratio of Expenses to Average Net Assets 1.2% 1.2% 1.3% 1.3% 1.3% 1.2% 1.1%
Ratio of Net Investment Income to
Average Net Assets 4.2% 4.4% 5.1% 6.1% 6.6% 7.5% 4.2%
Portfolio Turnover Rate(1) 348.3% 320.4% 418.4% 319.6% 206.5% 426.2% 336.5%
STRONG ASSET ALLOCATION FUND
1986 1985
-------- --------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.12 $ 17.62
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.89 0.84
Net Realized and Unrealized Gains
(Losses) on Investments 2.54 2.45
--------- ---------
TOTAL FROM INVESTMENT OPERATIONS 3.43 3.29
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.95) (0.75)
Distributions from Net Realized Gains (0.42) (0.04)
Returns of Capital -- --
--------- ---------
TOTAL DISTRIBUTIONS (1.37) (0.79)
--------- ---------
NET ASSET VALUE, END OF PERIOD $ 22.18 $ 20.12
========= =========
Total Return +17.6% +19.4%
Net Assets, End of Period (In Thousands) $ 339,405 $ 220,556
Ratio of Expenses to Average Net Assets 1.1% 1.1%
Ratio of Net Investment Income to
Average Net Assets 4.7% 5.4%
Portfolio Turnover Rate(1) 80.4% 143.6%
</TABLE>
I-4
<PAGE> 6
STRONG AMERICAN UTILITIES FUND
<TABLE>
<CAPTION> 1994 1993(2)
---- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.18
Net Realized and Unrealized Gains
on Investments 0.27
-----------
TOTAL FROM INVESTMENT OPERATIONS 0.45
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.18)
Distributions from Net Realized Gains(3) (0.08)
-----------
TOTAL DISTRIBUTIONS (0.26)
-----------
NET ASSET VALUE, END OF PERIOD $ 10.19
===========
Total Return +4.5%*
Net Assets, End of Period $32,456,865
Ratio of Expenses to Average Net Assets(4) 0.0%
Ratio of Net Investment Income to
Average Net Assets 5.6%**
Portfolio Turnover Rate 178.6%**
</TABLE>
STRONG TOTAL RETURN FUND
<TABLE>
<CAPTION>
1994 1993 1992 1991
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.17 $ 20.24 $ 15.34
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.33 0.18 0.22
Net Realized and Unrealized Gains
(Losses) on Investments 4.18 (0.08) 4.90
-------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 4.51 0.10 5.12
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.33) (0.17) (0.22)
Distributions from Net Realized Gains (0.05) -- --
Returns of Capital -- -- --
-------- -------- --------
TOTAL DISTRIBUTIONS (0.38) (0.17) (0.22)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 24.30 $ 20.17 $ 20.24
======== ======== ========
Total Return +22.50% +0.06% +33.6%
Net Assets, End of Period (In Thousands) $630,349 $587,873 $691,327
Ratio of Expenses to Average Net Assets 1.2% 1.3% 1.4%
Ratio of Net Investment Income to
</TABLE>
I-5
<PAGE> 7
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Average Net Assets 5.4% 7.7% 10.1% 5.2% 4.3% 5.0%
Portfolio Turnover Rate(1) 312.3% 305.3% 281.1% 224.4% 153.5% 304.6%
</TABLE>
NOTES:
(1) For years prior to 1985, pursuant to the Securities and Exchange
Commission's rules amendment, the portfolio turnover rates exclude
long-term U.S. government securities.
(2) Date of inception was July 1, 1993.
(3) Includes $0.01 ordinary income distribution for tax purposes.
(4) Since inception all of the American Utilities Fund, the Advisor voluntarily
waived its advisory fee and absorbed all other expenses. Without these
waivers and absorptions, the ratio of expenses to average net assets would
have been 1.4%.
* Total return is not annualized.
** Calculated on an annualized basis.
I-6
<PAGE> 8
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has distinct investment objectives and policies. Each Fund seeks
total return consistent with its investment objective and policies. The
investment objective of each Fund is set forth under "Investment Objectives and
Policies."
IMPLEMENTATION OF POLICIES AND RISKS
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
repurchase agreements, illiquid securities, and may engage in reverse
repurchase agreements and mortgage dollar roll transactions. The Asset
Allocation and Total Return Funds each may engage in substantial short-term
trading, which may result in high portfolio turnover rates. These investment
practices and techniques involve risks that are different in some respects from
those associated with similar funds that do not use them. The American
Utilities Fund is a "non-diversified" investment company, which means that it
may invest a larger portion of its assets in the securities of a single issuer
than diversified funds. The Funds may invest in non-investment-grade securities
(commonly called "junk bonds") within specified limits. (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 $11 billion. W.H.
Reaves & Co., Inc. (the "Subadvisor") is the subadvisor for the American
Utilities Fund. (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. (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; and a no-minimum investment
program. (See "Shareholder Manual -- Shareholder Services.")
DIVIDENDS AND DISTRIBUTIONS
The policy of each Fund is to distribute substantially all net investment
income, if any, on a quarterly basis and distribute any net realized capital
gains annually. (See "About the Funds -- Distributions and Taxes.")
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<PAGE> 9
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 the other
Strong Funds, which are described in separate prospectuses. Each Growth and
Income 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 Funds are each required or permitted to invest a substantial portion of
their 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 Funds,
therefore, are not appropriate for investors' short-term financial needs.
The following chart is intended to distinguish the Funds and help you determine
their suitability for your investments.
COMPARING THE FUNDS
<TABLE>
<CAPTION>
EQUITY BOND MAXIMUM
FUND RANGE RANGE CASH POSITION SPECIAL FOCUS
<S> <C> <C> <C> <C>
Asset Allocation 10-60% 20-60% 100% Sector
Allocation
American 65-100% 0-35% 100% Utility and
Utilities Energy Stocks
Total Return ___-100% ___-___% 100% Diversification
</TABLE>
Each Fund has adopted certain fundamental investment restrictions that are set
forth in its Statement of Additional Information ("SAI"). Those restrictions, a
Fund's investment objective, and any other investment policies identified as
"fundamental" in this prospectus or the SAI 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, each Fund may invest in a diversified portfolio of
securities without regard to objective investment criteria, such as company
size, exchange listing, earnings history, or other factors. When selecting
securities, the Advisor will, except as otherwise limited below, be limited
only by its best judgment as to what will help achieve each Fund's investment
objective.
STRONG ASSET ALLOCATION FUND
The Asset Allocation Fund seeks high total return consistent with reasonable
risk over the long term. The Fund allocates its assets globally among a
diversified portfolio of equity securities, bonds, and short-term, fixed income
securities.
Under normal market conditions, the Fund's assets will be allocated according to
a benchmark of 40% equities, 40% bonds, and 20% short-term, fixed income
securities. The Advisor intends to actively manage the Fund's assets,
maintaining a balance over
I-8
<PAGE> 10
time between investment opportunities and their associated potential risks. In
response to changing market and economic conditions, the Advisor may reallocate
the Fund's assets among these asset categories. Those allocations normally will
be within the ranges indicated below. However, in pursuit of total return, the
Advisor may under-allocate or over-allocate the Fund's assets in a particular
category. Furthermore, if in the opinion of the Advisor market conditions
warrant adopting a temporary defensive position, the Fund may invest without
limitation in cash and short-term fixed-income securities.
Asset-Allocation Categories
<TABLE>
<CAPTION>
Percentage of Fund Assets
Category of Investment Benchmark Range
<S> <C> <C>
Equities 40% 10 - 60%
Bonds 40% 20 - 60%
Short-Term Fixed Income Securities 20% 0 - 70%
</TABLE>
Equity securities in which the Fund may invest include common stocks, preferred
stocks, securities that are convertible into common stocks, such as warrants
and convertible bonds. Bonds purchased by the Fund will be primarily investment
grade debt securities, although the Fund may invest up to, but not including,
35% of its total assets in non-investment-grade debt securities. (See
"Implementation of Policies and Risks -- Debt Securities.")
The Fund also has the flexibility to take advantage of investment opportunities
around the world by investing in foreign securities. Currently, the Adviser
does not expect that, under normal market condition, the Fund will invest more
than 40% of its assets in foreign securities. Foreign investments involve
risks not normally found when investing in securities of U.S. issuers. (See
"Implementation of Policies and Risks -- Foreign Securities and Currencies.")
Within the asset-allocation categories described above, the Advisor will
allocate the Fund's investments among countries, geographic regions, and
currencies in response to changing market and economic trends. In making
geographical allocations of investments, the Advisor will consider such factors
as the historical and prospective relationships among currencies and
governmental policies that influence currency-exchange rates, current and
anticipated interest rates, inflation levels, and business conditions within
various countries, as well as other macroeconomic, social, and political
factors.
While there are no prescribed limits on the Fund's geographic allocations, the
Advisor anticipates that the Fund will generally invest in issuers in
industrialized countries and in major currencies, including the United States,
Canada, the countries of Western Europe, Japan, Australia, and New Zealand. The
Fund may also, however, invest in securities of issuers in developing
countries.
STRONG AMERICAN UTILITIES FUND
The American Utilities Fund seeks total return by investing for both income and
capital growth.
The Fund normally will invest at least 65% of its total assets in the equity
securities of public utility companies headquartered in the United States.
Equity securities in which
I-9
<PAGE> 11
the Fund may invest include common stocks, preferred stocks, securities that are
convertible into common stocks, such as warrants and convertible bonds. Public
utility companies include those engaged in the manufacture, production,
generation, transmission, sale and/or distribution of water, gas, and electric
energy, as well as those engaged in the communications industry, including
providers of telephone, telegraph, satellite, cable television, microwave,
and other communication facilities for the public, excluding public
broadcasting companies. (See "Implementation of Policies and Risks -- Public
Utility Companies.")
The balance of the Fund, up to 35% of its total assets, may be invested in any
type of security, including debt and equity securities of companies in other
industries. The Fund intends to use this allowance primarily to invest in the
equity securities of energy companies, which may compose up to 25% of the
Fund's total assets. (See "Implementation of Policies and Risks -- Energy
Companies.") Although the debt securities in which it invests will be primarily
investment-grade, the Fund may invest up to 5% its total assets in
non-investment-grade debt securities. (See "Implementation of Policies and
Risks -- Debt Securities.")
Under normal market conditions, the Fund expects to be fully invested in the
equity securities of companies in the public utility and energy industries.
However, when the Advisor or Subadvisor determines that market conditions
warrant a temporary defensive position, the Fund may invest without limitation
in cash and short-term fixed-income securities, including U.S. government
securities, commercial paper, banker's acceptances, certificates of deposit,
and time deposits.
STRONG TOTAL RETURN FUND
The Total Return Fund seeks high total return by investing for capital growth
and income. While the Fund normally emphasizes equity investments, it may also
invest in bonds and short-term, fixed-income securities.
The Fund may invest up to 100% of its assets in equity securities, including
growth-oriented and income oriented common stocks, preferred stocks, and
securities that are convertible into common stocks, such as warrants and
convertible bonds. The Fund may also invest without limitation in bonds, which
are intermediate-to long-term debt obligations, including corporate or U.S.
government debt securities. Although the debt securities in which it invests
will be primarily investment-grade, the Fund may invest up to 5% its total
assets in non-investment-grade debt securities. (See "Implementation of
Policies and Risks -- Debt Securities.") When the Advisor determines that
market conditions warrant a temporary defensive position, the Fund may invest
without limitation in cash and short-term, fixed-income securities.
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.
Presently, the Funds do not intend to engage in cross-trading. A more complete
discussion of certain of these securities and investment techniques and the
associated risks is contained in each Fund's Statement of Additional
Information.
DEBT SECURITIES
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IN GENERAL. The market value of all debt obligations is affected by changes in
the prevailing interest rates. The market value of such instruments generally
reacts inversely to interest rate changes. If the prevailing interest rates
decline, the market value of debt obligations generally increases. If the
prevailing interest rates increase, the market value of debt obligations
generally decreases. In general, the longer the maturity of a debt obligation,
the greater its sensitivity to changes in interest rates.
Investment grade debt securities include (i) bonds or bank obligations that are
rated in one of the four highest categories of any nationally recognized
statistical rating organization or "NRSRO" (e.g., BBB or higher by Standard &
Poor's Ratings Group or "S&P"); (ii) U.S. government securities (as defined
below); (iii) short-term bank obligations that are rated in one of the three
highest categories by any NRSRO (e.g., A-3 or higher by S&P) with respect to
obligations maturing in one year or less; (iv) commercial paper rated in one of
the three highest ratings categories of any NRSRO (e.g., A-3 or higher by S&P);
(v) repurchase agreements involving these securities; or (vi) unrated
securities determined by the Advisor to be of comparable quality. Securities
rated in the fourth highest category (e.g., BBB by S&P), although considered
investment-grade, have speculative characteristics and may be subject to
greater fluctuations in value than higher-rated securities. Non-
investment-grade debt securities, commonly referred to as "junk bonds," include
(i) securities rated as low as C by S&P or their equivalents; (ii) commercial
paper rated as low as A-3 by S&P or their equivalents; and (iii) unrated debt
securities judged to be of comparable quality by the Advisor. See "Appendix A
- -- Ratings of Debt Securities" for additional information.
HIGH-YIELD, HIGH RISK SECURITIES. The Total Return and American Utilities Funds
may invest up to 5% of their assets and the Asset Allocation Fund may invest up
to, but not including, 35% of its total assets in non-investment-grade debt
securities, also referred to as high-yield, high-risk securities or "junk
bonds." These securities include those rated lower than investment-grade and
unrated securities of comparable quality. Although these securities generally
offer higher yields than investment-grade securities with similar maturities,
lower-quality securities involve greater risks, including the possibility of
default or bankruptcy. In general, they are regarded to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Other potential risks associated with investing in high-yield
securities include:
- - substantial market-price volatility resulting from changes in interest
rates, changes in or uncertainty about economic conditions, and changes in
the actual or perceived ability of the issuer to meet its obligations;
- - greater sensitivity of highly leveraged issuers to adverse economic changes
and individual-issuer developments;
- - subordination to the prior claims of other creditors;
- - additional Congressional attempts to restrict the use or limit the tax and
other advantages of these securities; and
- - adverse publicity and changing investor perceptions about these securities.
As with any other asset in a Fund's portfolio, any reduction in the value of
such securities as a result of the factors listed above would be reflected in
the net asset value of the Fund. In addition, a Fund that invests in
lower-quality securities may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal and
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.
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The market for high-yield, high-risk securities initially grew during a period
of economic expansion and has experienced mixed results thereafter. It is
uncertain how the high-yield market will perform during a prolonged period of
rising interest rates. A prolonged economic downturn or a prolonged period of
rising interest rates could adversely affect the market for these securities,
increase their volatility, and reduce their value and liquidity. In addition,
lower-quality securities tend to be less liquid than higher-quality debt
securities because the market for them is not as broad or active. If market
quotations are not available, these securities will be valued in accordance
with procedures established by a Fund's Board of Directors. Judgment may,
therefore, play a particular securities. 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
A Fund's quality policies are applied at the time of purchase of a security.
These policies allow a Fund to retain a security whose credit quality is
downgraded after purchase. The Advisor will, however, monitor the credit
quality of any such security to consider what action, if any, the Fund should
take consistent with its investment objective.
GOVERNMENT SECURITIES. U.S. government securities include securities issued by
the U.S. government or its agencies or instrumentalities and are obligations
supported by the full faith and credit of the United States, such as U.S.
Treasury obligations and the obligations of certain agencies, including the
Government National Mortgage Association, and securities that are backed only
by (i) the right of the issuer to borrow from the U.S. Treasury, such as the
Federal Home Loan Bank; (ii) the discretionary authority of the U.S. government
to purchase such securities, such as the Federal National Mortgage Association;
or (iii) the credit of the agency or instrumentality itself, such as the
Student Loan Marketing Association. While the U.S. government provides
financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it always will do so. The
U.S. government, its agencies, and instrumentalities do not guarantee the
market value of their securities and consequently, the value of such securities
may fluctuate.
SHORT-TERM SECURITIES. Short-term fixed income securities in which the Funds
may invest include debt securities issued or guaranteed by the U.S. government
or its agencies or instrumentalities, commercial paper, banker's acceptances,
certificates of deposit, and time deposits. The Funds may invest in obligations
of domestic banks, foreign branches, and foreign subsidiaries of domestic
banks, domestic branches of foreign banks, and foreign branches of foreign
banks.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES. The Asset Allocation and
American Utilities 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 certain pay-in-kind securities to report as interest each
year the portion of the original discount (or deemed discount) on such
securities accruing that year. In order to qualify as a "regulated investment
company" under the Internal Revenue Code, the Fund may be required to
distribute a portion of such discount 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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PUBLIC UTILITY COMPANIES (AMERICAN UTILITIES FUND)
Under normal market conditions, at least 65% of the American Utilities
Fund's total assets will be invested in the equity securities of public utility
companies headquartered in the United States. Accordingly, the Fund's
performance will depend in part on conditions in the public utility industry.
Stocks of public utility companies have traditionally been popular among more
conservative stock market investors because they have generally paid consistent
and above-average dividends. The Fund's investments in public utility
securities may or may not pay consistent and above-average dividends. Moreover,
the securities of public utility companies can still be affected by the risks
of the stock market as well as factors specific to public utility companies.
Government regulation of public utility companies can limit their ability to
expand their businesses or to pass cost increases on to customers. Companies
providing power or energy-related services may also be affected by increases in
fuel and other operating costs; high costs of borrowing to finance capital
construction during inflationary periods; restrictions on operations and
increased costs and delays associated with compliance with environmental and
nuclear safety regulations; the difficulties involved in obtaining natural gas
for resale or fuel for generating electricity at reasonable prices; the risks
in connection with the construction and operation of nuclear power plants; the
effects of energy conservation; and the effects of regulatory changes. Some
public utility companies are facing increased competition, which may reduce
profits. All of these factors are subject to rapid change, which may affect
utility companies independently from the stock market as a whole. Equity
securities issued by public utility companies tend to be more affected by
changes in interest rates than are the equity securities of other issuers and,
therefore, may react to such changes somewhat like debt instruments. (See "Debt
Securities" above.)
In accordance with its investment objective and its fundamental investment
restrictions, the Fund will normally concentrate its investments in the public
utility industry. This means that more than 25% of the value of the Fund's
assets will normally be invested in the public utility industry. The Fund does
not have set policies to concentrate within any particular segment of the
public utilities industry; however, the Subadvisor generally emphasizes
investments in established electric utility, telephone, natural gas, and energy
stocks with sound financial structures.
Due to the Fund's concentration of investments in the public utility industry,
an investment in the Fund may be subject to greater fluctuations in value than
a Fund that does not concentrate its investments in a similar manner. For
example, as discussed above, certain economic factors or specific events may
exert a disproportionate impact upon the prices of equity securities of
companies within the public utilities industry relative to their impact on the
prices of securities of companies engaged in other industries. Additionally,
changes in the market price of the equity securities of a particular company
that occupies a dominant position in an industry may tend to influence the
market prices of other companies within the same industry. As a result of the
foregoing factors, the net asset value of the Fund may be more susceptible to
change than those of investment companies that diversify their investments over
many different industries.
ENERGY COMPANIES (AMERICAN UTILITIES FUND)
Under normal market conditions, the American Utilities Fund anticipates it may
invest a substantial portion, but not more than 25% of its total assets, in the
equity securities of energy companies. Energy companies are generally defined
as companies in the conventional areas of oil, gas, electricity, and coal, as
well as those involved in alternative sources of energy, such as nuclear,
geothermal, shale, and solar power. The business activities of energy
companies may include production, generation, refining, transmission,
transportation, marketing, control, or measurement of energy or energy fuels;
providing component parts or services to companies engaged in these energy
activities; energy
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research or experimentation; and environmental activities related to the
solution of energy problems, such as energy conservation and pollution control.
For purposes of this 25% investment limitation, energy companies shall exclude
companies that are also public utility companies.
To the extent the Fund makes significant investments in energy companies the
Fund's performance will depend in part on conditions in the energy industry.
The securities of companies in the energy industry are subject to changes in
value and dividend yield that depend to a large extent on the price and supply
of energy fuels. Swift price and supply fluctuations of energy fuels may be
caused by events relating to international politics, energy conservation, the
success of exploration projects, currency exchange rate fluctuations, and tax
and other regulatory policies of various governments.
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 until the settlement
date.
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 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. Each Fund
will segregate and maintain cash, cash equivalents, or other high-quality,
liquid debt securities in an amount at least equal to the amount of outstanding
commitments for when-issued securities at all times.
FOREIGN SECURITIES AND CURRENCIES
The Asset Allocation Fund may invest without limitation in foreign securities,
including both direct investments and investments made through depositary
receipts. The Total Return Fund may invest up to 15% of its assets directly in
the securities of foreign issuers and may also invest in foreign securities in
domestic markets through depositary receipts without regard to this limitation.
However, the Advisor currently intends to invest not more than 25% of the Total
Return Fund's assets in foreign securities, including both direct investments
and investments made through depositary receipts. The American Utilities Fund
may invest up to 15% of its total assets directly in the securities of foreign
issuers and may invest up to 35% of its total assets in foreign securities
through depositary receipts. Foreign investments involve special risks,
including (i) expropriation, confiscatory taxation, and withholding taxes on
dividends and interest; (ii) less extensive regulation of foreign brokers,
securities markets, and issuers; (iii) different accounting standards and less
publicly available information; (iv) costs incurred in conversions between
currencies, possible delays in settlement in foreign securities markets,
limitations on the use or transfer or assets (including suspension of the
ability to transfer currency from a given country), and difficulty of enforcing
obligations in other countries; and (v) 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
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reinvestment, resource self-sufficiency, and balance of payments positions.
Many foreign securities are 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. Certain costs attributable
to foreign investing, such as custody charges and brokerage costs, are higher
than those attributable to domestic investing.
The Asset Allocation Fund may invest a significant portion of its assets in the
foreign securities of issuers in developing countries. The risks of foreign
investments are generally intensified for investments in developing countries.
Risks of investing in such markets include (i) less social, political, and
economic stability; (ii) smaller securities markets and the lower trading
volume, which may result in a lack of liquidity and greater price volatility;
(iii) certain national policies that may restrict the Fund's investment
opportunities, including restrictions on investments in issuers or industries
deemed sensitive to national interests, or expropriation or confiscation of
assets or property, which could result in the Fund's loss of its entire
investment in that market; and (iv) 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 Asset Allocation Fund may also invest a significant portion of its assets
in debt securities 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, high
interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties, and extreme poverty and
unemployment. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or interest when due in accordance with the terms of such debt, and the Fund
may have limited legal recourse in the event of default.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Funds could be significantly affected by changes
in foreign currency exchange rates. The value of a Fund's assets denominated in
foreign currencies will increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S. dollar. Currency
exchange rates can be volatile at times in response to supply and demand in the
currency exchange markets, international balances of payments, governmental
intervention, speculation, and other political and economic conditions.
The Funds may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or any other lawful purpose. (See "Derivative Transactions.")
DERIVATIVE INSTRUMENTS
Derivative transactions may be used by the Funds for any lawful purpose,
including hedging, risk management, or enhancing returns, but not speculation.
Derivative instruments are securities or agreements whose value is derived from
the value of some
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underlying asset, including securities, currencies, reference indexes, or
commodities. Options, futures, and options on futures transactions are
considered derivative transactions. Derivative instruments or agreements
generally have characteristics similar to forward contracts (under which one
party is obligated to buy and the other party is obligated to sell an
underlying asset at a specific price on a specific date) or option contracts
(under which the holder of the option has the right but not the obligation to
buy or sell an underlying asset at a specified date). Accordingly, the change
in value of a forward-based derivative is generally related to the change in
value of the underlying asset. Option- based derivative instruments generally
will increase in value from favorable fluctuations in the value of the
underlying asset and decrease in value from unfavorable fluctuations in the
value of the underlying asset. Derivative transactions may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
transaction in relation to the underlying asset may be magnified. The purchaser
of an option-based derivative will generally pay a premium in connection with
entering into such position and the seller of an option-based derivative will
generally receive a premium in connection with such position. In addition to
options, futures, and options on futures transactions, derivative transactions
may include short sales against the box, in which a Fund sells a security it
owns for delivery at a future date; swaps, in which the two parties agree to
exchange a series of cash flows in the future, such as interest rate payments;
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;" and 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". Derivative transactions may
also include forward currency contracts and foreign currency exchange-related
securities.
Derivative transactions may be exchange-traded or over-the-counter transactions
between private parties. Over-the-counter transactions are subject to 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. When required by the SEC, the Fund will set
aside permissible liquid assets in a segregated account to secure its
obligations under derivative transactions. In order to maintain its required
cover for a derivative transaction, the Fund may need to sell portfolio
securities at disadvantageous prices or times since it may not be possible to
liquidate a derivative position.
The successful use of derivative transactions by the Fund is dependent upon the
Advisor's ability to correctly anticipate trends in the underlying asset. To
the extent that a Fund is engaging in derivative transactions other than for
hedging purposes, the Fund's successful use of such transactions is more
dependent upon the Advisor's ability to correctly anticipate such trends, since
losses in these transactions may not be offset in gains in the Fund's portfolio
or in lower purchase prices for assets it intends to acquire. The Advisor's
prediction of trends in underlying assets may prove to be inaccurate, which
could result in substantial losses to the Fund. Hedging transactions are also
subject to risks. If the Advisor incorrectly anticipates trends in the
underlying asset, the Fund may be in a worse position than if no hedging had
occurred. In addition, there may be imperfect correlation between the Fund's
derivative transactions and the instruments being hedged.
In connection with its futures and options on futures transactions, a Fund is
subject to certain restrictions on such transactions under the Commodity
Exchange Act and, accordingly, will use futures and options on futures
transactions solely for bona fide hedging transactions (within the meaning of
the Commodity Exchange Act). However, each 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
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(within the meaning of the Commodity Exchange Act), do not exceed 5% of the
Fund's net assets. In addition, each Fund follows certain other restrictions
concerning its options, futures, and options on futures transactions and,
accordingly, (i) the aggregate value of securities that underlie call options
on securities written by the Fund or obligations that underlie put options on
securities written by the Fund, determined as of the date the options are
written, will not exceed 50% of the Fund's net assets; (ii) the aggregate
premiums paid on all options purchased by the Fund and which are being held
will not exceed 20% of the Fund's net assets; (iii) the Fund will not purchase
put or call options, other than hedging positions, if, as a result thereof,
more than 5% of its total assets would be so invested; and (iv) the aggregate
margin deposits required on all futures and options on futures transactions
being held will not exceed 5% of the Fund's total assets.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators 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. However, the underlying assets are not first lien mortgage
loans or interests therein, but 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 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. 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.
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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 ("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.
DIVERSIFICATION
As a matter of fundamental policy, the Asset Allocation and Total Return Funds
are diversified investment companies. Pursuant to this restriction, these Funds
may not, with respect to 75% of each Fund's total assets, purchase the
securities of any issuer if the purchase would cause more than 5% of the value
of the Fund's total assets to be invested in the securities of any one issuer
(other than U.S. government securities).
As a non-diversified fund, the American Utilities Fund is not subject to such
limitations. It may invest a larger portion of its assets in the securities of
a single issuer than diversified funds and, therefore, its shares may be
subject to greater fluctuations in value than diversified funds, particularly
those that invest in a broad range of industries and issuers. Because the Fund
may invest in a smaller number of individual issuers than diversified funds, an
investment in the Fund may present greater risk to an investor than an
investment in a diversified fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
Certain restricted securities that may be resold to institutional investors
under Rule 144A under the Securities Act and Section 4(2) commercial paper may
be determined to be liquid under guidelines adopted by each Fund's Board of
Directors. See a Fund's Statement of Additional Information for further
information.
PORTFOLIO TURNOVER
Historical portfolio turnover rates for the Funds are listed under "Financial
Highlights." The annual portfolio turnover rate indicates changes in a Fund's
investments and may also be affected by sales of portfolio securities necessary
to meet cash requirements for redemption of shares. The turnover rate may vary
from year to year, as well as within a year. High turnover in any year will
result in the payment by a Fund of above average transaction costs and could
result in the payment by shareholders of above average amounts of taxes on
realized investment gains. The Asset Allocation and Total Return Funds each
have a wide investment scope and an active management investment policy. Their
portfolio turnover rates may be as much as 400% or more. Under normal market
conditions, it is anticipated that the rate of portfolio turnover of the
American Utilities Fund generally will not exceed 200%. These rates should not
be considered as limiting factors. The Asset Allocation and Total Return Funds
may engage in substantial short-term trading, which involves significant risk
and may be deemed speculative. Such trading will result in a higher portfolio
turnover rate and correspondingly higher brokerage costs for the Funds.
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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 advisory fee arrangements, the
Advisory Agreements are substantially 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. The Advisor also acts as investment advisor for each of
the mutual funds within the Strong Family of Funds. As of March 31, 1995, the
Advisor had over $11 billion under management. 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 advisory
fee based on a percentage of each Fund's average daily net asset value. The
annual rates are as follows: Asset Allocation and Total Return Funds, .85% of
the Fund's average daily net assets up to $35,000,000 and .80% of each Fund's
average daily net assets excess of $35,000,000; and American Utilities Fund,
.75%. Such fees are in excess of fees paid by many other funds. 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.
Except for the expenses assumed by the Advisor, the Subadvisor, or the
Distributor, each Fund is responsible for all its other expenses, including:
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 of printing and distributing prospectuses to existing
shareholders; charges of custodians (including fees as custodian for keeping
books and similar services for a Fund), transfer agents (including the printing
and mailing of reports and notices to shareholders), registrars, auditing and
legal services, and clerical services related to record keeping and shareholder
relations; printing of stock certificates; fees for directors who are not
"interested persons" of the Advisor; expenses of fidelity bond and other
insurance; expenses of indemnification; extraordinary expenses; and costs of
shareholder and director meetings. The Subadvisor has agreed to reimburse the
Advisor for a portion of certain costs it incurred in connection with the
start-up of the American Utilities Fund.
SUBADVISORY AGREEMENT - AMERICAN UTILITIES FUND. Under a subadvisory agreement
between the Advisor and W.H. Reaves & Co., Inc. (the "Subadvisory Agreement"),
the Subadvisor, pursuant to the oversight and supervision of the American
Utilities Fund's Board of Directors and the Advisor, provides a continuous
investment program for the American Utilities Fund. Under the Subadvisory
Agreement, the Subadvisor is responsible for determining the securities to be
purchased and sold by the Fund and for executing those transactions. However,
the Advisor is responsible for managing the short-term fixed income securities
maintained by the Fund in the ordinary course of its business
I-19
<PAGE> 21
which are expected to equal approximately five to seven percent of the Fund's
total assets. As compensation for its services, the Advisor (not the Fund) pays
the Subadvisor a monthly fee at an annual rate of .50% on the first $200
million of the Fund's average daily net assets plus 40% of the Advisor's net
management fee (after any waivers thereof) on that portion of the Fund's
average daily net assets in excess of $200 million except that the foregoing
percentage will be 50% on those average daily net assets between $1.0 billion
and $1.5 billion. The Subadvisor bears all of its own expenses in providing
subadvisory services to the Fund.
The Subadvisor began conducting business in 1961. Since then, its principal
business has been providing continuous investment supervision to institutional
investors such as corporations, corporate pension funds, employee savings
plans, foundations, and endowments. The Subadvisor is a Delaware corporation.
Mr. William H. Reaves is the controlling shareholder of the Subadvisor. As of
March 31, 1995, the Subadvisor had over $1 billion under management. Its
address is 30 Montgomery Street, Jersey City, New Jersey 07302.
The Subadvisor may also act as a broker for the American Utilities Fund. In
order for the Subadvisor to effect any portfolio transactions for the Fund on
an exchange, the commissions, fees, or other remuneration received by the
Subadvisor must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on any
exchange during a comparable period of time. This standard would allow the
Subadvisor to receive no more than the remuneration that would be expected to
be received by an unaffiliated broker in a commensurate arm's-length
transaction.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Strong Growth and Income Funds.
STRONG ASSET ALLOCATION FUND
BRADLEY C. TANK. Mr. Tank leads the Fund's investment team and allocates the
Fund's assets among equities, bonds, and short-term, fixed income securities.
In addition, Mr. Tank co-manages the Fund's bond component. Before joining the
Advisor in June 1990, he spent eight years at Salomon Brothers, Inc., where he
was a fixed income specialist and, for the last six years, a vice president.
Mr. Tank received his B.A. in 1980 from the University of Wisconsin-Eau Claire
and his M.B.A. in 1982 from the University of Wisconsin-Madison, where he also
completed the Applied Securities Analysis Program. In addition to his Asset
Allocation Fund duties, Mr. Tank manages the Strong Short-Term Bond and
Government Securities Funds and chairs the Advisor's Fixed Income Investment
Committee.
Equity Component
ANTHONY L.T. CRAGG. Mr. Cragg co-manages the equity component of the Fund. Mr.
Cragg joined the Advisor in April 1993 to develop the Advisor's international
investment activities. During the prior seven years, 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 as an international
investment manager in 1980 at Gartmore, Ltd., where his tenure included
assignments in London, Hong Kong, and Tokyo. He has co-managed the Fund since
December 1994 and managed the Strong International Stock
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<PAGE> 22
Fund since he joined the Advisor. He has also managed the Strong Asia Pacific
Fund since its inception in December 1993.
RONALD C. OGNAR. Mr. Ognar co-manages the equity component of the Fund. Mr.
Ognar, a Chartered Financial Analyst with more than 25 years of investment
experience, joined the Advisor in April 1993 after two years as a principal and
portfolio manager with RCM Capital Management. For approximately three years
prior to that, he was a portfolio manager at Kemper Financial Services in
Chicago. Mr. Ognar began his investment career in 1968 at LaSalle National Bank
in Chicago after serving two years in the U.S. Army. He received his bachelor's
degree in accounting from the University of Illinois in 1968. Mr. Ognar has
co-managed the Fund since December 1994. He has managed the Strong Growth Fund
since its inception in December 1993 and managed the Strong Total Return Fund
from April 1993 until October 1994, when Mr. Ian J. Rogers joined him as a
co-manager.
RICHARD S. STRONG. Mr. Strong co-manages the equity component of the Fund. Mr.
Strong founded the Advisor in 1974. He began his investment career at Employers
Insurance of Wausau in 1966, after receiving his master's degree in finance
from the University of Wisconsin-Madison that January. He received his
undergraduate degree in 1963 from Baldwin-Wallace College. Mr. Strong has
co-managed the Fund since December 1994. He has also managed the Strong
Discovery Fund since its inception in December 1987. In addition to his role as
a portfolio manager, he is currently the Chairman of the Board, Director, Chief
Investment Officer, and a member of the Advisor's Executive Committee.
RICHARD T. WEISS. Mr. Weiss co-manages the equity component of the Fund. Mr.
Weiss joined the Advisor in 1991 from Chicago-based Stein Roe & Farnham, where
he began his career as a research analyst in 1975. He was named a portfolio
manager in 1981. Mr. Weiss attended Harvard Graduate School of Business
Administration, where he was awarded his M.B.A. in 1975, and the University of
Southern California, where he received his bachelor's degree in business
administration in 1973. Mr. Weiss has co-managed the Fund since December 1994.
He has also co-managed the Strong Opportunity and Common Stock Funds since
1991. In addition, Mr. Weiss is a member of the Advisor's Executive Committee.
Bond Component
JEFFREY A. KOCH. Mr. Koch co-manages the bond component of the Fund. Mr. Koch
joined the Advisor as a portfolio manager and securities analyst in June 1989.
For a brief period prior to that, he was a market maker clerk at Fossett
Corporation, a clearing firm. Mr. Koch earned his M.B.A. in Finance at
Washington University in St. Louis, Missouri in 1989. His undergraduate degree,
awarded in 1987, is from the University of Minnesota-Morris. In 1991, Mr. Koch
joined Bradley C. Tank as co-portfolio manager of the Strong Advantage and
Income Funds, as well as the Strong Short-Term Bond and Government Securities
Funds. They managed the four Funds together until 1993, when Mr. Koch assumed
sole management responsibility for the Strong Advantage and Corporate Bond
Funds. Mr. Koch has co-managed the bond component of the Fund since December
1994.
SHIRISH T. MALEKAR. Mr. Malekar co-manages the bond component of the Fund. Mr.
Malekar joined the Advisor in 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
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<PAGE> 23
PaineWebber Incorporated in New York and Tokyo for more than two years. He has
a M.S. in Management from the Massachusetts Institute of Technology, a M.S. in
Petroleum Engineering from the University of Pittsburgh, and a B.S. in Chemical
Engineering from the University of Bombay, India. Mr. Malekar has co-managed
the bond component of the Fund since December 1994. In addition, Mr. Malekar
has managed the Strong Short-Term Global Bond and International Bond Funds
since their inception in March 1994.
Short-Term Component
JAY N. MUELLER. Mr. Mueller manages the Fund's short-term component. Mr.
Mueller joined the Advisor in September 1991 as a securities analyst and
portfolio manager. For four years prior to that, he was a securities analyst
and portfolio manager with R. Meeder & Associates of Dublin, Ohio. Mr. Mueller
received his bachelor's degree in economics in 1982 from the University of
Chicago. Mr. Mueller has managed the Fund's short- term component since 1993.
He has also managed the Strong Money Market and U.S. Treasury Money Funds since
October 1991.
STRONG AMERICAN UTILITIES FUND
WILLIAM H. REAVES. Mr. Reaves, the Fund's senior co-manager, has been the
President and Chief Investment Officer, Portfolio Manager, and Utilities
Analyst of the Subadvisor since 1961. He has worked as a utilities analyst
since 1946.
THOMAS R. WILLIAMS. Mr. Williams, a co-manager of the Fund, has been the
Executive Vice President, Portfolio Manager, and Utilities Analyst of the
Subadvisor since 1963. He has been a utilities analyst since 1950.
DOUGLAS S. ROBERTSON. Mr. Robertson, a co-manager of the Fund, has been the
Vice President, Portfolio Manager, and Utilities Analyst of the Subadvisor
since 1987. For nine years prior to that, he was an Assistant Treasurer and
Manager of Treasury Operations for the Public Service Company of Colorado. Mr.
Robertson has been a utilities analyst since 1966.
WILLIAM A. FERER. Mr. Ferer, a co-manager of the Fund, has been the Vice
President, Portfolio Manager, and Energy Analyst of the Subadvisor since 1987.
He has worked as a securities analyst since 1971.
RONALD J. SORENSON. Mr. Sorenson, a co-manager of the Fund, has been the Vice
President and Portfolio Manager of the Subadvisor since 1987. For three years
prior to that, he was a Partner and Portfolio Manager of PVF Inc. For a
two-year period prior to that, Mr. Sorenson was the Chairman of the Board and
Chairman of the Investment Committee of The American Life Insurance Company of
New York. Mr. Sorenson has acted as President of RWS Energy Services, Chief
Financial Officer of Emerging Market Services A.G., Controller of Triad Holding
Corporation S.A., and a C.P.A. for Arthur Young & Co.
STRONG TOTAL RETURN FUND
RONALD C. OGNAR. Information concerning Mr. Ognar is set forth above under
"Strong Asset Allocation Fund."
I-22
<PAGE> 24
IAN J. ROGERS. In October 1994, Mr. Rogers joined Mr. Ognar as co-portfolio
manager of the Fund. Mr. Rogers has worked with Mr. Ognar as an equity analyst
since joining the Advisor in August 1993. Prior to joining the Advisor, Mr.
Rogers worked for nine years as an equity analyst with Kemper Financial
Services in Chicago. For approximately two years prior to that, he was an
equity analyst for Allstate Insurance. Mr. Rogers began his investment career
in 1983 as an equity analyst for Comerica Bank in Detroit. He received his
M.B.A. from Central Michigan University in 1983 and his bachelor's degree in
Business Administration from Ferris State College in 1966.
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor 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 under the Advisory Agreements between the Advisor
and the Funds.
DISTRIBUTOR
Strong Funds Distributors, Inc., 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 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. Shareholders
have certain rights, including the right to call a meeting upon a vote of 10%
of a Fund's outstanding shares for the purpose of voting to remove one or more
directors or to transact any other business.
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.
I-23
<PAGE> 25
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND DISTRIBUTIONS. You may elect to have all your
dividends and capital gains distributions from a Fund automatically reinvested
in additional fund shares or in shares of another Strong Fund at the net asset
value determined on the dividend or capital gains distribution payment date. If
you request in writing that your dividends and other distributions be paid in
cash, the Fund will credit your bank account by Electronic Funds Transfer
("EFT") or issue a check to you within five business days of the reinvestment
date. You may change your election at any time by calling or writing the Strong
Funds. Strong Funds must receive any such change seven days (15 days for EFT)
prior to a dividend or capital gains distribution payment date in order for the
change to be effective for that payment. Each Fund distributes substantially
all of its net investment income quarterly and net realized capital gains
annually.
TAX STATUS OF DIVIDENDS AND 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. Distributions of net capital gain (the
excess of net long-term capital gain over net short-term capital loss) 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.
If a Fund's dividends exceed its 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) in any year, as a result of
currency-related losses or otherwise, all or a portion of those dividends 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 the same Fund at a loss, a
portion or all of that loss will not be deferred and will increase the cost
basis of the newly purchased shares. If you redeem out of a 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 DIVIDEND. A dividend paid shortly after an investor has purchased
shares in the Funds will reduce the net asset value of the shares by the amount
of the dividend, which will be taxable to the shareholder.
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. To do
so, each Fund distributes substantially all of its net investment income
quarterly and net realized capital gains (after using any available capital
loss carryover) annually. In addition, each Fund will limit its investments so
that,
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<PAGE> 26
at the close of each quarter of its taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer, and it will not own more
than 10% of the outstanding voting securities of a single issuer. The Funds'
investments in U.S. government securities are not subject to these limitations.
PERFORMANCE INFORMATION
Each Fund may advertise "average annual total return," "total return," and
"cumulative total return." The American Utilities Fund may also advertise
"yield." Each of these figures is based upon historical results and is not
necessarily representative of 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. The
American Utilities Fund's yield is a measure of the net investment income per
share earned by a Fund over a specific one-month 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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<PAGE> 27
SHAREHOLDER MANUAL
HOW TO BUY SHARES . . . . . . . . . . . . . . . . . . . . . . . . II-0
DETERMINING YOUR SHARE PRICE . . . . . . . . . . . . . . . . . . II-0
HOW TO SELL SHARES . . . . . . . . . . . . . . . . . . . . . . . II-0
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . II-0
REGULAR INVESTMENT PLANS . . . . . . . . . . . . . . . . . . . . II-0
SPECIAL SITUATIONS . . . . . . . . . . . . . . . . . . . . . . . II-0
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 values change daily, your purchase price will be
the next net asset value determined after Strong receives and accepts your
purchase order. Your money will begin earning dividends the day after your
purchase order is accepted in proper form.
Whether you are opening a new account or adding to an existing one, Strong
provides you with several methods to buy Fund shares.
<PAGE> 28
<TABLE>
<CAPTION>
TO OPEN A NEW ACCOUNT TO ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
MAIL BY CHECK BY CHECK
-Complete and sign the application. Make your -Complete an Additional Investment Form provided at
check or money order payable to "The Strong Funds." the bottom of your account statement, or write a note
indicating your fund account number. Make your
-Mail to The Strong Funds, P.O. Box 2936, Milwaukee, check or money order payable to "The Strong Funds."
Wisconsin 53201. If you're using an express delivery
service, send to The Strong Funds, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051. -Mail to The Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to The Strong Funds, 100 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
-Call 1-800-368-3863 for instructions on establishing an
account with an exchange by mail. BY EXCHANGE
-Call 1-800-368-3863 for instructions on exchanging
by mail.
TELEPHONE BY EXCHANGE BY EXCHANGE
-Call 1-800-368-3863 to establish a new account by -Add to an account by exchanging funds from another
1-800-368-3863 exchanging funds from an existing Strong Funds account. Strong Funds account.
-Sign up for telephone exchange services when you open -Sign up for telephone exchange services when you open
your account. To add the telephone exchange option to your account. To add the telephone exchange option
24 HOURS A DAY, your account, call 1-800-368-3863 for a Telephone to your account, call 1-800-368-3863 for a Telephone
7 DAYS A WEEK Exchange Form. Exchange Form.
-Please note that your accounts must be identically -Please note that the accounts must be identically
registered and that you must exchange enough into the registered and that the minimum exchange is $50 or
new account to meet the minimum initial investment. the balance of your account, whichever is less.
BY TELEPHONE PURCHASE
-Complete the Request for Telephone Purchase Form
at the back of this Prospectus to make additional
investments from $50 to $25,000 into your Strong
Funds account by telephone.
IN PERSON Stop by our Investor Center in Menomonee Falls, Stop by our Investor Center in Menomonee Falls
Wisconsin, Call 1-800-368-3863 for hours and directions. Wisconsin. Call 1-800-368-3863 for hours and
directions.
The Investor Center can only accept checks or money The Investor Center can only accept checks or money
orders. orders.
WIRE Call 1-800-368-3863 for instructions on opening an Call 1-800-368-3863 for instructions on adding to
account by wire. an account by wire.
</TABLE>
II-2
<PAGE> 29
<TABLE>
<S> <C> <C>
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM." USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS.
-If you sign up for Strong's Automatic Investment Sign up for these services when you open your account,
Plan when you open your account, Strong Funds will or call 1-800-368-3863 for instructions on how to add
waive the Fund's minimum initial investment (see them to your existing account.
chart below).
-AUTOMATIC INVESTMENT PLAN. Make regular, systematic
-Complete both the Automatic Investment Plan investments (minimum $50) into your Strong Funds
application at the back of this Prospectus and the account from your bank checking or NOW account. We've
new account application. included an application at the back of this Prospectus.
-Mail to the address indicated on the 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 gains
distributions will be automatically reinvested in
additional Fund shares. Or, you may elect to have your
dividends and capital gains distributions will be
automatically reinvested in shares of another Strong
Fund.
BROKER-DEALER -You may purchase shares in a Fund through a -You may purchase additional shares in a Fund through a
broker-dealer or other institution that may charge broker-dealer or other institution that may charge a
a transaction fee. transaction fee.
-Strong Funds may only accept requests to purchase -Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account from additional shares into a broker-dealer street name
the broker-dealer. account from the broker-dealer.
</TABLE>
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<PAGE> 30
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- - Please make all checks or money orders payable to "The 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 losses suffered by a Fund as a result.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - A Fund may decline to accept your purchase order upon receipt when, in the
judgment of the Advisor, it would not be in the best interests of the
existing shareholders.
- - The exchange privileges are available in all 50 states because all the
Strong Funds intend to continue to qualify their shares for sale in all 50
states.
- - Minimum Investment Requirements:
To open a regular account
Total Return and Asset Allocation Funds $250
American Utilities Fund $1,000
To open an IRA, Defined Contribution or $250
UGMA/UTMA account
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-11). Unless you participate in the Strong
No-Minimum Investment Program, please ensure your purchases meet the minimum
investment requirements.
Under certain circumstances (for example, if you discontinue a No-Minimum
Investment Program before you reach a Fund's minimum initial investment, or if,
after you reach a Fund's minimum, you reduce your balance to less than $500),
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.
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES THROUGH A BROKER-DEALER
- - If you purchase shares through a program of services offered or
administered by a broker-dealer, financial institution, or other
service provider, you should read the program materials, including
information relating to fees, in connection with a Fund's Prospectus.
Certain features of a Fund may not be available or may be modified in
connection with the program of services provided.
- - Certain broker-dealers, financial institutions, or other service
providers that have entered into an agreement with the Distributor may
enter purchase orders on behalf of their customers by phone, with
payment to follow within several days as specified
II-4
<PAGE> 31
in the agreement. The Funds may effect such purchase orders at
the net asset value next determined after receipt of the telephone
purchase order. It is the responsibility of the broker-dealer,
financial institution, or other service provider to place the order
with the Funds on a timely basis. If payment is not received within the
time specified in the agreement, the broker-dealer, financial
institution, or other service provider could be held liable for any
resulting fees or losses.
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 value of a Fund's total assets,
subtracting all its liabilities, and dividing by the total number of shares
outstanding. Expenses are accrued daily and applied when determining the net
asset value.
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.
Equity securities traded on a national securities exchange or NASDAQ are valued
at the last sales price on the national securities exchange or NASDAQ on which
such securities are primarily traded. Securities traded on NASDAQ for which
there were no transactions on a given day or securities not listed on an
exchange or NASDAQ are valued at the average of the most recent bid and asked
prices. Other exchange traded securities (generally foreign securities) will be
valued based on market quotations. Debt securities are valued by a pricing
service that utilizes electronic data processing techniques to determine values
for normal institutional-sized trading units of debt securities without regard
to sale or bid prices when such values are believed to more accurately reflect
the fair market value for such securities. Otherwise, sale or bid prices are
used. Any securities or other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Board of Directors. Debt securities having remaining maturities of 60 days or
less when purchased 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 the fluctuating rates on the
market value of the instrument.
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 net
asset value 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 net asset value 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.
II-5
<PAGE> 32
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 chart below.
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.
II-6
<PAGE> 33
TO SELL SHARES
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
Write a "letter of instruction" that includes the
following information: your account number, the dollar
amount or number of shares you wish to redeem, each
owner's name, your street address, and the signature of
each owner as it appears on the account.
Mail to The Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express
delivery service, send to 100 Heritage Reserve,
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
your account by checking the "Yes" box in the
1-800-368-3863 appropriate section of the account application. To add
the telephone redemption option to your account, call
1-800-368-3863 for a Telephone Redemption Form.
24 HOURS A DAY,
7 DAYS A WEEK Once the telephone redemption option is in place, you
may sell shares ($500 minimum) 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.
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.
II-7
<PAGE> 34
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.
- The right of redemption may be suspended during any period when (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.
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.
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 the Strong Funds at the address on the
cover of this Prospectus.
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.
II-8
<PAGE> 35
Each year, you will also receive a statement confirming the
tax status of any distributions paid to you, as well as a
semiannual report and an annual report containing audited
financial statements.
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 Statement of
Additional Information, which you may request by calling or
writing the 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 your accounts' registrations -- such as adding or removing
a joint owner, changing an owner's name, or changing the type of your
account -- must also be submitted in writing. Please call
1-800-368-3863 for instructions. For your protection, some requests
may require a signature guarantee.
TRANSACTION SERVICES
FREE 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 redeem
or exchange shares from any account you specify. 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.
REGULAR INVESTMENT PLANS
The 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 a regular time interval. 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 the average transaction price.
A program of regular investment cannot ensure a profit or protect
against a loss during declining
II-9
<PAGE> 36
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.
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. Such closing may occur in
periods of declining share prices. To establish the Plan, complete the
application at the back of this Prospectus, or call 1-800-368-3863.
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 Automated Clearing House
available to its employees. The Plan may be used for other direct
deposits, such as social security checks, military allotments, and
annuity payments.
To establish Direct Deposit for your account, call 1-800-368-3863 to
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 participation 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
II-10
<PAGE> 37
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 form, 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 and wire redemption 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 and wire redemption 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.
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 option to your existing
account;
- if you transfer the ownership of your account to another
individual or organization;
- when you submit a written redemption request for more than
$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.
II-11
<PAGE> 38
APPENDIX A
Ratings of Debt Securities:
<TABLE>
<CAPTION>
Moody's Standard & Fitch
Investors Poor's Investors
Service, Inc. Corporation Service, Inc. Definition
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper medium grade
Baa BBB BBB Medium grade
Ba BB BB Low grade
B B B Speculative
Caa, Ca, C CCC, CC, C CCC, CC, C Submarginal
D D DDD, DD, D Probably in default
</TABLE>
<TABLE>
<CAPTION>
Moody's S & P Fitch
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM MIG1/VMIG1 SP-1+, Very Strong quality F-1+ Exceptionally strong
quality
MIG2/VMIG2 SP-1 Strong quality F-1 Very strong quality
MIG3/VMIG3 SP-2 Satisfactory grade F-2 Good credit quality
MIG4/VMIG4 F-3 Fair credit quality
SG Speculative grade SP-3 Speculative grade F-S Weak credit quality
- -------------------------------------------------------------------------------------------------------------------------
COMMERCIAL P-1 Superior quality A-1+ Extremely strong F-1+ Exceptionally strong
PAPER quality quality
A-1 Strong quality F-1 Very strong quality
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
P-3 Acceptable quality A-3 Adequate quality F-3 Fair credit quality
B Speculative quality F-S Weak credit quality
Not Prime C Doubtful quality D Default
</TABLE>
A-1
<PAGE> 39
Explanation of Quality Ratings:
<TABLE>
<CAPTION>
BOND
RATING EXPLANATION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
MOODY'S Aaa Highest quality, smallest degree of investment risk.
INVESTORS
SERVICE, Aa High quality; together with Aaa bonds, they compose the high-grade bond
INC. group.
A Upper medium-grade obligations; many favorable investment attributes.
Baa Medium-grade obligations; neither highly protected nor poorly secured.
Interest and principal appear adequate for the present but certain
protective elements may be lacking or may be unreliable over any great
length of time.
Ba More uncertain, with speculative elements. Protection of interest and
principal payments not well safeguarded during good and bad times.
B Lack characteristics of desirable investment; potentially low assurance of
timely interest and principal payments or maintenance of other contract
terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other marked
shortcomings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
STANDARD & AAA Highest rating; extremely strong capacity to pay principal and interest.
POOR'S
CORP. AA High quality; very strong capacity to pay principal and interest.
A Strong capacity to pay principal and interest; somewhat more susceptible to
the adverse effects of changing circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest; normally exhibit adequate
protection parameters, but adverse economic conditions or changing
circumstances more likely to lead to a weakened capacity to pay principal
and interest than for higher-rated bonds.
BB, B, Predominantly speculative with respect to the issuer's capacity to meet
required interest and principal payments. BB- lowest degree of
CCC, speculation; C- the highest degree of speculation. Quality and protective
CC, C characteristics outweighed by large uncertainties or major risk exposure to
adverse conditions.
CI No interest being paid.
D In default.
FITCH AAA Highest quality; obligor has exceptionally strong ability to pay interest
INVESTORS and repay principal, which is unlikely to be affected by reasonably
SERVICE, foreseeable events.
INC.
AA Very high quality; obligor's ability to pay interest and repay principal is
very strong. Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+.
A High quality; obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than higher-rated bonds.
BBB Satisfactory credit quality; obligor's ability to pay interest and repay
principal is considered adequate. Unfavorable changes in economic
conditions and circumstances are more likely to adversely affect these
bonds and impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for higher-rated
bonds.
BB, B, Not investment-grade; predominantly speculative with respect to the
issuer's capacity to repay interest and repay principal in accordance with
CCC, the terms of the obligation for bond issues not in default. BB is least
CC, C speculative. C is the most speculative.
DDD, Bonds are in default on interest and/or principal payments. DDD represents
DD, D the highest potential for recovery of these bonds, and D represents the
lowest potential for recovery.
</TABLE>
See the Appendix to a Fund's Statement of Additional Information for a more
complete description of ratings.
A-2
<PAGE> 40
APPENDIX B
WEIGHTED AVERAGE RATINGS OF BONDS(1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Average Percentage of Assets Held During 1994(2) Percentage of Assets Held on December 31, 1994
- -------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund Asset Allocation Fund
- -------------------------------------------------------------------------------------------------------------------------------
Equivalent Equivalent
S&P Moody's Rated Unrated(3) S&P Moody's Rated Unrated(3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa(4) % - AAA Aaa(4) % -
AA Aa - AA Aa -
A A - A A - -
BBB Baa BBB Baa
BB Ba BB Ba
B B - B B -
CCC Caa - - CCC Caa - -
CC Ca - - CC Ca - -
C C - - C C - -
- -------------------------------------------------------------------------------------------------------------------------------
Totals % % Totals % %
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Average Percentage of Assets Held During 1994(2) Percentage of Assets Held on December 31, 1994
- -------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund Asset Allocation Fund
- -------------------------------------------------------------------------------------------------------------------------------
Equivalent Equivalent
S&P Moody s Rated Unrated(3) S&P Moody s Rated Unrated (3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A1 P1 % AAA Aaa(4) %
A2 P2 AA Aa
A3 P3 A A
BBB Baa
BB Ba
B B
CCC Caa
CC Ca
C C
- -------------------------------------------------------------------------------------------------------------------------------
Totals % % Totals % %
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE> 41
See the Appendix to a Fund's Statement of Additional Information for a more
complete description of ratings.
1. A security rated differently by the rating services is included in the
category representing the higher of the ratings assigned to the security.
This chart does not include holdings of the Total Return or American
Utilities Funds, since non-investment grade holdings of such Funds are
limited to 5% of each Fund's assets.
2. Based on a weighted average of the securities held at the end of each
month. Investment grade bonds are those rated in one of the four highest
categories by a nationally recognized rating organization. See
Implementation of Policies and Risks - Debt Securities in this Prospectus
for a discussion of the risks associated with non-investment grade bonds
and the Statement of Additional Information for a description of credit
ratings.
3. This category represents the comparable quality of unrated securities, as
determined by the Advisor.
4. Includes all U.S. government obligations.
B-2
<PAGE> 42
CUSTODIAN
Firstar Trust Company
P.O. Box 701, Milwaukee, Wisconsin 53201
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
AUDITORS
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street, Milwaukee, Wisconsin 53202
INVESTMENT ADVISOR
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
SUBADVISOR
Strong American Utilities Fund
W.H. Reaves & Co., Inc.
30 Montgomery Street, Jersey City, New Jersey 07302
DISTRIBUTOR
Strong Funds Distributors, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
<PAGE> 5
STATEMENT OF ADDITIONAL INFORMATION
STRONG TOTAL RETURN FUND, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: 1-414-359-1400
Toll-Free: 1-800-368-3863
This Statement of Additional Information is not a prospectus
and should be read in conjunction with the Prospectus of Strong
Total Return Fund, Inc. (the "Fund"), dated May 1, 1995.
Requests for copies of the Prospectus should be made by writing
to the Fund, P.O. Box 2936, Milwaukee, Wisconsin 53201,
Attention: Corporate Secretary; or by calling one of the numbers
listed above. The financial statements appearing in the Fund's
Annual Report, which accompanies this Statement of Additional
Information, are incorporated herein by reference.
This Statement of Additional Information is dated May 1, 1995.
<PAGE> 6
STRONG TOTAL RETURN FUND, INC.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . 0
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . 0
Illiquid Securities . . . . . . . . . . . . . . . . . 0
Short Sales Against the Box . . . . . . . . . . . . . 0
Warrants . . . . . . . . . . . . . . . . . . . . . . . 0
Fixed-Income Securities . . . . . . . . . . . . . . . 0
Variable- or Floating-Rate Securities . . . . . . . . 0
High Yield (High Risk) Securities . . . . . . . . . . 0
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities . 0
Mortgage- and Asset-Backed Backed Securities . . . . . 0
Small Companies . . . . . . . . . . . . . . . . . . . 0
Derivative Instruments . . . . . . . . . . . . . . . . 0
Lending of Portfolio Securities . . . . . . . . . . . 0
When-Issued Securities . . . . . . . . . . . . . . . . 0
European and American Depository Receipts . . . . . . 0
Foreign Investment Companies . . . . . . . . . . . . . 0
Repurchase Agreements . . . . . . . . . . . . . . . . 0
Borrowing . . . . . . . . . . . . . . . . . . . . . . 0
Mortgage Dollar Rolls and Reverse Repurchase Agreements 0
DIRECTORS AND OFFICERS OF THE FUND . . . . . . . . . . . 0
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . 0
INVESTMENT ADVISOR AND DISTRIBUTOR . . . . . . . . . . . 0
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . 0
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . 0
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT . . . . . . 0
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 0
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . 0
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . 0
FUND ORGANIZATION . . . . . . . . . . . . . . . . . . . . 0
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . 0
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . 0
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . 0
PORTFOLIO MANAGEMENT . . . . . . . . . . . . . . . . . . 0
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . 0
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 0
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 May
1, 1995, and if given or made, such information or
representations may not be relied upon as having been authorized
by the Fund.
This Statement of Additional Information does not
constitute an offer to sell securities.
<PAGE> 7
INVESTMENT RESTRICTIONS
The investment objective of the Fund is to seek a high total
return by investing for capital growth and income. The Fund's
investment objective and policies are described in detail in the
Prospectus under the caption "Investment Objectives and
Policies." The following are the Fund's fundamental investment
limitations which cannot be changed without shareholder approval.
The Fund:
1. May not with respect to 75% of its total assets, purchase
the securities of any issuer (except securities issued or
guaranteed by the U.S. government or its agencies or
instrumentalities) if, as a result, (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.
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 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 Investment Company Act of 1940.
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.
3
<PAGE> 8
The following are the Fund's non-fundamental operating
policies which may be changed by the Fund's Board of Directors
without shareholder approval.
The Fund may not:
1. Sell securities short, unless the Fund owns or has the right
to obtain securities equivalent in kind and amount to the
securities sold short, or unless it covers such short sale
as required by the current rules and positions of the SEC or
its staff, and provided that transactions in options,
futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling
securities short.
2. Purchase securities on margin, except that the Fund may
obtain such short-term credits as are necessary for the
clearance of transactions; and provided that margin deposits
in connection with futures contracts, options on futures
contracts, or other derivative instruments shall not
constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such
investment, more than 15% of its net assets would be
invested in illiquid securities, or such other amounts as
may be permitted under the Investment Company Act of 1940.
4. Purchase securities of other investment companies except in
compliance with the Investment Company Act of 1940 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. Purchase the securities of any issuer (other than securities
issued or guaranteed by domestic or foreign governments or
political subdivisions thereof) if, as a result, more than
5% of its total assets would be invested in the securities
of issuers that, including predecessor or unconditional
guarantors, have a record of less than three years of
continuous operation. This policy does not apply to
securities of pooled investment vehicles or mortgage or
asset-backed securities.
7. Invest in direct interests in oil, gas, or other mineral
exploration programs or leases; however, the Fund may invest
in the securities of issuers that engage in these
activities.
8. 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.
In addition, (i) the aggregate value of securities
underlying call options on securities written by the Fund or
obligations underlying put options on securities written by
the Fund determined as of the date the options are written
will not exceed 50% of the Fund's net assets; (ii) the
aggregate premiums paid on all options purchased by the Fund
and which are being held will not exceed 20% of the Fund's
net assets; (iii) the Fund will not purchase put or call
options, other than hedging positions, if, as a result
thereof, more than 5% of its total assets would be so
invested; and (iv) the aggregate margin deposits required on
all futures and options on futures transactions being held
will not exceed 5% of the Fund's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Fund
except as may be necessary in connection with permissible
borrowings or investments and then such pledging,
mortgaging, or hypothecating may not exceed 33 1/3% of the
Fund's total assets at the time of the borrowing or
investment.
10. Purchase or retain the securities of any issuer if any
officer or director of the Fund or its investment advisor
beneficially owns more than 1/2 of 1% of the securities of
such issuer and such officers and directors together own
beneficially more than 5% of the securities of such issuer.
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<PAGE> 9
11. Purchase warrants, valued at the lower of cost or market
value, in excess of 5% of the Fund's net assets. Included
in that amount, but not to exceed 2% of the Fund's net
assets, may be warrants that are not listed on the New York
Stock Exchange or the American Stock Exchange. Warrants
acquired by the Fund in units or attached to securities are
not subject to these restrictions.
12. 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.
13. 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.
If a percentage restriction relating to a fundamental or
non-fundamental limitation is adhered to at the time of
investment, a later increase in percentage resulting from a
change in market value of the investment or the total assets will
not constitute a violation of that restriction. 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.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the
Fund's investment objective, policies, and techniques that are
described in detail in the Prospectus under the captions
"Investment Objectives and Policies" and "Implementation of
Policies and Risks."
ILLIQUID SECURITIES
The Fund may invest in illiquid securities (i.e., securities
that are not readily marketable). However, the Fund will not
acquire illiquid securities if, as a result, they would comprise
more than 15% of the value of the Fund's net assets (or such
other amounts as may be permitted under the Investment Company
Act). The Board of Directors of the Fund, or its delegate, has
the ultimate authority to determine, to the extent permissible
under the federal securities laws, which securities are illiquid
for purposes of this limitation. Certain securities exempt from
registration or issued in transactions exempt from registration
under the Securities Act of 1933, as amended (the "Securities
Act"), including securities that may be resold pursuant to Rule
144A under the Securities Act, may be considered liquid. The
Board of Directors of the Fund has delegated to Strong Capital
Management, Inc. (the "Advisor") the day-to-day determination of
the liquidity of a security, although it has retained oversight
and ultimate responsibility for such determinations. Although no
definitive liquidity criteria are used, the Board of Directors
has directed the Advisor to look to such factors as (i) the
nature of the market for a security (including the institutional
private resale market), (ii) the terms of certain securities or
other instruments allowing for the disposition to a third party
or the issuer thereof (e.g., certain repurchase obligations and
demand instruments), (iii) the availability of market quotations
(e.g., for securities quoted in PORTAL system), and (iv) other
permissible relevant factors.
Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to
which a registration statement is in effect under the Securities
Act. Where registration is required, the Fund may be obligated to
pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and
the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain
a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced 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, the Fund should be in a position where
more than 15% of the value of its net assets are invested in
illiquid securities, including restricted securities which are
not readily marketable, the Fund will take such steps as is
deemed advisable, if any, to protect liquidity.
The Fund may sell over-the-counter ("OTC") options and, in
connection therewith, segregate assets or cover its obligations
with respect to OTC options written by the Fund. The assets used
as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the
option agreement. The cover for an OTC option
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<PAGE> 10
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.
SHORT SALES AGAINST THE BOX
The 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 the Fund
owns or has the right to acquire, for delivery at a specified
date in the future. If the Fund sells securities short against
the box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price rises.
WARRANTS
The Fund may acquire warrants. Warrants are securities
giving the holder the right, but not the obligation, to buy the
stock of an issuer at a given price (generally higher than the
value of the stock at the time of issuance) during a specified
period or perpetually. Warrants may be acquired separately or in
connection with the acquisition of securities. The Fund will not
purchase warrants, valued at the lower of cost or market value,
in excess of 5% of the Fund's net assets. Included in that
amount, but not to exceed 2% of the Fund's net assets, may be
warrants that are not listed on the New York Stock Exchange or
the American Stock Exchange. Warrants acquired by the 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 more speculative 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.
FIXED-INCOME SECURITIES
The Fund may invest a portion of its assets in fixed-income
securities, including U.S. government securities, commercial
paper, banker's acceptances, certificates of deposit, and time
deposits. Issuers of fixed-income securities have a contractual
obligation to pay interest at a specified rate on specified dates
and to repay principal on a specified maturity date. Certain
fixed-income securities (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.
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 security. 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.
CREDIT QUALITY. The values of debt securities 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
NRSROs. See the Appendix for additional information.
VARIABLE- OR FLOATING-RATE SECURITIES
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<PAGE> 11
The Fund may invest in securities which offer a variable- or
floating-rate of interest. Variable-rate securities provide for
automatic establishment of a new interest rate at fixed intervals
(e.g., daily, monthly, semi-annually, etc.). Floating-rate
securities 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, 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 a maturity of any
instrument which may be sold or put to the issuer or a third
party, the Fund may consider that instrument's maturity to be
shorter than its stated maturity.
Variable-rate demand notes include master demand notes,
which are obligations that permit the Fund to invest fluctuating
amounts that may change daily without penalty, pursuant to direct
arrangements between the Fund, as lender, and the borrower. The
interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right,
after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such
obligations. The interest rate on a floating-rate demand
obligation is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation
is adjusted automatically at specified intervals. Frequently,
such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because these obligations
are direct-lending arrangements between the lender and borrower,
it is not contemplated that such instruments will generally be
traded. There generally is not an established secondary market
for these obligations, although they are redeemable at face
value. Accordingly, where these obligations are not secured by
letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies
and, if not so rated, the Fund may invest in them only if the
Fund's advisor determines that, at the time of investment, the
obligations are of comparable quality to the other obligations in
which the Fund may invest. The Fund's Advisor, on behalf of the
Fund, will consider on an ongoing basis the creditworthiness of
the issuers of the floating- and variable-rate demand obligations
in the Fund's portfolio.
The Fund will not invest more than 15% of its net assets in
variable- and floating-rate demand obligations that are not
readily marketable (a variable- or floating-rate demand
obligation that may be disposed of on not more than seven days
notice will be deemed readily marketable and will not be subject
to this limitation). (See "Illiquid Securities" and "Investment
Restrictions.") In addition, each variable- or floating-rate
obligation must meet the credit quality requirements applicable
to all the Fund's investments at the time of purchase. When
determining whether such an obligation meets the Fund's credit
quality requirements, the Fund may look to the credit quality of
the financial guarantor providing a letter of credit or other
credit support arrangement.
HIGH YIELD (HIGH RISK) SECURITIES
IN GENERAL. The Fund has the authority to invest up to 5%
of its net assets in non-investment grade debt securities.
Non-investment grade debt securities (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
Corporation ("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 securities 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 of this Statement of Additional Information for a
discussion of securities ratings.
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<PAGE> 12
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 an economic downturn 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 the Fund's net asset value.
As previously stated, the value of a lower-quality or
comparable unrated security will decrease in a rising interest
rate market, and accordingly so will the Fund's net asset value.
If the Fund experiences unexpected net redemptions in such a
market, it may be forced to liquidate a portion of its portfolio
securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated
securities (discussed below), the Fund may be forced to liquidate
these securities at a substantial discount. Any such liquidation
would reduce the Fund's asset base over which expenses could be
allocated and could result in a reduced rate of return for the
Fund.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated
securities typically contain redemption, call or prepayment
provisions which permit the issuer of such securities containing
such provisions to, at its discretion, redeem the securities.
During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and
refinance them with debt securities with a lower interest rate.
To the extent an issuer is able to refinance the securities, or
otherwise redeem them, the Fund may have to replace the
securities with a lower yielding security, which would result in
a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit-rating
agencies evaluate the safety of principal and interest payments
of rated securities. They do not, however, evaluate the market
value risk of lower-quality securities and, therefore, may not
fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the condition of
the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary
indicator of investment quality. Investments in lower-quality and
comparable unrated securities will be more dependent on the
Advisor's credit analysis than would be the case with investments
in investment-grade debt securities. The Advisor employs its own
credit research and analysis, which includes a study of existing
debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Advisor
continually monitors the investments in the Fund's portfolio and
carefully evaluates whether to dispose of or to retain lower-
quality and comparable unrated securities whose credit ratings or
credit quality may have changed.
LIQUIDITY AND VALUATION. The Fund may have difficulty
disposing of certain lower-quality and comparable unrated
securities because there may be a thin trading market for such
securities. Because not all dealers maintain markets in all
lower-quality and comparable unrated securities, there is no
established retail secondary market for many of these securities.
The Fund anticipates that such securities could be sold only to a
limited number of dealers or institutional investors. To the
extent a secondary trading market does exist, it is generally not
as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact
on the market price of the security. As a result, the Fund's
asset value and ability to dispose of particular securities, when
necessary to meet the Fund's liquidity needs or in response to a
specific economic event, may be impacted. The lack of a liquid
secondary market for certain securities may also make it more
difficult for
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<PAGE> 13
the Fund to obtain accurate market quotations for purposes of
valuing the Fund's portfolio. Market quotations are generally
available on many lower-quality and comparable unrated issues
only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked
prices is likely to increase significantly. In addition, adverse
publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of
lower-quality and comparable unrated securities, especially in a
thinly traded market.
NEW AND PROPOSED LEGISLATION. Recent legislation has been
adopted, and from time to time, proposals have been discussed,
regarding new legislation designed to limit the use of certain
lower-quality and comparable unrated securities by certain
issuers. An example of legislation is a recent law which
requires federally insured savings and loan associations to
divest their investments in these securities over time. It is
not currently possible to determine the impact of the recent
legislation or the proposed legislation on the lower-quality and
comparable unrated securities market. However, 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.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
The Fund may invest in zero-coupon, step-coupon, and pay-in-
kind securities. These securities are debt securities that do
not make regular 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 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 taxable zero-coupon, step-coupon, and certain pay-in-kind
securities to report as interest each year the portion of the
original discount (or deemed discount) on such securities
accruing that year. In order to qualify as a "regulated
investment company" under the Code, the Fund may be required to
distribute a portion of such discount 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.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage
loans secured by real property, and include single- and multi-
class pass-through securities and collateralized mortgage
obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government
National Mortgage Association and the Federal National Mortgage
Association, or by private issuers, generally originators and
investors in mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers, and
special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be
supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or
they may be issued without any governmental guarantee of the
underlying mortgage assets but with some form of non-governmental
credit enhancement.
Asset-backed securities have structural characteristics
similar to mortgage-backed securities. However, the underlying
assets are not first lien mortgage loans or interests therein,
but 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 securities.
Among the principal differences are that interest and principal
payments are made more frequently on mortgage-and asset-backed
securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Fund
purchases these securities at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely,
if the Fund purchases these securities at a discount, a
prepayment rate that is faster than expected will increase yield
to maturity, while a prepayment rate that is slower than expected
will reduce yield to maturity. Amounts available for
reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result,
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<PAGE> 14
are likely to be reinvested at lower interest rates than during a
period of rising interest rates. Accelerated prepayments on
securities purchased by the Fund at a premium also impose a risk
of loss of principal because the premium may not have been fully
amortized at the time the principal is prepaid in full. The
market for privately issued mortgage- and asset-backed securities
is smaller and less liquid than the market for government-
sponsored mortgage-backed securities.
The Fund may invest in stripped mortgage- or asset-backed
securities, which receive differing proportions of the interest
and principal payments from the underlying assets. The market
value of such securities generally is more sensitive to changes
in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some
cases such market value may be extremely volatile. With respect
to certain stripped securities, such as interest only ("IO") and
principal only ("PO") classes, a rate of prepayment that is
faster or slower than anticipated may result in the Fund failing
to recover all or a portion of its investment, even though the
securities are rated investment grade.
SMALL COMPANIES
The Fund may, from time to time, invest a substantial
portion of its assets in small companies, some of which may be
unseasoned. However, the Fund will not purchase a security if,
after giving effect to the purchase, more than 5% of its assets
would be invested in securities of companies with continuous
operating histories (including the operating histories of
predecessors) of less than 3 years. (See "Investment
Restrictions.") While smaller companies generally have potential
for rapid growth, investments in smaller companies often involve
higher risks than investments in larger, more established
companies because smaller companies may lack the management
experience, financial resources, product diversification, and
competitive strengths of larger companies. In addition, in many
instances the securities of smaller 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
smaller 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 smaller company securities. Investors
should be aware that, based on the foregoing factors, an
investment in the Fund may involve greater risks than an
investment in a fund that invests primarily in larger, more
established companies, and the shares of the Fund may be subject
to greater price fluctuations than an investment in a fund that
invests primarily in larger, more established companies. In
addition, 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.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. As discussed in the Prospectus, the
Advisor may use a variety of derivative instruments, including
options, futures contracts (sometimes referred to as "futures")
and options on futures contracts for any lawful purpose, such as
to hedge the Fund's portfolio, risk management, or to attempt to
enhance returns.
The use of these instruments is subject to applicable
regulations of the SEC, the several options and futures exchanges
upon which they may be traded, the Commodity Futures Trading
Commission ("CFTC") and various state regulatory authorities. In
addition, the Fund's ability to use these instruments will be
limited by tax considerations.
In addition to the products, strategies and risks described
below and in the Prospectus, the Advisor expects to discover
additional derivative instruments and other hedging techniques.
These new opportunities may become available as the Advisor
develops new techniques or as regulatory authorities broaden the
range of permitted transactions. The Advisor may utilize these
opportunities to the extent that they are consistent with the
Fund's investment objective and permitted by the Fund's
investment limitations and applicable regulatory authorities.
SPECIAL RISKS OF THESE INSTRUMENTS. The use of derivative
instruments involves special considerations and risks as
described below. Risks pertaining to particular instruments are
described in the sections that follow.
(1) Successful use of most of these instruments depends
upon the Advisor's ability to predict movements of the overall
securities and currency markets, which requires different skills
than predicting changes in the prices of individual securities.
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<PAGE> 15
While the Advisor is experienced in the use of these instruments,
there can be no assurance that any particular strategy adopted
will succeed.
(2) 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 an instrument used in a short hedge (such as writing a call
option or buying a put option) increased by less than the decline
in value of the hedged investment, the hedge would not be fully
successful. 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 on the degree of correlation
between price movements in the index and price movements in the
investments being hedged.
(3) 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 opportunity for gain
by offsetting the positive effect of favorable price movements in
the hedged investments. For example, if the Fund entered into a
short hedge because the Advisor projected a decline in the price
of a security in the Fund's portfolio, and the price of that
security increased instead, the gain from that increase might be
wholly or partially offset by a decline in the price of the
instrument. Moreover, if the price of the instrument declined by
more than the increase in the price of the security, the Fund
could suffer a loss.
(4) As described below, the Fund might be required to
maintain assets as "cover," maintain segregated accounts, or make
margin payments when it takes positions in these instruments
involving obligations to third parties (i.e., instruments other
than purchased options). If the Fund were 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 or matured. The requirements
might impair the Fund's ability to sell a portfolio security or
make an investment at a time when it would otherwise be favorable
to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to 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 other party to the
transaction ("counter party") to enter into a transaction closing
out the position. Therefore, there is no assurance that any
hedging position can be closed out at a time and price that is
favorable to the Fund.
For a discussion of the federal income tax treatment of the
Fund's derivative instruments, see "TAXES -- Derivative
Instruments" below.
GENERAL LIMITATIONS ON CERTAIN DERIVATIVE TRANSACTIONS. The
Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the
Commodity Futures Trading Commission (the "CFTC") and the
National Futures Association, which regulate trading in the
futures markets. Pursuant to Rule 4.5 of the regulations under
the Commodity Exchange Act (the "CEA"), the notice of eligibility
for the Fund includes representations that the Fund will use
futures contracts and related options solely for bona fide
hedging purposes within the meaning of CFTC regulations, provided
that the Fund may hold other positions in futures contracts and
related options that do not qualify as a bona fide hedging
position if the aggregate initial margin deposits and premiums
required to establish these positions, less the amount by which
any such options positions are "in the money," do not exceed 5%
of the Fund's net assets. Adoption of these guidelines does not
limit the percentage of the Fund's assets at risk to 5%. The
Fund may purchase a put or call option, including any straddles
or spreads, only if the value of its premium, when aggregated
with the premiums on all other options purchased by the Fund,
does not exceed 5% of the Fund's total assets.
In addition, (i) the aggregate value of securities
underlying call options on securities written by the Fund or
obligations underlying put options on securities written by the
Fund determined as of the date the options are written will not
exceed 50% of the Fund's net assets; (ii) the aggregate premiums
paid on all options purchased by the Fund and which are being
held will not exceed 20% of the Fund's net assets; and (iii) the
Fund will not purchase put or call options, other than hedging
positions, if, as a result thereof, more than 5% of its total
assets would be so invested; and (iv) the aggregate margin
deposits required on all futures and options on futures
transactions being held will not exceed 5% of the Fund's total
assets.
The foregoing limitations are not fundamental policies of
the Fund and may be changed by the Fund's Board of Directors
without shareholder approval as regulatory agencies permit.
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<PAGE> 16
Transactions using options (other than purchased options)
and forward currency contracts, expose the Fund to counter-party
risk. To the extent required by SEC guidelines, the Fund will
not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options, or
futures or (2) cash and liquid high grade debt securities with a
value sufficient at all times to cover its potential obligations
to the extent not covered as provided in (1) above. The Fund
will also set aside cash and/or appropriate liquid assets in a
segregated custodial account if required to do so by the SEC and
CFTC regulations. Assets used as cover or held in a segregated
account cannot be sold while the position in the corresponding
option or futures contract is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion
of the Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
OPTIONS. The Fund may also purchase or write put and call
options on securities, on indices of debt and equity securities
and on foreign currencies. The purchase of call options serves
as a long hedge, and the purchase of put options serves as a
short hedge. Writing put or call options can enable the Fund to
enhance income by reason of the premiums paid by the purchaser of
such options. Writing call options serves as a limited short
hedge because declines in the value of the hedged investment
would be offset to the extent of the premium received for writing
the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be
expected that the option will be exercised and the Fund will be
obligated to sell the security at less than its market value or
will be obligated to purchase the security at a price greater
than that at which the security must be sold under the option.
All or a portion of any assets used as cover for OTC options
written by the Fund would be considered illiquid to the extent
described under "Investment Policies and Techniques--Illiquid
Securities." Writing put options serves as a limited long hedge
because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the
option. However, if the security depreciates to a price lower
than the exercise price of the put option, it can be expected
that the put option will be exercised and the Fund will be
obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other
things, the historical price volatility of the underlying
investment, the current market value of the underlying
investment, the time remaining until expiration, the relationship
of the exercise price to the market price of the underlying
investment, and general market conditions. The OTC debt and
foreign currency options used by the Fund may include European-
style options. This means that the option is only exercisable at
its expiration. This is in contrast to American-style options
which are exercisable at any time prior to the expiration date of
the option. Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation
under an option by entering into a closing transaction. For
example, the Fund may terminate its obligation under a call or
put option that it had written by purchasing an identical call or
put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call
option; this is known as a closing sale transaction. Closing
transactions permit the Fund to realize the profit or limit the
loss on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC
options. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is
listed that, in effect, guarantees completion of every exchange-
traded option transaction. OTC options are contracts between the
Fund and the other party to the transaction ("counter party")
(usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases or writes
an OTC option, it relies on the counter party to make or take
delivery of the underlying investment upon exercise of the
option. Failure by the counter party to do so would result in
the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid
market. The Fund intends to purchase or write only those
exchange-traded options for which there appears to be a liquid
secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions
can be made for OTC options only by negotiating directly with the
counter party, or by a transaction in the secondary market if any
such market exists. Although the Fund will enter into OTC options
only with counter parties that are expected to be capable of
entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC
option at a favorable price prior to expiration. In the event of
insolvency of the counter party, the Fund might be unable to
close out an OTC option position at any time prior to its
expiration.
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<PAGE> 17
If the Fund were unable to effect a closing transaction for
an option it had purchased, it would have to exercise the option
to realize any profit. The inability to enter into a closing
purchase transaction for a covered call option written by the
Fund could cause material losses because the Fund would be unable
to sell the investment used as a cover for the written option
until the option expires or is exercised.
The Fund may purchase and write put and call options on
indices of debt and equity securities in much the same manner as
the more traditional options discussed above, except the index
options may serve as a hedge against overall fluctuations in the
debt or equity securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular
security.
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 the effectiveness of
attempted hedging.
SPREAD TRANSACTIONS. The Fund may purchase covered spread
options from securities dealers. Such covered spread options are
not presently exchange-listed or exchange-traded. The purchase
of a spread option gives the Fund the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed yield
spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to the Fund in
purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be
available. The purchase of spread options will be used to
protect the Fund against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and
lower quality securities. Such protection is only provided
during the life of the spread option.
FUTURES CONTRACTS. The Fund may enter into futures
contracts (hereinafter referred to as "futures" or "futures
contracts"), including interest rate, securities index and
foreign currency futures. The Fund may also purchase put and
call options, and write covered put and call options, on futures
in which it is allowed to invest. The purchase of futures or
call options thereon can serve as a long hedge, and the sale of
futures or the purchase of put options thereon can serve as a
short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, and writing covered put
options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered options
in securities. The Fund's hedging may include purchases of
futures as an offset against the effect of expected increases in
securities prices and sales of futures as an offset against the
effect of expected declines in currency exchange rates and
securities prices. The Fund's futures transactions may be
entered into for any lawful purpose such as hedging purposes,
risk management, or to enhance returns. The Fund may also write
put options on futures contracts while at the same time
purchasing call options on the same futures contracts in order to
create synthetically a long futures contract position. Such
options would have the same strike prices and expiration dates.
The Fund will engage in this strategy only when the Advisor
believes it is more advantageous to the Fund than is purchasing
the futures contract.
To the extent required by regulatory authorities, the Fund
only enters into futures contracts that are traded on national
futures exchanges and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading
are regulated under the CEA by the CFTC. Although techniques
other than sales and purchases of futures contracts could be used
to reduce the Fund's exposure to interest rate fluctuations, the
Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.
An interest rate futures contract provides for the future
sale by one party and purchase by another party of a specified
amount of a specific financial instrument (debt security) for a
specified price at a designated date, time, and place. An index
futures contract is an agreement pursuant to which the parties
agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the
last trading day of the contract and the price at which the index
futures contract was originally written. A foreign currency
contract is a bilateral agreement pursuant to which one party
agrees to make and the other party agrees to accept delivery of a
specified type of currency at a specified future time and at a
specified price. Transactions 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
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<PAGE> 18
transaction in a matching futures contract. Although the value
of an index might be a function of the value of certain specified
securities, no physical delivery of those securities is made. If
the offsetting purchase price is less than the original sale
price, the Fund realizes a gain; if it is more, the Fund realizes
a loss. Conversely, if the offsetting sale price is more than
the original purchase price, the Fund realizes a gain; if it is
less, the Fund realizes a loss. The transaction costs must also
be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a
particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by the Fund upon entering into a futures
contract. Instead, at the inception of a futures contract, the
Fund is required to deposit in a segregated account with its
custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash,
U.S. government securities or other liquid, high grade debt
securities, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a
call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the
Fund at the termination of the transaction if all contractual
obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment,
and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent "variation margin" payments are made to and from
the futures broker daily as the value of the futures position
varies, a process known as "marking to market." Variation margin
does not involve borrowing, but rather represents a daily
settlement of the Fund's obligations to or from a futures broker.
When the Fund purchases an option on a future, the premium paid
plus transaction costs is all that is at risk. In contrast, when
the Fund purchases or sells a futures contract or writes a call
or put option thereon, it is subject to daily variation margin
calls that could be substantial in the event of adverse price
movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities
at a time when such sales are disadvantageous. Purchasers and
sellers of futures positions and options on futures can enter
into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a
secondary market. The Fund intends to enter into futures
transactions only on exchanges or boards of trade where there
appears to be a liquid secondary market. However, there can be
no assurance that such a market will exist for a particular
contract at a particular time.
Under certain circumstances, futures exchanges may establish
daily limits on the amount that the price of a future or option
on a futures contract can vary from the previous day's settlement
price; once that limit is reached, no trades may be made that day
at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures or option on
a futures contract position due to the absence of a liquid
secondary market or the imposition of price limits, it could
incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except
in the case of purchased options, the Fund would continue to be
required to make daily variation margin payments and might be
required to maintain the position being hedged by the future or
option or to maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase
the risk that movements in the prices of futures contracts or
options on futures contracts might not correlate perfectly with
movements in the prices of the investments being hedged. For
example, all participants in the futures and options on futures
contracts markets are subject to daily variation margin calls and
might be compelled to liquidate futures or options on futures
contracts positions whose prices are moving unfavorably to avoid
being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the
normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit
requirements in the futures market 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.
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FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES-SPECIAL
CONSIDERATIONS. The Fund may also use options and futures on
foreign currencies, as described above, and forward currency
contracts, as described below, to hedge against movements in the
values of the foreign currencies in which the Fund's securities
are denominated. The Fund may utilize foreign currency-related
derivative instruments for any lawful purposes such as for bona
fide hedging or to seek to enhance returns through exposure to a
particular foreign currency. Such currency hedges can protect
against price movements in a security the Fund owns or intends to
acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not,
however, protect against price movements in the securities that
are attributable to other causes.
The Fund 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 hedging 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 value of derivative instruments on foreign currencies
depends on the value of the underlying currency relative to the
U.S. dollar. Because foreign currency transactions occurring in
the interbank market might involve substantially larger amounts
than those involved in the use of such derivative instruments,
the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1
million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
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 reopen.
Settlement of derivative transactions involving foreign
currencies might be required to take place within the country
issuing the underlying currency. Thus, the Fund might be
required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S.
residents and might be required to pay any fees, taxes and
charges associated with such delivery assessed in the issuing
country.
Permissible foreign currency options will include options
traded primarily in the over-the-counter ("OTC") market.
Although options on foreign currencies are traded primarily in
the OTC market, the Fund will normally purchase OTC options on
foreign currency only when the Advisor believes a liquid
secondary market will exist for a particular option at any
specific time.
FORWARD CURRENCY CONTRACTS. A forward currency contract
involves an obligation to purchase or sell a specific currency at
a specified future date, which may be any fixed number of days
from the contract date agreed upon by the parties, at a price set
at the time the contract is entered into.
The Fund may enter into forward currency contracts to
purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency for any lawful purpose. Such
transactions may serve as long hedges -- for example, the Fund
may purchase a forward currency contract to lock in the U.S.
dollar price of a security denominated in a foreign currency that
the Fund intends to acquire. Forward currency contracts may also
serve as short hedges -- for example, the Fund may sell a forward
currency contract to lock in the U.S. dollar equivalent of the
proceeds from the anticipated sale of a security denominated in a
foreign currency.
As noted above, the Fund may seek to hedge against changes
in the value of a particular currency by using forward contracts
on another foreign currency or a basket of currencies, the value
of which the Advisor believes will have a positive correlation to
the values of the currency being hedged. In addition, the Fund
may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example,
if the Fund owns securities denominated in a foreign
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<PAGE> 20
currency and the Advisor believes that currency will decline
relative to another currency, it might enter into a forward
contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes
referred to as "cross hedges." Use of different foreign currency
magnifies the risk that movements in the price of the instrument
will not correlate or will correlate unfavorably with the foreign
currency being hedged.
The cost to the Fund of engaging in forward currency
contracts varies with factors such as the currency involved, the
length of the contract period and the market conditions then
prevailing. Because forward currency contracts are usually
entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract,
it relies on the counter party to make or take delivery of the
underlying currency at the maturity of the contract. Failure by
the counter party to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, purchasers and
sellers of forward currency contracts can enter into offsetting
closing transactions, similar to closing transactions on futures,
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 actions generally can be made for forward currency
contracts only by negotiating directly with the counter party.
Thus, there can be no assurance that the Fund will in fact be
able to close out a forward currency contract at a favorable
price prior to maturity. In addition, in the event of insolvency
of the counter party, the Fund might be unable to close out a
forward currency contract at any time prior to maturity. In
either event, the Fund would continue to be subject to market
risk with respect to the position, and would continue to be
required to maintain a position in securities denominated in the
foreign currency or to maintain cash or securities in a
segregated account.
The precise matching of forward currency contract amounts
and the value of the securities involved generally will not be
possible because the value of such securities, measured in the
foreign currency, will change after the foreign currency contract
has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts.
The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
When required by guidelines of the Securities and Exchange
Commission, the Fund will set aside permissible liquid assets in
segregated accounts to secure its potential obligations under
forward currency contracts.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total
value of its portfolio securities to broker-dealers or
institutional investors that the Advisor deems qualified, but
only when the borrower maintains with the Fund's custodian bank
collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities
loaned, plus accrued interest and dividends, determined on a
daily basis and adjusted accordingly. [However, the Fund does
not presently intend to engage in such lending.] In determining
whether to lend securities to a particular broker-dealer or
institutional investor, the Advisor will consider, and during the
period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower.
The Fund will retain authority to terminate any loans at any
time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or money market instruments
held as collateral to the borrower or placing broker. The Fund
will receive reasonable interest on the loan or a flat fee from
the borrower and amounts equivalent to any dividends, interest or
other distributions on the securities loaned. The Fund will
retain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights and
rights to dividends, interest and other distributions, when
retaining such rights is considered to be in the Fund's interest.
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<PAGE> 21
WHEN-ISSUED SECURITIES
The Fund may from time to time purchase securities on a
"when-issued" basis. The price of debt securities purchased on a
when-issued basis, which may be expressed in yield terms, 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 one month of
the purchase. During the period between the purchase and
settlement, no payment is made by the Fund to the issuer and no
interest on debt securities accrues to the Fund. Forward
commitments involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in value of the Fund's
other assets. While when-issued securities may be sold prior to
the settlement date, the Fund intends to purchase such securities
with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes the
commitment to purchase a security on a when-issued basis, it will
record the transaction and reflect the value of the security in
determining its net asset value. The Fund does not believe that
its net asset value or income will be adversely affected by its
purchases of securities on a when-issued basis.
The Fund will maintain cash and marketable securities equal
in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be
sold on or before the settlement date. When the time comes to
pay for when-issued securities, the Fund will meet its
obligations from then-available cash flow, sale of the securities
held in the separate account, described above, sale of other
securities or, although it would not normally expect to do so,
from the sale of the when-issued securities themselves (which may
have a market value greater or less than the Fund's payment
obligation).
EUROPEAN AND AMERICAN DEPOSITORY RECEIPTS
The Fund may invest in foreign securities by purchasing
American Depository Receipts ("ADRs"). The Fund also may
purchase securities of foreign issuers in foreign markets and
purchase European Depository Receipts ("EDRs") or other
securities convertible into securities or issuers based in
foreign countries. 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
European securities markets. ADRs are receipts typically issued
by a U.S. Bank or trust company evidencing ownership of the
underlying securities. EDRs are European receipts evidencing a
similar arrangement. For purposes of the Fund's investment
policies, ADRs and EDRs are deemed to have the same
classification as the underlying securities they represent.
Thus, an ADR or EDR representing ownership of common stock will
be treated as common stock.
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 participant. A depository
may establish an unsponsored facility without participation by
(or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depository 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 depository
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 distribution, and the
performance of other services. The depository of an unsponsored
facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR
holders in respect of the deposited securities. 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 depository.
The deposit agreement sets out the rights and responsibilities of
the issuer, the depository 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 depository), although ADR holders continue to
bear certain other costs (such as deposit and withdrawal fees).
Under the terms of most sponsored arrangements, depositories
agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of
the deposited securities.
FOREIGN INVESTMENT COMPANIES
Some of the countries in which the Fund invests may not
permit direct investment by outside investors. Investments in
such countries may only be permitted through foreign government-
approved or -authorized investment vehicles, which may include
other investment companies. Investing through such vehicles may
involve frequent or layered fees or expenses and may
17
<PAGE> 22
also be subject to limitation under the Investment Company Act.
Under the Investment Company Act, a Fund may invest up to 10% of
its assets in shares of 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.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements with certain
banks or non-bank dealers. In a repurchase agreement, the Fund
buys a security at one price, and at the time of sale, the seller
agrees to repurchase the obligation at a mutually agreed upon
time and price (usually within seven days). The repurchase
agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is
secured by the value of the underlying security. If the value of
such securities is less than the repurchase price, plus any
agreed-upon additional amount, the other party to the agreement
will be required to provide additional collateral so that at all
times the collateral is at least equal to the repurchase price,
plus any agreed-upon additional amount. 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.
BORROWINGS
Each Fund may borrow money from banks, limited by each
Fund's fundamental investment restriction to 33 1/3% of its total
assets and may engage in mortgage dollar roll transactions and
reverse repurchase agreements which may be considered a form of
borrowing. (See "Mortgage Dollar Rolls and Reverse Repurchase
Agreements" below.) In addition, each Fund may borrow up to an
additional 5% of its total assets from banks for temporary or
emergency purposes. A Fund will not purchase securities when bank
borrowings exceed 5% of the Fund's total assets.
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, the Fund would sell a security
and enter into an agreement to repurchase the security at a
specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since
the Fund receives cash upon entering into a reverse repurchase
agreement, it may be considered a borrowing. When required by
guidelines of the SEC, the Fund will set aside permissible liquid
assets in a segregated account to secure its 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 the Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would
be compensated by the difference between the current sales price
and the lower price for the future purchase as well as by any
interest earned on the proceeds of the initial sale. The Fund
also could be compensated through the receipt of fee income
equivalent to a lower forward price. At the time 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 rolls transaction may be considered a
borrowing by the Funds.
The mortgage dollar rolls and reverse repurchase agreements
entered into by the Fund may be used as arbitrage transactions in
which a Fund will maintain an offsetting position in investment-
grade securities or repurchase agreements that mature on or
before the settlement date on 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 Fund that are associated with other types of
leverage.
DIRECTORS AND OFFICERS OF THE FUND
18
<PAGE> 23
Directors and officers of the Fund, together with
information as to their principal business occupations during the
last five years, and other information are shown below. Each
director who is deemed an "interested person," as defined in the
Investment Company Act, is indicated by an asterisk. Each
officer and director holds the same position with the following
registered investment companies: Strong Money Market Fund, Inc.,
Strong U.S. Treasury Money Fund, Inc., Strong Municipal Money
Market Fund, Inc., Strong Municipal Bond Fund, Inc., Strong
Short-Intermediate Municipal Bond Fund, Inc., Strong Insured
Municipal Bond Fund, Inc., Strong Advantage Fund, Inc., Strong
Short-Term Bond Fund, Inc., Strong Corporate Bond Fund, Inc.,
Strong Government Securities Fund, Inc., Strong Asset Allocation
Fund, Inc., Strong Discovery Fund, Inc., Strong Opportunity Fund,
Inc., Strong Common Stock Fund, Inc., Strong International Stock
Fund, Inc., Strong Discovery Fund II, Inc., Strong Special Fund
II, Inc., Strong American Utilities Fund, Inc., Strong High-Yield
Municipal Bond Fund, Inc., Strong Asia Pacific Fund, Inc., Strong
Growth Fund, Inc., Strong International Bond Fund, Inc., and
Strong Short-Term Global Bond Fund, Inc. (collectively, the
"Strong Funds").
*Richard S. Strong, Chairman of the Board and Director of
the Fund.
Prior to August 1985, Mr. Strong was Chief Executive Officer
of the Advisor, which he founded in 1974. Since August 1985, Mr.
Strong has been a Security Analyst and Portfolio Manager of the
Advisor. In October 1991, Mr. Strong also became the Chairman of
the Advisor. Mr. Strong is a director of the Advisor. Since
October 1993, Mr. Strong has been Chairman and a director of
Strong Holdings, Inc., a Wisconsin corporation and subsidiary of
the Advisor ("Holdings"), and the Fund's underwriter, Strong
Funds Distributors, Inc., a Wisconsin corporation and subsidiary
of Holdings ("Distributor"). Since January 1994, Mr. Strong has
been Chairman and a director of Heritage Reserve Development
Corporation, a Wisconsin Corporation and subsidiary of Holdings
("Heritage"); and since February 1994, Mr. Strong has been a
member of the Managing Boards of Fussville Real Estate Holdings
L.L.C. ("Real Estate Holdings"), a Wisconsin Limited Liability
Company and subsidiary of the Advisor, and Fussville Development
L.L.C. ("Development"), a Wisconsin Limited Liability Company and
subsidiary of the Advisor, and certain of its subsidiaries. Mr.
Strong has served as a director of the Fund since its inception
in 1981 and as Chairman of the Board of the Fund since July 1986.
Mr. Strong has been in the investment management business since
1967.
Marvin E. Nevins, Director of the Fund.
Private Investor. From 1945 to 1980, Mr. Nevins was
Chairman of Wisconsin Centrifugal Inc., a foundry. From July 1983
to December 1986, he was Chairman of General Casting Corp.,
Waukesha, Wisconsin, a foundry. Mr. Nevins is a former Chairman
of the Wisconsin Association of Manufacturers & Commerce. He was
also a regent of the Milwaukee School of Engineering and a member
of the Board of Trustees of the Medical College of Wisconsin.
Mr. Nevins has served as a director of the Fund since the Fund's
inception in 1981.
Willie D. Davis, Director of the Fund.
Mr. Davis has been director of Alliance Bank since 1980,
Sara Lee Corporation (a food/consumer products company) since
1983, Kmart Corporation (a discount consumer products company)
since 1985, YMCA Metropolitan -- Los Angeles since 1985, Dow
Chemical Company since 1988, MGM Grand, Inc. (an
entertainment/hotel company) since 1990, WICOR, Inc. (a utility
company) since 1990, Johnson Controls, Inc. (an industrial
company) since 1992, L.A. Gear (a footwear/sportswear company)
since 1992, and Rally's Hamburger, Inc. since 1994. Mr. Davis
has been a trustee of the University of Chicago since 1980,
Marquette University since 1988, and Occidental College since
1990. Since 1977, Mr. Davis has been President and Chief
Executive Officer of All Pro Broadcasting, Inc. Mr. Davis was a
director of the Fireman's Fund (an insurance company) from 1975
until 1990. Mr. Davis has served as a director of the Fund since
July 1994.
*John Dragisic, Vice Chairman and Director of the Fund.
Mr. Dragisic has been Vice Chairman and a director of the
Advisor and a director of Holdings and Distributor since 1994.
Mr. Dragisic previously served as a director of the Fund from
1991 until 1994. 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 InterAmerican Development Bank. Mr.
Dragisic received his Ph.D. in Economics in 1971
19
<PAGE> 24
from the University of Wisconsin -- Madison and his B.A. degree
in Economics in 1962 from Lake Forest College. Mr. Dragisic has
served as Vice Chairman of the Fund since July 1994 and director
of the Fund since April 1995.
Stanley Kritzik, Director of the Fund.
[need biography]
William F. Vogt, Director of the Fund.
Mr. Vogt has been the President of Vogt Management
Consulting, Inc. (need description of Co.), Denver, Colorado
since 1990. From 1982 until 1990, he served as an executive
director of University Physicians (need description), Denver,
Colorado. Mr. Vogt was also a Fellow of the Medical Group
Management Association, American College of Medical Practice
Executives. He has served as a director of the Fund since April
1995.
Lawrence A. Totsky, C.P.A., Vice President of the Fund.
Mr. Totsky has been Senior Vice President of the Advisor
since December 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 been the Vice President of the Fund since May
1993.
Thomas P. Lemke, Vice President of the Fund.
Mr. Lemke has been Senior Vice President, Secretary, and
General Counsel of the Advisor since September 1994. For two
years prior to joining the Advisor, Mr. Lemke acted as Resident
Counsel for Funds Management at J.P. Morgan & Co., Inc. From
February 1989 until April 1992, Mr. Lemke acted as Associate
General Counsel to Sanford C. Bernstein Co., Inc. For two years
prior to that, Mr. Lemke was Of Counsel at the Washington, D.C.
law firm of Tew Jorden & Schulte, a successor of Finley, Kumble
Wagner. From August 1979 until December 1986, Mr. Lemke worked
at the Securities and Exchange Commission, most notably as the
Chief Counsel to the Division of Investment Management (November
1984 - December 1986), and as Special Counsel to the Office of
Insurance Products, Division of Investment Management (April 1982
- - October 1984). Mr. Lemke has been a Vice President of the Fund
since October 1994.
Ann E. Oglanian, Secretary of the Fund.
Ms. Oglanian has been an Associate Counsel to the Advisor
since January 1992. Ms. Oglanian acted as Associate Counsel for
the Chicago-based investment management firm, Kemper Financial
Services, Inc., from June 1988 until December 1991. Ms. Oglanian
has been the Secretary of the Fund since May 1994.
Ronald A. Neville, Treasurer of the Funds.
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 33963. 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 3003 East Third Avenue,
Denver, Colorado 80206.
As of January 31, 1995, the officers and directors of the
Fund in the aggregate beneficially owned less than 1% of Fund's
then outstanding shares. Directors and officers of the Fund who
are officers, directors, employees, or stockholders of the
Advisor do not receive any remuneration from the Fund for serving
as directors or officers.
PRINCIPAL SHAREHOLDERS
As of January 31, 1995, no persons owned of record or are
known by the Fund to own of record or beneficially, more than 5%
of the Fund's outstanding shares:
INVESTMENT ADVISOR AND DISTRIBUTOR
20
<PAGE> 25
The Advisor to the Fund is Strong Capital Management, Inc.
Mr. Richard S. Strong controls the Advisor. Mr. Strong is the
Chairman and a director of the Advisor, Mr. Dragisic is the Vice
Chairman and a director of the Advisor. Mr. Totsky is a Senior
Vice President of the Advisor, Mr. Lemke is a Senior Vice
President, Secretary and General Counsel of the Advisor, Ms.
Oglanian is an Associate Counsel of the Advisor and Mr. Zoeller
is the Treasurer of the Advisor. A brief description of the
Fund's investment advisory agreement ("Advisory Agreement") is
set forth in the Prospectus under "About the Funds -- Management."
The Advisory Agreement, which is dated April 13, 1995, was
last approved by shareholders at the annual meeting of
shareholders held on April 13, 1995. The Advisory Agreement is
required to be approved annually by the Board of Directors of the
Fund or by vote of a majority of the Fund's outstanding voting
securities (as defined in the Investment Company Act). In either
case, each annual renewal must be approved by the vote of a
majority of the Fund's directors who are not parties to the
Advisory Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement is terminable, without penalty,
on 60 days' written notice by the Board of Directors of the Fund,
by vote of a majority of the Fund's outstanding voting
securities, or by the Advisor. In addition, the Advisory
Agreement will terminate automatically in the event of its
assignment.
Under the terms of the Advisory Agreement, the Advisor
manages the Fund's investments subject to the supervision of the
Fund's Board of Directors. The Advisor is responsible for
investment decisions and supplies investment research and
portfolio management. At its expense, the Advisor provides
office space and all necessary office facilities, equipment, and
personnel for servicing the investments of the Fund. The Advisor
places all orders for the purchase and sale of the Fund's
portfolio securities at its expense.
Except for expenses assumed by the Advisor as set forth
above or 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; expenses of issue,
sale, repurchase, or redemption of shares; expenses of
registering or qualifying shares for sale; expenses for printing
and distribution costs of prospectuses and quarterly financial
statements mailed to existing shareholders; and 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, the cost of stock certificates, and fees for directors
who are not "interested persons" of the Advisor. The Fund,
Advisor and each of Salomon Brothers Inc. ("Salomon") and
PaineWebber, Incorporated ("PaineWebber") have entered into an
agreement pursuant to which Salomon or PaineWebber pays certain
expenses incurred by the Fund with proceeds from certain
brokerage commissions received by Salomon or PaineWebber. (See
"Portfolio Transactions and Brokerage.")
As compensation for its services, the Fund pays to the
Advisor a monthly advisory fee at the annual rate of .85% of the
first $35,000,000 of the Fund's average daily net asset value and
at the annual rate of .80% of the Fund's average daily net asset
value in excess of $35,000,000. (See "Shareholder Manual --
Determining Your Share Price" in the Prospectus.) From time to
time, the Advisor may voluntarily waive all or a portion of its
management fee for the Fund. In 1992, 1993, and 1994, the Fund
paid the Advisor $4,995,179, $4,614,268, and $ ,
respectively, in advisory fees.
The Advisory Agreement requires the Advisor to reimburse the
Fund in the event that the expenses and charges payable by the
Fund in any fiscal year, including the advisory fee but excluding
taxes, interest, brokerage commissions, and similar fees, exceed
that percentage of the average net asset value of the Fund for
such year. Such excess is determined by valuations made as of the
close of each business day of the year, which is the most
restrictive percentage provided by the state laws of the various
states in which the Fund's common stock is qualified for sale; or
if the states in which the Fund's common stock is qualified for
sale impose no restrictions, then 2%. The most restrictive
percentage limitation currently applicable to the Fund is 2 1/2%
of its average daily net assets up to $30,000,000, 2% on the next
$70,000,000 of its average daily net assets, and 1 1/2% of the
average daily net assets in excess of $100,000,000.
Reimbursement of expenses in excess of the applicable limitation
will be made on a monthly basis and will be paid to the Fund by
reduction of the Advisor's fee, subject to later adjustment,
month by month, for the remainder of the Fund's fiscal year. The
Advisor may from time to time voluntarily absorb expenses for the
Fund in addition to the reimbursement of expenses in excess of
applicable limitations.
On July 12, 1994, the Securities and Exchange Commission
(the "SEC") filed an administrative action (Order) against SCM, Mr.
Strong, and another employee of SCM in connection with conduct
that occurred between 1987 and early 1990. In re
21
<PAGE> 26
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
alleged that SCM 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
alleged that SCM 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 SCM's policy
on personal trading and by failing to disclose trading by
Harbour, an entity in which principals of SCM 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 SCM agreed to various undertakings, including adoption of
certain procedures and a limitation for six months on accepting
certain types of new advisory clients.
Under a Distribution Agreement dated December 1, 1993 with
the Fund (the "Distribution Agreement"), Strong Funds
Distributors, Inc. acts as underwriter of the Fund's shares (the
"Distributor"). The Distribution Agreement provides that the
Distributor will use its best efforts to distribute the Fund's
shares. Since the Fund is a "no-load" fund, no sales commissions
are charged on the purchase of Fund shares. The Distribution
Agreement further provides that the Distributor will bear the
costs of printing prospectuses and shareholder reports which are
used for selling purposes, as well as advertising and other costs
attributable to the distribution of the Fund's shares. The
Distributor is an indirect subsidiary of the Advisor and
controlled by the Advisor and Richard S. Strong. Prior to
December 1, 1993, the Advisor acted as underwriter for the Fund.
On December 1, 1993, Distributor succeeded to the broker-dealer
registration of the Advisor and, in connection therewith, the
Distribution Agreement was executed on substantially identical
terms as the former distribution agreement with the Advisor as
distributor. The Distribution Agreement is subject to the same
termination and renewal provisions as are described above with
respect to the Advisory Agreement.
From time to time, the Distributor may hold in-house sales
incentive programs for its associated persons under which these
persons may receive non-cash compensation awards in connection
with the sale and distribution of 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 Fund and for the placement of its portfolio
business and the negotiation of the commissions to be paid on
such transactions. It is the policy of the Advisor to seek the
best execution at the best security price available with respect
to each transaction, in light of the overall quality of brokerage
and research services provided to the Advisor or the Fund. In
over-the-counter transactions, orders are placed directly with a
principal market maker unless it is believed that a better price
and execution can be obtained using a broker. The best price to
the Fund means the best net price without regard to the mix
between purchase or sale price and commissions. In selecting
broker-dealers and in negotiating commissions, the Advisor
considers the firm's reliability, the quality of its execution
services on a continuing basis, and its financial condition.
Brokerage will not be allocated based on the sale of Fund shares.
Section 28(e) of the Securities Exchange Act of 1934
("Section 28(e)") permits an investment advisor, under certain
circumstances, to cause an account to pay a broker or dealer who
supplies brokerage and research services a commission for
effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a)
furnishing advice as to the value of securities, the advisability
of investing, purchasing or selling securities, and the
availability of securities or purchasers or sellers of
securities; (b) furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c)
effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement,
the Advisor may cause the Fund to pay a broker which provides
brokerage and research services to the Advisor a commission for
effecting a securities transaction in excess of the amount
another broker would have charged for effecting the transaction.
The Advisor is of the opinion that the continued receipt of
supplemental investment research services from broker-dealers is
essential to its provision of high-quality portfolio management
22
<PAGE> 27
services to the Fund. The Advisory Agreement provides that such
higher commissions will not be paid by the Fund unless (a) the
Advisor determines in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction
or in terms of the Advisor's overall responsibilities with
respect to the accounts as to which it exercises investment
discretion; (b) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal
laws, and the Advisory Agreement; and (c) in the opinion of the
Advisor, the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long
term. The investment advisory fee paid by the Fund under the
Advisory Agreement is not reduced as a result of the Advisor's
receipt of research services. During 1992, 1993, and 1994, the
Fund paid $4,466,546, $4,309,166, and $ , respectively,
in brokerage commissions.
Generally, research services provided consist of portfolio
pricing and capital changes services and reports, research
reports dealing with macroeconomic trends and monetary and fiscal
policy, research reports on individual companies and industries,
and information dealing with market trends and technical
analysis. 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. The Advisor's receipt of these
administrative benefits arises from its ability, in certain
cases, to direct brokerage to certain firms in connection with
its management of client portfolios. In making good faith
allocations between administrative benefits and research and
brokerage services, a conflict of interest may exist by reason of
the Advisor's allocation of the costs of such benefits and
services between those that primarily benefit the Advisor and
those that primarily benefit its clients, such as the Fund.
The Advisor places portfolio transactions for other advisory
accounts, including other mutual funds managed by the Advisor.
Research services furnished by firms through which the Fund
effects its securities transactions may be used by the Advisor in
servicing all of its accounts; not all of such services may be
used by the Advisor in connection with the Fund. In the opinion
of the Advisor, it is not possible to separately measure the
benefits from research services to each of the accounts
(including the Fund) managed by the Advisor. Because the volume
and nature of the trading activities of the accounts are not
uniform, the amount of commissions in excess of those charged by
another broker paid by each account for brokerage and research
services will vary. However, in the opinion of the Advisor, such
costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
The Advisor seeks to allocate portfolio transactions
equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some
cases, this procedure could have an adverse effect on the price
or the amount of securities available to the Fund. In making
such allocations between the Fund and other advisory accounts,
the main factors considered by the Advisor are the respective
investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for
investment, the size of investment commitments generally held,
and the opinions of the persons responsible for recommending the
investment.
The Fund has entered into agreements with the Advisor and
each of Salomon and PaineWebber (collectively, the "Brokers"), in
which the Brokers have agreed to pay directly to vendors certain
investment management and other related expenses incurred and
otherwise payable by the Fund ("Expense Agreements"). In
accordance with the Expense Agreements, the Advisor directs the
delivery to the Brokers of invoices determined by the Fund to be
appropriate for payment by the Brokers. The Brokers pay the
invoices with the proceeds of certain commissions received from
the Fund. The Expense Agreements provide that a percentage of
commissions received from the Fund for completed agency
transactions in certain securities for the Fund, designated by
the Advisor as directed commissions subject to the Expense
Agreements, shall be used by the Brokers to pay the invoices.
Investment management and other related expenses include those
payable by the Fund, as described under "Investment Advisor and
Distributor" in this Statement of Additional Information.
As of December 31, 1994, the Fund has acquired securities of
its regular brokers or dealers (as defined in Rule 10b-1 under
the 1940 Act) or their parents in the following amounts:
<TABLE>
<CAPTION>
Regular Broker or Dealer or Value of Securities Owned as of
Parent Issuer December 31, 1994*
<S> <C>
$
</TABLE>
* To the nearest thousandth.
23
<PAGE> 28
CUSTODIAN
As custodian of the Fund's assets, Firstar Trust Company has
custody of all securities and cash of the Fund, delivers and
receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and
performs other duties, all as directed by officers of the Fund.
The custodian is in no way responsible for any of the investment
policies or decisions of the Fund.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
The Advisor acts as dividend-disbursing agent and transfer
agent to the Fund. The Advisor is compensated based on an annual
fee per open account of the Fund of $21.75 plus certain
out-of-pocket expenses and a $4.20 charge per account per annum
on all closed accounts, payable monthly. For transfer agent and
dividend-disbursing agent services in 1992, 1993, and 1994, the
Fund paid the Advisor $1,944,126, $1,596,596, and $ ,
respectively, in per account charges and $385,737, $360,677, and
$ , respectively, for out-of-pocket expenses. The
Advisor also acts as investment advisor to the Fund. The fees
received and the services provided as transfer agent and
dividend-disbursing agent are in addition to the fees received
and services provided under the Advisory Agreement.
In addition to the foregoing services, the Advisor provides
certain printing and mailing services for the Fund such as
printing and mailing of shareholder account statements, checks
and tax forms. During 1992, 1993, and 1994 the Fund paid the
Advisor $44,675, $37,559, and $ , respectively, for
printing and mailing services.
From time to time, the Funds, directly or indirectly through
arrangements with 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 401k plans. These services
may include, among other things, sub-accounting services,
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 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, the Fund intends to continue to qualify
annually as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended (the "Code"). This
qualification does not involve government supervision of the
Fund's management practices or policies.
In order to qualify for treatment as a RIC under the Code,
the Fund must distribute to its shareholders for each taxable
year at least 90% of its investment company taxable income
(consisting generally of net investment income and net short-term
capital gain) and must meet several additional requirements.
Among these requirements are 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
other income (including gains from options or futures) derived
with respect to its business of investing in securities ("Income
Requirement"); (2) the Fund must derive less than 30% of its
gross income each taxable year from the sale or other disposition
of securities, or options or futures, that were held for less
than three months ("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.
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.
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<PAGE> 29
The Fund will be subject to a nondeductible 4% excise tax
(the "Excise Tax") to the extent it fails to distribute by the
end of any calendar year substantially all of its ordinary income
for that year and capital gain net income for the one-year period
ending on October 31 of that year, plus certain other amounts.
FOREIGN TRANSACTIONS
Interest and dividends received by the Fund may be subject
to income, withholding, or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield on its
securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
The Fund will maintain its accounts and calculate its income
in U.S. dollars. In general, gain or loss (1) from the
disposition of foreign currencies and forward foreign 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 a 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 normal
rate that takes into account expected decreases in the value of
the principal amount of the security due to anticipated currency
devaluations; in that case, the Fund would be required to include
the interest in income as it accrues but generally would realize
a currency loss with respect to the principal only when the
principal was received (through disposition or upon maturity).
[The Fund may invest in the stock of "passive foreign
investment companies" ("PFICs"). 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 (collectively, "PFIC
income"), plus interest thereon, even if the Fund distributes the
PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its
shareholders. If 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 would have to be distributed to
its shareholders to satisfy the Distribution Requirement and to
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.]
Three bills passed by Congress in 1991 and 1992 and vetoed
by President Bush would have substantially modified the taxation
of U.S. shareholders of foreign corporations, including
eliminating the provisions described above dealing with PFICs and
replacing them (and other provisions) with a regulatory scheme
involving entities called "passive foreign corporations." The
"Tax Simplification and Technical Corrections Bill of 1993,"
approved in November 1993 by the House Ways and Means Committee,
contains the same modifications. It is unclear at this time
whether, and in what form, the proposed modifications may be
enacted into law.
Pursuant to proposed regulations, open-end RICs such as the
Funds would be entitled to elect to "mark-to-market" their stock
in certain PFICs. "Marking-to-market," in this context, means
recognizing as gain for each taxable year the excess, as of the
end of that year, of the fair market value of such PFIC's stock
over the adjusted basis in that stock (including mark-to-market
gain for each prior year for which an election was in effect).
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and
selling (writing) options and futures and entering into foreign
currency contracts, involves complex rules that will determine
for income tax purposes the character and timing of recognition
of the gains and losses the Fund realizes in connection
therewith. Gains from the disposition of foreign currencies
(except certain gains therefrom that may be excluded by future
regulations), and income from transactions in options, futures,
and forward
25
<PAGE> 30
currency contracts derived by the Fund with respect to its
business of investing in securities or foreign securities, 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, options,
futures, and forward currency contracts on foreign currencies,
that are not directly related to the Fund's principal business of
investing in securities (or options and futures with respect to
securities) also will be subject to the 30% Limitation if they
are held for less than three months.
If the Fund satisfies certain requirements, any increase in
value of a position that is part of a "designated hedge" will be
offset by any decrease in value (whether realized or not) of the
offsetting hedging position during the period of the hedge for
purposes of determining whether the Fund satisfies the 30%
Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that
limitation. The Fund intends that, when it engages in hedging
strategies, the hedging transactions will qualify for this
treatment, but at the present time it is not clear whether this
treatment will be available for all of the Fund's hedging
transactions. To the extent this treatment is not available or
is not elected by the Fund, it may be forced to defer the closing
out of certain options or futures contracts beyond the time when
it otherwise would be advantageous to do so, in order for the
Fund to qualify as a RIC.
For federal income tax purposes, the Fund is required to
recognize as income for each taxable year its net unrealized
gains and losses on options and futures contracts that are
subject to section 1256 of the Code ("Section 1256 Contracts")
and are held by the Fund as of the end of the year, as well as
gains and losses on Section 1256 Contracts actually realized
during the year. Except for Section 1256 Contracts that are part
of a "mixed straddle" and with respect to which the Fund makes a
certain election, any gain or loss recognized with respect to
Section 1256 Contracts is considered to be 60% long-term capital
gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the Section 1256 Contract.
Unrealized gains on Section 1256 Contracts that have been held by
the Fund for less than three months as of the end of its taxable
year, and that are recognized for federal income tax purposes as
described above, will not be considered gains on investments held
for less than three months for purposes of the 30% Limitation.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may acquire zero-coupon, step-coupon, or other
securities issued with original issue discount. As the holder of
those securities, the Fund must include in its income the
original issue discount that accrues on the securities during the
taxable year, even if the Fund receives no corresponding payment
on the securities during the year. Similarly, the Fund must
include in its gross income securities it receives as "interest"
on pay-in-kind securities. Because the Fund annually must
distribute substantially all of its investment company taxable
income, including any original issue discount and other non-cash
income, to satisfy the Distribution Requirement and to avoid
imposition of the Excise Tax, it may be required in a particular
year to distribute as a dividend an amount that is greater than
the total amount of cash it actually receives. Those
distributions may be made from the proceeds on sales of portfolio
securities, if necessary. The Fund may realize capital gains or
losses from those sales, which would increase or decrease its
investment company taxable income or net capital gain, or both.
In addition, any such gains may be realized on the disposition of
securities held for less than three months. Because of the 30%
Limitation, any such gains would reduce the Fund's ability to
sell other securities, or options or futures contracts, held for
less that three months that it might wish to sell in the ordinary
course of its portfolio management.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption
"Shareholder Manual - Determining Your Share Price," the net
asset value of the Fund will be determined as of the close of
trading on each day the New York Stock Exchange is open for
trading. The New York Stock Exchange is open for trading Monday
through Friday except New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day. Additionally, if any of the
aforementioned holidays falls on a Saturday, the New York Stock
Exchange will not be open for trading on the preceding Friday,
and when any such holiday falls on a Sunday, the New York Stock
Exchange 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.
Debt securities are valued by a pricing service that
utilizes electronic data processing techniques to determine
values for normal institutional-sized trading units of debt
securities without regard to sale or bid prices when such values
are believed to more accurately reflect the fair market value for
such securities. Otherwise, sale or bid prices are used. Any
securities or other
26
<PAGE> 31
assets for which market quotations are not readily available are
valued at fair value as determined in good faith by the Board of
Directors of the Fund. Debt securities having remaining
maturities of 60 days or less when purchased are valued by the
amortized cost method when the Fund's Board of Directors
determines that the fair value of such securities is their
amortized cost. Under this method of valuation, a security is
initially valued at its acquisition cost, and thereafter,
amortization of any discount or premium is assumed each day,
regardless of the impact of the fluctuating rates on the market
value of the instrument.
SHAREHOLDER SERVICES
As described under "Shareholder Manual - Shareholder
Services" in the Prospectus, all income dividends and capital
gain distributions will be invested automatically in additional
Fund shares unless the Fund is otherwise notified in writing.
SYSTEMATIC WITHDRAWAL PLAN
You can set up automatic withdrawals from your account at
monthly, quarterly, or annual intervals. To begin distributions,
you must have an initial balance of $5,000 in your account. To
establish the Systematic Withdrawal Plan, call 1-800-368-3863 and
request an application. To establish the Systematic Withdrawal
Plan, you deposit your Fund shares with the Fund and appoint it
as your agent to effect redemptions of Fund shares held in your
account for the purpose of making monthly, quarterly, or annual
withdrawal payments of a fixed amount to you out of your account.
Your signature should be guaranteed by an eligible guarantor
institution as described under "Shareholder Manual - Shareholder
Services" in the Prospectus.
The minimum amount of a withdrawal payment is $50. These
payments will be made from the proceeds of periodic redemption of
shares in the account at net asset value. Redemptions will be
made on the fifth business day preceding the last day of each
month or, if that day is a holiday, on the next preceding
business day.
Withdrawal payments cannot be considered to be yield or
income on the shareholder's investment since portions of each
payment will normally consist of a return of capital. Depending
on the size or the frequency of the disbursements requested and
the fluctuation in the value of the Fund's portfolio, redemptions
for the purpose of making such disbursements may reduce or even
exhaust your account.
You may vary the amount or frequency of withdrawal payments,
temporarily discontinue them, or change the designated payee or
payee's address by notifying the Fund.
AUTOMATIC INVESTMENT PLAN
An Automatic Investment Plan may be established at any time.
By participating in the Automatic Investment Plan, you may
automatically make purchases of shares of the Fund on a regular,
convenient basis. You may choose to make contributions on any day
of each month in amounts of $50 or more.
Under the Automatic Investment Plan, your bank or other
financial institution debits preauthorized amounts drawn on your
account each month and applies such amounts to the purchase of
shares of the Fund. The Automatic Investment Plan can be
implemented with any financial institution that is a member of
the Automated Clearing House. An Automatic Investment Plan form
is attached to the Prospectus. No service fee is charged by the
Fund for participating in the Automatic Investment Plan.
GENERAL PROCEDURES FOR SHAREHOLDER ACCOUNTS
As set forth under "About the Funds - Organization" in the
Prospectus, certificates for Fund shares are only issued upon
written request.
Either an investor or the Fund, by written notice to the
other, may terminate the investor's participation in the plans,
programs, privileges, or other services described under
"Shareholder Manual - Shareholder Services" in the Prospectus
without penalty any time, except as discussed in the Prospectus.
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<PAGE> 32
Your account may be terminated by the Fund on not less than
30 days' notice if, at the time of any transfer or redemption of
shares in the account, the value of the remaining shares in the
account at the current offering price value falls below $500.
Upon any such termination, the shares will be redeemed at the
then current net asset value and a check for the proceeds of
redemption sent within seven days of such redemption.
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGES AND AUTOMATIC
EXCHANGE PLAN
A discussion of the Telephone Exchange and Redemption
Privileges and Automatic Exchange Plan is set forth in the
Prospectus under the captions "Shareholder Manual - Shareholder
Service."
Shares of the Fund and any other funds sponsored by the
Advisor may be exchanged for each other at relative net asset
values. Exchanges will be effected by redemption of shares of
the Fund held and purchase of shares of the fund for which Fund
shares are being exchanged (the "New Fund"). For federal income
tax purposes, any such exchange constitutes a sale upon which a
capital gain or loss will be realized, depending upon whether the
value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis. If you are interested in
exercising any of these exchange privileges, you should obtain
prospectuses of other funds sponsored by the Advisor from the
Advisor. Upon a telephone exchange, the transfer agent
establishes a new account in the New Fund with the same
registration and dividend and capital gains options as the
redeemed account, unless otherwise specified, and confirms the
purchase to you. In order to establish a Systematic Withdrawal
Plan for the new account, however, an exchanging shareholder must
file a specific written request.
The Fund employs reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Fund may
not be liable for losses due to unauthorized or fraudulent
instructions. Such procedures include but are not limited to
requiring a form of personal identification prior to acting on
instructions received by telephone, providing written
confirmations of such transactions to the address of record, and
tape recording telephone instructions.
The Telephone Exchange and Redemption Privileges and
Automatic Exchange Plan are available only in states where shares
of the New Fund may be sold, and may be modified or discontinued
at any time. Additional information regarding the Telephone
Exchange and Redemption Privileges and Automatic Exchange Plan is
contained in the Fund's Prospectus.
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. Under certain
circumstances, your contribution will be deductible.
Direct Rollover IRA: To avoid the mandatory 20% federal
withholding tax on distributions, you must transfer the qualified
retirement or Code section 403(b) plan distribution directly into
an IRA. This tax cannot be avoided if you receive a distribution
and then roll it over into an IRA. 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 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 is a type of SEP-IRA in which an employer may allow
employees to defer part of their salaries and contribute into an
IRA account. These deferrals help lower the employees' taxable
income.
Defined Contribution Plan: A defined contribution plan allows
self-employed individuals, partners, or a corporation to provide
retirement benefits for themselves and their employees. There are
three plan types: a profit-sharing plan, a money purchase pension
plan, and a paired plan (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 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.
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<PAGE> 33
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 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 with 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 is 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.
SHAREHOLDER MEETINGS
The Fund is a Wisconsin corporation organized on September
3, 1981 with 300,000,000 authorized shares of capital stock, $.01
par value. The Wisconsin Business Corporation Law permits
registered investment companies, such as the Fund, to operate
without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the
Investment Company Act of 1940. The Fund has adopted the
appropriate provisions in its By-Laws and may, at its discretion,
not hold an annual meeting in any year in which the election of
directors is not required to be acted on by shareholders under
the Investment Company Act of 1940.
The Fund's By-Laws also contain procedures for the removal
of directors by its shareholders. At any meeting of
shareholders, duly called and at which a quorum is present, the
shareholders may, by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any
director or directors from office and may elect a successor or
successors to fill any resulting vacancies for the unexpired
terms of removed directors.
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. Whenever ten or
more shareholders of record who have been such for at least six
months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least
$25,000 or at least one percent (1%) of the total outstanding
shares, whichever is less, shall apply to the Fund's Secretary in
writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to a request for
a meeting as described above and accompanied by a form of
communication and request which they wish to transmit, the
Secretary shall within five business days after such application
either: (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books
of the Fund; or (2) inform such applicants as to the approximate
number of shareholders of record and the approximate cost of
mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in
clause (2) of the last sentence of the preceding paragraph, the
Secretary, upon the written request of such applicants,
accompanied by a tender of the material to be mailed and of the
reasonable expenses of mailing, shall, with reasonable
promptness, mail such material to all shareholders of record at
their addresses as recorded on the books unless within five
business days after such tender the Secretary shall mail to such
applicants and file with the Commission, together with a copy of
the material to be mailed, a written statement signed by at least
a majority of the Board of Directors to the effect that in their
opinion either such material contains untrue statements of fact
or omits to state facts necessary to make the statements
contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion.
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<PAGE> 34
After opportunity for hearing upon the objections specified
in the written statement so filed, the Commission may, and if
demanded by the Board of Directors or by such applicants shall,
enter an order either sustaining one or more of such objections
or refusing to sustain any of them. If the Commission shall
enter an order refusing to sustain any of such objections, or if,
after the entry of an order sustaining one or more of such
objections, the Commission shall find, after notice and
opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Secretary
shall mail copies of such material to all shareholders with
reasonable promptness after the entry of such order and the
renewal of such tender.
PERFORMANCE INFORMATION
As described under "About the Funds - Performance
Information" in the prospectus, the Fund's historical performance
or return may be shown in the form of "average annual total
return," "total return," and "cumulative total return." From time
to time, the Adviser may voluntarily waive all or a portion of
its management fee and/or absorb certain expenses for the Fund.
Without these waivers and absorption of expenses, the performance
results for the Fund noted herein would have been lower. All
performance and returns noted herein are historical and do not
necessarily represent the future performance of the Fund.
AVERAGE ANNUAL TOTAL RETURN
The Fund's average annual total return quotation is computed
in accordance with a standardized method prescribed by rules of
the Commission. The average annual total return for the Fund for
a specific period is found by first taking a hypothetical $10,000
investment ("initial investment") in the Fund's shares on the
first day of the period and computing the "redeemable value" of
that investment at the end of the period. The redeemable value
is then divided by the initial investment, and this quotient is
taken to the Nth root (N representing the number of years in the
period) and 1 is subtracted from the result, which is then
expressed as a percentage. The calculation assumes that all
income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during
the period. Average annual total return figures for various
periods are set forth in the table below.
TOTAL RETURN
Calculation of the Fund's total return is not subject to a
standardized formula. Total return performance for a specific
period is calculated by first taking an investment (assumed
below to be $10,000) ("initial investment") in the Fund's shares
on the first day of the period and computing the "ending value"
of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial
investment from the ending value and dividing the remainder by
the initial investment and expressing the result as a percentage.
The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset
value of the reinvestment dates during the period. Total return
may also be shown as the increased dollar value of the
hypothetical investment over the period. Total return figures
for various periods are set forth in the table below.
CUMULATIVE TOTAL RETURN
Cumulative total return represents the simple change in
value of our investment over a stated period and may be quoted as
a percentage or as a dollar amount. Total returns and cumulative
total returns may be broken down into their components of income
and capital (including capital gains and changes in share price)
in order to illustrate the relationship between these factors and
their contributions to total return.
The Fund's performance figures are based upon historical
results and are not necessarily representative of future
performance. The Fund's shares are sold at net asset value per
share. The Fund's returns and net asset value will fluctuate
and shares are redeemable at the then current net asset value of
the Fund, which may be more or less than original cost. Factors
affecting the 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 December 31, 1994. 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> 35
Strong Total Return Fund
<TABLE>
<CAPTION>
Average
Annual
Total Total
Return Return
------ ------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
-----------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $ % %
Ten Years 10,000
Five Years 10,000
One Year 10,000
------------------------
</TABLE>
(1) December 30, 1981
The Fund's total return for the three months ending March
31, 1995 was ______%.
COMPARISONS
(1) U.S. TREASURY BILLS, NOTES, OR BONDS
Investors may want to compare the performance of the Fund to
that of U.S. Treasury Bills, notes, or bonds, which are issued by
the U.S. Government. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the
time of issuance and payment of principal and interest is backed
by the full faith and credit of the United States Treasury. The
market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal
par value at maturity. Generally, the values of obligations with
shorter maturities will fluctuate less than those with longer
maturities.
(2) CERTIFICATES OF DEPOSIT
Investors may want to compare the Fund's performance to that
of certificates of deposit offered by banks and other depository
institutions. Certificates of deposit may offer fixed or
variable interest rates and principal is guaranteed and may be
insured. Withdrawal of the deposits prior to maturity normally
will be subject to a penalty. Rates offered by banks and other
depository institutions are subject to change at any time
specified by the issuing institution.
(3) MONEY MARKET FUNDS
Investors may also want to compare performance of the Fund
to that of money market funds. Money market fund yields will
fluctuate and shares are not insured, but share values usually
remain stable.
(4) LIPPER ANALYTICAL SERVICES ("LIPPER") AND OTHER INDEPENDENT
RANKING ORGANIZATION
From time to time, in marketing and other fund literature,
the Fund's performance may be compared to the performance of
other mutual funds in general or to the performance of particular
types of mutual funds, with similar investment goals, as tracked
by independent organizations. Among these organizations, Lipper,
a widely used independent research firm which ranks mutual funds
by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net
asset value, with all income and capital gain dividends
reinvested. Such calculations do not include the effect of any
sales charges imposed by other funds. The Fund will be compared
to Lipper's appropriate fund category, that is, by fund objective
and portfolio holdings. The Fund's performance may also be
compared to the average performance of its upper category.
(5) MORNINGSTAR, INC.
The Fund's performance may also be compared to the
performance of other mutual funds by Morningstar, Inc. which
rates funds on the basis of historical risk and total return.
Morningstar's ratings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for
3, 5, and 10 year periods. Ratings are not absolute or
necessarily predictive of future performance.
31
<PAGE> 36
(6) INDEPENDENT SOURCES
Evaluations of Fund performance made by independent sources
may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the
Fund, especially those with similar objectives. Sources for Fund
performance and articles about the Fund may include publications
such as Money, Forbes, Kiplinger's, Morningstar, Inc., Financial
World, Business Week, U.S. News and World Report, The Wall Street
Journal, Barron's and a variety of investment newsletters.
(7) INDICES
The Fund may compare its performance to a wide variety of
indices including the following:
(a) The Consumer Price Index,
(b) Dow Jones Average of 30 Industrials,
(c) Standard & Poor's 500 Stock Index (comparison of
both dividend yields and total returns),
(d) NASDAQ Over-the-Counter Composite Index,
(e) Russell 2000 Small Stock Index,
(f) Russell 3000 Stock Index,
(g) Salomon Brothers 3-month Treasury Bill Index,
(h) The Salomon Brothers Broad Investment-Grade Bond
Index,
(i) Lipper Growth and Income Fund Index.
There are differences and similarities between the
investments that the Fund may purchase for its portfolio and the
investments measured by these indices.
(8) STRONG FAMILY OF FUNDS
The Strong Family of Funds offers a comprehensive range of
conservative to aggressive investment options. The Fund may from
time to time be compared to the other funds in the Strong Family
of Funds based on a risk/reward spectrum. The following graph
illustrates the risk/return spectrum for the Strong Family of
Funds and the Fund's place on that spectrum.
LOWER RISK AND HIGHER RISK AND
RETURN POTENTIAL RETURN POTENTIAL
___
------------------------------------| |----------------------------
| MONEY MARKET | INCOME | | | GROWTH FUNDS |
| FUNDS | FUNDS | | | |
------------------------------------|___|----------------------------
THE STRONG TOTAL RETURN FUND
32
<PAGE> 37
The Fund is a member of the Strong Family of Funds. All of
the members of the Strong Family and their investment objectives
are listed below.
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVE
<S> <C>
Strong U.S. Current income, a stable share price and
Treasury Money Fund daily liquidity.
Strong Money Market Current income, a stable share price and
Fund daily liquidity.
Strong Advantage Current income with a very low degree of
Fund share-price fluctuation.
Strong Short-Term Total return by investing for a high level
Bond Fund of current income with a low degree of
share-price fluctuation.
Strong Short-Term Total return by investing for a high level
Global Bond Fund of income with a low degree of share-price
fluctuation.
Strong Government Total return by investing for a high level
Securities Fund of current income with a moderate degree
of share-price fluctuation.
Strong Corporate Total return by investing for a high level
Bond Fund of current income with a moderate degree
of share-price fluctuation.
Strong A high total return by investing for both
International Bond income and capital appreciation.
Fund
Strong Asset A high total return consistent with
Allocation Fund reasonable risk over the long term.
Strong Total Return A high total return by investing for
Fund capital growth and income.
Strong American Total return by investing for both income
Utilities Fund and capital growth.
Strong Opportunity Capital growth.
Fund
Strong Growth Fund Capital growth.
Strong Common Stock Capital growth.
Fund*
Strong Discovery Capital growth.
Fund
Strong Capital growth.
International Stock
Fund
Strong Asia Pacific Capital growth.
Fund
Strong Municipal Federally tax-exempt current income, a
Money Market Fund stable share-price and daily liquidity.
Strong Short- Total return by investing for a high level
Intermediate of federally tax-exempt current income
Municipal Bond Fund with a low degree of share-price
fluctuation.
Strong Insured Total return by investing for a high level
Municipal Bond Fund of federally tax-exempt current income
with a moderate degree of share-price
fluctuation.
Strong Municipal Total return by investing for a high level
Bond Fund of federally tax-exempt current income
with a moderate degree of share-price
fluctuation.
Strong High-Yield Total return by investing for a high level
Municipal Bond Fund of federally tax-exempt current income.
Strong Special Fund Capital growth.
II**
Strong Discovery Capital growth.
Fund II**
</TABLE>
* The Strong Common Stock Fund is currently closed to new
investors.
** The Fund is an investment vehicle that funds variable annuity
accounts.
33
<PAGE> 38
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 Growth and
Income Funds, which consist of the Strong Total Return Fund, the
Strong American Utilities Fund and the Strong Asset Allocation
Fund, and determine which Fund or combination of Funds best meets
your personal investment objectives, they are described in the
same Prospectus. Though they appear in the same Prospectus, each
of the Growth and Income Funds is a separately incorporated
investment company. Because the Funds share a Prospectus, there
may be the possibility of cross liability between the Funds.
GENERAL INFORMATION
SERVICE ORIENTATION
The Advisor is an independent, Midwestern-based investment
advisor, unaffiliated with any bank, securities brokerage, or
insurance company. 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. Through its commitment to
excellence, the Advisor intends to benefit investors and to
encourage them to think of Strong Funds as their mutual fund
family.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions
and their impact on the Fund may be used in advertisements and
sales materials. Such factors that may impact the Fund include,
but are not limited to, changes in interest rates, political
developments, the competitive environment, consumer behavior,
industry trends, technological advances, macroeconomic trends,
and the supply and demand of various financial instruments. In
addition, marketing materials may cite the portfolio management's
views or interpretations of such factors.
PORTFOLIO MANAGEMENT
The following is certain information regarding the Fund's
current portfolio manager:
Ronald C. Ognar, Portfolio Manager
Mr. Ognar, who has managed money for over 25 years, joined
the Advisor in April 1993. For approximately two years prior to
that, he was a principal and portfolio manager with RCM Capital
Management. For approximately three years prior to that, he was
a portfolio manager with Kemper Financial Services, Inc. For
four years prior to that, he was a principal, portfolio manager
and director of research with Northern Capital Management.
Conventional wisdom often divides fund managers into two
schools -- growth and value. Growth-style managers look for
companies that exhibit faster-than-average gains in earnings and
profits. Value-style managers generally concentrate more on the
price side of the equation, looking for companies that are
undervalued and selling at a discount to what they believe is
their intrinsic value.
Mr. Ognar's style leans more toward growth, although he
keeps an eye on valuations. He looks for growth of both earnings
and dividends, but doesn't want to overpay. He believes that,
in general, good growth companies exhibit accelerating sales and
earnings, high return on equity, and, typically, low debt. They
offer products or services that should show strong future growth,
and their market share is expanding. In short, they offer some
unique, sustainable competitive advantage. However, he believes
that the key is the management. He likes to see management that
knows what it's doing and, preferably, owns a share of the
company. He meets face-to-face with the management of many
companies he buys, which helps him get to know and trust a
company and the people in charge of it.
Currently, he is focusing on some companies that are
undergoing positive change. Oftentimes, a new product, a new
technology, or a change in management can positively affect a
company's earnings growth prospects. Themes also play a big part
in his investment strategy. Some examples would be the aging
population, the need to upgrade outdated infrastructure, and the
rapid development of foreign economies. These changes can create
opportunities for companies in the investment, capital
34
<PAGE> 39
goods, and telecommunications industries, for instance. In
addition, the energy area should see a resurgence and natural gas
and oil service and drilling companies are positioned to do well
in the mid-90s as demand exceeds supply.
He believes that, in the '90s, growth-and-income investors
need to have both large and small companies because core holdings
with growing dividends are usually found in larger companies, but
faster growth should continue in medium and small companies.
The Advisor believes that active management is the best way
to achieve the Fund's objectives. This policy is based on a
fundamental belief that economic and financial conditions create
favorable and unfavorable investment periods (or seasons) and
that these different seasons require different investment
approaches. During favorable investment periods, the Fund seeks
to generate real (inflation-plus) growth. During uncertain
periods, income and capital preservation can be emphasized.
Through its understanding and willingness to change with these
investment cycles, the Advisor seeks to achieve the Fund's
objectives throughout the seasons of investment.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 411 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, are the independent accountants for
the Fund, providing audit services and assistance and
consultation with respect to the preparation of filings with the
Securities and Exchange Commission.
FINANCIAL STATEMENTS
The Annual Report that is attached hereto contains the
following financial information for the Fund:
(a) Schedules of Investments in Securities.
(b) Statements of Operations.
(c) Statements of Assets and Liabilities.
(d) Statements of Changes in Net Assets.
(e) Notes to Financial Statements.
(f) Financial Highlights.
(g) Report of Independent Accountants.
35
<PAGE> 40
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 for 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 risk
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> 41
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-' debt
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 of maintenance of other terms of the contract over
any long period of time may be small.
A-2
<PAGE> 42
Caa - Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond 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
issue or class of debt 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 that have 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 considered to be investment grade and of the
highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because
bonds 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 considered to be investment grade and of high
credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to
pay interest 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 bonds, and therefore impair timely
payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than
for bonds with higher ratings.
A-3
<PAGE> 43
Fitch speculative grade bond 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 of principal and
interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, 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, 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 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. Moreover, the character of the risk factor varies from
industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's
ability to pay interest 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 are considered highly speculative. While bonds
in this class are currently meeting debt service
requirements, 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 have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds 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.
DDD, DD
and D Bonds are in default on interest and/or principal
payments. Such bonds 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 bonds, 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.
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.
A-4
<PAGE> 44
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
<S> <C>
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AAA Highest credit quality. The risk factors are
negligible, being only slightly more
than for risk-free U.S. Treasury debt.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA+ High credit quality. Protection factors are
strong. Risk is modest, but may
AA vary slightly from time to time because of
economic conditions.
AA-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A+ Protection factors are average but adequate.
However, risk factors are more
A variable and greater in periods of economic
stress.
A-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB+ Below average protection factors but still
considered sufficient for prudent
BBB investment. Considerable variability in risk
during economic cycles.
BBB-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB+ Below investment grade but deemed likely to meet
obligations when due.
BB Present or prospective financial protection
factors fluctuate according to
BB- industry conditions or company fortunes. Overall
quality may move up or
down frequently within this category.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B+ Below investment grade and possessing risk that
obligations will not be met
B when due. Financial protection factors will
fluctuate widely according to
B- economic cycles, industry conditions and/or
company fortunes. Potential
exists for frequent changes in the rating within
this category or into a higher
or lower rating grade.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CCC Well below investment grade securities.
Considerable uncertainty exists as to timely
payment of principal, interest or preferred
dividends. Protection factors are narrow and risk
can be substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DD Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or
interest payments.
DP Preferred stock with dividend arrearages.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
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.
A-5
<PAGE> 45
Ratings 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.
MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means
promissory obligations not having an original maturity in excess
of nine months. Moody's makes no representation as to whether
such commercial paper is by any other definition "commercial
paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having
an original maturity in excess of nine months. Moody's makes no
representation that such obligations are exempt from registration
under the Securities Act of 1933, nor does it represent that any
specific note is a valid obligation of a rated issuer or issued
in conformity with any applicable law. Moody's employs the
following three designations, all judged to be investment grade,
to indicate the relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: (i) leading market
positions in well established industries, (ii) high rates of
return on funds employed, (iii) conservative capitalization
structures 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 related supporting institutions)
have a strong capacity for repayment of short-term promissory
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, will 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 related supporting institutions)
have an acceptable capacity for repayment of short-term
promissory obligations. The effect of industry characteristics
and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for 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
A-6
<PAGE> 46
Fitch's short-term ratings apply to debt obligations that
are payable on demand or have original maturities of generally up
to three years, including commercial paper, certificates of
deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-
term rating on the existence of liquidity necessary to meet the
issuer's obligations in a timely manner.
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.
A-7
<PAGE> 47
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the
rating criteria utilized 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.
<TABLE>
<CAPTION>
Rating Scale: Definition
------------ ----------
<S> <C>
Duff 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.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity
factors are strong and supported by good
fundamental protection factors. Risk factors are
very small.
Good Grade
----------
Duff 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
------------------
Duff 3 Satisfactory liquidity and other
protection factors qualify issue as to investment
grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is
expected.
Non-investment Grade
--------------------
Duff 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
-------
Duff 5 Issuer failed to meet scheduled principal and/or
interest payments.
</TABLE>
A-8
<PAGE> 48
STRONG TOTAL RETURN FUND, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Inapplicable
(b) Exhibits
(1) Articles of Incorporation, as amended
(1.1) Amendment to Articles of Incorporation
(1.2) Amendment to Articles of Incorporation
(2) Restated By-Laws
(3) Inapplicable
(4) Specimen Stock Certificate
(5) Investment Advisory Agreement
(6) Distribution Agreement
(7) Inapplicable
(8.1) Custody Agreement
(8.2) Amendment to Custody Agreement
(8.3) Amendment to Custody Agreement
(8.4) Global Custody Agreement
(9) Shareholder Servicing Agent Agreement
(10) Inapplicable
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14.1) Amended Prototype Defined Contribution Retirement
Plan with Standardized Adoption Agreements
(14.2) Amended Individual Retirement Custodial Account
(14.3) Amended Section 403(b)(7) Retirement Plan
(15) Inapplicable
(16) Computation of Performance Figures
(17) Power of Attorney
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
C - 1
<PAGE> 49
Number of Record Holders
Title of Class as of January 31, 1995
-------------- ------------------------
Common Stock, $.01 par value 64,842
Item 27. Indemnification
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Surplus Lines Insurance
Company and First State Insurance Company in the aggregate amount of
$10,000,000, subject to certain deductions. Pursuant to the authority of the
Wisconsin Business Corporation Law, Article VII of Registrant's By-Laws
provides as follows:
ARTICLE VII. INDEMNIFICATION
7.01. Provision of Indemnification. The corporation shall,
to the fullest extent permitted or required by Sections 180.0850 to 180.0859,
inclusive, of the Wisconsin Business Corporation Law, including any amendments
thereto (but in the case of any such amendment, only to the extent such
amendment permits or requires the corporation to provide broader
indemnification rights than prior to such amendment), indemnify its Directors
and Officers against any and all Liabilities, and advance any and all
reasonable Expenses, incurred thereby in any Proceeding to which any such
Director or Officer is a Party because he or she is or was a Director or
Officer of the corporation. The corporation shall also indemnify an employee
who is not a Director or Officer, to the extent that the employee has been
successful on the merits or otherwise in defense of a Proceeding, for all
Expenses incurred in the Proceeding if the employee was a Party because he or
she is or was an employee of the corporation. The rights to indemnification
granted hereunder shall not be deemed exclusive of any other rights to
indemnification against Liabilities or the advancement of Expenses which a
Director, Officer or employee may be entitled under any written agreement,
Board resolution, vote of shareholders, the Wisconsin Business Corporation Law
or otherwise. The corporation may, but shall not be required to, supplement
the foregoing rights to indemnification against Liabilities and advancement of
Expenses under this Section 7.01 by the purchase of insurance on behalf of any
one or more of such Directors, Officers or employees, whether or not the
corporation would be obligated to indemnify or advance Expenses to such
Director, Officer or employee under this Section 7.01. All capitalized terms
used in this Article VII and not otherwise defined herein shall have the
meaning set forth in Section 180.0850 of the Wisconsin Business Corporation
law. Notwithstanding anything herein to the contrary, in no event shall the
corporation indemnify any person hereunder in contravention of any provision of
the Investment Company Act of 1940.
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 Fund" and "Investment
Advisor and Distributor" in the Statement of Additional Information is hereby
incorporated by reference pursuant to Rule 411 under the Securities Act of
1933.
C - 2
<PAGE> 50
Item 29. Principal Underwriters
(a) Strong Funds Distributors, Inc., principal underwriter for
Registrant, also serves as principal underwriter for Strong Advantage Fund,
Inc.; Strong American Utilities Fund, Inc.; Strong Asia Pacific Fund, Inc.;
Strong Asset Allocation Fund, Inc.; Strong Common Stock Fund, Inc.; Strong
Discovery Fund II, Inc.; Strong Discovery Fund, Inc.; Strong Government
Securities Fund, Inc.; Strong Growth Fund, Inc.; Strong High-Yield Municipal
Bond Fund, Inc.; Strong Income Fund, Inc.; Strong Insured Municipal Bond Fund,
Inc.; Strong International Bond Fund, Inc.; Strong International Stock Fund,
Inc.; Strong Money Market Fund, Inc.; Strong Municipal Bond Fund, Inc.; Strong
Municipal Money Market Fund, Inc.; Strong Opportunity 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. and Strong
U.S. Treasury Money Fund, Inc.
(b) The information contained under "About the Funds - Management" in
the Prospectus and under "Directors and Officers of the Fund" and "Investment
Advisor and Distributor" in the Statement of Additional Information is hereby
incorporated by reference pursuant to Rule 411 under the Securities Act of
1933.
(c) None
Item 30. Location of Accounts and Records
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Treasurer, Thomas M.
Zoeller, at Registrant's corporate offices, 100 Heritage Reserve, Menomonee
Falls, Wisconsin 53051.
Item 31. Management Services
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered, upon request and without charge, a copy of the
Registrant's latest annual report to shareholders.
C - 3
<PAGE> 51
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 18 to the Registration Statement on Form N-1A to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
Village of Menomonee Falls, and State of Wisconsin on the 23rd day of February,
1995.
STRONG TOTAL RETURN FUND, INC.
(Registrant)
BY: /s/ John Dragisic
----------------------------------------
John Dragisic, Vice Chairman
Each person whose signature appears below constitutes and appoints
John Dragisic, Thomas P. Lemke, Lawrence A. Totsky, and Ann E. Oglanian, 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 any and all post-effective amendments to this
Registration Statement on Form N-1A and to file the same, with all exhibits
thereto, and any other documents in connection therewith, with the Securities
and Exchange Commission and any other regulatory body on or before May 30,
1996, 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.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 18 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>
Vice Chairman of the Board (Principal
/s/ John Dragisic Executive Officer) February 23, 1995
------------------------------------
John Dragisic
Treasurer (Principal Financial and
/s/ Thomas M. Zoeller Accounting Officer) February 23, 1995
------------------------------------
Thomas M. Zoeller
/s/ Richard S. Strong Chairman of the Board and a Director February 23, 1995
------------------------------------
Richard S. Strong
/s/ Marvin E. Nevins Director February 23, 1995
------------------------------------
Marvin E. Nevins
/s/ Willie D. Davis Director February 23, 1995
------------------------------------
Willie D. Davis
</TABLE>
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Exhibit Page No.
----------- ------- --------
<S> <C> <C>
(1) Articles of Incorporation, as amended(1)
(1.1) Amendment to Articles of Incorporation(3)
(1.2) Amendment to Articles of Incorporation(4)
(2) Restated By-Laws(5)
(3) Inapplicable
(4) Specimen Stock Certificate(1)
(5) Investment Advisory Agreement(1)
(6) Distribution Agreement(3)
(7) Inapplicable
(8.1) Custody Agreement(1)
(8.2) Amendment to Custody Agreement(2)
(8.3) Amendment to Custody Agreement(4)
(8.4) Global Custody Agreement(6)
(9) Shareholder Servicing Agent Agreement(4)
(10) Inapplicable
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14.1) Amended Prototype Defined Contribution Retirement Plan with Standardized
Adoption Agreements(6)
(14.2) Amended Individual Retirement Custodial Account(6)
(14.3) Amended Section 403(b)(7) Retirement Plan(6)
(15) Inapplicable
(16) Computation of Performance Figures
(17) Power of Attorney (See Signature Page)
</TABLE>
<PAGE> 53
- --------------------------
(1) Incorporated herein by reference to Amendment No. 1 to the Registration
Statement on Form N-1A of Registrant. The Custody Agreement is
incorporated by reference to Exhibit 8 to Amendment No. 1.
(2) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement on Form N-1A of Registrant.
(3) Incorporated herein by reference to Amendment No. 8 to the Registration
Statement on Form N-1A of Registrant.
(4) Incorporated herein by reference to Amendment No. 11 to the Registration
Statement on Form N-1A of Registrant.
(5) Incorporated herein by reference to Exhibit 2.3 to Amendment No. 13 to the
Registration Statement on Form N-1A of Registrant.
(6) Incorporated herein by reference to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A of Registrant filed on or about
April 28, 1994.
<PAGE> 1
EXHIBIT 16
Strong Total Return Fund, Inc.
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. AVERAGE ANNUAL TOTAL RETURN
A. Formula
_____
P (1 + T)n = ERV or T = \n/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 stated periods.
B. Calculation
_____
T = \n/ERV/P - 1
1. One-year period 12-31-93 through 12-31-94
____________
-1.38% = \1/9,862/10,000 - 1
2. Five-year period 12-31-89 through 12-31-94
_____________
8.56% = \5/15,081/10,000 - 1
3. Ten-year period 12-31-84 through 12-31-94
_____________
11.06% = \10/28,536/10,000 - 1
4. Since inception 12-30-81 through 12-31-94
_____________
14.63% = \13/59,027/10,000 - 1
<PAGE> 2
III. TOTAL RETURN
A. Formula
EV-IV
-----
IV = TR
Where: EV = Value at the end of the period, 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 December 31, 1994
9,862 - 10,000
--------------
10,000 = -1.38%
