<PAGE> 1
As filed with the Securities and Exchange Commission on or about February 26,
1997
Securities Act Registration No. 2-99820
Investment Company Act Registration No. 811-4390
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 14 [X]
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 15 [X]
----
(Check appropriate box or boxes)
STRONG CORPORATE BOND FUND, INC.
(Exact Name of Registrant as Specified in Charter)
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
THOMAS P. LEMKE
STRONG CAPITAL MANAGEMENT, INC.
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Name and Address of Agent for Service)
Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Securities Act of 1933; the Registrant's Rule 24f-2 Notice
for the fiscal year ended October 31, 1996 was filed on or about December 26,
1996.
It is proposed that this filing will become effective (check appropriate
box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on March 1, 1997 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
================================================================================
<PAGE> 2
STRONG CORPORATE BOND FUND, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- ------------------------------------------------------ --------------------------------------
<S> <C>
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Expenses; Highlights
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Strong Income Funds; Investment
Objectives and Policies; Fundamentals
of Fixed Income Investing;
Implementation of Policies and Risks;
About the Funds - Organization
5. Management of the Fund About the Funds - Management;
Financial Highlights
5A. Management's Discussion of Fund Performance *
6. Capital Stock and Other Securities About the Funds - Organization, -
Distributions and Taxes; Shareholders
Manual - Shareholder Services
7. Purchase of Securities Being Offered Shareholder Manual - How to Buy
Shares, - Determining Your Share
Price, - Shareholder Services
8. Redemption or Repurchase Shareholder Manual - How to Sell
Shares, - Determining Your Share
Price, - Shareholder Services
9. Pending Legal Proceedings Inapplicable
PART B - INFORMATION REQUIRED IN STATEMENT OF
ADDITIONAL INFORMATION
10. Cover Page Cover page
11. Table of Contents Table of Contents
12. General Information and History **
13. Investment Objectives and Policies Investment Restrictions; Investment
Policies and Techniques
14. Management of the Fund Directors and Officers of the Fund
15. Control Persons and Principal Holders of Principal Shareholders; Directors and
Securities Officers of the Fund; Investment
Advisor and Distributor
16. Investment Advisory and Other Services Investment Advisor and Distributor;
About the Funds - Management (in
Prospectus); Custodian; Transfer
Agent and Dividend-Disbursing Agent;
Independent Accountants; Legal
Counsel
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- ------------------------------------------------------ --------------------------------------
<S> <C>
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Included in Prospectus under the
heading About the Funds -
Organization and in the Statement of
Additional Information under the
heading Shareholder Meetings
19. Purchase, Redemption and Pricing of Securities Included in Prospectus under the
Being Offered headings: Shareholder Manual - How
to Buy Shares, - Determining Your
Share Price, - How to Sell Shares, -
Shareholder Services; and in the
Statement of Additional Information
under the headings: Additional
Shareholder Information; Investment
Advisor and Distributor; and
Determination of Net Asset Value
20. Tax Status Included in Prospectus under the
heading About the Funds -
Distributions and Taxes; and in the
Statement of Additional Information
under the heading Taxes
21. Underwriters Investment Advisor and Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
* Complete answer to Item is contained in Registrant's Annual Report.
** Complete answer to Item is contained in Registrant's Prospectus.
<PAGE> 4
STRONG INCOME FUNDS
<TABLE>
<S> <C>
STRONG SHORT-TERM BOND FUND STRONG FUNDS
STRONG GOVERNMENT SECURITIES FUND P.O. Box 2936
STRONG CORPORATE BOND FUND Milwaukee, Wisconsin 53201
STRONG HIGH-YIELD BOND FUND Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
Device for the
Hearing-Impaired:
(800) 999-2780
</TABLE>
The Strong Family of Funds ("Strong Funds") is a family of more than
twenty-five diversified and non-diversified mutual funds. All of the Strong
Funds are no-load funds, meaning that you may purchase, redeem, or exchange
shares without paying a sales charge. Strong Funds include growth funds,
conservative equity funds, income funds, municipal income funds, international
funds, and cash management funds. The Strong Income Funds are described in this
Prospectus.
This Prospectus contains information you should consider before you invest.
Please read it carefully and keep it for future reference. A Statement of
Additional Information for the Funds, dated March 1, 1997, contains further
information, is incorporated by reference into this Prospectus, and has been
filed with the Securities and Exchange Commission ("SEC"). This Statement, which
may be revised from time to time, is available without charge upon request to
the above-noted address or telephone number. If you would like to electronically
access additional information about the Funds after reading the prospectus, you
may do so by accessing the SEC's World Wide Web site (at http://www.sec.gov)
that contains the Statement of Additional Information regarding the Funds and
other related materials.
============================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------
THE STRONG HIGH-YIELD BOND FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN
LOWER-RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS." BONDS OF THIS TYPE ARE
SUBJECT TO GREATER RISKS WITH REGARD TO PAYMENT OF INTEREST AND RETURN OF
PRINCIPAL, THAN ARE HIGHER-RATED BONDS. INVESTORS
March 1, 1997
---------------------
PROSPECTUS PAGE I-1
<PAGE> 5
SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND.
(SEE THE PROSPECTUS SECTION ENTITLED "FUNDAMENTALS OF FIXED INCOME INVESTING -
CREDIT QUALITY - HIGH-YIELD (HIGH-RISK) SECURITIES.")
STRONG INCOME FUNDS
The Strong Short-Term Bond Fund, Inc., Strong Government Securities Fund,
Inc., and Strong Corporate Bond Fund, Inc. are separately incorporated,
diversified, open-end management investment companies. The Strong High-Yield
Bond Fund is a diversified series of Strong Income Funds, Inc., which is an
open-end management investment company.
STRONG SHORT-TERM BOND FUND (the "Short-Term Bond Fund") seeks total return
by investing for a high level of current income with a low degree of share-price
fluctuation. The Fund invests primarily in short- and intermediate-term,
investment-grade debt obligations, and its average portfolio maturity will
normally be between one and three years.
STRONG GOVERNMENT SECURITIES FUND (the "Government Securities Fund") seeks
total return by investing for a high level of current income with a moderate
degree of share-price fluctuation. The Fund normally invests at least 80% of its
net assets in U.S. government securities.
STRONG CORPORATE BOND FUND (the "Corporate Bond Fund") seeks total return by
investing for a high level of current income with a moderate degree of
share-price fluctuation. The Fund invests primarily in investment-grade
corporate debt obligations.
STRONG HIGH-YIELD BOND FUND (the "High-Yield Fund") seeks total return by
investing for a high level of current income and capital growth. The Fund
invests primarily in medium- and lower-quality corporate debt obligations.
---------------------
PROSPECTUS PAGE I-2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
EXPENSES..................................... I-4
FINANCIAL HIGHLIGHTS......................... I-5
HIGHLIGHTS................................... I-10
INVESTMENT OBJECTIVES AND POLICIES........... I-11
Comparing the Funds................. I-12
Strong Short-Term Bond Fund......... I-12
Strong Government Securities Fund... I-13
Strong Corporate Bond Fund.......... I-13
Strong High-Yield Bond Fund......... I-14
FUNDAMENTALS OF FIXED INCOME INVESTING....... I-15
IMPLEMENTATION OF POLICIES AND RISKS......... I-18
ABOUT THE FUNDS.............................. I-26
SHAREHOLDER MANUAL........................... II-1
APPENDIX..................................... A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the Statement
of Additional Information, and if given or made, such information or
representations may not be relied upon as having been authorized by the Funds.
This Prospectus does not constitute an offer to sell securities in any state or
jurisdiction in which such offering may not lawfully be made.
---------------------
PROSPECTUS PAGE I-3
<PAGE> 7
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Funds, will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............. NONE
Sales Load Imposed on Reinvested
Dividends................................. NONE
Deferred Sales Load......................... NONE
Redemption Fees............................. NONE
Exchange Fees............................... NONE
</TABLE>
There are certain charges associated with retirement accounts and with
certain other special shareholder services offered by the Funds. Additionally,
purchases and redemptions may also be made through broker-dealers or other
financial intermediaries who may charge a commission or other transaction fee
for their services. (See "Shareholder Manual - How to Buy Shares" and "- How to
Sell Shares.")
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Management Other 12b-1 Total Operating
Fund Fees Expenses Fees Expenses
<S> <C> <C> <C> <C>
Short-Term Bond .625% .255% NONE .88%
Government Securities .60 .26 NONE .86
Corporate Bond .625 .365 NONE .99
High-Yield Bond .625 .335 NONE .96
</TABLE>
- ----------------------------------------------------------------------------
From time to time, the Funds' investment advisor, Strong Capital Management,
Inc. (the "Advisor"), may voluntarily waive its management fee and/or absorb
certain expenses for a Fund. The expenses specified in the table above for the
Funds are based on actual expenses incurred during the fiscal year ended October
31, 1996. During the fiscal year ended October 31, 1996, the Advisor waived its
management fee and absorbed certain expenses for the High-Yield Bond Fund. The
actual total operating expenses incurred for such fiscal year by the High-Yield
Bond Fund after waivers and absorptions was 0%. (See "Financial Highlights.")
Therefore the expenses specified in the table above for the High-Yield Bond Fund
has been restated for the fiscal year ended October 31, 1996 to include such
management fees and expenses. For additional information concerning fees and
expenses, see "About the Funds - Management."
---------------------
PROSPECTUS PAGE I-4
<PAGE> 8
EXAMPLE. You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period (in years)
-----------------------------
Fund 1 3 5 10
<S> <C> <C> <C> <C> <C>
Short-Term Bond $ 9 $28 $49 $108
Government Securities 9 27 48 106
Corporate Bond 10 32 55 121
High-Yield Bond 10 31 53 118
</TABLE>
- ----------------------------------------------------------------------------
The Example is based on each Fund's "Total Operating Expenses" before any
waivers and absorptions, as 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 Funds has been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
Their report for the fiscal year ended October 31, 1996 is included in the
Annual Report of the Income Funds that is contained in the Funds' Statement of
Additional Information. The Financial Highlights for the Funds should be read in
conjunction with the Financial Statements and related notes included in the
Funds' Annual Report. Additional information about each Fund's performance is
contained in the Funds' Annual Report, which may be obtained without charge by
calling or writing Strong Funds. The following presents information relating to
a share of common stock of each of the Funds, outstanding for the entire period
ended as indicated.
---------------------
PROSPECTUS PAGE I-5
<PAGE> 9
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
STRONG SHORT-TERM BOND FUND
10-31-96 10-31-95(1) 12-31-94 12-31-93 12-31-92 12-31-91 12-31-90
---------- ----------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.77 $ 9.42 $ 10.23 $ 9.99 $ 10.12 $ 9.53 $ 9.86
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.69 0.56 0.64 0.66 0.76 0.75 0.81
Net Realized and Unrealized Gains
(Losses)
on Investments (0.02) 0.35 (0.80) 0.25 (0.11) 0.59 (0.33)
---------- ---------- ---------- ---------- -------- -------- -------
Total from Investment Operations 0.67 0.91 (0.16) 0.91 0.65 1.34 0.48
LESS DISTRIBUTIONS
From Net Investment Income (0.69) (0.56) (0.65) (0.66) (0.76) (0.75) (0.81)
In Excess of Net Investment Income -- -- -- (0.01) -- -- --
From Net Realized Gains -- -- -- -- (0.02)(3) -- --
---------- ---------- ---------- ---------- -------- -------- -------
Total Distributions (0.69) (0.56) (0.65) (0.67) (0.78) (0.75) (0.81)
---------- ---------- ---------- ---------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 9.75 $ 9.77 $ 9.42 $ 10.23 $ 9.99 $ 10.12 $ 9.53
========== ========== ========== ========== ======== ======== =======
TOTAL RETURN +7.1% +9.9% -1.6% +9.3% +6.7% +14.6% +5.3%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $1,147,811 $1,083,073 $1,041,081 $1,531,627 $756,867 $164,954 $80,070
Ratio of Expenses to Average
Net Assets 0.9% 0.9%* 0.9% 0.8% 0.6% 1.0% 1.3%
Ratio of Expenses to Average Net
Assets Without Waivers and
Absorptions 0.9% 0.9%* 0.9% 0.9% 0.9% 1.2% 1.3%
Ratio of Net Investment Income to
Average
Net Assets 7.1% 7.0%* 6.5% 6.3% 7.3% 7.8% 8.6%
Portfolio Turnover Rate 191.5% 317.1% 249.7% 444.9% 353.3% 398.1% 313.8%
<CAPTION>
---------------------------------
STRONG SHORT-TERM BOND FUND
12-31-89 12-31-88 12-31-87(2)
-------- -------- -----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.09 $ 10.03 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.99 0.86 0.27
Net Realized and Unrealized Gains
(Losses)
on Investments (0.18) 0.13 0.04
-------- -------- -------
Total from Investment Operations 0.81 0.99 0.31
LESS DISTRIBUTIONS
From Net Investment Income (0.99) (0.86) (0.27)
In Excess of Net Investment Income -- -- --
From Net Realized Gains (0.05) (0.07) (0.01)
-------- -------- -------
Total Distributions (1.04) (0.93) (0.28)
-------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 9.86 $ 10.09 $ 10.03
======== ======== =======
TOTAL RETURN +8.2% +10.1% +3.2%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $130,001 $102,175 $17,128
Ratio of Expenses to Average
Net Assets 1.1% 1.0% 0.1%*
Ratio of Expenses to Average Net
Assets Without Waivers and
Absorptions 1.2% 1.2% 0.8%*
Ratio of Net Investment Income to
Average
Net Assets 9.7% 8.5% 8.8%*
Portfolio Turnover Rate 177.0% 461.3% 45.2%
</TABLE>
* Calculated on an annualized basis.
(1) Total return and portfolio turnover rate are not annualized.
(2) Inception date is August 31, 1987. Total return and portfolio turnover rate
are not annualized.
(3) Ordinary income distribution for tax purposes.
---------------------
PROSPECTUS PAGE I-6
<PAGE> 10
<TABLE>
<CAPTION>
-------------------------------------------------------------------
STRONG GOVERNMENT SECURITIES FUND
10-31-96 10-31-95(1) 12-31-94 12-31-93 12-31-92 12-31-91
-------- ----------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.60 $ 9.63 $ 10.61 $ 10.39 $ 10.77 $ 10.10
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.63 0.54 0.62 0.66 0.80 0.77
Net Realized and Unrealized Gains
(Losses) on Investments (0.16) 0.99 (0.98) 0.63 0.11 0.84
-------- -------- -------- --------- -------- --------
Total from Investment Operations 0.47 1.53 (0.36) 1.29 0.91 1.61
LESS DISTRIBUTIONS
From Net Investment Income (0.63) (0.54) (0.62) (0.66) (0.80) (0.77)
In Excess of Net Investment Income -- (0.02) -- -- -- --
From Net Realized Gains -- -- -- (0.32) (0.49) (0.17)
In Excess of Net Realized Gains -- -- -- (0.09) -- --
-------- -------- -------- --------- -------- --------
Total Distributions (0.63) (0.56) (0.62) (1.07) (1.29) (0.94)
-------- -------- -------- --------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.44 $ 10.60 $ 9.63 $ 10.61 $ 10.39 $ 10.77
======== ======== ======== ========= ======== ========
TOTAL RETURN +4.6% +16.2% -3.4% +12.7% +9.2% +16.7%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $637,685 $456,232 $276,832 $ 221,961 $ 82,169 $ 51,934
Ratio of Expenses to Average
Net Assets 0.9% 0.9%* 0.9% 0.8% 0.7% 0.8%
Ratio of Expenses to Average Net Assets
Without Waivers and Absorptions 0.9% 0.9%* 0.9% 1.0% 1.2% 1.4%
Ratio of Net Investment Income to
Average Net Assets 6.0% 6.2%* 6.2% 6.0% 7.7% 7.5%
Portfolio Turnover Rate 457.6% 409.2% 479.0% 520.9% 628.8% 292.9%
<CAPTION>
-----------------------------------------
STRONG GOVERNMENT SECURITIES FUND
12-31-90 12-31-89 12-31-88 12-31-87
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.08 $ 9.98 $ 9.75 $ 10.09
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.72 0.78 0.68 0.65
Net Realized and Unrealized Gains
(Losses) on Investments 0.12 0.17 0.32 (0.34)
-------- -------- ------- -------
Total from Investment Operations 0.84 0.95 1.00 0.31
LESS DISTRIBUTIONS
From Net Investment Income (0.72) (0.78) (0.68) (0.65)
In Excess of Net Investment Income -- -- -- --
From Net Realized Gains (0.10) (0.07) (0.09) --
In Excess of Net Realized Gains -- -- -- --
-------- -------- ------- -------
Total Distributions (0.82) (0.85) (0.77) (0.65)
-------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 10.10 $ 10.08 $ 9.98 $ 9.75
======== ======== ======= =======
TOTAL RETURN +8.7% +9.9% +10.5% +3.4%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $ 41,099 $ 35,119 $25,408 $11,380
Ratio of Expenses to Average
Net Assets 1.3% 1.3% 0.4% 1.0%
Ratio of Expenses to Average Net Assets
Without Waivers and Absorptions 1.5% 1.6% 1.6% 1.6%
Ratio of Net Investment Income to
Average Net Assets 7.2% 7.6% 6.9% 6.6%
Portfolio Turnover Rate 254.2% 421.6% 1,727.8% 715.0%
</TABLE>
* Calculated on an annualized basis.
(1) Total return and portfolio turnover rate are not annualized.
---------------------
PROSPECTUS PAGE I-7
<PAGE> 11
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
STRONG CORPORATE BOND FUND
10-31-96 10-31-95(1) 12-31-94 12-31-93 12-31-92 12-31-91 12-31-90
-------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.56 $ 9.36 $ 10.24 $ 9.40 $ 9.37 $ 8.87 $ 10.57
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.73 0.63 0.73 0.70 0.82 0.76 1.06
Net Realized and Unrealized Gains
(Losses) on Investments 0.08 1.22 (0.87) 0.84 0.03 0.50 (1.70)
-------- -------- -------- -------- -------- ------- -------
Total from Investment Operations 0.81 1.85 (0.14) 1.54 0.85 1.26 (0.64)
LESS DISTRIBUTIONS
From Net Investment Income (0.73) (0.63) (0.73) (0.70) (0.82) (0.76) (1.06)
In Excess of Net Investment Income -- (0.02) (0.01) -- -- -- --
From Net Realized Gains -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Total Distributions (0.73) (0.65) (0.74) (0.70) (0.82) (0.76) (1.06)
-------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 10.64 $ 10.56 $ 9.36 $ 10.24 $ 9.40 $ 9.37 $ 8.87
======== ======== ======== ======== ======== ======= =======
TOTAL RETURN +8.0% +20.3% -1.3% +16.8% +9.4% +14.8% -6.2%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (In
Thousands) $297,608 $218,061 $123,305 $123,400 $102,783 $92,364 $92,201
Ratio of Expenses to Average Net
Assets 1.0% 1.0%* 1.1% 1.1% 1.3% 1.5% 1.4%
Ratio of Net Investment Income
to Average Net Assets 7.0% 7.5%* 7.6% 7.0% 8.7% 8.4% 11.2%
Portfolio Turnover Rate 672.8% 621.4% 603.0% 665.8% 557.0% 392.4% 293.5%
<CAPTION>
------------------------------
STRONG CORPORATE BOND FUND
12-31-89 12-31-88 12-31-87
-------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.88 $ 11.64 $ 12.65
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.40 1.17 1.23
Net Realized and Unrealized Gains
(Losses) on Investments (1.31) 0.24 (0.67)
-------- -------- --------
Total from Investment Operations 0.09 1.41 0.56
LESS DISTRIBUTIONS
From Net Investment Income (1.40) (1.17) (1.53)
In Excess of Net Investment Income -- -- --
From Net Realized Gains -- -- (0.04)
-------- -------- --------
Total Distributions (1.40) (1.17) (1.57)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.57 $ 11.88 $ 11.64
======== ======== ========
TOTAL RETURN +0.4% +12.5% +4.5%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (In
Thousands) $195,350 $202,623 $137,898
Ratio of Expenses to Average Net
Assets 1.2% 1.2% 1.1%
Ratio of Net Investment Income
to Average Net Assets 12.1% 9.8% 10.6%
Portfolio Turnover Rate 207.2% 400.2% 245.4%
</TABLE>
* Calculated on an annualized basis.
(1) Total return and portfolio turnover rate are not annualized.
---------------------
PROSPECTUS PAGE I-8
<PAGE> 12
<TABLE>
<CAPTION>
-------------------------------
STRONG HIGH-YIELD BOND FUND
10-31-96(1)
-------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.84
Net Realized and Unrealized Gains
(Losses) on Investments 1.26
--------
Total from Investment Operations 2.10
LESS DISTRIBUTIONS
From Net Investment Income (0.84)
--------
Total Distributions (0.84)
--------
NET ASSET VALUE, END OF PERIOD $ 11.26
========
TOTAL RETURN +21.7%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (In
Thousands) $217,002
Ratio of Expenses to Average Net
Assets 0.0%*
Ratio of Expenses to Average Net
Assets Without Waivers and
Absorptions 1.0%*
Ratio of Net Investment Income to
Average Net Assets 9.6%*
Portfolio Turnover Rate 390.8%
</TABLE>
* Calculated on an annualized basis.
(1) Inception date is December 28, 1995. Total return and portfolio turnover
rate are not annualized.
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PROSPECTUS PAGE I-9
<PAGE> 13
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has distinct investment objectives and policies. Each Fund seeks to
provide income consistent with its maturity, quality, and other standards as set
forth under "Investment Objectives and Policies."
IMPLEMENTATION OF POLICIES AND RISKS
The Funds may engage in derivative transactions, including options, futures,
and options on futures transactions within specified limits. Each Fund may
invest in when-issued securities, illiquid securities, repurchase agreements,
and foreign securities, except the Government Securities Fund may only invest in
U.S. dollar-denominated foreign securities. Each Fund may engage in reverse
repurchase agreements and mortgage dollar roll transactions. The Short-Term Bond
and Corporate Bond Funds may invest a portion of their assets, and the
High-Yield Bond Fund may invest without limitation, in junk bonds. These
investment practices involve risks that are different in some respects from
those associated with similar funds that do not use them. (See "Implementation
of Policies and Risks" and "Fundamentals of Fixed Income Investing - Credit
Quality.")
MANAGEMENT
The Advisor, Strong Capital Management, Inc., serves as investment advisor to
the Funds. The Advisor provides investment management services for mutual funds
and other investment portfolios representing assets of over $24 billion. (See
"About the Funds - Management.")
PURCHASE AND REDEMPTION OF SHARES
You may purchase or redeem shares of a Fund at net asset value. There are no
redemption or 12b-1 charges. The net asset values of the Funds change daily with
the value of each Fund's portfolio. You can locate the net asset value for a
Fund in newspaper listings of mutual fund prices under the "Strong Funds"
heading or at our site on the World Wide Web at http://www.strong-funds.com.
(See "Shareholder Manual - How to Buy Shares" and "- How to Sell Shares.")
SHAREHOLDER SERVICES
Strong shareholder benefits include: telephone purchase, exchange, and
redemption privileges; professional representatives available 24 hours a day;
----------------------
PROSPECTUS PAGE I-10
<PAGE> 14
automatic investment, automatic dividend reinvestment, payroll direct deposit,
automatic exchange and systematic withdrawal plans; free check writing; and a
no-minimum investment program. (See "Shareholder Manual - Shareholder
Services.")
DIVIDENDS AND OTHER DISTRIBUTIONS
The policy of each Fund is to pay dividends from net investment income
monthly and to distribute substantially all net realized capital gains annually.
(See "About the Funds - Distributions and Taxes.")
INVESTMENT OBJECTIVES AND POLICIES
The descriptions that follow are designed to help you choose the Fund that
best fits your investment objective. You may want to pursue more than one
objective by investing in more than one of the Funds or by investing in one of
the other Strong Funds, which are described in separate prospectuses. Each
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.
Each Fund's risk and return potential depends in part on the maturity and
credit-quality characteristics of the underlying investments in its portfolio.
In general, longer-maturity fixed-income securities carry higher yields and
greater price volatility than shorter-term fixed-income securities. Similarly,
fixed income securities issued by less-creditworthy entities tend to carry
higher yields than those with higher credit ratings. (See "Fundamentals of Fixed
Income Investing" for a more detailed discussion of the principles and risks
associated with fixed income securities.)
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PROSPECTUS PAGE I-11
<PAGE> 15
COMPARING THE FUNDS
The following summary is intended to help distinguish the Funds and help you
determine their suitability for your investments.
<TABLE>
<CAPTION>
AVERAGE CREDIT INCOME DEGREE OF SHARE-
FUND MATURITY QUALITY POTENTIAL PRICE FLUCTUATION
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
SHORT-TERM BOND 1 to 3 years Primarily Moderate Low
investment
grade
- ----------------------------------------------------------------------------
GOVERNMENT SECURITIES 5 to 10 years* 100% Moderate Moderate
investment to high
grade
- ----------------------------------------------------------------------------
CORPORATE BOND 7 to 12 years* Primarily Moderate Moderate
investment to high
grade
- ----------------------------------------------------------------------------
HIGH-YIELD BOND 5 to 10 years* At least 65% High Moderate to high
rated BBB or
lower
- ----------------------------------------------------------------------------
</TABLE>
*Expected range
Each Fund has adopted certain fundamental investment restrictions that are
set forth in the Funds' Statement of Additional Information ("SAI"). Those
restrictions, each Fund's investment objective, and any other investment
policies identified as "fundamental" cannot be changed without shareholder
approval. To further guide investment activities, each Fund has also instituted
a number of non-fundamental operating policies, which are described throughout
this Prospectus and in the SAI. Although operating policies may be changed by a
Fund's Board of Directors without shareholder approval, a Fund will promptly
notify shareholders of any material change in operating policies.
When the Advisor determines market conditions warrant a temporary defensive
position, the Funds may each invest without limitation in cash and short-term
fixed-income securities.
STRONG SHORT-TERM BOND FUND
The Short-Term Bond Fund seeks total return by investing for a high level of
current income with a low degree of share-price fluctuation.
The Fund is designed for investors who are willing to accept some fluctuation
in principal in order to pursue a higher level of income than is generally
available from money market securities. BECAUSE ITS SHARE PRICE WILL VARY, THE
FUND IS NOT AN APPROPRIATE INVESTMENT FOR THOSE WHOSE PRIMARY OBJECTIVE IS
ABSOLUTE PRINCIPAL STABILITY.
----------------------
PROSPECTUS PAGE I-12
<PAGE> 16
The Fund invests primarily in short- and intermediate-term, investment-grade
debt obligations. Under normal market conditions at least 65% of the Fund's
total assets will be invested in debt obligations, such as corporate and U.S.
government debt obligations. The Fund's average portfolio maturity will be
between one and three years under normal market conditions.
Under normal market conditions, at least 75% of the Fund's net assets will be
invested in investment-grade debt obligations, which generally include a range
of obligations from those in the highest rating category to those in the
fourth-highest rating category (e.g., BBB or higher by Standard & Poor's Ratings
Group or "S&P"). The Fund may also invest up to 25% of its net assets in
non-investment-grade debt obligations that are rated in the fifth-highest rating
category (e.g., BB by S&P) or unrated securities of comparable quality. (See
"Fundamentals of Fixed Income Investing - Credit Quality.")
STRONG GOVERNMENT SECURITIES FUND
The Government Securities Fund seeks total return by investing for a high
level of current income with a moderate degree of share-price fluctuation.
The Fund is designed for long-term investors who want to pursue higher income
than shorter-term securities generally provide, who are willing to accept the
fluctuation in principal associated with longer-term securities, and who seek
the low credit risk that U.S. government securities generally carry.
Under normal market conditions, at least 80% of the Fund's net assets will be
invested in U.S. government securities. The balance of the Fund's assets may be
invested in other investment-grade debt obligations. While there are no maturity
restrictions on the portfolio, it is anticipated that the Fund's average
portfolio maturity will normally be between 5 and 10 years.
Under federal law, the interest income earned from U.S. Treasury securities
is exempt from state and local taxes. All states allow mutual funds to "pass
through" that exemption to their shareholders, although there are conditions to
this treatment in some states. Because the requirements vary by state, you
should consult the instructions to your state's income tax return or a qualified
tax adviser to determine whether you may be able to exclude the Fund's
distributions from your state and local taxable income. (See "About the Funds -
Distributions and Taxes.")
STRONG CORPORATE BOND FUND
The Corporate Bond Fund seeks total return by investing for a high level of
current income with a moderate degree of share-price fluctuation.
The Fund is designed for long-term investors who want to pursue higher income
than shorter-term securities generally provide and who are willing to accept the
fluctuation in principal associated with longer-term debt obligations. While
there are no maturity restrictions on the portfolio, it is anticipated that the
Fund's average portfolio maturity will normally be between 7 and 12 years.
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PROSPECTUS PAGE I-13
<PAGE> 17
Under normal market conditions at least 65% of the Fund's total assets will
be invested in the bonds of corporate issuers, which includes any corporate debt
obligation. The Fund may invest up to 35% of its total assets in any other
type of fixed income security, such as U.S. government securities and
mortgage-backed issues. Under normal market conditions, at least 75% of the
Fund's net assets will be invested in investment-grade debt obligations, which
include a range of securities from those in the highest rating category to those
rated medium-quality (e.g., BBB or higher by S&P). The Fund may also invest up
to 25% of its net assets in non-investment-grade debt obligations and other
high-yield (high-risk) securities (e.g., those bonds rated as low as C by S&P).
(See "Fundamentals of Fixed Income Investing - Credit Quality.")
STRONG HIGH-YIELD BOND FUND
The High-Yield Bond Fund seeks total return by investing for a high level of
current income and capital growth.
The Fund is designed for investors who want to pursue higher income than
higher-quality debt obligations generally provide and who are willing to accept
the risk of principal fluctuation associated with medium- and lower-quality debt
obligations. While there are no maturity restrictions for the Fund's debt
obligations, it is anticipated that the Fund will maintain an average portfolio
maturity of between 5 and 10 years.
The Fund invests primarily in medium- and lower-quality debt obligations.
Under normal market conditions the Fund invests at least 65% of its total assets
in medium- and lower-quality debt obligations of corporate issuers. Medium-
quality debt obligations are those rated in the fourth-highest category (e.g.,
bonds rated BBB by S&P) or obligations determined by the Advisor to be of
comparable quality. Medium-quality debt obligations, although considered
investment grade, have some speculative characteristics. Lower-quality bonds,
also commonly referred to as "non-investment-grade" bonds or "junk" bonds, are
those rated below the fourth-highest category (e.g., those bonds rated as low as
C by S&P) or bonds of comparable quality. The Fund also may invest in debt
obligations that are in default, but such obligations are not expected to exceed
10% of the Fund's net assets. Under normal market conditions, however, the Fund
is unlikely to emphasize higher-quality debt obligations, since generally they
offer lower yields than medium- and lower-quality bonds with similar maturities.
(See "Fundamentals of Fixed Income Investing - Credit Quality - High-Yield
(High-Risk) Securities" for further information on the risks associated with
investing in medium- and lower-quality debt obligations.) The Fund may also
invest up to 20% of its net assets in common stocks and securities that are
convertible into common stocks, such as warrants.
----------------------
PROSPECTUS PAGE I-14
<PAGE> 18
FUNDAMENTALS OF
FIXED INCOME INVESTING
The Funds may invest in a wide variety of debt obligations and other
securities. (See "Implementation of Policies and Risks - Debt Obligations.")
Issuers of debt obligations have a contractual obligation to pay interest at
a specified rate ("coupon rate") on specified dates and to repay principal
("face value" or "par value") on a specified maturity date. Certain debt
obligations (usually intermediate- and long-term obligations) have provisions
that allow the issuer to redeem or "call" the obligation before its maturity.
Issuers are most likely to call such debt obligations during periods of falling
interest rates. As a result, a Fund may be required to invest the unanticipated
proceeds of the called obligations at lower interest rates, which may cause the
Fund's income to decline.
Although the net asset values of the Funds are expected to fluctuate, the
Advisor actively manages each Fund's portfolio and adjusts its average portfolio
maturity according to the Advisor's interest rate outlook while seeking to avoid
or reduce, to the extent possible, any negative changes in net asset value.
PRICE VOLATILITY
The market value of debt obligations is affected by changes in prevailing
interest rates. The market value of a debt obligation generally reacts inversely
to interest-rate changes, meaning, when prevailing interest rates decline, an
obligation's price usually rises, and when prevailing interest rates rise, an
obligation's price usually declines. A fund portfolio consisting primarily of
debt obligations will react similarly to changes in interest rates.
MATURITY
In general, the longer the maturity of a debt obligation, the higher its
yield and the greater its sensitivity to changes in interest rates. Conversely,
the shorter the maturity, the lower the yield but the greater the price
stability. Commercial paper is generally considered the shortest form of debt
obligation. Notes, whose original maturities are two years or less, are
considered short-term obligations. The term "bond" generally refers to
securities with maturities longer than two years. Bonds with maturities of three
years or less are considered short-term, bonds with maturities between three and
seven years are considered intermediate-term, and bonds with maturities greater
than seven years are considered long-term.
----------------------
PROSPECTUS PAGE I-15
<PAGE> 19
CREDIT QUALITY
The values of debt obligations may also be affected by changes in the credit
rating or financial condition of their issuers. Generally, the lower the quality
rating of an obligation, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less-creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings.
In conducting its credit research and analysis, the Advisor considers both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings compiled
by a number of nationally recognized statistical rating organizations, which
include Standard & Poor's Ratings Group ("S&P), Moody's Investors Service, Inc.,
Fitch Investors Service, Inc., Duff & Phelps Rating Co., Thomson BankWatch,
Inc., and IBCA, Inc. (the "NRSROs"). "Appendix - Ratings of Debt Obligations"
presents a summary of the ratings of these organizations. Please refer to the
Appendix in the Funds' SAI for a more detailed description of the ratings of the
NRSROs.
INVESTMENT-GRADE DEBT OBLIGATIONS. Debt obligations rated in the highest-
through the medium-quality categories are commonly referred to as
"investment-grade" debt obligations and include the following:
- - U.S. government securities (See "Implementation of Policies and Risks - Debt
Obligations" below);
- - bonds or bank obligations rated in one of the four highest rating categories
(e.g., BBB or higher by S&P);
- - short-term notes rated in one of the two highest rating categories (e.g., SP-2
or higher by S&P);
- - short-term bank obligations rated in one of the three highest rating
categories (e.g., A-3 or higher by S&P), with respect to obligations maturing
in one year or less;
- - commercial paper rated in one of the three highest rating categories (e.g.,
A-3 or higher by S&P);
- - unrated debt obligations determined by the Advisor to be of comparable
quality; and
- - repurchase agreements involving investment-grade debt obligations.
Investment-grade debt obligations are generally believed to have relatively
low degrees of credit risk. All ratings are determined at the time of
investment. Any subsequent rating downgrade of a debt obligation will be
monitored by the Advisor to consider what action, if any, a Fund should take
consistent with its investment objective. For purposes of determining whether a
security is investment grade, the Advisor may use the highest rating assigned to
that security by any NRSRO.
----------------------
PROSPECTUS PAGE I-16
<PAGE> 20
HIGH-YIELD (HIGH-RISK) SECURITIES. High-yield (high-risk) securities, also
referred to as "junk bonds," are those securities that are rated lower than
investment grade and unrated securities of comparable quality. Although these
securities generally offer higher yields than investment-grade securities with
similar maturities, lower-quality securities involve greater risks, including
the possibility of default or bankruptcy. In general, they are regarded to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Other potential risks associated with investing in high-
yield securities include:
- - substantial market-price volatility resulting from changes in interest rates,
changes in or uncertainty about economic conditions, and changes in the actual
or perceived ability of the issuer to meet its obligations;
- - greater sensitivity of highly-leveraged issuers to adverse economic changes
and individual-issuer developments;
- - subordination to the prior claims of other creditors;
- - additional Congressional attempts to restrict the use or limit the tax and
other advantages of these securities; and
- - adverse publicity and changing investor perceptions about these securities.
As with any other asset in a Fund's portfolio, any reduction in the value of
such securities as a result of the factors listed above would be reflected in
the 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.
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 greater role in valuing these securities. The lack of a liquid secondary
market may have an adverse effect on market price and a Fund's ability to sell
particular securities.
See the Appendix for information concerning the credit quality of the Short-
Term Bond, Corporate Bond and High-Yield Bond Funds' investments for the fiscal
year ended October 31, 1996.
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PROSPECTUS PAGE I-17
<PAGE> 21
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to
certain restrictions described below), the Funds may invest in some or all of
the following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of certain of these securities and investment techniques and
the associated risks is contained in the Funds' SAI.
DEBT OBLIGATIONS
The Funds may invest in any debt obligations. A Fund's authority to invest in
certain types of debt obligations may be restricted or subject to objective
investment criteria. For additional information on these restrictions, see
"Investment Objectives and Policies."
TYPES OF OBLIGATIONS. Debt obligations include (i) corporate debt securities,
including bonds, debentures, and notes; (ii) bank obligations, such as
certificates of deposit, banker's acceptances, and time deposits of domestic and
foreign banks and their subsidiaries and branches, and domestic savings and loan
associations (in amounts in excess of the insurance coverage (currently $100,000
per account) provided by the Federal Deposit Insurance Corporation); (iii)
commercial paper (including variable-amount master demand notes); (iv)
repurchase agreements; (v) loan interests; (vi) foreign debt obligations issued
by foreign issuers traded either in foreign markets or in domestic markets
through depositary receipts; (vii) convertible securities - debt obligations of
corporations convertible into or exchangeable for equity securities or debt
obligations that carry with them the right to acquire equity securities, as
evidenced by warrants attached to such securities, or acquired as part of units
of the securities; (viii) preferred stocks - securities that represent an
ownership interest in a corporation and that give the owner a prior claim over
common stock on the company's earnings or assets; (ix) trust preferred
securities - certain obligations which have characteristics of both debt and
preferred stock; (x) U.S. government securities; (xi) mortgage-backed
securities, collateralized mortgage obligations, and similar securities; and
(xii) municipal obligations.
GOVERNMENT SECURITIES
U.S. government securities are issued or guaranteed by the U.S. government or
its agencies or instrumentalities. Securities issued by the government include
U.S. Treasury obligations, such as Treasury bills, notes, and bonds. Securities
issued or guaranteed by government agencies or instrumentalities include the
following:
- - the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, and the
----------------------
PROSPECTUS PAGE I-18
<PAGE> 22
Government National Mortgage Association, including GNMA pass-through
certificates, whose securities are supported by the full faith and credit of
the United States;
- - the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association, the Interamerican Development Bank,
and International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators in mortgage loans, including savings associations, mortgage bankers,
commercial banks, investment bankers, and special purpose entities
(collectively, "private lenders"). Mortgage-backed securities issued by private
lenders may be supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by the U.S. government
or one of its agencies or instrumentalities, or they may be issued without any
governmental guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first-lien mortgage
loans or interests therein; rather they include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal and
interest on asset-backed securities may be supported by non-governmental credit
enhancements similar to those utilized in connection with mortgage-backed
securities.
The yield characteristics of mortgage- and asset-backed securities differ
from those of traditional debt obligations. Among the principal differences are
----------------------
PROSPECTUS PAGE I-19
<PAGE> 23
that interest and principal payments are made more frequently on mortgage-and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if a Fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government sponsored mortgage-backed securities.
The Funds may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases the market
value may be extremely volatile. With respect to certain stripped securities,
such as interest-only ("IO") and principal-only ("PO") classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
LOAN INTERESTS
The Short-Term Bond, Corporate Bond, and High-Yield Bond Funds may each
invest a portion of their assets in loan interests, which are interests in
amounts owed by a corporate, governmental or other borrower to lenders or
lending syndicates. Loan interests purchased by a Fund may have a maturity of
any number of days or years, and may be secured or unsecured. Loan interests,
which may take the form of participation interests in, assignments of, or
novations of a loan, may be acquired from U.S. and foreign banks, insurance
companies, finance companies or other financial institutions that have made
loans or are members of a lending syndicate or from the holders of loan
interests. Loan interests involve the risk of loss in case of default or
bankruptcy of the borrower and, in the case of participation interests, involve
a risk of insolvency of the agent lending bank or other financial intermediary.
Loan interests are not rated by any NRSROs and are, at present, not readily
marketable and may be subject to contractual restrictions on resale.
----------------------
PROSPECTUS PAGE I-20
<PAGE> 24
FOREIGN SECURITIES AND CURRENCIES
The Short-Term Bond, Corporate Bond, and High-Yield Bond Funds each may
invest up to 25% of their net assets, and the Government Securities Fund may
invest up to 20% of its net assets, directly or indirectly in foreign
securities. The Government Securities Fund will limit its investments in foreign
securities to those denominated in U.S. dollars. The Funds may invest in U.S.
securities enhanced as to credit quality or liquidity by foreign issuers without
regard to this limit.
Foreign investments involve special risks, including:
- - expropriation, confiscatory taxation, and withholding taxes on dividends and
interest;
- - less extensive regulation of foreign brokers, securities markets, and issuers;
- - less publicly available information and different accounting standards;
- - costs incurred in conversions between currencies, possible delays in
settlement in foreign securities markets, limitations on the use or transfer
of assets (including suspension of the ability to transfer currency from a
given country), and difficulty of enforcing obligations in other countries;
and
- - diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy
in various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance-of-payments positions. Many foreign securities may
be less liquid and their prices more volatile than comparable U.S. securities.
Although the Funds generally invest only in securities that are regularly traded
on recognized exchanges or in over-the-counter markets, from time to time
foreign securities may be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign investing, such as custody
charges and brokerage costs, may be higher than those attributable to domestic
investing.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Short-Term Bond, Corporate Bond, and High-Yield
Bond Funds could be affected by changes in foreign currency exchange rates to
some extent. The value of a Fund's assets denominated in foreign currencies will
increase or decrease in response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Currency exchange rates can be volatile
at times in response to supply and demand in the currency exchange markets,
international balances of payments, governmental intervention, speculation, and
other political and economic conditions.
The Short-Term Bond, Corporate Bond, and High-Yield Bond 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 Instruments.")
----------------------
PROSPECTUS PAGE I-21
<PAGE> 25
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with certain banks and
non-bank dealers. In a repurchase agreement, a Fund buys a security at one
price, and at the time of sale, the seller agrees to repurchase the obligation
at a mutually agreed upon time and price (usually within seven days). The
repurchase agreement 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. A Fund may enter into repurchase agreements with respect to
any security in which it may invest. The Advisor will monitor, on an ongoing
basis, the value of the underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued interest. Repurchase
agreements could involve certain risks in the event of a default or insolvency
of the other party to the agreement, including possible delays or restrictions
upon a Fund's ability to dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the Advisor reviews the
creditworthiness of the banks and non-bank dealers with which the Funds enter
into repurchase agreements to evaluate those risks. A Fund may, under certain
circumstances, deem repurchase agreements collateralized by U.S. government
securities to be investments in U.S. government securities.
DERIVATIVE INSTRUMENTS
A Fund may use derivative instruments for any lawful purpose consistent with
the Fund's investment objective such as hedging or managing risk. Derivative
instruments are commonly defined to include securities or contracts whose values
depend on (or "derive" from) the value of one or more other assets, such as
securities, currencies, or commodities. These "other assets" are commonly
referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Options and forward
contracts are considered to be the basic "building blocks" of derivatives. For
example, forward-based derivatives include forward contracts, swap contracts, as
well as exchange-traded futures. Option-based derivatives include privately
negotiated, over-the-counter (OTC) options (including caps, floors, collars, and
options on forward and swap contracts) and exchange-traded options on futures.
Diverse types of derivatives may be created by combining options or forward
contracts in different ways, and by applying these structures to a wide range of
underlying assets.
An option is a contract in which the "holder" (the buyer) pays a certain
amount (the "premium") to the "writer" (the seller) to obtain the right, but not
the obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time. The
holder pays the premium at inception and has no further financial obligation.
The holder of an option-based derivative generally will benefit from favorable
----------------------
PROSPECTUS PAGE I-22
<PAGE> 26
movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses due to changes in the value of the
underlying asset.
A forward is a sales contract between a buyer (holding the "long" position)
and a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed future
date and the seller agrees to deliver the asset. The seller hopes that the
market price on the delivery date is less than the agreed upon price, while the
buyer hopes for the contrary. The change in value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset.
Derivative instruments may include (i) options; (ii) futures; (iii) options
on futures; (iv) short sales against the box, in which a Fund sells a security
it owns for delivery at a future date; (v) swaps, in which two parties agree to
exchange a series of cash flows in the future, such as interest-rate payments;
(vi) interest-rate caps, under which, in return for a premium, one party agrees
to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; (vii) interest-rate floors, under which, in return for
a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; (viii) forward currency
contracts and foreign currency exchange-related securities; and (ix) structured
instruments which combine the foregoing in different ways.
Derivatives may be exchange-traded or traded in OTC transactions between
private parties. OTC transactions are subject to additional risks, such as the
credit risk of the counterparty to the instrument and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. Derivative instruments may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
instrument in relation to the underlying asset may be magnified. When required
by SEC guidelines, a Fund will set aside permissible liquid assets in a
segregated account to secure its obligations under the derivative.
The successful use of derivatives by a Fund is dependent upon a variety of
factors, particularly the Advisor's ability to correctly anticipate trends in
the underlying asset. In a hedging transaction, if the Advisor incorrectly
anticipates trends in the underlying asset, a Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between a Fund's derivative transactions and the instruments being hedged. To
the extent that the Fund is engaging in derivative transactions for risk
management, the Fund's successful use of such transactions is more dependent
upon the Advisor's ability to correctly anticipate such trends, since losses in
these transactions may not be offset by gains in the Fund's portfolio or by
lower purchase prices for assets it intends to acquire. The Advisor's prediction
of trends in underlying assets may prove to be inaccurate, which could result in
substantial losses to a Fund.
----------------------
PROSPECTUS PAGE I-23
<PAGE> 27
In addition to the derivative instruments and strategies described above, the
Advisor expects to discover additional derivative instruments and other trading
techniques. The Advisor may utilize these new derivative instruments and
techniques to the extent that they are consistent with a Fund's investment
objective and permitted by the Fund's investment limitations, operating
policies, and applicable regulatory authorities.
WHEN-ISSUED SECURITIES
Each Fund may invest in securities purchased on a when-issued or delayed-
delivery basis. Although the payment and interest terms of these securities are
established at the time the purchaser enters into the commitment, these
securities may be delivered and paid for at a future date, generally within 45
days. Purchasing when-issued securities allows a Fund to lock in a fixed price
or yield on a security it intends to purchase. However, when a Fund purchases a
when-issued security, it immediately assumes the risk of ownership, including
the risk of price fluctuation.
The greater a Fund's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although a Fund may be
able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless, after entering into the commitment, a sale appears desirable for
investment reasons. When required by SEC guidelines, a Fund will set aside
permissible liquid assets in a segregated account to secure its outstanding
commitments for when-issued securities.
ILLIQUID SECURITIES
The Funds may each invest up to 15% of their net assets in illiquid
securities. Illiquid securities are those securities that are not readily
marketable, including restricted securities and repurchase obligations maturing
in more than seven days. Certain restricted securities which may be resold to
institutional investors under Rule 144A under the Securities Act of 1933 and
Section 4(2) commercial paper may be determined to be liquid under guidelines
adopted by each Fund's Board of Directors.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Funds may invest in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon and step-coupon securities are sold at a deep discount to
their face value. Pay-in-kind securities pay interest through the issuance of
----------------------
PROSPECTUS PAGE I-24
<PAGE> 28
additional securities. Because such securities do not pay current cash income,
the price of these securities can be volatile when interest rates fluctuate.
While these securities do not pay current cash income, federal income tax law
requires the holders of zero-coupon, step-coupon, and pay-in-kind securities to
include in income each year the portion of the original issue discount (or
deemed discount) and other non-cash income on such securities accrued during
that year. In order to continue to qualify for treatment as a "regulated
investment company" under the Internal Revenue Code and avoid a certain excise
tax, each Fund may be required to distribute a portion of such discount and
income and may be required to dispose of other portfolio securities, which may
occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
MORTGAGE DOLLAR ROLLS AND
REVERSE REPURCHASE AGREEMENTS
The Funds may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions discussed below. In a reverse repurchase agreement, 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 SEC guidelines, a Fund will set aside permissible
liquid assets in a segregated account to secure its obligation to repurchase the
security.
Each Fund may also enter into mortgage dollar rolls, in which the Fund would
sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid on
the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sale price and the lower price
for 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. When required by SEC guidelines, a
Fund would set aside permissible liquid assets in a segregated account to secure
its obligation for the forward commitment to buy mortgage-backed securities.
Mortgage dollar roll transactions may be considered a borrowing by the Funds.
The mortgage dollar rolls and reverse repurchase agreements entered into by
the Funds may be used as arbitrage transactions in which a Fund will maintain an
offsetting position in investment-grade debt obligations or repurchase
agreements that mature on or before the settlement date of the related mortgage
dollar roll or reverse repurchase agreement. Since a Fund will receive interest
on the securities or repurchase agreements in which it invests
----------------------
PROSPECTUS PAGE I-25
<PAGE> 29
the transaction proceeds, such transactions may involve leverage. However, since
such securities or repurchase agreements will be high quality and will mature on
or before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, the Advisor believes that such arbitrage transactions do not present
the risks to the Funds that are associated with other types of leverage.
PORTFOLIO TURNOVER
Historical portfolio turnover rates for the Short-Term Bond, Government
Securities, and Corporate Bond Funds are listed under "Financial Highlights."
The annual portfolio turnover rate indicates changes in a Fund's portfolio. The
turnover rate may vary from year to year, as well as within a year. It may also
be affected by sales of portfolio securities necessary to meet cash requirements
for redemption of shares. High portfolio turnover in any year will result in the
payment by a Fund of above-average amounts of transaction costs and could result
in the payment by shareholders of above-average amounts of taxes on realized
investment gains. The annual portfolio turnover rates for the High-Yield Fund
Bond is expected to be between 200% and 300%. However, the High-Yield Bond
Fund's portfolio turnover rate may exceed 300% when the Advisor believes the
anticipated benefits of short-term investments outweigh any increase in
transaction costs or increase in capital gains.
CASH MANAGEMENT
Each Fund may invest directly in cash and short-term fixed-income securities,
including, for this purpose, shares of one or more money market funds managed by
the Advisor (collectively, the "Strong Money Funds"). The Strong Money Funds
seek current income, a stable share price of $1.00, and daily liquidity. All
money market instruments can change in value when interest rates or an issuer's
creditworthiness change dramatically. The Strong Money Funds cannot guarantee
that they will always be able to maintain a stable net asset value of $1.00 per
share.
ABOUT THE FUNDS
MANAGEMENT
The Board of Directors of each Fund is responsible for managing its business
and affairs. Each of the Funds has entered into an investment advisory agreement
(collectively the "Advisory Agreements") with Strong Capital Management, Inc.
(the "Advisor"). Except for the management fee arrangements, the Advisory
Agreements are 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.
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PROSPECTUS PAGE I-26
<PAGE> 30
ADVISOR. The Advisor began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and profit-sharing
plans, as well as mutual funds, several of which are funding vehicles for
variable insurance products. As of February 1, 1997, the Advisor had over $24
billion under management. The Advisor's principal mailing address is P.O. Box
2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong, the Chairman of the
Board of each Fund, is the controlling shareholder of the Advisor.
As compensation for its services, each Fund pays the Advisor a monthly
management fee based on a percentage of each Fund's average daily net asset
value. The annual rates are as follows: Government Securities Fund, .60%; and
Short-Term Bond, Corporate Bond, and High-Yield Funds, .625%. From time to time,
the Advisor may voluntarily waive all or a portion of its management fee and/or
absorb certain Fund expenses without further notification of the commencement or
termination of such waiver or absorption. Any such waiver or absorption will
temporarily lower a Fund's overall expense ratio and increase a Fund's overall
return to investors.
The Advisor permits portfolio managers and other persons who may have access
to information about the purchase or sale of securities in the Fund's portfolio
("access persons") to purchase and sell securities for their own accounts,
subject to the Advisor's policy governing personal investing. The policy
requires access persons to conduct their personal investment activities in a
manner that the Advisor believes is not detrimental to the Fund or to the
Advisor's other advisory clients. Among other things, the policy requires access
persons to obtain preclearance before executing personal trades and prohibits
access persons from keeping profits derived from the purchase or sale of the
same security within 60 calendar days. See the SAI for more information.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the four Strong Income Funds.
STRONG SHORT-TERM BOND FUND
BRADLEY C. TANK. Before joining the Advisor in June 1990, Mr. Tank spent
eight years at Salomon Brothers, Inc., where he was a vice president and fixed
income specialist. 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. He has
managed or co-managed the Strong Short-Term Bond and Government Securities Funds
since he joined the Advisor. In addition, Mr. Tank chairs the Fixed Income
Investment Committee.
LYLE J. FITTERER. Mr. Fitterer joined the Advisor in 1989 after receiving his
bachelor's degree in accounting from the University of North Dakota.
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PROSPECTUS PAGE I-27
<PAGE> 31
Previously, he served the Advisor as a fixed income research analyst and trader.
Mr. Fitterer has also served as a trader for the Advisor's equity products and
as manager of the Strong Funds' fixed income accounting department. He is a
Certified Public Accountant. Mr. Fitterer has co-managed the Fund since January
1996.
MR. SHIRISH MALEKAR. Mr. Malekar joined the Advisor in January 1994. He was
an international bond portfolio manager at Pacific Investment Management Company
in California for the previous three years. Prior to that, he was a bond trader
at Harris Bank in Chicago for one year and a bond trader at PaineWebber
Incorporated in New York and Tokyo for more than two years. He has an M.S. in
Management from the Massachusetts Institute of Technology, an M.S. in Petroleum
Engineering from the University of Pittsburgh, and a B.S. in Chemical
Engineering from the University of Bombay, India. Mr. Malekar has co-managed the
Fund since March 1997.
STRONG GOVERNMENT SECURITIES FUND
BRADLEY C. TANK. Information concerning Mr. Tank is set forth above under
"Strong Short-Term Bond Fund."
JOHN T. BENDER. Mr. Bender began his career with the Advisor in 1987 as an
intern in the mutual fund accounting department. After receiving his bachelor's
degree from Marquette University in 1988, he became an accountant in Strong's
shareholder and accounting compliance department. He subsequently joined the
investment team as an equity trader, and later became a fixed income research
analyst and trader. He is both a Chartered Financial Analyst and a Certified
Public Accountant. Mr. Bender has co-managed the Corporate Bond Fund since
January 1996 and the Government Securities Fund since March 1997.
STRONG CORPORATE BOND FUND
JEFFREY A. KOCH. 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. Mr. Koch is also a Chartered Financial Analyst. He has co-
managed or managed the Fund since 1991. He has managed the Strong High-Yield
Bond Fund since its inception in December 1995.
JOHN T. BENDER. Information concerning Mr. Bender is set forth above under
"Strong Government Securities Fund."
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PROSPECTUS PAGE I-28
<PAGE> 32
STRONG HIGH-YIELD BOND FUND
JEFFREY A. KOCH. Information concerning Mr. Koch is set forth above under
"Strong Corporate Bond Fund."
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin 53201, also acts as
dividend-disbursing agent and transfer agent for the Funds. The Advisor is
compensated for its services based on an annual fee per account plus certain
out-of-pocket expenses. The fees received and the services provided as transfer
agent and dividend-disbursing agent are in addition to those received and
provided under the Advisory Agreements between the Advisor and the Funds.
DISTRIBUTOR
Strong Funds Distributors, Inc., P.O. Box 2936, Milwaukee, Wisconsin 53201,
an indirect subsidiary of the Advisor, acts as distributor of the shares of the
Funds.
ORGANIZATION
SHAREHOLDER RIGHTS. Each Fund (except for the High-Yield Fund) is a Wisconsin
corporation that is authorized to issue an indefinite number of shares of common
stock and series and classes of series of shares of common stock. The High-Yield
Fund is a series of common stock of Strong Income Funds, Inc., a Wisconsin
corporation that is authorized to issue an indefinite number of shares of common
stock and series and classes of series of shares of common stock. Each share of
the 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 Investment Company Act of 1940 (the "1940 Act").
SHAREHOLDER PRIVILEGES. The shareholders of each Fund may benefit from the
privileges described in the "Shareholder Manual" (see page II-1). However, each
Fund reserves the right, at any time and without prior notice, to suspend,
limit, modify, or terminate any of these privileges or their use in any manner
by any person or class.
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PROSPECTUS PAGE I-29
<PAGE> 33
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. Unless you choose otherwise,
all your dividends and capital gains distributions will be automatically
reinvested in additional Fund shares. Or, you may elect to have all your
dividends and capital gain distributions from a Fund automatically invested in
additional shares of another Strong Fund. Shares are purchased at the net asset
value determined on the payment date. If you request in writing that your
dividends and other distributions be paid in cash, a Fund will credit your bank
account by Electronic Funds Transfer ("EFT") or issue a check to you within five
business days of the payment date. You may change your election at any time by
calling or writing Strong Funds. Strong Funds must receive any such change 7
days (15 days for EFT) prior to a dividend or capital gain distribution payment
date in order for the change to be effective for that payment.
The policy of each Fund is to pay dividends from net investment income
monthly and to distribute substantially all net realized capital gains, and
gains from foreign currency transactions, if any, annually. Each Fund may make
additional distributions if necessary to avoid imposition of a 4% excise tax on
undistributed income and gains. Each Fund declares dividends on each day its net
asset value is calculated, except for bank holidays. Income earned on weekends,
holidays (including bank holidays), and days on which net asset value is not
calculated is declared as a dividend on the day on which a Fund's net asset
value was most recently calculated.
TAX STATUS OF DIVIDENDS AND OTHER DISTRIBUTIONS. You will be subject to
federal income tax at ordinary income tax rates on any dividends you receive
that are derived from investment company taxable income (consisting generally of
net investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if any). Distributions by the Funds of net
capital gain (the excess of net long-term capital gain over net short-term
capital loss), when designated as such, 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. All state laws provide a pass-through to
mutual fund shareholders of the state and local income tax exemption afforded
owners of direct U.S. government obligations, although there are conditions to
this treatment in some states. You will be notified annually of the percentage
of a Fund's income that is derived from U.S. government securities.
If a Fund's distributions exceed its investment company taxable income and
net capital gain in any year, as a result of currency-related losses or
otherwise, all or a portion of those distributions may be treated as a return of
capital to shareholders for tax purposes.
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PROSPECTUS PAGE I-30
<PAGE> 34
YEAR-END TAX REPORTING. After the end of each calendar year, you will receive
a statement (Form 1099) of the federal income tax status of all dividends and
other distributions paid (or deemed paid) during the year.
SHARES SOLD OR EXCHANGED. Your redemption of shares of the Funds 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 deductible and will increase the cost
basis of the newly purchased shares. If you redeem shares out of a non-IRA
retirement account, you will be subject to withholding for federal income tax
purposes unless you transfer the distribution directly to an "eligible
retirement plan." In addition, if you redeem all shares in an account at any
time during a month, dividends credited to the account since the beginning of
the month through the day of redemption will be paid with the redemption
proceeds.
BACKUP WITHHOLDING. If you are an individual or certain other noncorporate
shareholder and do not furnish a Fund with a correct taxpayer identification
number, the Fund is required to withhold federal income tax at a rate of 31%
(backup withholding) from all dividends, capital gain distributions, and
redemption proceeds, payable to you. Withholding at that rate from dividends and
capital gain distributions payable to you also is required if you otherwise are
subject to backup withholding. To avoid backup withholding, you must provide a
taxpayer identification number and state that you are not subject to backup
withholding due to the underreporting of your income. This certification is
included as part of your application. Please complete it when you open your
account.
TAX STATUS OF THE FUNDS. Each Fund intends to continue to qualify for
treatment as a regulated investment company under Subchapter M of the Internal
Revenue Code and, if so qualified, will not be liable for federal income tax on
earnings and gains distributed to its shareholders in a timely manner.
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effects on the Funds and investors therein. See
the SAI for a further discussion. There may be other federal, state, or local
tax considerations applicable to a particular investor. You are therefore urged
to consult your own tax adviser.
PERFORMANCE INFORMATION
Each Fund may advertise a variety of types of performance information,
including "yield," "average annual total return," "total return," and
"cumulative
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PROSPECTUS PAGE I-31
<PAGE> 35
total return." Each of these figures is based upon historical results and does
not represent the future performance of a Fund.
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
Funds' 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.
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.
----------------------
PROSPECTUS PAGE I-32
<PAGE> 36
SHAREHOLDER MANUAL
<TABLE>
<S> <C>
HOW TO BUY SHARES...................... II-1
DETERMINING YOUR SHARE PRICE........... II-4
HOW TO SELL SHARES..................... II-5
SHAREHOLDER SERVICES................... II-8
REGULAR INVESTMENT PLANS............... II-10
SPECIAL SITUATIONS..................... II-11
</TABLE>
HOW TO BUY SHARES
All the Strong Funds are 100% no-load, meaning you may purchase, redeem, or
exchange shares directly at net asset value without paying a sales charge.
Because the Funds' net asset value changes daily, your purchase price will be
the next net asset value determined after Strong receives and accepts your
purchase order. Your money will begin earning dividends the first business 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.
----------------------
PROSPECTUS PAGE II-1
<PAGE> 37
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO OPEN A NEW ACCOUNT
- ----------------------------------------------------------------------------
MAIL BY CHECK
- Complete and sign the application. Make your check
or money order payable to "Strong Funds."
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express
delivery service, send to Strong Funds, 900
Heritage Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- Call 1-800-368-3863 for instructions on
establishing an account with an exchange by mail.
- ----------------------------------------------------------------------------
TELEPHONE BY EXCHANGE
- Call 1-800-368-3863 to establish a new account by
1-800-368-3863 exchanging funds from an existing Strong Funds
24 HOURS A DAY, account.
7 DAYS A WEEK - Sign up for telephone exchange services when you
open your account. To add the telephone exchange
option to your account, call 1-800-368-3863 for a
Telephone Exchange Form.
- Please note that your accounts must be identically
registered and that you must exchange enough into
the new account to meet the minimum initial
investment.
Or use Strong DirectSM, Strong Funds' automated
telephone response system. Call 1-800-368-7550.
- ----------------------------------------------------------------------------
IN PERSON - Stop by our Investor Center in Menomonee Falls,
Wisconsin.
Call 1-800-368-3863 for hours and directions.
- The Investor Center can only accept checks or money
orders.
- ----------------------------------------------------------------------------
WIRE Call 1-800-368-3863 for instructions on opening an
account
by wire.
- ----------------------------------------------------------------------------
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM."
- If you sign up for Strong's Automatic Investment
Plan when you open your account, Strong Funds will
waive the Fund's minimum initial investment (see
chart on page II-4).
- Complete the Automatic Investment Plan section on
the account application.
- Mail to the address indicated on the application.
- ----------------------------------------------------------------------------
BROKER-DEALER - You may purchase shares in a Fund through a
broker-dealer
or other institution that may charge a transaction
fee.
- Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account
from the broker-dealer.
</TABLE>
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PROSPECTUS PAGE II-2
<PAGE> 38
-----------------------------------------------------------------------------
TO ADD TO AN EXISTING ACCOUNT
- --------------------------------------------------------------------------------
BY CHECK
- - Complete an Additional Investment Form provided at the bottom of your account
statement, or write a note indicating your fund account number and
registration. Make your check or money order payable to "Strong Funds."
- - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
using an express delivery service, send to Strong Funds, 900 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- - Call 1-800-368-3863 for instructions on exchanging by mail.
- --------------------------------------------------------------------------------
BY EXCHANGE
- - Add to an account by exchanging funds from another Strong Funds account.
- - Sign up for telephone exchange services when you open your account. To add the
telephone exchange option to your account, call 1-800-368-3863 for a Telephone
Exchange Form.
- - Please note that the accounts must be identically registered and that the
minimum exchange is $50 or the balance of your account, whichever is less.
BY TELEPHONE PURCHASE
- - Sign up for telephone purchase when you open your account to make additional
investments from $50 to $25,000 into your Strong Funds account by telephone.
To add this option to your account, call 1-800-368-3863 for a Telephone
Purchase Form.
Or use Strong DirectSM, Strong Funds' automated telephone response system. Call
1-800-368-7550.
- --------------------------------------------------------------------------------
- - Stop by our Investor Center in Menomonee Falls, Wisconsin. Call 1-800-368-3863
for hours and directions.
- - The Investor Center can only accept checks or money orders.
- --------------------------------------------------------------------------------
Call 1-800-368-3863 for instructions on adding to an account by wire.
- --------------------------------------------------------------------------------
USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS. Sign up for these services
when you open your account, or call 1-800-368-3863 for instructions on how to
add them to your existing account.
- - AUTOMATIC INVESTMENT PLAN. Make regular, systematic investments (minimum $50)
into your Strong Funds account from your bank checking or NOW account.
Complete the Automatic Investment Plan section on the account application.
- - AUTOMATIC EXCHANGE PLAN. Make regular, systematic exchanges (minimum $50) from
one Strong Funds account to another. Call 1-800-368-3863 for an application.
- - PAYROLL DIRECT DEPOSIT. Have a specified amount (minimum $50) regularly
deducted from your paycheck, social security check, military allotment, or
annuity payment invested directly into your Strong Funds account. Call
1-800-368-3863 for an application.
- - AUTOMATIC DIVIDEND REINVESTMENT. Unless you choose otherwise, all your
dividends and capital gain distributions will be automatically reinvested in
additional Fund shares. Or, you may elect to have your dividends and capital
gain distributions automatically invested in shares of another Strong Fund.
- --------------------------------------------------------------------------------
- - You may purchase additional shares in a Fund through a broker-dealer or other
institution that may charge a transaction fee.
- - Strong Funds may only accept requests to purchase additional shares into a
broker-dealer street name account from the broker-dealer.
----------------------
PROSPECTUS PAGE II-3
<PAGE> 39
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- - Please make all checks or money orders payable to "Strong Funds."
- - We cannot accept third-party checks or checks drawn on banks outside the U.S.
- - You will be charged a $20 service fee for each check, wire, or Electronic
Funds Transfer ("EFT") purchase that is returned unpaid, and you will be
responsible for any resulting losses suffered by a Fund.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - A Fund reserves the right to decline to accept your purchase order upon
receipt for any reason.
- - Minimum Investment Requirements:
- ----------------------------------------------------------------------------
To open a regular account...........................................$2,500
To open an IRA or Defined Contribution account......................$1,000
To open an UGMA/UTMA account..........................................$250
To open a 401(k) or 403(b) retirement account...................No Minimum
To add to an existing account..........................................$50
The Funds offer a No-Minimum Investment Program that waives the minimum
initial investment requirements for investors who participate in the Strong
Automatic Investment Plan (described on page II-10). Unless you participate in
the Strong No-Minimum Investment Program, please ensure that your purchases meet
the minimum investment requirements.
Under certain circumstances (for example, if you discontinue a No-Minimum
Investment Program before you reach a Fund's minimum initial investment), each
Fund reserves the right to close your account. Before taking such action, a Fund
will provide you with written notice and at least 60 days in which to reinstate
an investment program or otherwise reach the minimum initial investment
required.
DETERMINING YOUR SHARE PRICE
Generally, when you make any purchases, sales, or exchanges, the price of
your shares will be the net asset value ("NAV") next determined after Strong
Funds receives your request in proper form. If Strong Funds receives such
request prior to the close of the New York Stock Exchange (the "Exchange") on a
day on which the Exchange is open, your share price will be the NAV determined
that day. The NAV for each Fund is normally determined as of 3:00 p.m. Central
Time ("CT") each day the Exchange is open. The Funds reserve the right to change
the time at which purchases, redemptions, and exchanges are priced if the
Exchange closes at a time other than 3:00 p.m. CT
----------------------
PROSPECTUS PAGE II-4
<PAGE> 40
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 and applied daily
when determining the NAV.
With respect to the Funds, debt securities are valued by a pricing service
that utilizes electronic data processing techniques to determine values for
normal institutional size trading units of debt securities without regard to the
existence of sale or bid prices when such techniques are believed to more
accurately reflect the fair market value of such securities. Otherwise, sale or
bid prices are used. Any securities or other assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by the Board of Directors. Debt securities having remaining maturities of 60
days or less are valued by the amortized cost method when the Board of Directors
determines that the fair value of such securities is their amortized cost.
HOW TO SELL SHARES
You can access the money in your account at any time by selling (redeeming)
some or all of your shares back to the Fund. Once your redemption request is
received in proper form, Strong will normally mail you the proceeds the next
business day and, in any event, no later than seven days thereafter.
To redeem shares, you may use any of the methods described in the following
chart. However, if you are selling shares in a retirement account, please call
1-800-368-3863 for instructions. Please note that there is a $10.00 fee for
closing an IRA or other retirement account or for transferring assets to another
custodian. For your protection, certain requests may require a signature
guarantee. (See "Special Situations -- Signature Guarantees.")
----------------------
PROSPECTUS PAGE II-5
<PAGE> 41
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO SELL SHARES
- ------------------------------------------------------------------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
For your protection - Write a "letter of instruction" that includes the
certain redemption following information: your account number, the
requests may require dollar amount or number of shares you wish to
a signature guarantee. redeem, each owner's name, your street address, and
See "Special Situa- the signature of each owner as it appears on the
tions -- Signature account.
Guarantees." - Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express
delivery service, send to 900 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
1-800-368-3863 your account by checking the "Yes" box in the
24 HOURS A DAY, appropriate section of the account application. To
7 DAYS A WEEK add the telephone redemption option to your account,
call 1-800-368-3863 for a Telephone Redemption Form.
Once the telephone redemption option is in place, you
may sell shares by phone and arrange to receive the
proceeds in one of three ways:
TO RECEIVE A CHECK BY MAIL
- At no charge, we will mail a check to the address
to which your account is registered.
TO DEPOSIT BY EFT
- At no charge, we will transmit the proceeds by
Electronic Funds Transfer (EFT) to a pre-authorized
bank account. Usually, the funds will arrive at
your bank two banking days after we process your
redemption.
TO DEPOSIT BY WIRE
- For a $10 fee, we will transmit the proceeds by
wire to a pre-authorized bank account. Usually, the
funds will arrive at your bank the next banking day
after we process your redemption.
You may also use Strong Direct SM, Strong Funds'
automated telephone response system. Call
1-800-368-7550.
- ------------------------------------------------------------------------------
CHECK WRITING Sign up for the free check-writing privilege when you
open
your account. To add check writing to an existing
account or to order additional checks, call
1-800-368-3863.
- Please keep in mind that all check redemptions must
be for a minimum of $500 and that you cannot write a
check to close an account.
- ------------------------------------------------------------------------------
AUTOMATICALLY You can set up automatic withdrawals from your
account at
regular intervals. To establish the Systematic
Withdrawal Plan, request a form by calling
1-800-368-3863.
- ------------------------------------------------------------------------------
BROKER-DEALER You may also redeem shares through broker-dealers or
others
who may charge a commission or other transaction fee.
</TABLE>
----------------------
PROSPECTUS PAGE II-6
<PAGE> 42
WHAT YOU SHOULD KNOW ABOUT SELLING SHARES
- - If you have recently purchased shares, please be aware that your redemption
request may not be honored until the purchase check has cleared your bank,
which generally occurs within ten calendar days.
- - You will be charged a $10 service fee for a stop-payment and replacement of a
redemption or dividend check.
- - The right of redemption may be suspended during any period in which (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined by the
SEC exists, making disposal of portfolio securities or valuation of net assets
of a Fund not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must endorse
the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
REDEMPTIONS IN KIND
If the Advisor determines that existing conditions make cash payments
undesirable, redemption payments (including the satisfaction of redemption
checks) may be made in whole or in part in securities or other financial assets,
valued for this purpose as they are valued in computing the NAV for a Fund's
shares. Shareholders receiving securities or other financial assets on
redemption may realize a gain or loss for tax purposes, and will incur any costs
of sale, as well as the associated inconveniences.
WHAT YOU SHOULD KNOW ABOUT TELEPHONE REDEMPTIONS
- - The Funds reserve the right to refuse a telephone redemption if they believe
it advisable to do so.
- - Once you place your telephone redemption request, it cannot be canceled or
modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Funds and their transfer
agent employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. The Funds may incur liability if they do not follow
these procedures.
- - Because of increased telephone volume, you may experience difficulty in
implementing a telephone redemption during periods of dramatic economic or
market changes.
----------------------
PROSPECTUS PAGE II-7
<PAGE> 43
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus, or e-mail us at [email protected].
STRONG DIRECTSM AUTOMATED TELEPHONE SYSTEM. Also available 24 hours a day,
the Strong DirectSM automated response system enables you to use a touch-tone
phone to hear fund quotes and returns on any Strong Fund. You may also confirm
account balances, hear records of recent transactions and dividend activity
(1-800-368-5550), and perform purchases, exchanges or redemptions among your
existing Strong accounts (1-800-368-7550). You may also perform an exchange to
open a new Strong account provided that your account has the telephone exchange
option. Please note that your accounts must be identically registered and you
must exchange enough into the new account to meet the minimum initial
investment. Your account information is protected by a personal code that you
establish.
STRONG NETDIRECTSM. Available 24 hours a day from your personal computer,
Strong netDirectSM allows you to use the Internet to access your Strong Funds
account information. You may access specific account history, view current
account balances, obtain recent dividend activity, and perform purchases,
exchanges, or redemptions among your existing Strong accounts.
To register for netDirect, please visit our website at http://www.strong-
funds.com. Your account information is protected by a personal password and
Internet encryption technology. For more information on this service, please
call 1-800-359-3379 or e-mail us at [email protected].
STATEMENTS AND REPORTS. At a minimum, each Fund will confirm all transactions
for your account on a quarterly basis. We recommend that you file each quarterly
statement - and, especially, each calendar year-end statement - with your other
important financial papers, since you may need to refer to them at a later date
for tax purposes. Should you need additional copies of previous statements, you
may order confirmation statements for the current and preceding year at no
charge. Statements for earlier years are available for $10 each. Call
1-800-368-3863 to order past statements.
Each year, you will also receive a statement confirming the tax status of any
distributions paid to you, as well as a semi-annual report and an annual report
containing audited financial statements.
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
More complete information regarding each Fund's investment policies and
services is contained in its SAI, which you may request by calling or writing
----------------------
PROSPECTUS PAGE II-8
<PAGE> 44
Strong Funds at the phone number and address on the cover of this Prospectus.
CHANGING YOUR ACCOUNT INFORMATION. So that you continue receiving your Strong
correspondence, including any dividend checks and statements, please notify us
in writing as soon as possible if your address changes. You may use the
Additional Investment Form at the bottom of your confirmation
statement, or simply write us a letter of instruction that contains the
following information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to an account's registration - such as adding or removing a joint
owner, changing an owner's name, or changing the type of your account - must
also be submitted in writing. Please call 1-800-368-3863 for instructions. For
your protection, some requests may require a signature guarantee.
TRANSACTION SERVICES
EXCHANGE PRIVILEGE. You may exchange shares between identically registered
Strong Funds accounts, either in writing or by telephone. By establishing the
telephone exchange services, you authorize the Fund and its agents to act upon
your instruction by telephone to exchange shares from any account you specify.
For tax purposes, an exchange is considered a sale and a purchase of Fund
shares. Please obtain and read the appropriate prospectus before investing in
any of the Strong Funds. Since an excessive number of exchanges may be
detrimental to the Funds, each Fund reserves the right to discontinue the
exchange privilege of any shareholder who makes more than five exchanges in a
year or three exchanges in a calendar quarter.
CHECK-WRITING PRIVILEGES. You may also redeem shares by check in amounts of
$500 or more. There is no charge for check-writing privileges. Redemption by
check cannot be honored if share certificates are outstanding and would need to
be liquidated to honor the check. In addition, a check may not be honored if the
check results in you redeeming more than the lesser of $250,000 or 1% of the
Fund's assets during any 90-day period and the Advisor determines that existing
conditions make cash payments undesirable. Checks are supplied free of charge,
and additional checks will be sent to you upon request. The Funds do not return
the checks you write, although copies are available upon request.
You may place stop-payment requests on checks by calling Strong Funds at
1-800-368-3863. A $10 fee will be charged for each stop-payment request. A stop
payment will remain in effect for two weeks following receipt of oral
instructions (six months following written instructions) by Strong Funds.
If there are insufficient cleared shares in your account to cover the amount
of your redemption by check, the check will be returned, marked "insufficient
funds," and a fee of $10 will be charged to the account.
----------------------
PROSPECTUS PAGE II-9
<PAGE> 45
REGULAR INVESTMENT PLANS
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan, all discussed below, are methods of implementing DOLLAR
COST AVERAGING. Dollar cost averaging is an investment strategy that involves
investing a fixed amount of money at regular time intervals. By always investing
the same set amount, you will be purchasing more shares when the price is low
and fewer shares when the price is high. Ultimately, by using this principle in
conjunction with fluctuations in share price, your average cost per share may be
less than your average transaction price. A program of regular investment cannot
ensure a profit or protect against a loss during declining markets. Since such a
program involves continuous investment regardless of fluctuating share values,
you should consider your ability to continue the program through periods of both
low and high share-price levels.
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in a Fund from your bank checking or NOW
account. You may choose to make investments on any day of the month in amounts
of $50 or more. You can set up the Automatic Investment Plan with any financial
institution that is a member of the Automated Clearing House. Because each Fund
has the right to close an investor's account for failure to reach the minimum
initial investment, please consider your ability to continue this Plan until you
reach the minimum initial investment. To establish the Plan, complete the
Automatic Investment Plan section on the account application, or call
1-800-368-3863 for an application.
PAYROLL DIRECT DEPOSIT PLAN. Once you meet a Fund's minimum initial
investment requirement, you may purchase additional Fund shares through the
Payroll Direct Deposit Plan. Through this Plan, periodic investments (minimum
$50) are made automatically from your payroll check into your existing Fund
account. By enrolling in the Plan, you authorize your employer or its agents to
deposit a specified amount from your payroll check into the Fund's bank account.
In most cases, your Fund account will be credited the day after the amount is
received by the Fund's bank. In order to participate in the Plan, your employer
must have direct deposit capabilities through the Automated Clearing House
available to its employees. The Plan may be used for other direct deposits, such
as social security checks, military allotments, and annuity payments.
To establish a Direct Deposit for your account, call 1-800-368-3863 to obtain
an Authorization for Payroll Direct Deposit to a Strong Funds Account form. Once
the Plan is established, you may alter the amount of the deposit, alter the
frequency of the deposit, or terminate your participation in the program by
notifying your employer.
-----------------------
PROSPECTUS PAGE II-10
<PAGE> 46
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 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.
-----------------------
PROSPECTUS PAGE II-11
<PAGE> 47
As an alternative, you may complete a Certification of Authorized Individuals,
which can be obtained from the Funds. Until a valid corporate resolution or
Certification of Authorized Individuals is received by the Fund, services such
as telephone redemption, wire redemption, and check writing will not be
established.
If you are investing as a trustee, please include the date of the trust. All
trustees must sign the application. If they do not, services such as telephone
redemption, wire redemption, and check writing will not be established. All
trustees must sign redemption requests unless proper documentation to the
contrary is provided to the Fund. Failure to provide these documents or
signatures as required when you invest may result in delays in processing
redemption requests.
FINANCIAL INTERMEDIARIES. Broker-dealers, financial institutions, and other
financial intermediaries that have entered into agreements with the Distributor
may enter purchase or redemption orders on behalf of their customers. If you
purchase or redeem shares of a Fund through a financial intermediary, certain
features of the Fund relating to such transactions may not be available or may
be modified in accordance with the terms of the intermediaries' agreement with
the Distributor. In addition, certain operational policies of a Fund, including
those related to settlement and dividend accrual, may vary from those applicable
to direct shareholders of the Fund and may vary among intermediaries. We urge
you to consult your financial intermediary for more information regarding these
matters. In addition, a Fund may pay, directly or indirectly through
arrangements with the Advisor, amounts to financial intermediaries that provide
transfer agent and/or other administrative services relating to the Fund to
their customers provided, however, that the Fund will not pay more for these
services through intermediary relationships than it would if the intermediaries'
customers were direct shareholders in the Fund. Certain financial intermediaries
may charge a commission or other transaction fee for their services. You will
not be charged for such fees if you purchase or redeem your Fund shares directly
from a Fund without the intervention of a financial intermediary.
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you and
the Funds against fraudulent transactions by unauthorized persons. In the
following instances, the Funds will require a signature guarantee for all
authorized owners of an account:
- - when you add the telephone redemption or check-writing options to your
existing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $25,000;
-----------------------
PROSPECTUS PAGE II-12
<PAGE> 48
- - when you request to redeem or redeposit shares that have been issued in
certificate form;
- - if you open an account and later decide that you want certificates;
- - when you request that redemption proceeds be sent to a different name or
address than is registered on your account;
- - if you add/change your name or add/remove an owner on your account; and
- - if you add/change the beneficiary on your transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor
institution, as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms, and others. PLEASE NOTE THAT A
NOTARY PUBLIC STAMP OR SEAL IS NOT ACCEPTABLE.
-----------------------
PROSPECTUS PAGE II-13
<PAGE> 49
APPENDIX
RATINGS OF DEBT OBLIGATIONS
<TABLE>
<CAPTION>
Standard & Poor's Moody's Investor Fitch Investors Duff & Phelps Thomsons
Definition Ratings Group Services, Inc. Service, Inc. Rating Co. IBCA, Inc. BankWatch, Inc.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Highest quality AAA Aaa AAA AAA AAA AAA
High quality AA Aa AA AA AA AA
Upper medium grade A A A A A A
Medium grade BBB Baa BBB BBB BBB BBB
Low grade BB Ba BB BB BB BB
Speculative B B B B B B
Submarginal CCC, CC, C Caa, Ca CCC, CC, C CCC CCC, CC CCC, CC
Probably in
default D C DDD, DD, D DD C D
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
----------------------
PROSPECTUS PAGE A-1
<PAGE> 50
ASSET COMPOSITION
For the fiscal year ended October 31, 1996, the following Funds' assets were
invested in the credit categories shown below. Percentages are computed on a
dollar-weighted basis and are an average of twelve monthly calculations.
<TABLE>
<CAPTION>
Short-Term Bond Fund Corporate Bond Fund
--------------------------------------- ---------------------------------------
Percentage of Advisor's Assessment of Percentage of Advisor's Assessment of
Rating Investments* Unrated Securities Investments* Unrated Securities
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA 34.6 % -- 6.0 % --
AA 5.4 0.4 % 4.6 --
A 10.9 1.4 10.6 --
BBB 28.8 0.7 52.8 0.1 %
BB 16.9 0.9 18.1 --
B -- -- 6.7 --
CCC -- -- 0.2 --
CC -- -- -- --
C -- -- -- --
D -- -- -- --
Unrated 3.4 0.1
Total 100.0 % 3.4 % 100.0 % 0.1 %
- ------------------------------------------------------------------------------------------
<CAPTION>
High-Yield Bond Fund
---------------------------------------
Percentage of Advisor's Assessment of
Rating Investments* Unrated Securities
- ------- ---------------------------------------
<S> <C> <C>
AAA 5.4 % --
AA 1.6 --
A -- --
BBB 1.0 --
BB 27.7 0.3 %
B 59.0 2.0
CCC 1.7 1.3
CC -- --
C -- --
D -- --
Unrated 3.6
Total 100.0 % 3.6 %
- ------------------------------------------------------------------------------------------
</TABLE>
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are
substantially similar to those used in this chart (see the preceding table for
the rating categories of the six NRSROs).
----------------------
PROSPECTUS PAGE A-2
<PAGE> 51
NOTES
<PAGE> 52
STATEMENT OF ADDITIONAL INFORMATION
STRONG SHORT-TERM BOND FUND
STRONG GOVERNMENT SECURITIES FUND
STRONG CORPORATE BOND FUND
STRONG HIGH-YIELD BOND FUND
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
This Statement of Additional Information is not a Prospectus and
should be read in conjunction with the Prospectus of Strong Short-Term Bond
Fund, Inc. (the "Short-Term Bond Fund"); Strong Government Securities Fund,
Inc. (the "Government Fund"); Strong Corporate Bond Fund, Inc. (the "Corporate
Bond Fund"); and Strong High-Yield Bond Fund (the "High-Yield Fund"), which is
a series of Strong Income Funds, Inc. (individually, a "Fund" and
collectively, the "Funds"), dated March 1, 1997. Requests for copies of the
Prospectus should be made by calling one of the numbers listed above. The
financial statements appearing in the Funds' Annual Report, which accompanies
this Statement of Additional Information, are incorporated herein by reference.
This Statement of Additional Information is dated March 1, 1997
<PAGE> 53
STRONG INCOME FUNDS
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Convertible Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Depositary Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Foreign Investment Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
High-Yield (High-Risk) Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Lending of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Loan Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mortgage- and Asset-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mortgage Dollar Rolls and Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . . . 21
Municipal Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Temporary Defensive Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Variable- or Floating-Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
When-Issued Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities . . . . . . . . . . . . . . . . . . . . . . 25
DIRECTORS AND OFFICERS OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
INVESTMENT ADVISOR AND DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ADDITIONAL SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FUND ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
PORTFOLIO MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated March 1, 1997 and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Funds.
This Statement of Additional Information does not constitute an offer to sell
securities.
<PAGE> 54
INVESTMENT RESTRICTIONS
The investment objective of the Short-Term Bond Fund is to seek total
return by investing for a high level of current income with a low degree of
share-price fluctuation. The investment objective of the Government Fund is to
seek total return by investing for a high level of current income with a
moderate degree of share-price fluctuation. The investment objective of the
Corporate Bond Fund is to seek total return by investing for a high level of
current income with a moderate degree of share-price fluctuation. The
investment objective of the High-Yield Fund is to seek total return by
investing for a high level of current income and capital growth. The Funds'
investment objectives and policies are described in detail in the Prospectus
under the caption "Investment Objectives and Policies." The following are the
Funds' fundamental investment limitations which cannot be changed without
shareholder approval.
Each Fund:
1. May not with respect to 75% of its total assets, purchase the
securities of any issuer (except securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities) if, as a
result, (i) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (ii) the Fund would hold more
than 10% of the outstanding voting securities of that issuer.
2. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 (the "1940 Act") which may involve a borrowing, provided
that the combination of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount borrowed), less
the Fund's liabilities (other than borrowings), except that the Fund
may borrow up to an additional 5% of its total assets (not including
the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Fund may
also borrow money from the other Strong Funds or other persons to the
extent permitted by applicable law.
3. May not issue senior securities, except as permitted under the 1940
Act.
4. May not act as an underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's
total assets would be lent to other persons, except through (i)
purchases of debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Fund's total assets would be invested in the
securities of issuers, the principal business activities of which are
in the same industry. With respect to the Money Market Funds only,
this limitation shall not limit the Funds' purchases of obligations
issued by domestic banks.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prohibit the Fund from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objective, policies, and restrictions as the
Fund.
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<PAGE> 55
The following are the Funds' non-fundamental operating policies which
may be changed by the Board of Directors of each Fund without shareholder
approval.
Each Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short,
or unless it covers such short sale as required by the current rules
and positions of the Securities and Exchange Commission or its staff,
and provided that transactions in options, futures contracts, options
on futures contracts, or other derivative instruments are not deemed
to constitute selling securities short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions;
and provided that margin deposits in connection with futures
contracts, options on futures contracts, or other derivative
instruments shall not constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities,
or such other amounts as may be permitted under the 1940 Act.
4. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
investment management company with substantially the same fundamental
investment objective, restrictions and policies as the Fund.
6. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act
and, in accordance with Rule 4.5, will use futures or options on
futures transactions solely for bona fide hedging transactions (within
the meaning of the Commodity Exchange Act), provided, however, that
the Fund may, in addition to bona fide hedging transactions, use
futures and options on futures transactions if the aggregate initial
margin and premiums required to establish such positions, less the
amount by which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed 5% of the
Fund's net assets.
7. Borrow money except (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities
when bank borrowings exceed 5% of its total assets.
8. Make any loans other than loans of portfolio securities, except
through (i) purchases of debt securities or other debt instruments, or
(ii) engaging in repurchase agreements.
Corporate Bond Fund. Under normal market conditions, the Corporate Bond Fund
will invest at least 65% of its total assets in bonds. The Fund may invest up
to 5% of its total assets in warrants. In addition, the Advisor has adopted an
internal policy that the Fund will not invest more than 10% of its total assets
in debt obligations rated lower than BB or its equivalent. For the purposes of
this internal policy, convertible securities will not be considered debt
obligations.
Except for the fundamental investment limitations listed above and
each Fund's investment objective, the other investment policies described in
the Prospectus and this Statement of Additional Information are not fundamental
and may be changed with approval of a Fund's Board of Directors. Unless noted
otherwise, if a percentage restriction is adhered to at the time of investment,
a later increase or decrease in percentage resulting from a change in a Fund's
assets (i.e., due to cash inflows or redemptions) or in market value of the
investment or a Fund's assets will not constitute a violation of that
restriction.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds'
investment objectives, policies and techniques that are described in detail in
the Prospectus under the captions "Investment Objectives and Policies" and
"Implementation of Policies and Risks."
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<PAGE> 56
BORROWING
(ALL FUNDS)
A Fund may borrow money from banks and make other investments or
engage in other transactions permissible under the 1940 Act which may be
considered a borrowing (such as mortgage dollar rolls and reverse repurchase
agreements) as discussed under "Investment Restrictions." However, a Fund may
not purchase securities when bank borrowings exceed 5% of a Fund's total
assets. Presently, the Funds only intend to borrow from banks for temporary or
emergency purposes.
The Funds have established a line-of-credit (LOC) with certain banks
by which they may borrow funds for temporary or emergency purposes. A
borrowing is presumed to be for temporary or emergency purposes if it is repaid
by a Fund within sixty days and is not extended or renewed. The Funds intend
to use the LOC to meet large or unexpected redemptions that would otherwise
force a Fund to liquidate securities under circumstances which are unfavorable
to a Fund's remaining shareholders. The Funds pay a commitment fee to the
banks for the LOC.
CONVERTIBLE SECURITIES
(ALL FUNDS)
A Fund may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks, or other securities that may be converted
into or exchanged for a specified amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
normally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently
are issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value,
if converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as
interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. Generally, the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of
the underlying common stock approaches or exceeds the conversion price, the
price of the convertible security will be increasingly influenced by its
conversion value. A convertible security generally will sell at a premium over
its conversion value by the extent to which investors place value on the right
to acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
a Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
DEPOSITARY RECEIPTS
(ALL FUNDS)
The Funds may invest in foreign securities by purchasing depositary
receipts, including American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"), or other securities convertible into securities
of foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities into which they may be
-5-
<PAGE> 57
converted. Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets, while EDRs,
in bearer form, may be denominated in other currencies and are designed for use
in the European securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs are European receipts evidencing a similar arrangement. For purposes of a
Fund's investment policies, ADRs and EDRs are deemed to have the same
classification as the underlying securities they represent, except that ADRs
and EDRs shall be treated as indirect foreign investments. Thus, an ADR or EDR
representing ownership of common stock will be treated as common stock. ADR
and EDR depositary receipts do not eliminate all of the risks associated with
directly investing in the securities of foreign issuers.
ADR facilities may be established as either "unsponsored" or
"sponsored." While ADRs issued under these two types of facilities are in some
respects similar, there are distinctions between them relating to the rights
and obligations of ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depositary requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities.
The depositary usually charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into U.S. dollars, the
disposition of non-cash distributions, and the performance of other services.
The depositary of an unsponsored facility frequently is under no obligation to
pass through voting rights to ADR holders in respect of the deposited
securities. In addition, an unsponsored facility is generally not obligated to
distribute communications received from the issuer of the deposited securities
or to disclose material information about such issuer in the U.S. and thus
there may not be a correlation between such information and the market value of
the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary, and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
DERIVATIVE INSTRUMENTS
(ALL FUNDS)
IN GENERAL. A Fund may use derivative instruments for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk. Derivative instruments are commonly defined to include
securities or contracts whose values depend on (or "derive" from) the value of
one or more other assets, such as securities, currencies, or commodities.
These "other assets" are commonly referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or
exhibits characteristics similar to options or forward contracts. Options and
forward contracts are considered to be the basic "building blocks" of
derivatives. For example, forward-based derivatives include forward contracts,
swap contracts, as well as exchange-traded futures. Option-based derivatives
include privately negotiated, over-the-counter (OTC) options (including caps,
floors, collars, and options on forward and swap contracts) and exchange-traded
options on futures. Diverse types of derivatives may be created by combining
options or forward contracts in different ways, and by applying these
structures to a wide range of underlying assets.
An option is a contract in which the "holder" (the buyer) pays a
certain amount (the "premium") to the "writer" (the seller) to obtain the
right, but not the obligation, to buy from the writer (in a "call") or sell to
the writer (in a "put") a specific asset at an agreed upon price at or before a
certain time. The holder pays the premium at inception and has no further
financial obligation. The holder of an option- based derivative generally will
benefit from favorable movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse movements in the value of
the underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
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<PAGE> 58
A forward is a sales contract between a buyer (holding the "long"
position) and a seller (holding the "short" position) for an asset with
delivery deferred until a future date. The buyer agrees to pay a fixed price
at the agreed future date and the seller agrees to deliver the asset. The
seller hopes that the market price on the delivery date is less than the agreed
upon price, while the buyer hopes for the contrary. The change in value of a
forward-based derivative generally is roughly proportional to the change in
value of the underlying asset.
HEDGING. A Fund may use derivative instruments to protect against
possible adverse changes in the market value of securities held in, or are
anticipated to be held in, the Fund's portfolio. Derivatives may also be used
by a Fund to "lock-in" the Fund's realized but unrecognized gains in the value
of its portfolio securities. Hedging strategies, if successful, can reduce the
risk of loss by wholly or partially offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments.
MANAGING RISK. A Fund may also use derivative instruments to manage
the risks of the Fund's portfolio. Risk management strategies include, but are
not limited to, facilitating the sale of portfolio securities, managing the
effective maturity or duration of debt obligations in a Fund's portfolio,
establishing a position in the derivatives markets as a substitute for buying
or selling certain securities, or creating or altering exposure to certain
asset classes, such as equity, debt, and foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way for a Fund to invest than "traditional" securities
(i.e., stocks or bonds) would.
EXCHANGE OR OTC DERIVATIVES. Derivative instruments may be
exchange-traded or traded in OTC transactions between private parties.
Exchange-traded derivatives are standardized options and futures contracts
traded in an auction on the floor of a regulated exchange. Exchange contracts
are generally very liquid. The exchange clearinghouse is the counterparty of
every contract. Thus, each holder of an exchange contract bears the credit
risk of the clearinghouse (and has the benefit of its financial strength)
rather than that of a particular counterparty. Over-the-counter transactions
are subject to additional risks, such as the credit risk of the counterparty to
the instrument and are less liquid than exchange-traded derivatives since they
often can only be closed out with the other party to the transaction.
RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments
involves risks and special considerations as described below. Risks pertaining
to particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as
the risk of the underlying assets, namely that the value of the underlying
asset may go up or down. Adverse movements in the value of an underlying asset
can expose a Fund to losses. Derivative instruments may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
instrument in relation to the underlying asset may be magnified. The
successful use of derivative instruments depends upon a variety of factors,
particularly Strong Capital Management, Inc.'s (the "Advisor'") ability to
predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy adopted
will succeed. The Advisor's decision to engage in a derivative instrument will
reflect the Advisor's judgment that the derivative transaction will provide
value to the Fund and its shareholders and is consistent with the Fund's
objectives, investment limitations, and operating policies. In making such a
judgment, the Advisor will analyze the benefits and risks of the derivative
transaction and weigh them in the context of the Fund's entire portfolio and
investment objective.
(2) CREDIT RISK. A Fund will be subject to the risk that a loss
may be sustained by the Fund as a result of the failure of a counterparty to
comply with the terms of a derivative instrument. The counterparty risk for
exchange-traded derivative instruments is generally less than for
privately-negotiated or OTC derivative instruments, since generally a clearing
agency, which is the issuer or counterparty to each exchange-traded instrument,
provides a guarantee of performance. For privately-negotiated instruments,
there is no similar clearing agency guarantee. In all transactions, a Fund
will bear the risk that the counterparty will default, and this could result in
a loss of the expected benefit of the derivative transaction and possibly other
losses to the Fund. A Fund will enter into transactions in derivative
instruments only with counterparties that the Advisor reasonably believes are
capable of performing under the contract.
-7-
<PAGE> 59
(3) CORRELATION RISK. When a derivative transaction is used to
completely hedge another position, changes in the market value of the combined
position (the derivative instrument plus the position being hedged) result from
an imperfect correlation between the price movements of the two instruments.
With a perfect hedge, the value of the combined position remains unchanged for
any change in the price of the underlying asset. With an imperfect hedge, the
values of the derivative instrument and its hedge are not perfectly correlated.
Correlation risk is the risk that there might be imperfect correlation, or even
no correlation, between price movements of an instrument and price movements of
investments being hedged. For example, if the value of a derivative
instruments used in a short hedge (such as writing a call option, buying a put
option, or selling a futures contract) increased by less than the decline in
value of the hedged investments, the hedge would not be perfectly correlated.
Such a lack of correlation might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or other pressures on the
markets in which these instruments are traded. The effectiveness of hedges
using instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and price movements in the investments
being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity
risk. Liquidity risk is the risk that a derivative instrument cannot be sold,
closed out, or replaced quickly at or very close to its fundamental value.
Generally, exchange contracts are very liquid because the exchange
clearinghouse is the counterparty of every contract. OTC transactions are less
liquid than exchange-traded derivatives since they often can only be closed out
with the other party to the transaction. A Fund might be required by
applicable regulatory requirement to maintain assets as "cover," maintain
segregated accounts, and/or make margin payments when it takes positions in
derivative instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If a Fund was unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired,
matured, or was closed out. The requirements might impair a Fund's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to sell or close out a
position in an instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the counterparty to enter into a transaction closing
out the position. Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price that is favorable to a
Fund.
(5) LEGAL RISK. Legal risk is the risk of loss caused by the
legal unenforcibility of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside in
exchange for downside protection, the party taking the risk is looking for a
positive payoff. Despite this voluntary assumption of risk, a counterparty
that has lost money in a derivative transaction may try to avoid payment by
exploiting various legal uncertainties about certain derivative products.
(6) SYSTEMIC OR "INTERCONNECTION" RISK. Interconnection risk is
the risk that a disruption in the financial markets will cause difficulties for
all market participants. In other words, a disruption in one market will spill
over into other markets, perhaps creating a chain reaction. Much of the OTC
derivatives market takes place among the OTC dealers themselves, thus creating
a large interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create losses
at other dealers and destabilize the entire market for OTC derivative
instruments.
GENERAL LIMITATIONS. The use of derivative instruments is subject to
applicable regulations of the Securities and Exchange Commission (the "SEC"),
the several options and futures exchanges upon which they may be traded, the
Commodity Futures Trading Commission ("CFTC"), and various state regulatory
authorities. In addition, a Fund's ability to use derivative instruments may
be limited by certain tax considerations. For a discussion of the federal
income tax treatment of a Fund's derivative instruments, see "Taxes -
Derivative Instruments."
Each Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets. In
accordance with Rule 4.5 of the regulations under the Commodity Exchange Act
(the "CEA"), the notice of eligibility for a Fund includes representations that
the Fund will use futures contracts and related options solely for bona fide
hedging purposes within the meaning of CFTC regulations, provided that the Fund
may hold other positions in futures contracts and related options that do not
qualify as a bona fide hedging position if the aggregate initial margin
deposits and premiums required to establish these
-8-
<PAGE> 60
positions, less the amount by which any such futures contracts and related
options positions are "in the money," do not exceed 5% of the Fund's net
assets. Adherence to these guidelines does not limit a Fund's risk to 5% of
the Fund's assets.
The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging a Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of a Fund's assets, as defined under the 1940 Act, the SEC
has stated that a Fund may use coverage or the segregation of a Fund's assets.
To the extent required by SEC guidelines, a Fund will not enter into any such
transactions unless it owns either: (i) an offsetting ("covered") position in
securities, options, futures, or derivative instruments; or (ii) cash or liquid
securities positions with a value sufficient at all times to cover its
potential obligations to the extent that the position is not "covered". The
Funds will also set aside cash and/or appropriate liquid assets in a segregated
custodial account if required to do so by the SEC and CFTC regulations. Assets
used as cover or held in a segregated account cannot be sold while the
derivative position is open, unless they are replaced with similar assets. As
a result, the commitment of a large portion of a Fund's assets to segregated
accounts could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
In some cases a Fund may be required to maintain or limit exposure to
a specified percentage of its assets to a particular asset class. In such
cases, when a Fund uses a derivative instrument to increase or decrease
exposure to an asset class and is required by applicable SEC guidelines to set
aside liquid assets in a segregated account to secure its obligations under the
derivative instruments, the Advisor may, where reasonable in light of the
circumstances, measure compliance with the applicable percentage by reference
to the nature of the economic exposure created through the use of the
derivative instrument and not by reference to the nature of the exposure
arising from the liquid assets set aside in the segregated account (unless
another interpretation is specified by applicable regulatory requirements).
OPTIONS. A Fund may use options for any lawful purpose consistent
with the Fund's investment objective such as hedging or managing risk. An
option is a contract in which the "holder" (the buyer) pays a certain amount
(the "premium") to the "writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price (the "strike price" or
"exercise price") at or before a certain time (the "expiration date"). The
holder pays the premium at inception and has no further financial obligation.
The holder of an option will benefit from favorable movements in the price of
the underlying asset but is not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The writer of an option will
receive fees or premiums but is exposed to losses due to changes in the value
of the underlying asset. A Fund may buy or write (sell) put and call options
on assets, such as securities, currencies, commodities, and indices of debt and
equity securities ("underlying assets") and enter into closing transactions
with respect to such options to terminate an existing position. Options used
by the Funds may include European, American, and Bermuda style options. If an
option is exercisable only at maturity, it is a "European" option; if it is
also exercisable prior to maturity, it is an "American" option. If it is
exercisable only at certain times, it is a "Bermuda" option.
Each Fund may purchase (buy) and write (sell) put and call options
underlying assets and enter into closing transactions with respect to such
options to terminate an existing position. The purchase of call options serves
as a long hedge, and the purchase of put options serves as a short hedge.
Writing put or call options can enable a Fund to enhance income by reason of
the premiums paid by the purchaser of such options. Writing call options
serves as a limited short hedge because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the security appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Fund will be obligated to sell the security at less than its
market value or will be obligated to purchase the security at a price greater
than that at which the security must be sold under the option. All or a
portion of any assets used as cover for OTC options written by a Fund would be
considered illiquid to the extent described under "Investment Policies and
Techniques -- Illiquid Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the Fund
will be obligated to purchase the security at more than its market value.
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The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, a Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit a Fund to
realize the profit or limit the loss on an option position prior to its
exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between a Fund and the other party to the transaction
("counter party") (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a Fund purchases or writes an OTC option,
it relies on the counter party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counter party to do so
would result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. Each Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the counter party, or
by a transaction in the secondary market if any such market exists. Although
each Fund will enter into OTC options only with counter parties that are
expected to be capable of entering into closing transactions with the Funds,
there is no assurance that the Funds will in fact be able to close out an OTC
option at a favorable price prior to expiration. In the event of insolvency of
the counter party, a Fund might be unable to close out an OTC option position
at any time prior to its expiration. If a Fund were unable to effect a closing
transaction for an option it had purchased, it would have to exercise the
option to realize any profit.
The Funds may engage in options transactions on indices in much the
same manner as the options on securities discussed above, except the index
options may serve as a hedge against overall fluctuations in the securities
market in general.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
SPREAD TRANSACTIONS. A Fund may use spread transactions for any
lawful purpose consistent with the Fund's investment objective such as hedging
or managing risk. A Fund may purchase covered spread options from securities
dealers. Such covered spread options are not presently exchange-listed or
exchange-traded. The purchase of a spread option gives a Fund the right to
put, or sell, a security that it owns at a fixed dollar spread or fixed yield
spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to a Fund in purchasing covered spread
options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used to
protect a Fund against adverse changes in prevailing credit quality spreads,
i.e., the yield spread between high quality and lower quality securities. Such
protection is only provided during the life of the spread option.
FUTURES CONTRACTS. A Fund may use futures contracts for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk. A Fund may enter into futures contracts, including interest
rate, index, and currency futures. Each Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve
as a long hedge, and the sale of futures or the purchase of put options thereon
can serve as a short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options in securities. The Funds' hedging may include
purchases of futures as an offset against the effect of expected increases in
currency exchange rates and securities prices and sales of futures as an offset
against the effect of expected declines in currency exchange rates and
securities prices. The Funds may also write put options on
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futures contracts while at the same time purchasing call options on the same
futures contracts in order to create synthetically a long futures contract
position. Such options would have the same strike prices and expiration dates.
The Funds will engage in this strategy only when the Advisor believes it is
more advantageous to the Funds than is purchasing the futures contract.
To the extent required by regulatory authorities, the Funds only enter
into futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce a Fund's exposure to market, currency, or interest rate fluctuations, a
Fund may be able to hedge its exposure more effectively and perhaps at a lower
cost through using futures contracts.
An interest rate futures contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (e.g., debt security) or currency for a specified price at
a designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index futures
contract was originally written. Transaction costs are incurred when a futures
contract is bought or sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as the case may be, of the
instrument, the currency or by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out prior to delivery by
entering into an offsetting transaction in a matching futures contract.
Although the value of an index might be a function of the value of certain
specified securities, no physical delivery of those securities is made. If the
offsetting purchase price is less than the original sale price, a Fund realizes
a gain; if it is more, a Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, a Fund realizes a gain; if
it is less, a Fund realizes a loss. The transaction costs must also be
included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to
enter into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, a Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash
or other appropriate liquid assets, in an amount generally equal to 10% or less
of the contract value. 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 a Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Fund may be required by an
exchange to increase the level of its initial margin payment, and initial
margin requirements might be increased generally in the future by regulatory
action.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as "marking to market." Variation margin does not involve borrowing, but
rather represents a daily settlement of a Fund's obligations to or from a
futures broker. When a Fund purchases an option on a future, the premium paid
plus transaction costs is all that is at risk. In contrast, when a Fund
purchases or sells a futures contract or writes a call or put option thereon,
it is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If a Fund has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous. Purchasers and sellers of futures
positions and options on futures can enter into offsetting closing transactions
by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there
can be no assurance that such a market will exist for a particular contract at
a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
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If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or options on futures
contracts positions whose prices are moving unfavorably to avoid being subject
to further calls. These liquidations could increase price volatility of the
instruments and distort the normal price relationship between the futures or
options and the investments being hedged. Also, because initial margin deposit
requirements in the futures markets are less onerous than margin requirements
in the securities markets, there might be increased participation by
speculators in the future markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
FOREIGN CURRENCIES. The Funds may purchase and sell foreign currency
on a spot basis, and may use currency-related derivatives instruments such as
options on foreign currencies, futures on foreign currencies, options on
futures on foreign currencies and forward currency contracts (i.e., an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into). The Funds
may use these instruments for hedging or any other lawful purpose consistent
with their respective investment objectives, including transaction hedging,
anticipatory hedging, cross hedging, proxy hedging, and position hedging. The
Funds' use of currency-related derivative instruments will be directly related
to a Fund's current or anticipated portfolio securities, and the Funds may
engage in transactions in currency-related derivative instruments as a means to
protect against some or all of the effects of adverse changes in foreign
currency exchange rates on their portfolio investments. In general, if the
currency in which a portfolio investment is denominated appreciates against the
U.S. dollar, the dollar value of the security will increase. Conversely, a
decline in the exchange rate of the currency would adversely affect the value
of the portfolio investment expressed in U.S. dollars.
For example, a Fund might use currency-related derivative instruments
to "lock in" a U.S. dollar price for a portfolio investment, thereby enabling
the Fund to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received. A Fund also might use
currency-related derivative instruments when the Advisor believes that one
currency may experience a substantial movement against another currency,
including the U.S. dollar, and it may use currency-related derivative
instruments to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, a Fund
may use currency-related derivative instruments to hedge all or part of its
foreign currency exposure through the use of a basket of currencies or a proxy
currency where such currency or currencies act as an effective proxy for other
currencies. The use of this basket hedging technique may be more efficient and
economical than using separate currency-related derivative instruments for each
currency exposure held by the Fund. Furthermore, currency-related derivative
instruments may be used for short hedges - for example, a Fund may sell a
forward currency contract to lock in the U.S. dollar equivalent of the
proceeds from the anticipated sale of a security denominated in a foreign
currency.
In addition, a Fund may use a currency-related derivative instrument
to shift exposure to foreign currency fluctuations from one foreign country to
another foreign country where the Advisor believes that the foreign currency
exposure purchased will appreciate relative to the U.S. dollar and thus better
protect the Fund against the expected decline in the foreign currency exposure
sold. For example, if a Fund owns securities denominated in a foreign currency
and the Advisor believes that currency will decline, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in a second foreign currency that the Advisor believes
would better protect the Fund against the decline in the first security than
would a U.S. dollar exposure. Hedging transactions that use two foreign
currencies are sometimes referred to as "cross hedges." The effective use of
currency-related derivative instruments by a Fund in a cross hedge is dependent
upon a correlation between price movements of the two currency instruments and
the underlying security involved, and the use of two currencies magnifies the
risk that movements in the price of one instrument may not correlate or may
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correlate unfavorably with the foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the currency
instruments used or investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
A Fund also might seek to hedge against changes in the value of a
particular currency when no hedging instruments on that currency are available
or such hedging instruments are more expensive than certain other hedging
instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using currency-related derivative
instruments on another foreign currency or a basket of currencies, the values
of which the Advisor believes will have a high degree of positive correlation
to the value of the currency being hedged. The risk that movements in the
price of the hedging instrument will not correlate perfectly with movements in
the price of the currency being hedged is magnified when this strategy is used.
The use of currency-related derivative instruments by a Fund involves
a number of risks. The value of currency-related derivative instruments
depends on the value of the underlying currency relative to the U.S. dollar.
Because foreign currency transactions occurring in the interbank market might
involve substantially larger amounts than those involved in the use of such
derivative instruments, a Fund could be disadvantaged by having to deal in the
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than
for round lots (generally consisting of transactions of greater than $1
million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments
might be required to take place within the country issuing the underlying
currency. Thus, a Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents
and might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When a Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for
exchange-traded instruments is generally less than for privately-negotiated or
OTC currency instruments, since generally a clearing agency, which is the
issuer or counterparty to each instrument, provides a guarantee of performance.
For privately-negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the transaction and possibly other losses to the Fund. The Funds
will enter into transactions in currency-related derivative instruments only
with counterparties that the Advisor reasonably believes are capable of
performing under the contract.
Purchasers and sellers of currency-related derivative instruments may
enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can
be no assurance that a Fund will in fact be able to close out a forward
currency contract (or any other currency-related derivative instrument) at a
time and price favorable to a Fund. In addition, in the event of insolvency of
the counterparty, a Fund might be unable to close out a forward currency
contract at any time prior to maturity. In the case of an exchange-traded
instrument, a Fund will be able to close the position out only on an exchange
which provides a market for the instruments. The ability to establish and
close out positions on an exchange is subject to the maintenance of a liquid
market, and there can be no assurance that a liquid market will exist for any
instrument at any specific time. In the case of a privately-negotiated
instrument, a Fund will be able to realize the value of the
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<PAGE> 65
instrument only by entering into a closing transaction with the issuer or
finding a third party buyer for the instrument. While a Fund will enter into
privately-negotiated transactions only with entities who are expected to be
capable of entering into a closing transaction, there can be no assurance that
a Fund will in fact be able to enter into such closing transactions.
The precise matching of currency-related derivative instrument amounts
and the value of the portfolio securities involved generally will not be
possible because the value of such securities, measured in the foreign
currency, will change after the currency-related derivative instrument position
has been established. Thus, a Fund might need to purchase or sell foreign
currencies in the spot (cash) market. The projection of short-term currency
market movements is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded
primarily in the OTC market. Although options on foreign currencies are traded
primarily in the OTC market, the Funds will normally purchase or sell OTC
options on foreign currency only when the Advisor reasonably believes a liquid
secondary market will exist for a particular option at any specific time.
There will be a cost to a Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. A Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to a Fund at one rate, while offering a lesser
rate of exchange should the Fund desire to resell that currency to the dealer.
When required by the SEC guidelines, the Funds will set aside
permissible liquid assets in segregated accounts or otherwise cover their
respective potential obligations under currency-related derivatives
instruments. To the extent a Fund's assets are so set aside, they cannot be
sold while the corresponding currency position is open, unless they are
replaced with similar assets. As a result, if a large portion of a Fund's
assets are so set aside, this could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
The Advisor's decision to engage in a transaction in a particular
currency-related derivative instrument will reflect the Advisor's judgment that
the transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives and policies. In making such a judgment,
the Advisor will analyze the benefits and risks of the transaction and weigh
them in the context of the Fund's entire portfolio and objectives. The
effectiveness of any transaction in a currency-related derivative instrument is
dependent on a variety of factors, including the Advisor's skill in analyzing
and predicting currency values and upon a correlation between price movements
of the currency instrument and the underlying security. There might be
imperfect correlation, or even no correlation, between price movements of an
instrument and price movements of investments being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which these instruments are traded. In addition, a Fund's use of
currency-related derivative instruments is always subject to the risk that the
currency in question could be devalued by the foreign government. In such a
case, any long currency positions would decline in value and could adversely
affect any hedging position maintained by the Fund.
The Funds' dealing in currency-related derivative instruments will
generally be limited to the transactions described above. However, the Funds
reserve the right to use currency-related derivatives instruments for different
purposes and under different circumstances. Of course, the Funds are not
required to use currency-related derivatives instruments and will not do so
unless deemed appropriate by the Advisor. It also should be realized that use
of these instruments does not eliminate, or protect against, price movements in
the Funds' securities that are attributable to other (i.e., non-currency
related) causes. Moreover, while the use of currency-related derivatives
instruments may reduce the risk of loss due to a decline in the value of a
hedged currency, at the same time the use of these instruments tends to limit
any potential gain which may result from an increase in the value of that
currency.
SWAP AGREEMENTS. The Funds may enter into interest rate, securities
index, commodity, or security and currency exchange rate swap agreements for
any lawful purpose consistent with each Fund's investment objective, such as
for the purpose of attempting to obtain or preserve a particular desired return
or spread at a lower cost to the Fund than if the Fund had
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<PAGE> 66
invested directly in an instrument that yielded that desired return or spread.
A Fund also may enter into swaps in order to protect against an increase in the
price of, or the currency exchange rate applicable to, securities that the Fund
anticipates purchasing at a later date. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to several years. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount," i.e., the return on or increase in value
of a particular dollar amount invested at a particular interest rate, in a
particular foreign currency, or in a "basket" of securities representing a
particular index. Swap agreements may include interest rate caps, under which,
in return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or "cap;" interest rate
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates fall below a specified level, or
"floor;" and interest rate collars, under which a party sells a cap and
purchases a floor, or vice versa, in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have
agreed to exchange. Under most swap agreements entered into by a Fund, the
obligations of the parties would be exchanged on a "net basis." Consequently,
a Fund's obligation (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). A Fund's obligation under a swap agreement will be accrued daily
(offset against amounts owed to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, or liquid high grade debt obligations.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on the Advisor's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Certain restrictions
imposed on the Funds by the Internal Revenue Code may limit the Funds' ability
to use swap agreements. The swaps market is largely unregulated.
The Funds will enter swap agreements only with counterparties that the
Advisor reasonably believes are capable of performing under the swap
agreements. If there is a default by the other party to such a transaction, a
Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In addition to the
derivative instruments and strategies described above and in the Funds'
Prospectus, the Advisor expects to discover additional derivative instruments
and other hedging or risk management techniques. The Advisor may utilize these
new derivative instruments and techniques to the extent that they are
consistent with a Fund's investment objective and permitted by the Fund's
investment limitations, operating policies, and applicable regulatory
authorities.
FOREIGN INVESTMENT COMPANIES
(ALL FUNDS)
The Funds may invest, to a limited extent, in foreign investment
companies. Some of the countries in which the Funds invest may not permit
direct investment by outside investors. Investments in such countries may only
be permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may be
less expensive and more expedient for a Fund to invest in a foreign investment
company in a country which permits direct foreign investment. Investing
through such vehicles may involve frequent or layered fees or expenses and may
also be subject to limitation under the 1940 Act. Under the 1940 Act, a Fund
may invest up to 10% of its assets in shares of other investment companies and
up to 5% of its assets in any one investment company as long as the investment
does not represent more than 3% of the voting stock of the acquired investment
company. Each Fund does not intend to invest in such investment companies
unless, in the judgment of the Advisor, the potential benefits of such
investments justify the payment of any associated fees and expenses.
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FOREIGN SECURITIES
(ALL FUNDS)
Investing in foreign securities involves a series of risks not present
in investing in U.S. securities. Many of the foreign securities held by the
Fund will not be registered with the Securities and Exchange Commission (the
"SEC"), nor will the foreign issuers be subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by the Funds than is available concerning
U.S. companies. Disclosure and regulatory standards in many respects are less
stringent in emerging market countries than in the U.S. and other major
markets. There also may be a lower level of monitoring and regulation of
emerging markets and the activities of investors in such markets, and
enforcement of existing regulations may be extremely limited. Foreign
companies, and in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting, auditing and financial
reporting standards, or to other regulatory requirements comparable to those
applicable to U.S. companies. The Fund's net investment income and capital
gains from its foreign investment activities may be subject to non-U.S.
withholding taxes.
The costs attributable to foreign investing that the Funds must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing.
Costs associated with the exchange of currencies also make foreign investing
more expensive than domestic investing. Investment income on certain foreign
securities in which the Funds may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities.
Tax treaties between the United States and foreign countries, however, may
reduce or eliminate the amount of foreign tax to which the Funds would be
subject.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
failed to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to a Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
HIGH-YIELD (HIGH-RISK) SECURITIES
(SHORT-TERM BOND, CORPORATE BOND, AND HIGH-YIELD FUNDS)
IN GENERAL. The Short-Term Bond Fund may invest up to 25% of its net
assets only in non-investment grade debt obligations rated in the fifth highest
rating category (e.g., BB by S&P) or comparable unrated securities. The
Corporate Bond Fund may invest up to 25% of its net assets, and the High-Yield
Bond Fund may invest without limitation, in non-investment grade debt
obligations. Non-investment grade debt obligations (hereinafter referred to
as "lower-quality securities") include (i) bonds rated as low as C by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"),
or Fitch Investors Service, Inc. ("Fitch"), or CCC by Duff & Phelps, Inc.
("D&P"); (ii) commercial paper rated as low as C by S&P, Not Prime by Moody's,
or Fitch 4 by Fitch; and (iii) unrated debt obligations of comparable quality.
Lower-quality securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to the Appendix for
a discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated security market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such
conditions could severely disrupt the market for and adversely affect the value
of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
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interest rates. Lower-quality and comparable unrated securities also tend to
be more sensitive to economic conditions than are higher-rated securities. As
a result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, a Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in a Fund's net asset value.
As previously stated, the value of a lower-quality or comparable
unrated security will decrease in a rising interest rate market and
accordingly, so will a Fund's net asset value. If a Fund experiences
unexpected net redemptions in such a market, it may be forced to liquidate a
portion of its portfolio securities without regard to their investment merits.
Due to the limited liquidity of lower-quality and comparable unrated securities
(discussed below), a Fund may be forced to liquidate these securities at a
substantial discount. Any such liquidation would force the Fund to sell the
more liquid portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, a Fund may have
to replace the securities with a lower yielding security, which would result in
a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully reflect the true risks
of an investment. In addition, credit rating agencies may or may not make
timely changes in a rating to reflect changes in the economy or in the
condition of the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in lower-quality and comparable unrated
obligations will be more dependent on the Advisor's credit analysis than would
be the case with investments in investment-grade debt obligations. The Advisor
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Advisor continually monitors the investments in
each Fund's portfolio and carefully evaluates whether to dispose of or to
retain lower-quality and comparable unrated securities whose credit ratings or
credit quality may have changed.
LIQUIDITY AND VALUATION. A Fund may have difficulty disposing of
certain lower-quality and comparable unrated securities because there may be a
thin trading market for such securities. Because not all dealers maintain
markets in all lower-quality and comparable unrated securities, there is no
established retail secondary market for many of these securities. The Funds
anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. As a result, a Fund's
asset value and ability to dispose of particular securities, when necessary to
meet the Fund's liquidity needs or in response to a specific economic event,
may be impacted. The lack of a liquid secondary market for certain securities
may also make it more difficult for a Fund to obtain accurate market quotations
for purposes of valuing the Fund's portfolio. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
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LEGISLATION. Legislation may be adopted, from time to time designed
to limit the use of certain lower-quality and comparable unrated securities by
certain issuers. It is anticipated that if additional legislation is enacted
or proposed, it could have a material affect on the value of these securities
and the existence of a secondary trading market for the securities.
ILLIQUID SECURITIES
(ALL FUNDS)
The Funds may invest in illiquid securities (i.e., securities that are
not readily marketable). However, a Fund will not acquire illiquid securities
if, as a result, they would comprise more than 15%, or with respect to the
Money Fund, 10%, of the value of the Fund's net assets (or such other amounts
as may be permitted under the 1940 Act). However, as a matter of internal
policy, the Advisor intends to limit each Fund's investments in illiquid
securities to 10% of its net assets.
The Board of Directors of each Fund, or its delegate, has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are illiquid for purposes of this limitation.
Certain securities exempt from registration or issued in transactions exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), such as securities that may be resold to institutional investors under
Rule 144A under the Securities Act and Section 4(2) commercial paper, may be
considered liquid under guidelines adopted by the Funds' Board of Directors.
The Board of Directors of each Fund has delegated to the Advisor the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. The
Board of Directors has directed the Advisor to look to such factors as (i) the
frequency of trades or quotes for a security, (ii) the number of dealers
willing to purchase or sell the security and number of potential buyers, (iii)
the willingness of dealers to undertake to make a market in the security, (iv)
the nature of the security and nature of the marketplace trades, such as the
time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer, (v) the likelihood that the security's marketability
will be maintained throughout the anticipated holding period, and (vi) any
other relevant factors. The Advisor may determine 4(2) commercial paper to be
liquid if (i) the 4(2) commercial paper is not traded flat or in default as to
principal and interest, (ii) the 4(2) commercial paper is rated in one of the
two highest rating categories by at least two nationally rated statistical
rating organizations ("NRSRO"), or if only one NRSRO rates the security, by
that NRSRO, or is determined by the Advisor to be of equivalent quality, and
(iii) the Advisor considers the trading market for the specific security taking
into account all relevant factors. With respect to the Short-Term Bond,
Corporate Bond, and High-Yield Funds' foreign holdings, a foreign security may
be considered liquid by the Advisor (despite its restricted nature under the
Securities Act) if the security can be freely traded in a foreign securities
market and all the facts and circumstances support a finding of liquidity.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at
fair value as determined in good faith by the Board of Directors of the Funds.
If through the appreciation of restricted securities or the depreciation of
unrestricted securities, a Fund should be in a position where more than 15% of
the value of its net assets are invested in illiquid securities, including
restricted securities which are not readily marketable (except for 144A
Securities and 4(2) commercial paper deemed to be liquid by the Advisor), the
Fund will take such steps as is deemed advisable, if any, to protect liquidity.
Each Fund may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC
options written by the Fund. The assets used as cover for OTC options written
by the Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
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LENDING OF PORTFOLIO SECURITIES
(ALL FUNDS)
Each Fund is authorized to lend up to 33 1/3% of the total value of
its portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. Although the Funds are authorized to lend, the Funds do not
presently intend to engage in lending. In determining whether to lend
securities to a particular broker-dealer or institutional investor, the Advisor
will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Funds will retain authority to terminate any loans at any time. The Funds may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Funds
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Funds will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when retaining such
rights is considered to be in a Fund's interest.
LOAN INTERESTS
(SHORT-TERM BOND AND CORPORATE BOND FUNDS)
Each Fund may acquire a loan interest (a "Loan Interest"). A Loan
Interest is typically originated, negotiated, and structured by a U.S. or
foreign commercial bank, insurance company, finance company, or other financial
institution (the "Agent") for a lending syndicate of financial institutions.
The Agent typically administers and enforces the loan on behalf of the other
lenders in the syndicate. In addition, an institution, typically but not
always the Agent (the "Collateral Bank"), holds collateral (if any) on behalf
of the lenders. These Loan Interests may take the form of participation
interests in, assignments of or novations of a loan during its secondary
distribution, or direct interests during a primary distribution. Such Loan
Interests may be acquired from U.S. or foreign banks, insurance companies,
finance companies, or other financial institutions who have made loans or are
members of a lending syndicate or from other holders of Loan Interests. A Fund
may also acquire Loan Interests under which the Fund derives its rights
directly from the borrower. Such Loan Interests are separately enforceable by
a Fund against the borrower and all payments of interest and principal are
typically made directly to a Fund from the borrower. In the event that a Fund
and other lenders become entitled to take possession of shared collateral, it
is anticipated that such collateral would be held in the custody of a
Collateral Bank for their mutual benefit. The Funds may not act as an Agent, a
Collateral Bank, a guarantor or sole negotiator or structurer with respect to a
loan.
The Advisor will analyze and evaluate the financial condition of the
borrower in connection with the acquisition of any Loan Interest. The Advisor
also analyzes and evaluates the financial condition of the Agent and, in the
case of Loan Interests in which the Fund does not have privity with the
borrower, those institutions from or through whom the Fund derives its rights
in a loan (the "Intermediate Participants").
In a typical loan the Agent administers the terms of the loan
agreement. In such cases, the Agent is normally responsible for the collection
of principal and interest payments from the borrower and the apportionment of
these payments to the credit of all institutions which are parties to the loan
agreement. A Fund will generally rely upon the Agent or an Intermediate
Participant to receive and forward to the Fund its portion of the principal and
interest payments on the loan. Furthermore, unless under the terms of a
participation agreement a Fund has direct recourse against the borrower, the
Fund will rely on the Agent and the other members of the lending syndicate to
use appropriate credit remedies against the borrower. The Agent is typically
responsible for monitoring compliance with covenants contained in the loan
agreement based upon reports prepared by the borrower. The seller of the Loan
Interest usually does, but is often not obligated to, notify holders of Loan
Interests of any failures of compliance. The Agent may monitor the value of
the collateral and, if the value of the collateral declines, may accelerate the
loan, may give the borrower an opportunity to provide additional collateral or
may seek other protection for the benefit of the participants in the loan. The
Agent is compensated by the borrower for providing these services under a loan
agreement, and such compensation may include special fees paid upon structuring
and funding the loan and other fees paid on a continuing basis. With respect
to Loan Interests for which the Agent does not perform such administrative and
enforcement functions, a Fund will perform such tasks on its own behalf,
although a Collateral Bank will typically hold any collateral on behalf of the
Fund and the other lenders pursuant to the applicable loan agreement.
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A financial institution's appointment as Agent may usually be
terminated in the event that it fails to observe the requisite standard of care
or becomes insolvent, enters Federal Deposit Insurance Corporation ("FDIC")
receivership, or, if not FDIC insured, enters into bankruptcy proceedings. A
successor Agent would generally be appointed to replace the terminated Agent,
and assets held by the Agent under the loan agreement should remain available
to holders of Loan Interests. However, if assets held by the Agent for the
benefit of the Fund were determined to be subject to the claims of the Agent's
general creditors, the Fund might incur certain costs and delays in realizing
payment on a loan interest, or suffer a loss of principal and/or interest. In
situations involving Intermediate Participants similar risks may arise.
Purchasers of Loan Interests depend primarily upon the
creditworthiness of the borrower for payment of principal and interest. If a
Fund does not receive scheduled interest or principal payments on such
indebtedness, the Fund's share price and yield could be adversely affected.
Loans that are fully secured offer a Fund more protections than an unsecured
loan in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the liquidation of collateral from a secured loan
would satisfy the borrower's obligation, or that the collateral can be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks, and may be highly speculative. Borrowers that are
in bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries will also involve a risk that the governmental entities responsible
for the repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.
MATURITY
(ALL FUNDS)
A Fund's average portfolio maturity represents an average based on the
actual stated maturity dates of the debt securities in a Fund's portfolio,
except that (i) variable-rate securities are deemed to mature at the next
interest-rate adjustment date, (ii) debt securities with put features are
deemed to mature at the next put-exercise date, (iii) the maturity of
mortgage-backed securities is determined on an "expected life" basis as
determined by the Advisor, and (iv) securities being hedged with futures
contracts may be deemed to have a longer maturity, in the case of purchases of
futures contracts, and a shorter maturity, in the case of sales of futures
contracts, than they would otherwise be deemed to have. In addition, a
security that is subject to redemption at the option of the issuer on a
particular date (the "call date"), which is prior to the security's stated
maturity, may be deemed to mature on the call date rather than on its stated
maturity date. The call date of a security will be used to calculate average
portfolio maturity when the Advisor reasonably anticipates, based upon
information available to it, that the issuer will exercise its right to redeem
the security. The average portfolio maturity of a Fund is dollar-weighted
based upon the market value of a Fund's securities at the time of the
calculation.
MORTGAGE- AND ASSET-BACKED SECURITIES
(ALL FUNDS)
Mortgage-backed securities represent direct or indirect participations
in, or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
collateralized mortgage obligations. Such securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, such as the
Government National Mortgage Association and the Federal National Mortgage
Association, or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by private lenders may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
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enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any mortgage- and asset-backed security is
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional debt
securities. Among the principal differences are that interest and principal
payments are made more frequently on mortgage- and asset-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if a Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing the yield to maturity. Conversely, if a Fund purchases these
securities at a discount, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Amounts available for reinvestment by
a Fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage - and
asset-backed securities is smaller and less liquid than the market for
government-sponsored mortgage-backed securities.
While many mortgage- and asset-backed securities are issued with only
one class of security, many are issued in more than one class, each with
different payment terms. Multiple class mortgage- and asset-backed securities
are issued for two main reasons. First, multiple classes may be used as a
method of providing credit support. This is accomplished typically through
creation of one or more classes whose right to payments on the security is made
subordinate to the right to such payments of the remaining class or classes.
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates, or other characteristics differing both from those of
each other and from those of the underlying assets. Examples include so-called
"strips" (mortgage- and asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-mortgage-
or asset-backed securities, such as floating interest rates (i.e., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
The Funds may invest in stripped mortgage- or asset-backed securities,
which receive differing proportions of the interest and principal payments from
the underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such
market value may be extremely volatile. With respect to certain stripped
securities, such as interest only and principal only classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
Mortgage- and asset-backed securities backed by assets, other than as
described above, or in which the payment streams on the underlying assets are
allocated in a manner different than those described above may be issued in the
future. A Fund may invest in such securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of a Fund.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
(ALL FUNDS)
The Funds may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, a
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing. (See "Borrowing".) When required by guidelines of the
SEC, a Fund will set aside permissible liquid assets in a segregated account to
secure its obligations to repurchase the security.
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Each Fund may also enter into mortgage dollar rolls, in which the Fund
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. At the time the Fund would
enter into a mortgage dollar roll, it would set aside permissible liquid assets
in a segregated account to secure its obligation for the forward commitment to
buy mortgage-backed securities. Mortgage dollar roll transactions may be
considered a borrowing by the Funds. (See "Borrowing".)
The mortgage dollar rolls and reverse repurchase agreements entered
into by the Funds may be used as arbitrage transactions in which a Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar roll or reverse repurchase agreements. Since a Fund
will receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities or repurchase agreements will be high quality
and will mature on or before the settlement date of the mortgage dollar roll or
reverse repurchase agreement, the Advisor believes that such arbitrage
transactions do not present the risks to the Funds that are associated with
other types of leverage.
MUNICIPAL OBLIGATIONS
(ALL FUNDS)
General obligation bonds are secured by the issuer's pledge of its
full faith, credit, and taxing power for the payment of interest and principal.
Revenue bonds are payable only from the revenues derived from a project or
facility or from the proceeds of a specified revenue source. Industrial
development bonds are generally revenue bonds secured by payments from and the
credit of private users. Municipal notes are issued to meet the short-term
funding requirements of state, regional, and local governments. Municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax and revenue anticipation notes, construction loan
notes, short-term discount notes, tax-exempt commercial paper, demand notes,
and similar instruments. Municipal obligations include obligations, the
interest on which is exempt from federal income tax, that may become available
in the future as long as the Board of Directors of a Fund determines that an
investment in any such type of obligation is consistent with that Fund's
investment objective.
Municipal lease obligations may take the form of a lease, an
installment purchase, or a conditional sales contract. They are issued by
state and local governments and authorities to acquire land, equipment, and
facilities, such as state and municipal vehicles, telecommunications and
computer equipment, and other capital assets. The Fund may purchase these
obligations directly, or it may purchase participation interests in such
obligations. Municipal leases are generally subject to greater risks than
general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet in order to issue
municipal obligations. Municipal leases may contain a covenant by the state or
municipality to budget for, appropriate, and make payments due under the
obligation. Certain municipal leases may, however, contain "non-appropriation"
clauses which provide that the issuer is not obligated to make payments on the
obligation in future years unless funds have been appropriated for this purpose
each year. Accordingly, such obligations are subject to "non-appropriation"
risk. While municipal leases are secured by the underlying capital asset, it
may be difficult to dispose of any such asset in the event of non-appropriation
or other default.
REPURCHASE AGREEMENTS
(ALL FUNDS)
Each Fund may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement, a Fund buys a security at one
price, and at the time of sale, the seller agrees to repurchase the obligation
at a mutually agreed upon time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. The Advisor will monitor, on an ongoing
basis, the value of the underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued interest. Repurchase
agreements could involve certain risks in the event of a default or insolvency
of the other party to the agreement, including possible delays or restrictions
upon a Fund's ability to dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the Advisor reviews the
creditworthiness of the banks and non-bank dealers with which the Funds enter
into repurchase agreements to evaluate those risks. A Fund may,
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under certain circumstances, deem repurchase agreements collateralized by U.S.
government securities to be investments in U.S. government securities.
SHORT SALES AGAINST THE BOX
(ALL FUNDS)
Each Fund may sell securities short against the box to hedge
unrealized gains on portfolio securities. Selling securities short against the
box involves selling a security that a Fund owns or has the right to acquire,
for delivery at a specified date in the future. If a Fund sells securities
short against the box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price rises.
TEMPORARY DEFENSIVE POSITION
(ALL FUNDS)
When the Advisor determines that market conditions warrant a temporary
defensive position, the Funds may invest without limitation in cash and
short-term fixed income securities, including U.S. government securities,
commercial paper, banker's acceptances, certificates of deposit, and time
deposits.
VARIABLE- OR FLOATING-RATE SECURITIES
(ALL FUNDS)
The Fund may invest in securities which offer a variable- or
floating-rate of interest. Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities generally provide for automatic
adjustment of the interest rate whenever some specified interest rate index
changes. The interest rate on variable- or floating-rate securities is
ordinarily determined by reference to or is a percentage of a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial
paper or bank certificates of deposit, an index of short-term interest rates,
or some other objective measure.
Variable- or floating-rate securities frequently include a demand
feature entitling the holder to sell the securities to the issuer at par. In
many cases, the demand feature can be exercised at any time on 7 days notice;
in other cases, the demand feature is exercisable at any time on 30 days notice
or on similar notice at intervals of not more than one year. Some securities
which do not have variable or floating interest rates may be accompanied by
puts producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, the Fund may consider that instrument's maturity to be shorter than its
stated maturity. Any such determination by the Money Fund will be made in
accordance with Rule 2a-7.
Variable-rate demand notes include master demand notes which are
obligations that permit the Fund to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the Fund,
as lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded. There generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and, if not so rated, the Fund may
invest in them only if the Advisor determines that at the time of investment
the obligations are of comparable quality to the other obligations in which
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<PAGE> 75
the Fund may invest. The Advisor, on behalf of the Fund, will consider on an
ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in the Fund's portfolio.
The Fund will not invest more than 10% of its net assets in variable-
and floating-rate demand obligations that are not readily marketable (a
variable- or floating-rate demand obligation that may be disposed of on not
more than seven days notice will be deemed readily marketable and will not be
subject to this limitation). (See "Illiquid Securities" and "Investment
Restrictions.") In addition, each variable- or floating-rate obligation must
meet the credit quality requirements applicable to all the Fund's investments
at the time of purchase. When determining whether such an obligation meets the
Fund's credit quality requirements, the Fund may look to the credit quality of
the financial guarantor providing a letter of credit or other credit support
arrangement.
In determining the Fund's weighted average portfolio maturity, the
Fund will consider a floating or variable rate security to have a maturity
equal to its stated maturity (or redemption date if it has been called for
redemption), except that it may consider (i) variable rate securities to have a
maturity equal to the period remaining until the next readjustment in the
interest rate, unless subject to a demand feature, (ii) variable rate
securities subject to a demand feature to have a remaining maturity equal to
the longer of (a) the next readjustment in the interest rate or (b) the period
remaining until the principal can be recovered through demand, and (iii)
floating rate securities subject to a demand feature to have a maturity equal
to the period remaining until the principal can be recovered through demand.
Variable and floating rate securities generally are subject to less principal
fluctuation than securities without these attributes since the securities
usually trade at amortized cost following the readjustment in the interest
rate.
WARRANTS
(ALL FUNDS)
Each Fund may acquire warrants. Warrants are securities giving the
holder the right, but not the obligation, to buy the stock of an issuer at a
given price (generally higher than the value of the stock at the time of
issuance) during a specified period or perpetually. Warrants may be acquired
separately or in connection with the acquisition of securities. Warrants
acquired by a Fund in units or attached to securities are not subject to these
restrictions. Warrants do not carry with them the right to dividends or voting
rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As
a result, warrants may be considered to have more speculative characteristics
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
WHEN-ISSUED SECURITIES
(ALL FUNDS)
Each Fund may from time to time purchase securities on a "when-issued"
basis. The price of debt obligations purchased on a when-issued basis, which
may be expressed in yield terms, generally is fixed at the time the commitment
to purchase is made, but delivery and payment for the securities take place at
a later date. Normally, the settlement date occurs within 45 days of the
purchase although in some cases settlement may take longer. During the period
between the purchase and settlement, no payment is made by a Fund to the issuer
and no interest on the debt obligations accrues to the Fund. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Fund's other assets. While when-issued securities may
be sold prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes the commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The
Funds do not believe that their net asset values will be adversely affected by
purchases of securities on a when-issued basis.
To the extent required by the SEC, the Funds will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date. When the time comes to pay for when-issued
securities, a Fund will meet its obligations from then-available cash flow,
sale of the securities held in the separate account, described above, sale of
other securities or, although it would not normally expect to do so, from the
sale of the when-issued securities themselves (which may have a market value
greater or less than the Fund's payment obligation).
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<PAGE> 76
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
(ALL FUNDS)
The Funds may invest in zero-coupon, step-coupon, and pay-in-kind
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon securities are sold at a deep
discount to their face value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because such securities do not pay current
cash income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, federal
income tax law requires the holders of zero-coupon, step-coupon, and
pay-in-kind securities to include in income each year the portion of the
original issue discount (or deemed discount) and other non-cash income on such
securities accruing that year. In order to continue to qualify as a "regulated
investment company" under the Internal Revenue Code and avoid a certain excise
tax, each Fund may be required to distribute a portion of such discount and
income and may be required to dispose of other portfolio securities, which may
occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
DIRECTORS AND OFFICERS OF THE FUNDS
Directors and officers of the Funds, together with information as to
their principal business occupations during the last five years, and other
information are shown below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an asterisk (*). Each
officer and director holds the same position with the 25 registered open-end
management investment companies consisting of 38 mutual funds, which are
managed by the Advisor (the "Strong Funds"). The Strong Funds, in the
aggregate, pays each Director who is not a director, officer, or employee of
the Advisor, or any affiliated company (a "disinterested director") an annual
fee of $50,000, plus $100 per Board meeting for each Strong Fund. In addition,
each disinterested director is reimbursed by the Strong Funds for travel and
other expenses incurred in connection with attendance at such meetings. Other
officers and directors of the Strong Funds receive no compensation or expense
reimbursement from the Strong Funds.
*RICHARD S. STRONG (DOB 5/12/42), Chairman of the Board and Director of the
Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the
Advisor, which he founded in 1974. Since August 1985, Mr. Strong has been a
Security Analyst and Portfolio Manager of the Advisor. In October 1991, Mr.
Strong also became the Chairman of the Advisor. Mr. Strong is a Director of
the Advisor. Mr. Strong has been in the investment management business since
1967. Mr. Strong has served the Funds as follows:
DIRECTOR - Short-Term Bond Fund (since August 1987); Government Fund
(since October 1986); Corporate Bond Fund (since December 1985); and
High-Yield Fund (since October 1995).
CHAIRMAN - Short-Term Bond Fund (since August 1987); Government Fund
(since October 1986); Corporate Bond Fund (since December 1985); and
High-Yield Fund (since October 1995).
MARVIN E. NEVINS (DOB 7/9/18), Director of the Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of
Wisconsin Centrifugal Inc., a foundry. From July 1983 to December 1986, he was
Chairman of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins
is a former Chairman of the Wisconsin Association of Manufacturers & Commerce.
He was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin. Mr. Nevins has served
the Funds as follows:
DIRECTOR - Short-Term Bond Fund (since August 1987); Government Fund
(since October 1986); Corporate Bond Fund (since December 1985); and
High-Yield Fund (since October 1995).
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<PAGE> 77
WILLIE D. DAVIS (DOB 7/24/34), Director of the Funds.
Mr. Davis has been director of Alliance Bank since 1980, Sara Lee
Corporation (a food/consumer products company) since 1983, KMart Corporation (a
discount consumer products company) since 1985, YMCA Metropolitan - Los Angeles
since 1985, Dow Chemical Company since 1988, MGM Grand, Inc. (an
entertainment/hotel company) since 1990, WICOR, Inc. (a utility company) since
1990, Johnson Controls, Inc. (an industrial company) since 1992, L.A. Gear (a
footwear/sportswear company) since 1992, and Rally's Hamburger, Inc. since
1994. Mr. Davis has been a trustee of the University of Chicago since 1980,
Marquette University since 1988, and Occidental College since 1990. Since
1977, Mr. Davis has been President and Chief Executive Officer of All Pro
Broadcasting, Inc. Mr. Davis was a director of the Fireman's Fund (an
insurance company) from 1975 until 1990. Mr. Davis has served the Funds as
follows:
DIRECTOR - Short-Term Bond Fund (since July 1994); Government Fund
(since July 1994); Corporate Bond Fund (since July 1994); and High-
Yield Fund (since October 1995).
*JOHN DRAGISIC (DOB 11/26/40), President and Director of the Funds.
Mr. Dragisic has been President of the Advisor since October 1995, and
a Director of the Advisor since July 1994. Mr. Dragisic served as Vice
Chairman of the Advisor from July 1994 until October 1995. Mr. Dragisic was
the President and Chief Executive Officer of Grunau Company, Inc. (a mechanical
contracting and engineering firm), Milwaukee, Wisconsin from 1987 until July
1994. From 1981 to 1987, he was an Executive Vice President with Grunau
Company, Inc. From 1969 until 1973, Mr. Dragisic worked for the InterAmerican
Development Bank. Mr. Dragisic received his Ph.D. in Economics in 1971 from
the University of Wisconsin - Madison and his B.A. degree in Economics in 1962
from Lake Forest College. Mr. Dragisic has served the Funds as follows:
DIRECTOR - Short-Term Bond Fund (July 1991 until July 1994, and since
April 1995); Government Fund (July 1991 until July 1994, and since
April 1995); Corporate Bond Fund (July 1991 until July 1994, and since
April 1995); and High-Yield Fund (since October 1995).
VICE CHAIRMAN - Short-Term Bond Fund (July 1994 until October 1995);
Government Fund (July 1994 until October 1995); and Corporate Bond
Fund (July 1994 until October 1995)
PRESIDENT - Short-Term Bond Fund (since October 1995); Government Fund
(since October 1995); Corporate Bond Fund (since October 1995); and
High-Yield Fund (since October 1995)
STANLEY KRITZIK (DOB 1/9/30), Director of the Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since 1962,
a Director of Aurora Health Care since 1987, and Health Network Ventures, Inc.
since 1992. Mr. Kritzik has served the Funds as follows:
DIRECTOR - Short-Term Bond Fund (since April 1995); Government Fund
(since April 1995); Corporate Bond Fund (since April 1995); and
High-Yield Fund (since October 1995).
WILLIAM F. VOGT (DOB 7/19/47), Director of the Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc.
since 1990. From 1982 until 1990, he served as Executive Director of
University Physicians of the University of Colorado. Mr. Vogt is the Past
President of the Medical Group Management Association and a Fellow of the
American College of Medical Practice Executives. He has served the Funds as
follows:
DIRECTOR - Short-Term Bond Fund (since April 1995); Government Fund
(since April 1995); Corporate Bond Fund (since April 1995); and
High-Yield Fund (since October 1995).
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<PAGE> 78
LAWRENCE A. TOTSKY (DOB 5/6/59), C.P.A., Vice President of the Funds.
Mr. Totsky has been Senior Vice President of the Advisor since
September 1994. Mr. Totsky served as Vice President of the Advisor from
December 1992 to September 1994. Mr. Totsky acted as the Advisor's Manager of
Shareholder Accounting and Compliance from June 1987 to June 1991 when he was
named Director of Mutual Fund Administration. Mr. Totsky has served the Funds
as follows:
VICE PRESIDENT - Short-Term Bond Fund (since May 1993); Government
Fund (since May 1993); Corporate Bond Fund (since May 1993); and
High-Yield Fund (since October 1995).
THOMAS P. LEMKE (DOB 7/30/54), Vice President of the Funds.
Mr. Lemke has been Senior Vice President, Secretary, and General
Counsel of the Advisor since September 1994. For two years prior to joining
the Advisor, Mr. Lemke acted as Resident Counsel for Funds Management at J.P.
Morgan & Co., Inc. From February 1989 until April 1992, Mr. Lemke acted as
Associate General Counsel to Sanford C. Bernstein Co., Inc. For two years
prior to that, Mr. Lemke was Of Counsel at the Washington, D.C. law firm of Tew
Jorden & Schulte, a successor of Finley, Kumble & Wagner. From August 1979
until December 1986, Mr. Lemke worked at the Securities and Exchange
Commission, most notably as the Chief Counsel to the Division of Investment
Management (November 1984 - December 1986), and as Special Counsel to the
Office of Insurance Products, Division of Investment Management (April 1982 -
October 1984). Mr. Lemke has served the Funds as follows:
VICE PRESIDENT - Short-Term Bond Fund (since October 1994), Government
Fund (since October 1994); Corporate Bond Fund (since October 1994);
and High-Yield Fund (since October 1995).
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the
Funds.
Mr. Shenkenberg has been Deputy General Counsel to the Advisor since
November 1996. From December 1992 until November 1996, Mr. Shenkenberg acted
as Associate Counsel to the Advisor. From June 1987 until December 1992, Mr.
Shenkenberg was an attorney for Godfrey & Kahn, S.C., a Milwaukee law firm.
Mr. Shenkenberg has served the Funds as follows:
VICE PRESIDENT - Short-Term Bond Fund (since April 1996); Government
Fund (since April 1996); Corporate Bond Fund (since April 1996); and
High-Yield Fund (since April 1996).
SECRETARY - Short-Term Bond Fund (since October 1996); Government Fund
(since October 1996); Corporate Bond Fund (since October 1996); and
High-Yield Fund (since October 1996).
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Funds.
Mr. Weitzer has been an Associate Counsel to the Advisor since July
1993. Mr. Weitzer has served the Funds as follows:
VICE PRESIDENT - Short-Term Bond Fund (since January 1996); Government
Fund (since January 1996); Corporate Bond Fund (since January 1996);
and High-Yield Fund (since January 1996).
Except for Messrs. Nevins, Davis, Kritzik and Vogt, the address of all
of the above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 34108. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301. Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 2830 East Third Avenue, Denver, Colorado
80206.
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<PAGE> 79
In addition to the positions listed above, the following individuals
also hold the following positions with Strong Holdings, Inc. ("Holdings"), a
Wisconsin corporation and subsidiary of the Advisor; Strong Funds Distributors,
Inc., the Fund's underwriter ("Distributors"), Heritage Reserve Development
Corporation ("Heritage"), and Strong Service Corporation ("SSC"), each of which
is a Wisconsin corporation and subsidiary of Holdings; Fussville Real Estate
Holdings L.L.C. ("Real Estate Holdings") and Sherwood Development L.L.C.
("Sherwood"), each of which is a Wisconsin Limited Liability Company and
subsidiary of the Advisor and Heritage; and Fussville Development L.L.C.
("Fussville Development"), a Wisconsin Limited Liability Company and subsidiary
of the Advisor and Real Estate Holdings:
RICHARD S. STRONG:
CHAIRMAN AND A DIRECTOR - Holdings and Distributors (since October
1993); Heritage (since January 1994); and SSC (since November 1995).
CHAIRMAN AND A MEMBER OF THE MANAGING BOARD - Real Estate Holdings and
Fussville Development (since December 1995 and February 1994,
respectively); and Sherwood (since October 1994).
JOHN DRAGISIC:
PRESIDENT AND A DIRECTOR - Holdings (since December 1995 and July
1994, respectively); Distributors (since September 1996 and July 1994,
respectively); Heritage (since May 1994 and August 1994,
respectively); and SSC (since November 1995).
VICE CHAIRMAN AND A MEMBER OF THE MANAGING BOARD - Real Estate and
Fussville Development (since December 1995 and August 1994,
respectively); and Sherwood (since October 1994).
THOMAS P. LEMKE:
VICE PRESIDENT - Holdings, Heritage, Real Estate Holdings, and
Fussville Development (since December 1995); Distributors (since
October 1996); Sherwood (since October 1994); and SSC (since November
1995).
STEPHEN J. SHENKENBERG:
VICE PRESIDENT AND SECRETARY - Distributors (since December 1995).
SECRETARY - Holdings, Heritage, Fussville Development, Real Estate
Holdings, and Sherwood (since December 1995); and SSC (since November
1995).
As of January 31, 1997, the officers and directors of the Funds in the
aggregate beneficially owned less than 1% of each Fund's then outstanding
shares.
PRINCIPAL SHAREHOLDERS
As of January 31, 1997, no persons owned of record or are known by the
Funds to own of record or beneficially, more than 5% of a Fund's outstanding
shares.
INVESTMENT ADVISOR AND DISTRIBUTOR
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<PAGE> 80
The Advisor to the Funds is Strong Capital Management, Inc. Mr.
Richard S. Strong controls the Advisor. Mr. Strong is the Chairman and a
director of the Advisor, Mr. Dragisic is the President and a director of the
Advisor, Mr. Totsky is a Senior Vice President of the Advisor, Mr. Lemke is a
Senior Vice President, Secretary and General Counsel of the Advisor, Mr.
Shenkenberg is Vice President, Assistant Secretary, and Deputy General Counsel
of the Advisor, and Mr. Weitzer is Associate Counsel of the Advisor. A brief
description of each Fund's investment advisory agreement ("Advisory Agreement")
is set forth in the Prospectus under "About the Funds - Management."
The Advisory Agreements for the Short-Term Bond, Government, and
Corporate Bond Funds, dated May 1, 1995, were last approved by shareholders at
the annual meeting of shareholders held on April 13, 1995. The High-Yield
Fund's Advisory Agreement, dated December 27, 1995, was last approved by the
sole shareholder on December 27, 1995, and will remain in effect as to the Fund
for a period of two years. Each Advisory Agreement is required to be approved
annually by either the Board of Directors of the Fund or by vote of a majority
of the Fund's outstanding voting securities (as defined in the 1940 Act). In
either case, each annual renewal must be approved by the vote of a majority of
the Fund's directors who are not parties to the Advisory Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. Each Advisory Agreement is terminable,
without penalty, on 60 days' written notice by the Board of Directors of the
Fund, by vote of a majority of the Fund's outstanding voting securities, or by
the Advisor. In addition, an Advisory Agreement will terminate automatically
in the event of its assignment.
Under the terms of each 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 the Fund's expense.
Except for expenses assumed by the Advisor as set forth above or by
the Distributor as described below with respect to the distribution of a Fund's
shares, a 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 agents
(including the printing and mailing of reports and notices to shareholders),
registrars, auditing and legal services, clerical services related to
recordkeeping and shareholder relations, printing stock certificates; and fees
for directors who are not "interested persons" of the Advisor.
As compensation for its services, each Fund pays to the Advisor
monthly management fees at the following annual rates: (1) Short-Term Bond
Fund: .625% of average daily net assets; (2) Government Fund: .60% of average
daily net assets; and (3) Corporate Bond and High-Yield Funds: .625% of average
daily net assets. (See "Shareholder Manual - Determining Your Share Price" in
the Prospectus.) From time to time, the Advisor may voluntarily waive all or a
portion of its management fee for a Fund. The organizational expenses of the
High-Yield Fund, which were $20,316, were advanced by the Advisor and will be
reimbursed by the Fund over a period of not more than 60 months from each
Fund's date of inception.
The following table sets forth certain information concerning
management fees for each Fund for the fiscal year ended October 31, 1996, the
ten-month fiscal year ended October 31, 1995, and for the fiscal years ended
December 31, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
Management Fee
Incurred Management Fee Management Fee
by Fund Waiver Paid by Fund
------- ------ ------------
<S> <C> <C> <C>
Short-Term Bond Fund
1993 $6,876,818 $ 659,797 $6,217,021
1994 $8,715,270 $ 0 $8,715,270
1995* $5,395,150 $ 0 $5,395,150
</TABLE>
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<PAGE> 81
<TABLE>
<S> <C> <C> <C>
1996 $7,007,561 $ 0 $7,007,561
Government Fund
1993 $ 922,030 $ 205,059 $ 716,971
1994 $1,537,259 $ 150,180 $1,387,079
1995* $1,709,928 $ 0 $1,709,928
1996 $3,378,889 $ 0 $3,778,889
</TABLE>
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<PAGE> 82
<TABLE>
<S> <C> <C> <C>
Corporate Bond Fund
1993 $ 724,883 $ 0 $ 724,883
1994 $ 773,759 $ 0 $ 773,759
1995* $ 858,786 $ 0 $ 858,786
1996 $ 1,702,234 $ 0 $ 1,702,234
High-Yield Fund
1996 $ 423,481 $ 0 $ 423,481
- ---------------------------------------------------------
</TABLE>
* For the ten-month fiscal year ended October 31, 1995.
Each Advisory Agreement requires the Advisor to reimburse a Fund in
the event that the expenses and charges payable by the Fund in any fiscal year,
including the management fee but excluding taxes, interest, brokerage
commissions, and similar fees and to the extent permitted extraordinary
expenses, exceed two percent (2%) of the average net asset value of the Fund
for such year, as determined by valuations made as of the close of each
business day of the year. Reimbursement of expenses in excess of the applicable
limitation will be made on a monthly basis and will be paid to 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 a Fund in addition to the reimbursement of
expenses in excess of application limitations.
On July 12, 1994, the Securities and Exchange Commission (the "SEC")
filed an administrative action (the "Order") against the Advisor, Mr. Strong,
and another employee of the Advisor in connection with conduct that occurred
between 1987 and early 1990. In re Strong/Corneliuson Capital Management, Inc.,
et al. Admin. Proc. File No. 3-8411. The proceeding was settled by consent
without admitting or denying the allegations in the Order. The Order found that
the Advisor and Mr. Strong aided and abetted violations of Section 17(a) of the
1940 Act by effecting trades between mutual funds, and between mutual funds and
Harbour Investments Ltd. ("Harbour"), without complying with the exemptive
provisions of SEC Rule 17a-7 or otherwise obtaining an exemption. It further
found that the Advisor violated, and Mr. Strong aided and abetted violations
of, the disclosure provisions of the 1940 Act and the Investment Advisers Act
of 1940 by misrepresenting the Advisor's policy on personal trading and by
failing to disclose trading by Harbour, an entity in which principals of the
Advisor owned between 18 and 25 percent of the voting stock. As part of the
settlement, the respondents agreed to a censure and a cease and desist order
and the Advisor agreed to various undertakings, including adoption of certain
procedures and a limitation for six months on accepting certain types of new
advisory clients.
On June 6, 1996, the Department of Labor (the "DOL") filed an action
against the Advisor for equitable relief alleging violations of the Employee
Retirement Income Security Act of 1974 ("ERISA") in connection with cross
trades that occurred between 1987 and late 1989 involving certain pension
accounts managed by the Advisor. Contemporaneous with this filing, the
Advisor, without admitting or denying the DOL's allegations, agreed to the
entry of a consent judgment resolving all matters relating to the allegations.
Reich v. Strong Capital Management, Inc., (U.S.D.C. E.D. WI) (the "Consent
Judgment"). Under the terms of the Consent Judgment, the Advisor agreed to
reimburse the affected accounts a total of $5.9 million. The settlement did
not have any material impact on the Advisor's financial position or operations.
The Funds and the Advisor have adopted a Code of Ethics (the "Code")
which governs the personal trading activities of all "Access Persons" of the
Advisor. Access Persons include every director and officer of the Advisor and
the investment companies managed by the Advisor, including the Funds, as well
as certain employees of the Advisor who have access to information relating to
the purchase or sale of securities by the Advisor on behalf of accounts managed
by it. The Code is based upon the principal that such Access Persons have a
fiduciary duty to place the interests of the Funds and the Advisor's other
clients ahead of their own.
The Code requires Access Persons (other than Access Persons who are
independent directors of the investment companies managed by the Advisor,
including the Funds) to, among other things, preclear their securities
transactions (with limited exceptions, such as transactions in shares of mutual
funds, direct obligations of the U.S. government, and certain options on
broad-based securities market indexes) and to execute such transactions through
the Advisor's trading department. The Code, which applies to all Access Persons
(other than Access Persons who are independent directors of the investment
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<PAGE> 83
companies managed by the Advisor, including the Funds), includes a ban on
acquiring any securities in an initial public offering, other than a new
offering of a registered open-end investment company, and a prohibition from
profiting on short-term trading in securities. In addition, no Access Person
may purchase or sell any security which is contemporaneously being purchased or
sold, or to the knowledge of the Access Person, is being considered for
purchase or sale, by the Advisor on behalf of any mutual fund or other account
managed by it. Finally, the Code provides for trading "black out" periods of
seven calendar days during which time Access Persons who are portfolio managers
may not trade in securities which have been purchased or sold by any mutual
fund or other account managed by the portfolio manager.
From time to time the Advisor votes the shares owned by the Funds
according to its Statement of General Proxy Voting Policy ("Proxy Voting
Policy"). The general principal of the Proxy Voting Policy is to vote any
beneficial interest in an equity security prudently and solely in the best
long-term economic interest of the Fund and its beneficiaries considering all
relevant factors and without undue influence from individuals or groups who may
have an economic interest in the outcome of a proxy vote. Shareholders may
obtain a copy of the Proxy Voting Policy upon request from the Advisor.
The Advisor provides investment advisory services for multiple clients
and may give advice and take action, with respect to any client, that may
differ from the advice given, or the timing or nature of action taken, with
respect to any one account. However, the Advisor will allocate over a period
of time, to the extent practical, investment opportunities to each account on a
fair and equitable basis relative to other similarly-situated client accounts.
The Advisor, its principals and associates (to the extent not prohibited by the
Code), and other clients of the Advisor may have, acquire, increase, decrease,
or dispose of securities or interests therein for an account that are or may be
deemed to be inconsistent with the actions taken by such persons.
Under a Distribution Agreement dated December 1, 1993 with the
Short-Term Bond, Government, and Corporate Bond Funds, and a Distribution
Agreement dated December 27, 1995 for the High-Yield Fund (the "Distribution
Agreements"), Strong Funds Distributors, Inc. ("Distributor"), a subsidiary of
the Advisor, acts as underwriter of each Fund's shares. The Distribution
Agreements provide that the Distributor will use its best efforts to distribute
the Fund's shares. Since the Funds are "no-load" funds, no sales commissions
are charged on the purchase of Fund shares. Each Distribution Agreement
further provides that the Distributor will bear the additional costs of
printing Prospectuses and shareholder reports which are used for selling
purposes, as well as advertising and any other costs attributable to the
distribution of a 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 Money, Short-Term
Bond, Government, and Corporate Bond Funds. On December 1, 1993, the
Distributor succeeded to the broker-dealer registration of the Advisor and, in
connection therewith, the Distribution Agreements for the Money, Short-Term
Bond, Government, and Corporate Bond Funds were executed on substantially
identical terms as the former distribution agreements with the Advisor as
distributor. The Distribution Agreements are subject to the same termination
and renewal provisions as are described above with respect to the Advisory
Agreements.
From time to time, the Distributor may hold in-house sales incentive
programs for its associated persons under which these persons may receive
non-cash compensation awards in connection with the sale and distribution of a
Fund's shares. These awards may include items such as, but not limited to,
gifts, merchandise, gift certificates, and payment of travel expenses, meals
and lodging. As required by the National Association of Securities Dealers,
Inc. or NASD's proposed rule amendments in this area, any in-house sales
incentive program will be multi-product oriented, i.e., any incentive will be
based on an associated person's gross production of all securities within a
product type and will not be based on the sales of shares of any specifically
designated mutual fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities
for the Funds and for the placement of the Funds' portfolio business and the
negotiation of the commissions to be paid on such transactions. It is the
policy of the Advisor to seek the best execution at the best security price
available with respect to each transaction, in light of the overall quality of
brokerage and research services provided to the Advisor or the Funds. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained using a broker. The best price to the Funds means the best net price
without regard to the mix between purchase or sale price and commissions, if
any. In selecting broker-dealers and in negotiating commissions, the Advisor
considers a variety of factors, including best price and
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execution, the full range of brokerage services provided by the broker, as well
as its capital strength and stability, and the quality of the research and
research services provided by the broker. Brokerage will not be allocated
based on the sale of any shares of the Strong Funds.
The Advisor has adopted procedures that provide generally for the
Advisor to seek to bunch orders for the purchase or sale of the same security
for the Fund, other mutual funds managed by the Advisor, and other advisory
clients (collectively, the "client accounts"). The Advisor will bunch orders
when it deems it to be appropriate and in the best interests of the client
accounts. When a bunched order is filled in its entirety, each participating
client account will participate at the average share price for the bunched
order on the same business day, and transaction costs shall be shared pro rata
based on each client's participation in the bunched order. When a bunched
order is only partially filled, the securities purchased will be allocated on a
pro rata basis to each client account participating in the bunched order based
upon the initial amount requested for the account, subject to certain
exceptions, and each participating account will participate at the average
share price for the bunched order on the same business day.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment advisor, under certain circumstances, to cause an account
to pay a broker or dealer a commission for effecting a transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting the transaction in recognition of the value of the brokerage and
research services provided by the broker or dealer. Brokerage and research
services include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreements, the Advisor
may cause the Funds to pay a broker, which provides brokerage and research
services to the Advisor, a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting the
transaction. The Advisor believes it is important to its investment
decision-making process to have access to independent research. The Advisory
Agreements provide that such higher commissions will not be paid by a 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 a Fund will be reasonable in relation to
the benefits to the Fund over the long term. The investment management fees
paid by the Funds under the Advisory Agreements are not reduced as a result of
the Advisor's receipt of research services.
Generally, research services provided by brokers may include
information on the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law interpretations,
political developments, legal developments affecting portfolio securities,
technical market action, pricing and appraisal services, credit analysis, risk
measurement analysis, performance analysis, and analysis of corporate
responsibility issues. Such research services are received primarily in the
form of written reports, telephone contacts, and personal meetings with
security analysts. In addition, such research services may be provided in the
form of access to various computer- generated data, computer hardware and
software, and meetings arranged with corporate and industry spokespersons,
economists, academicians, and government representatives. In some cases,
research services are generated by third parties but are provided to the
Advisor by or through brokers. Such brokers may pay for all or a portion of
computer hardware and software costs relating to the pricing of securities.
Where the Advisor itself receives both administrative benefits and
research and brokerage services from the services provided by brokers, it makes
a good faith allocation between the administrative benefits and the research
and brokerage services, and will pay for any administrative benefits with cash.
In making good faith allocations of costs between administrative benefits and
research and brokerage services, a conflict of interest may exist by reason of
the Advisor's allocation of the costs of such benefits and services between
those that primarily benefit the Advisor and those that primarily benefit the
Funds and other advisory clients.
From time to time, the Advisor may purchase new issues of securities
for a Fund in a fixed price offering. In these situations, the seller may be a
member of the selling group that will, in addition to selling the securities to
the Funds and other
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<PAGE> 85
advisory clients, provide the Advisor with research. The National Association
of Securities Dealers has adopted rules expressly permitting these types of
arrangements under certain circumstances. Generally, the seller will provide
research "credits" in these situations at a rate that is higher than that which
is available for typical secondary market transactions. These arrangements may
not fall within the safe harbor of Section 28(e).
Each year, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Funds and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e), the
Advisor allocates brokerage to those firms, provided that their brokerage and
research services were satisfactory to the Advisor and their execution
capabilities were compatible with the Advisor's policy of seeking best
execution at the best security price available, as discussed above. In no case
will the Advisor make binding commitments as to the level of brokerage
commissions it will allocate to a broker, nor will it commit to pay cash if any
informal targets are not met. The Advisor anticipates it will continue to
enter into such brokerage arrangements.
The Advisor may direct the purchase of securities on behalf of the
Funds and other advisory clients in secondary market transactions, in public
offerings directly from an underwriter, or in privately negotiated transactions
with an issuer. When the Advisor believes the circumstances so warrant,
securities purchased in public offerings may be resold shortly after
acquisition in the immediate aftermarket for the security in order to take
advantage of price appreciation from the public offering price or for other
reasons. Short-term trading of securities acquired in public offerings, or
otherwise, may result in higher portfolio turnover and associated brokerage
expenses.
The Advisor places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Advisor. Research services
furnished by firms through which the Funds effect their securities transactions
may be used by the Advisor in servicing all of its accounts; not all of such
services may be used by the Advisor in connection with the Funds. In the
opinion of the Advisor, it is not possible to measure separately the benefits
from research services to each of the accounts (including the Funds) managed by
the Advisor. Because the volume and nature of the trading activities of the
accounts are not uniform, the amount of commissions in excess of those charged
by another broker paid by each account for brokerage and research services will
vary. However, in the opinion of the Advisor, such costs to the Funds will not
be disproportionate to the benefits received by the Funds on a continuing
basis.
The Advisor seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by the
Funds 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 Funds.
In making such allocations between a Fund and other advisory accounts, the main
factors considered by the Advisor are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending
the investment.
Where consistent with a client's investment objectives, investment
restrictions, and risk tolerance, the Advisor may purchase securities sold in
underwritten public offerings for client accounts, commonly referred to as
"deal" securities. The Advisor has adopted deal allocation procedures (the
"procedures"), summarized below, that reflect the Advisor's overriding policy
that deal securities must be allocated among participating client accounts in a
fair and equitable manner and that deal securities may not be allocated in a
manner that unfairly discriminates in favor of certain clients or types of
clients.
The procedures provide that, in determining which client accounts a
portfolio manager team will seek to have purchase deal securities, the team
will consider all relevant factors including, but not limited to, the nature,
size, and expected allocation to the Advisor of deal securities; the size of
the account(s); the accounts' investment objectives and restrictions; the risk
tolerance of the client; the client's tolerance for possibly higher portfolio
turnover; the amount of commissions generated by the account during the past
year; and the number of other deals the client has participated in during the
past year.
Where more than one of the Advisor portfolio manager team seeks to
have client accounts participate in a deal and the amount of deal securities
allocated to the Advisor by the underwriting syndicate is less than the
aggregate amount ordered
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by the Advisor (a "reduced allocation"), the deal securities will be allocated
among the portfolio manager teams based on all relevant factors. The primary
factor shall be assets under management, although other factors that may be
considered in the allocation decision include, but are not limited to, the
nature, size, and expected Advisor allocation of the deal; the amount of
brokerage commissions or other amounts generated by the respective
participating portfolio manager teams; and which portfolio manager team is
primarily responsible for the Advisor receiving securities in the deal. Based
on the relevant factors, the Advisor has established general allocation
percentages for its portfolio manager teams, and these percentages are reviewed
on a regular basis to determine whether asset growth or other factors make it
appropriate to use different general allocation percentages for reduced
allocations.
When a portfolio manager team receives a reduced allocation of deal
securities, the portfolio manager team will allocate the reduced allocation
among client accounts in accordance with the allocation percentages set forth
in the team's initial allocation instructions for the deal securities, except
where this would result in a de minimis allocation to any client account. On a
regular basis, the Advisor reviews the allocation of deal securities to ensure
that they have been allocated in a fair and equitable manner that does not
unfairly discriminate in favor of certain clients or types of clients.
The following table sets forth certain information concerning
brokerage commissions paid by each Fund for the fiscal year ended October 31,
1996, the ten-month fiscal year ended October 31, 1995, and for the fiscal
years ended December 31, 1994 and December 31, 1993.
<TABLE>
<CAPTION>
Short-Term Bond Fund Brokerage Commissions
-------------------- ---------------------
<S> <C>
1993 $ 286,000
1994 $ 66,000
1995* $ 1,045,000(1)
1996 $ 174,817
Government Fund
----------------
1993 $ 63,000
1994 $ 8,000
1995* $ 153,000
1996 $ 46,170
Corporate Bond Fund
-------------------
1993 $ 61,000
1994 $ 4,000
1995* $ 101,000
1996 $ 63,034
High-Yield Bond Fund
--------------------
1996 $ 7,551
</TABLE>
* For the ten-month fiscal year ended October 31, 1995.
(1) The Fund paid higher brokerage commissions for the ten-month fiscal period
ended October 31, 1995, due to trading strategies employed in response to
volatile foreign market conditions. These strategies were designed to help
the Fund achieve a high level of current income in pursuit of its
investment objective.
For the fiscal year ended October 31, 1996, the ten-month fiscal
period ending October 31, 1995, and the 1994 fiscal period ended December 31,
the Government and Corporate Bond Funds' respective portfolio turnover rates
were as follows: (1) Government Fund: 457.6%, 409.2%, and 479.0%; and (2)
Corporate Bond Fund: 672.8%, 621.4%, and 603.0%. For the fiscal year ended
October 31, 1996, the High-Yield Fund's portfolio turnover rate was 390.8%.
The above listed portfolio turnover rates for the respective Funds were higher
than anticipated primarily because each Fund employed a trading strategy to
take advantage of yield spread opportunities to help enhance the Fund's total
return.
As of October 31, 1996, the following Funds had 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:
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<PAGE> 87
<TABLE>
<CAPTION>
Regular Broker or Dealer or Parent Issuer Fund/Value of Securities Owned as of October 31, 1996
----------------------------------------- ------------------------------------------------------
<S> <C>
Lehman Brothers Holdings, Inc. Government/$10,562,000
Corporate/$7,291,000
Merrill Lynch, Pierce, Fenner & Smith Government/$726,000
Corporate/$363,000
Short-Term Bond/$2,363,000
Salomon Brothers, Inc. Corporate/$8,100,000
</TABLE>
CUSTODIAN
As custodian of each Fund's assets, Firstar Trust Company, P.O. Box
701, Milwaukee, Wisconsin 53201, has custody of all securities and cash of the
Funds, delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by the officers of the Funds. The custodian and, if
applicable, the sub-custodian are in no way responsible for any of the
investment policies or decisions of the Funds.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
The Advisor acts as transfer agent and dividend-disbursing agent for
the Funds. The Advisor is compensated based on an annual fee per open account
of $31.50, plus out-of-pocket expenses, such as postage and printing expenses
in connection with shareholder communications. The Advisor also receives an
annual fee per closed account of $4.20 from each Fund. The fees received and
the services provided as transfer agent and dividend disbursing agent are in
addition to those received and provided by the Advisor under the Advisory
Agreement. In addition, the Advisor provides certain printing and mailing
services for the Funds, such as printing and mailing of shareholder account
statements, checks, and tax forms.
The following table sets forth certain information concerning amounts
paid by each Fund for transfer agency and dividend disbursing and printing and
mailing services for the fiscal year ended October 31, 1996, the ten-month
fiscal year ended October 31, 1995, and for the fiscal years ended December 31,
1994 and December 31, 1993:
<TABLE>
<CAPTION>
Transfer Agency and Dividend Disbursement
Services Charges Incurred
Per Printing and Amounts Net Amount
Account Out-of-Pocket Mailing Absorbed By Paid By
Fund Charges Expenses Services Advisor Fund
-------- ------- -------- -------- ------- -----
Short-Term Bond Fund
<S> <C> <C> <C> <C> <C>
1993 $ 1,818,354 $503,093 $ 65,804 $ 0 $ 2,387,251
1994 $ 2,550,992 $528,202 $ 58,057 $ 0 $ 3,137,251
1995* $ 1,833,475 $214,821 $ 32,413 $ 0 $ 2,080,709
1996 $ 2,186,020 $185,316 $ 33,221 $ 0 $ 2,404,557
Government Fund
1993 $ 334,277 $ 76,557 $ 10,009 $ 0 $ 420,843
1994 $ 525,837 $ 81,183 $ 9,695 $ 0 $ 616,715
1995* $ 541,956 $ 43,541 $ 6,796 $ 0 $ 592,293
1996 $ 1,010,103 $ 62,450 $ 9,379 $ 0 $ 1,081,932
Corporate Bond Fund
1993 $ 374,189 $ 82,743 $ 11,692 $ 0 $ 468,624
1994 $ 389,833 $ 79,434 $ 8,512 $ 0 $ 477,779
1995* $ 365,802 $ 39,362 $ 6,936 $ 0 $ 412,100
1996 $ 712,084 $ 67,332 $ 8,885 $ 0 $ 788,301
</TABLE>
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<PAGE> 88
<TABLE>
<S> <C> <C> <C> <C> <C>
High-Yield Bond Fund
1996 $ 82,506 $ 10,502 $ 1,161 $ 94,169 $ 0
- ----------------------------------------------------------------------
</TABLE>
* For the ten-month fiscal year ended October 31, 1995.
From time to time, the Funds, directly or indirectly through
arrangements with the Advisor, and/or the Advisor may pay amounts to third
parties that provide transfer agent and other administrative services relating
to the Funds to persons who beneficially own interests in the Funds, such as
participants in 401(k) plans. These services may include, among other things,
sub-accounting services, transfer agent type activities, answering inquiries
relating to the Funds, transmitting, on behalf of the Funds, proxy statements,
annual reports, updated Prospectuses, other communications regarding the Funds,
and related services as the Funds or beneficial owners may reasonably request.
In such cases, the Funds will not pay fees based on the number of beneficial
owners at a rate that is greater than the rate the Funds are currently paying
the Advisor for providing these services to Fund shareholders.
TAXES
GENERAL
As indicated under "About the Funds - Distributions and Taxes" in the
Prospectus, each Fund intends to continue to qualify annually for treatment as
a regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). This qualification does not involve government
supervision of the Funds' management practices or policies.
In order to qualify for treatment as a RIC under the Code, each Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions ) ("Distribution Requirement") and must meet several
additional requirements. For each Fund these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities or foreign
currencies or other income (including gains from options, futures, or forward
currency contracts) derived with respect to its business of investing in
securities or these currencies ("Income Requirement"); (2) the Fund must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of securities, or options or futures (other than those on foreign
currencies), or foreign currencies (or options, futures, or forward contracts
thereon) that are not directly related to the Fund's principal business of
investing in securities (or options and futures with respect to securities)
that were held for less than three months ("30% Limitation"); (3) at the close
of each quarter of a Fund's taxable year, at least 50% of the value of its
total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs, and other securities, with these other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities; and (4) at the
close of each quarter of the Fund's taxable year, not more than 25% of the
value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer. From
time to time the Advisor may find it necessary to make certain types of
investments for the purpose of ensuring that the Fund continues to qualify for
treatment as a RIC under the Code.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
FOREIGN TRANSACTIONS
Interest and dividends received by a Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the
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<PAGE> 89
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.
Each Fund maintains its accounts and calculates its income in U.S.
dollars. In general, gain or loss (1) from the disposition of foreign
currencies and forward currency contracts, (2) from the disposition of
foreign-currency-denominated debt securities that are attributable to
fluctuations in exchange rates between the date the securities are acquired and
their disposition date, and (3) attributable to fluctuations in exchange rates
between the time a Fund accrues interest or other receivables or expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects those receivables or pays those liabilities, will be treated
as ordinary income or loss. A foreign-currency-denominated debt security
acquired by a Fund may bear interest at a high 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).
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Funds realize
in connection therewith. Gains from the disposition of foreign currencies
(except certain gains therefrom that may be executed by future regulations),
and income from transactions in options, futures, and forward currency
contracts derived by a Fund with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
Income Requirement. However, income from the disposition of options and
futures (other than those on foreign currencies) will be subject to the 30%
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward contracts
on foreign currencies that are not directly related to a Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the 30% Limitation if they are held for
less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
30% Limitation. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. The Funds
intend that, when they engage in hedging strategies, the hedging transactions
will qualify for this treatment, but at the present time it is not clear
whether this treatment will be available for all of the Funds' hedging
transactions. To the extent this treatment is not available or is not elected
by a Fund, it may be forced to defer the closing out of certain options,
futures, or forward currency contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Fund to continue to qualify as a
RIC.
For federal income tax purposes, each Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on options,
futures, or forward currency contracts that are subject to section 1256 of the
Code ("Section 1256 Contracts") and are held by the Fund as of the end of the
year, as well as gains and losses on Section 1256 Contracts actually realized
during the year. Except for Section 1256 Contracts that are part of a "mixed
straddle" and with respect to which a Fund makes a certain election, any gain
or loss recognized with respect to Section 1256 Contracts is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Section 1256 Contract. Unrealized
gains on Section 1256 Contracts that have been held by a Fund for less than
three months as of the end of its taxable year, and that are recognized for
federal income tax purposes as described above, will not be considered gains on
investments held for less than three months for purposes of the 30% Limitation.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
Certain Funds may acquire zero-coupon, step-coupon, or other
securities issued with original issue discount. As a holder of those
securities, a Fund must include in its income the original issue discount that
accrues on the securities during the taxable year, even if the Fund receives no
corresponding payment on the securities during the year. Similarly, a Fund
must include in its income securities it receives as "interest" on pay-in-kind
securities. Because a Fund annually must distribute substantially all of its
investment company taxable income, including any original issue discount and
other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute
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<PAGE> 90
as a dividend an amount that is greater than the total amount of cash it
actually receives. Those distributions may be made from the proceeds on sales
of portfolio securities, if necessary. A Fund may realize capital gains or
losses from those sales, which would increase or decrease its investment
company taxable income or net capital gain, or both. In addition, any such
gains may be realized on the disposition of securities held for less than three
months. Because of the 30% Limitation, any such gains would reduce the Fund's
ability to sell other securities, or certain options, or futures, or forward
currency contracts, held for less that three months that it might wish to sell
in the ordinary course of its portfolio management.
The foregoing federal tax discussion as well as the tax discussion
contained within the Prospectus under "About the Funds - Distributions and
Taxes" is intended to provide you with an overview of the impact of federal
income tax provisions on each Fund or its shareholders. These tax provisions
are subject to change by legislative or administrative action at the federal,
state, or local level, and any changes may be applied retroactively. Any such
action that limits or restricts each Fund's current ability to pass-through
earnings without taxation at the Fund level, or otherwise materially changes a
Fund's tax treatment, could adversely affect the value of a shareholder's
investment in a Fund. Because each Fund's taxes are a complex matter, you
should consult your tax adviser for more detailed information concerning the
taxation of a Fund and the federal, state, and local tax consequences to
shareholders of an investment in a Fund.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "Shareholder Manual -
Determining Your Share Price," the net asset value of each Fund will be
determined as of the close of trading on each day the New York Stock Exchange
(the "NYSE") is open for trading. The 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 NYSE will not be open for trading on the preceding Friday, and
when any such holiday falls on a Sunday, the NYSE will not be open for trading
on the succeeding Monday, unless unusual business conditions exist, such as the
ending of a monthly or yearly accounting period.
ADDITIONAL SHAREHOLDER INFORMATION
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGES
The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds may not be liable for losses
due to unauthorized or fraudulent instructions. Such procedures include but are
not limited to requiring a form of personal identification prior to acting on
instructions received by telephone, providing written confirmations of such
transactions to the address of record, and tape recording telephone
instructions.
REDEMPTION-IN-KIND
The Funds have elected to be governed by Rule 18f-1 under the 1940
Act, which obligates each Fund to redeem shares in cash, with respect to any
one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of
the assets of the Fund. If the Advisor determines that existing conditions
make cash payments undesirable, redemption payments may be made in whole or in
part in securities or other financial assets, valued for this purpose as they
are valued in computing the NAV for the Fund's shares (a "redemption-in-kind").
Shareholders receiving securities or other financial assets in a
redemption-in-kind may realize a gain or loss for tax purposes, and will incur
any costs of sale, as well as the associated inconveniences. If you expect to
make a redemption in excess of the lesser of $250,000 or 1% of the Fund's assets
during any 90-day period and would like to avoid any possibility of being paid
with securities in-kind, you may do so by providing Strong Funds with an
unconditional instruction to redeem at least 15 calendar days prior to the date
on which the redemption transaction is to occur, specifying the dollar amount or
number of shares to be redeemed and the date of the transaction (please call
1-800-368-3863). This will provide the Fund with sufficient time to raise the
cash in an orderly manner to pay the redemption and thereby minimize the effect
of the redemption on the interests of the Fund's remaining shareholders.
Redemption checks in excess of the lesser of $250,000 or 1% of the Fund's assets
during any 90-day period may not be honored by the Fund if the Advisor
determines that existing conditions make cash payments undesirable.
-39-
<PAGE> 91
RETIREMENT PLANS
Individual Retirement Account (IRA): Everyone under age 70 1/2 with earned
income may contribute to a tax-deferred IRA. The Strong Funds offer a prototype
plan for you to establish your own IRA. You are allowed to contribute up to the
lesser of $2,000 or 100% of your earned income each year to your IRA (or up to
$4,000 between your IRA and your non-working spouses' IRA). Under certain
circumstances, your contribution will be deductible.
Direct Rollover IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or Code section
403(b) plan distribution directly into an IRA. The distribution must be
eligible for rollover. The amount of your Direct Rollover IRA contribution
will not be included in your taxable income for the year.
Simplified Employee Pension Plan (SEP-IRA): A SEP-IRA plan allows an employer
to make deductible contributions to separate IRA accounts established for each
eligible employee.
Salary Reduction Simplified Employee Pension Plan (SAR SEP-IRA): A SAR SEP-IRA
plan is a type of SEP-IRA plan in which an employer may allow employees to
defer part of their salaries and contribute to an IRA account. These deferrals
help lower the employees' taxable income. Please note that you may no longer
open new SAR SEP-IRA plans (since December 31, 1996). However, employers with
SAR SEP-IRA plans that were established prior to January 31, 1997 may still
open accounts for new employees.
Simplified Incentive Match Plan for Employees (SIMPLE-IRA): A SIMPLE-IRA plan
is a retirement savings plan that allows employees to contribute a percentage
of their compensation, up to $6,000, on a pre-tax basis, to a SIMPLE-IRA
account. The employer is required to make annual contributions to eligible
employees' accounts. All contributions grow tax-deferred.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans,
money purchase pension plans, and paired plans (a combination of a
profit-sharing plan and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
403(b)(7) Plan: A tax-sheltered custodial account designed to qualify under
section 403(b)(7) of the Code is available for use by employees of certain
educational, non-profit, hospital, and charitable organizations.
FUND ORGANIZATION
Each Corporation was organized on the following dates and currently
has the following authorized shares of capital stock:
<TABLE>
<CAPTION>
Incorporation Date Series Authorized Par
Corporation Date Created Shares Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strong Corporate Bond Fund, Inc.(1) 07/19/85 Indefinite .001
Strong Government Securities Fund, Inc. 08/08/86 Indefinite .001
Strong Income Funds, Inc.(2) 02/24/89 Indefinite .00001
- Strong High-Yield Bond Fund 10/27/95 Indefinite .00001
Strong Short-Term Bond Fund, Inc. 03/20/87 Indefinite .001
</TABLE>
(1) Prior to April 17, 1995, the Fund's name was Strong Income Fund, Inc.
(2) Prior to April 17, 1995, the Fund's name was Strong U.S. Treasury Money
Fund, Inc.
-40-
<PAGE> 92
The Short-Term Bond, Government, and Corporate Bond Funds are Wisconsin
corporations (each a "Corporation") that are authorized to offer separate series
of shares representing interests in separate portfolios of securities, each with
differing investment objectives. The High-Yield Fund is a series of common
stock of Strong Income Funds, Inc., a Wisconsin corporation (a "Corporation")
that is authorized to offer separate series of shares representing interests in
separate portfolios of securities, each with differing 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 Corporations provides that if additional classes
of shares are issued by a Corporation, such new classes of shares may not affect
the preferences, limitations or relative rights of the Corporation's outstanding
shares. In addition, the Board of Directors of each Corporation is authorized
to allocate assets, liabilities, income and expenses to each series and class.
Classes within a series may have different expense arrangements than other
classes of the same series and, accordingly, the net asset value of shares
within a series may differ. Finally, all holders of shares of a Corporation may
vote on each matter presented to shareholders for action except with respect to
any matter which affects only one or more series or class, in which case only
the shares of the affected series or class are entitled to vote. Fractional
shares have the same rights proportionately as do full shares. Shares of the
Corporation have no preemptive, conversion, or subscription rights. If a
Corporation issues additional series, the assets belonging to each series of
shares will be held separately by the custodian, and in effect each series will
be a separate fund.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered investment
companies, such as the Corporations, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the 1940 Act. Each Corporation has adopted the appropriate provisions in
their Bylaws and may, at their discretion, not hold an annual meeting in any
year in which the election of directors is not required to be acted on by
shareholders under the 1940 Act.
Each Corporation's Bylaws allow for a director to be removed by its
shareholders with or without cause, only at a meeting called for the purpose
of removing the director. Upon the written request of the holders of shares
entitled to not less than ten percent (10%) of all the votes entitled to be
cast at such meeting, the Secretary of the Corporation shall promptly call a
special meeting of shareholders for the purpose of voting upon the question of
removal of any director. The Secretary of the Corporation shall inform such
shareholders of the reasonable estimated costs of preparing and mailing the
notice of the meeting, and upon payment to the Corporation of such costs, the
Corporation shall give not less than ten nor more than sixty days notice of the
special meeting.
PERFORMANCE INFORMATION
As described in the "About the Funds - Performance Information"
section of the Funds' Prospectus, each Fund's historical performance or return
may be shown in the form of "yield." In addition, each Funds' performance may
be shown in the form of "average annual total return," "total return," and
"cumulative total return," and the Money Fund's performance may be shown in the
form of "effective yield." From time to time, the advisor agrees to waive or
reduce its management fee and to absorb certain operating expenses for a Fund.
Without these waivers and absorptions, the performance results for the Funds
noted herein would have been lower. All performance and returns noted herein
are historical and do not represent the future performance of a Fund.
YIELD
Each Fund's yield is computed in accordance with a standardized method
prescribed by rules of the SEC. Under that method, the current yield quotation
for a Fund is based on a one month or 30-day period. The yield is computed by
dividing the net investment income per share earned during the 30-day or one
month period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[( a-b + 1)(superior 6) - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
-41-
<PAGE> 93
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the 30-day period ended October 31, 1996, the Short-Term Bond
Fund's yield was 7.23%, the Government Fund's yield was 6.62%, the Corporate
Bond Fund's yield was 7.10%, and the High-Yield Fund's yield was 10.33%. In
computing yield, the Funds follow certain standardized accounting practice
specified by SEC rules. During this period, the Advisor waived management fees
of .625% and absorbed expenses of .185% for the High-Yield Fund. Without this
waiver and absorption, the High-Yield Fund's yield would have been 9.52%.
These practices are not necessarily consistent with those that the Funds use to
prepare annual and interim financial statements in conformity with generally
accepted accounting principles.
DISTRIBUTION RATE
The distribution rate is computed, according to a non-standardized
formula, by dividing the total amount of actual distributions per share paid by
a Fund over a twelve month period by the Fund's net asset value on the last day
of the period. The distribution rate differs from a Fund's yield because the
distribution rate includes distributions to shareholders from sources other
than dividends and interest, such as premium income from option writing and
short-term capital gains. Therefore, a Fund's distribution rate may be
substantially different than its yield. Both a Fund's yield and distribution
rate will fluctuate.
AVERAGE ANNUAL TOTAL RETURN
Each Fund's average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the SEC. The
average annual total return for a 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 each Fund's total return is not subject to a
standardized formula. Total return performance for a specific period is
calculated by first taking an investment (assumed below to be $10,000)
("initial investment") in the Fund's shares on the first day of the period and
computing the "ending value" of that investment at the end of the period. The
total return percentage is then determined by subtracting the initial
investment from the ending value and dividing the remainder by the initial
investment and expressing the result as a percentage. The calculation assumes
that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Total return may also be shown as the increased dollar value of the
hypothetical investment over the period. Total return figures for various
periods are set forth in the table below.
CUMULATIVE TOTAL RETURN
Calculation of each Fund's cumulative total return is not subject to a
standardized formula and 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.
A Fund's performance figures are based upon historical results and do
not represent future results. Each Fund's shares are sold at net asset value
per share. The Short-Term Bond, Government, Corporate Bond, and High-Yield
Fund's returns and net asset value will fluctuate and shares are redeemable at
the then current net asset value of the Fund, which may be more or less than
original cost. Factors affecting a Fund's performance include general market
conditions, operating
-42-
<PAGE> 94
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce the returns described in this
section.
The figures below show performance information for various periods
ended October 31, 1996. No adjustment has been made for taxes, if any, payable
on dividends. Securities prices fluctuated during these periods.
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $20,034 100.34% 7.87%
Five Years $10,000 $13,968 39.68% 6.91%
One Year $10,000 $10,707 7.07% 7.07%
-----------------------
</TABLE>
(1) Commenced operations on August 31, 1987.
GOVERNMENT FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $23,544 135.44% 8.93%
Ten Years $10,000 $23,510 135.10% 8.92%
Five Years $10,000 $15,203 52.03% 8.74%
One Year $10,000 $10,460 4.60% 4.60%
------------------------
</TABLE>
(1) Commenced operations on October 29, 1986.
CORPORATE BOND FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $27,858 178.58% 9.87%
Ten Years $10,000 $21,006 110.06% 7.70%
Five Years $10,000 $16,935 69.35% 11.11%
One Year $10,000 $10,798 7.98% 7.98%
------------------------
</TABLE>
(1) Commenced operations on December 12, 1985.
HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
-43-
<PAGE> 95
<TABLE>
<S> <C> <C>
Life of Fund(1) $10,000 $12,166 21.66% 21.66%
------------------------
(1) Commenced operations on December 30, 1995.
</TABLE>
The Short-Term Bond, Government, Corporate Bond, and High-Yield Funds'
total return for the three months ending January 31, 1997, were 2.33%, 1.87%,
2.74% and 6.41%, respectively.
COMPARISONS
(1) U.S. TREASURY BILLS, NOTES, OR BONDS
Investors may want to compare the performance of a Fund to that of
U.S. Treasury bills, notes or bonds, which are issued by the U.S. government.
Treasury obligations are issued in selected denominations. Rates of Treasury
obligations are fixed at the time of issuance and payment of principal and
interest is backed by the full faith and credit of the United States Treasury.
The market value of such instruments will generally fluctuate inversely with
interest rates prior to maturity and will equal par value at maturity.
Generally, the values of obligations with shorter maturities will fluctuate
less than those with longer maturities.
(2) CERTIFICATES OF DEPOSIT
Investors may want to compare a Fund's performance to that of
certificates of deposit offered by banks and other depositary institutions.
Certificates of deposit may offer fixed or variable interest rates and
principal is guaranteed and may be insured. Withdrawal of the deposits prior to
maturity normally will be subject to a penalty. Rates offered by banks and
other depositary institutions are subject to change at any time specified by
the issuing institution.
(3) MONEY MARKET FUNDS
Investors may also want to compare performance of a Fund to that of
money market funds. Money market fund yields will fluctuate and shares are not
insured, but share values usually remain stable.
(4) LIPPER ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT
RANKING ORGANIZATIONS
From time to time, in marketing and other fund literature, a Fund's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual 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. A Fund
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings. A Fund's performance may also be compared to
the average performance of its Lipper category.
(5) MORNINGSTAR, INC.
A Fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc. which rates funds on the basis of historical
risk and total return. Morningstar's ratings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for 3, 5, and 10
year periods. Ratings are not absolute and do not represent future results.
(6) INDEPENDENT SOURCES
Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning a Fund, including reprints of, or
selections from, editorials or articles about a Fund, especially those with
similar objectives. Sources for Fund performance information and articles
about a Fund may include publications such as Money, Forbes, Kiplinger's, Smart
Money, Morningstar, Inc., Financial World, Business Week, U.S. News and World
Report, The Wall Street Journal, Barron's, and a variety of investment
newsletters.
(7) VARIOUS BANK PRODUCTS
Each Fund's performance also may be compared on a before or after-tax
basis to various bank products, including the average rate of bank and thrift
institution money market deposit accounts, Super N.O.W. accounts and
certificates of deposit of various maturities as reported in the Bank Rate
Monitor, National Index of 100 leading banks, and thrift institutions as
-44-
<PAGE> 96
published by the Bank Rate Monitor, Miami Beach, Florida. The rates published
by the Bank Rate Monitor National Index are averages of the personal account
rates offered on the Wednesday prior to the date of publication by 100 large
banks and thrifts in the top ten Consolidated Standard Metropolitan Statistical
Areas. The rates provided for the bank accounts assume no compounding and are
for the lowest minimum deposit required to open an account. Higher rates may
be available for larger deposits.
With respect to money market deposit accounts and Super N.O.W.
accounts, account minimums range upward from $2,000 in each institution and
compounding methods vary. Super N.O.W. accounts generally offer unlimited check
writing while money market deposit accounts generally restrict the number of
checks that may be written. If more than one rate is offered, the lowest rate
is used. Rates are determined by the financial institution and are subject to
change at any time specified by the institution. Generally, the rates offered
for these products take market conditions and competitive product yields into
consideration when set. Bank products represent a taxable alternative income
producing product. Bank and thrift institution deposit accounts may be insured.
Shareholder accounts in the Fund are not insured. Bank passbook savings accounts
compete with money market mutual fund products with respect to certain liquidity
features but may not offer all of the features available from a money market
mutual fund, such as check writing. Bank passbook savings accounts normally
offer a fixed rate of interest while the yield of the Fund fluctuates. Bank
checking accounts normally do not pay interest but compete with money market
mutual fund products with respect to certain liquidity features (e.g., the
ability to write checks against the account). Bank certificates of deposit may
offer fixed or variable rates for a set term. (Normally, a variety of terms are
available.) Withdrawal of these deposits prior to maturity will normally be
subject to a penalty. In contrast, shares of each Fund are redeemable at the
net asset value (normally, $1.00 per share) next determined after a request is
received, without charge.
(8) INDICES
The Funds may compare their performance to a wide variety of indices
including the following:
(a) The Consumer Price Index
(b) Merrill Lynch 91 Day Treasury Bill Index
(c) Merrill Lynch Government/Corporate 1-3 Year Index
(d) IBC/Donoghue's General Purpose Money Fund AverageTM
(e) IBC/Donoghue's Taxable Money Fund AverageTM
(f) IBC/Donoghue's Government Money Fund AverageTM
(g) Salomon Brothers 1-Month Treasury Bill Index
(h) Salomon Brothers 3-Month Treasury Bill Index
(i) Salomon Brothers 1-Year Treasury Benchmark-on-the-Run Index
(j) Salomon Brothers 1-3 Year Treasury/Government-Sponsored/
Corporate Bond Index
(k) Salomon Brothers Corporate Bond Index
(l) Salomon Brothers AAA, AA, A, BBB, and BB Corporate Bond Indexes
(m) Salomon Brothers Broad Investment-Grade Bond Index
(n) Salomon Brothers High-Yield BBB Index
(o) Lehman Brothers Aggregate Bond Index
(p) Lehman Brothers 1-3 Year Government/Corporate Bond Index
(q) Lehman Brothers Intermediate Government/Corporate Bond Index
(r) Lehman Brothers Intermediate AAA, AA, and A Corporate Bond
Indexes
(s) Lehman Brothers Government/Corporate Bond Index
(t) Lehman Brothers Corporate Baa Index
(u) Lehman Brothers Intermediate Corporate Baa Index
(v) Lehman Brothers High-Yield Index
There are differences and similarities between the investments which a
Fund may purchase and the investments measured by the indices which are noted
herein. The market prices and yields of taxable and tax-exempt bonds will
fluctuate. There are important differences among the various investments
included in the indices that should be considered in reviewing this information.
(9) HISTORICAL ASSET CLASS RETURNS
-45-
<PAGE> 97
From time to time, marketing materials may portray the historical
returns of various asset classes. Such presentations will typically compare
the average annual rates of return of inflation, U.S. Treasury bills, bonds,
common stocks, and small stocks. There are important differences between each
of these investments that should be considered in viewing any such comparison.
The market value of stocks will fluctuate with market conditions, and
small-stock prices generally will fluctuate more than large-stock prices.
Stocks are generally more volatile than bonds. In return for this volatility,
stocks have generally performed better than bonds or cash over time. Bond
prices generally will fluctuate inversely with interest rates and other market
conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and payment of principal and interest may
be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
(10) STRONG FAMILY OF FUNDS
The Strong Family of Funds offers a comprehensive range of
conservative to aggressive investment options. All of the members of the Strong
Family and their investment objectives are listed below. The Funds are listed
in ascending order of risk and return, as determined by the Funds' Advisor.
<TABLE>
<CAPTION>
Fund Name Investment Objective
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Strong Money Market Fund Current income, a stable share price, and daily liquidity.
-------------------------------------------------------------------------------------------------------------
Strong Heritage Money Fund Current income, a stable share price, and daily liquidity.
-------------------------------------------------------------------------------------------------------------
Strong Municipal Money Market Federally tax-exempt current income, a stable share-price, and daily
Fund liquidity.
-------------------------------------------------------------------------------------------------------------
Strong Municipal Advantage Fund Federally tax-exempt current income with a very low degree of share-
price fluctuation.
- -------------------------------------------------------------------------------------------------------------
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
-------------------------------------------------------------------------------------------------------------
Strong Short-Term Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a low degree of share-price fluctuation.
-------------------------------------------------------------------------------------------------------------
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low
degree of share-price fluctuation.
-------------------------------------------------------------------------------------------------------------
Strong Short-Term Global Bond Total return by investing for a high level of income with a low degree
Fund of share-price fluctuation.
-------------------------------------------------------------------------------------------------------------
Strong Government Securities Total return by investing for a high level of current income with a
Fund moderate degree of share-price fluctuation.
-------------------------------------------------------------------------------------------------------------
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
-------------------------------------------------------------------------------------------------------------
Strong Corporate Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
-------------------------------------------------------------------------------------------------------------
Strong High-Yield Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income.
-------------------------------------------------------------------------------------------------------------
Strong High-Yield Bond Fund Total return by investing for a high level of current income and capital
growth.
-------------------------------------------------------------------------------------------------------------
Strong International Bond Fund High total return by investing for both income and capital appreciation.
-------------------------------------------------------------------------------------------------------------
Strong Asset Allocation Fund High total return consistent with reasonable risk over the long term.
-------------------------------------------------------------------------------------------------------------
Strong Equity Income Fund Total return by investing for both income and capital growth.
-------------------------------------------------------------------------------------------------------------
Strong American Utilities Fund Total return by investing for both income and capital growth.
-------------------------------------------------------------------------------------------------------------
Strong Total Return Fund High total return by investing for capital growth and income.
-------------------------------------------------------------------------------------------------------------
Strong Growth and Income Fund High total return by investing for capital growth and income.
-------------------------------------------------------------------------------------------------------------
Strong Schafer Value Fund Long-term capital appreciation principally through investment in common
stocks and other equity securities. Current income is a secondary
objective.
-------------------------------------------------------------------------------------------------------------
Strong Value Fund Capital growth.
-------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund Capital growth.
-------------------------------------------------------------------------------------------------------------
Strong Growth Fund Capital growth.
-------------------------------------------------------------------------------------------------------------
Strong Mid Cap Fund Capital growth.
-------------------------------------------------------------------------------------------------------------
Strong Common Stock Fund* Capital growth.
-------------------------------------------------------------------------------------------------------------
Strong Small Cap Fund Capital growth.
-------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 98
<TABLE>
<S> <C>
Strong Discovery Fund Capital growth.
-------------------------------------------------------------------------------------------------------------
Strong International Stock Fund Capital growth.
-------------------------------------------------------------------------------------------------------------
Strong Asia Pacific Fund Capital growth.
-------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund is closed to new investors, except the Fund may continue to offer
its shares through certain 401(k) plans and similar company- sponsored
retirement plans.
The Advisor also serves as Advisor or Subadvisor to several management
investment companies, some of which fund variable annuity separate accounts of
certain insurance companies.
Each Fund may from time to time be compared to the other funds in the
Strong Family of Funds based on a risk/reward spectrum. In general, the amount
of risk associated with any investment product is commensurate with that
product's potential level of reward. The Strong Funds risk/reward continuum or
any Fund's position on the continuum may be described or diagrammed in
marketing materials. The Strong Funds risk/reward continuum positions the risk
and reward potential of each Strong Fund relative to the other Strong Funds,
but is not intended to position any Strong Fund relative to other mutual funds
or investment products. Marketing materials may also discuss the relationship
between risk and reward as it relates to an individual investor's portfolio.
Financial goals vary from person to person. You may choose one or
more of the Strong Funds to help you reach your financial goals. To help you
better understand the Strong Income Funds and determine which Fund or
combination of Funds best meets your personal investment objectives, they are
described in the same Prospectus.
(10) TYING TIME FRAMES TO YOUR GOALS
There are many issues to consider as you make your investment
decisions, including analyzing your risk tolerance, investing experience, and
asset allocations. You should start to organize your investments by learning
to link your many financial goals to specific time frames. Then you can begin
to identify the appropriate types of investments to help meet your goals. As a
general rule of thumb, the longer your time horizon, the more price fluctuation
you will be able to tolerate in pursuit of higher returns. For that reason,
many people with longer-term goals select stocks or long-term bonds, and many
people with nearer-term goals match those up with for instance, short-term
bonds. The Advisor developed the following suggested holding periods to help
our investors set realistic expectations for both the risk and reward potential
of our funds. (See table below.) Of course, time is just one element to
consider when making your investment decision.
STRONG FUNDS SUGGESTED MINIMUM HOLDING PERIODS
<TABLE>
<CAPTION>
UNDER 1 YEAR 1 TO 2 YEARS 4 TO 7 YEARS 5 OR MORE YEARS
------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Money Market Fund Advantage Fund Government Securities Fund Total Return Fund
Heritage Money Fund Municipal Advantage Fund Municipal Bond Fund Opportunity Fund
Municipal Money Market Corporate Bond Fund Growth Fund
Fund 2 TO 4 YEARS International Bond Fund Common Stock Fund*
------------
Short-Term Bond Fund High-Yield Municipal Bond Discovery Fund
Short-Term Municipal Bond Fund International Stock
Fund Asset Allocation Fund Fund
Short-Term Global Bond American Utilities Fund Asia Pacific Fund
Fund High-Yield Bond Fund Value Fund
Equity Income Fund Small Cap Fund
Growth and Income
Fund
Mid Cap Fund
Schafer Value Fund
</TABLE>
* This Fund is closed to new investors, except the Fund may continue to offer
its shares through certain 401(k) plans and similar company- sponsored
retirement plans.
<PAGE> 99
ADDITIONAL FUND INFORMATION
(1) DURATION
Duration is a calculation that seeks to measure the price sensitivity
of a bond or a bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes by taking into account the time value of
cash flows generated over the bond's life. Future interest and principal
payments are discounted to reflect their present value and then are multiplied
by the number of years they will be received to produce a value that is
expressed in years. Since duration can also be computed for the Funds, you can
estimate the effect of interest rates on a Fund's share price. Simply multiply
the Fund's duration by an expected change in interest rates. For example, the
price of a Fund with a duration of two years would be expected to fall
approximately two percent if market interest rates rose by one percentage
point.
(2) PORTFOLIO CHARACTERISTICS
In order to present a more complete picture of a Fund's portfolio,
marketing materials may include various actual or estimated portfolio
characteristics, including but not limited to median market capitalizations,
earnings per share, alphas, betas, price/earnings ratios, returns on equity,
dividend yields, capitalization ranges, growth rates, price/book ratios, top
holdings, sector breakdowns, asset allocations, quality breakdowns, and
breakdowns by geographic region.
(3) MEASURES OF VOLATILITY AND RELATIVE PERFORMANCE
Occasionally statistics may be used to specify Fund volatility or
risk. The general premise is that greater volatility connotes greater risk
undertaken in achieving performance. Measures of volatility or risk are
generally used to compare the Fund's net asset value or performance relative to
a market index. One measure of volatility is beta. Beta is the volatility of
a fund relative to the total market as represented by the Standard & Poor's 500
Stock Index. A beta of more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates volatility less than the market.
Another measure of volatility or risk is standard deviation. Standard deviation
is a statistical tool that measures the degree to which a fund's performance
has varied from its average performance during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of (the sum of)(xi - xm)2
----------------------
n-1
where (sigma) = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
Statistics may also be used to discuss a Fund's relative performance.
One such measure is alpha. Alpha measures the actual return of a fund compared
to the expected return of a fund given its risk (as measured by beta). The
expected return is based on how the market as a whole performed, and how the
particular fund has historically performed against the market. Specifically,
alpha is the actual return less the expected return. The expected return is
computed by multiplying the advance or decline in a market representation by
the fund's beta. A positive alpha quantifies the value that the fund manager
has added, and a negative alpha quantifies the value that the fund manager has
lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor,
owned by professionals active in its management. Recognizing that investors are
the focus of its business, the Advisor strives for excellence both in
investment
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<PAGE> 100
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires specialized
skills and processes for each asset class and style. Therefore, the Advisor
believes that active management should produce greater returns than a passively
managed index. The Advisor has brought together a group of top-flight
investment professionals with diverse product expertise, and each concentrates
on their investment specialty. The Advisor believes that people are the firm's
most important asset. For this reason, continuity of professionals is critical
to the firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their
impact on the Funds may be used in advertisements and sales materials. Such
factors that may impact the Funds include, but are not limited to, changes in
interest rates, political developments, the competitive environment, consumer
behavior, industry trends, technological advances, macroeconomic trends, and
the supply and demand of various financial instruments. In addition, marketing
materials may cite the portfolio management's views or interpretations of such
factors.
EIGHT BASIC PRINCIPLES FOR SUCCESSFUL MUTUAL FUND INVESTING
These common sense rules are followed by many successful investors.
They make sense for beginners, too. If you have a question on these principles,
or would like to discuss them with us, please contact us at 1-800-368-3863.
1. Have a plan - even a simple plan can help you take control of your
financial future. Review your plan once a year, or if your
circumstances change.
2. Start investing as soon as possible. Make time a valuable ally. Let it
put the power of compounding to work for you, while helping to reduce
your potential investment risk.
3. Diversify your portfolio. By investing in different asset classes -
stocks, bonds, and cash - you help protect against poor performance in
one type of investment while including investments most likely to help
you achieve your important goals.
4. Invest regularly. Investing is a process, not a one-time event. By
investing regularly over the long term, you reduce the impact of
short-term market gyrations, and you attend to your long-term plan
before you're tempted to spend those assets on short-term needs.
5. Maintain a long-term perspective. For most individuals, the best
discipline is staying invested as market conditions change. Reactive,
emotional investment decisions are all too often a source of regret -
and principal loss.
6. Consider stocks to help achieve major long-term goals. Over time,
stocks have provided the more powerful returns needed to help the
value of your investments stay well ahead of inflation.
7. Keep a comfortable amount of cash in your portfolio. To meet current
needs, including emergencies, use a money market fund or a bank
account - not your long-term investment assets.
8. Know what you're buying. Make sure you understand the potential risks
and rewards associated with each of your investments. Ask questions...
request information...make up your own mind. And choose a fund company
that helps you make informed investment decisions.
STRONG RETIREMENT PLAN SERVICES
Strong Retirement Plan Services offers a full menu of high quality,
affordable retirement plan options, including traditional money purchase
pension and profit sharing plans, 401(k) plans, simplified employee pension
plans, salary reduction plans, Keoghs, and 403(b) plans. Retirement plan
specialists are available to help companies determine which type of retirement
plan may be appropriate for their particular situation.
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<PAGE> 101
Markets:
The retirement plan services provided by the Advisor focus on four
distinct markets, based on the belief that a retirement plan should fit the
customer's needs, not the other way around.
1. Small company plans. Small company plans are designed for companies
with 1-50 plan participants. The objective is to incorporate the
features and benefits typically reserved for large companies, such as
sophisticated recordkeeping systems, outstanding service, and
investment expertise, into a small company plan without administrative
hassles or undue expense. Small company plan sponsors receive a
comprehensive plan administration manual as well as toll-free
telephone support.
2. Large company plans. Large company plans are designed for companies
with between 51 and 1,000 plan participants. Each large company plan
is assigned a team of professionals consisting of an account manager,
who is typically an attorney, CPA, or holds a graduate degree in
business, a conversion specialist (if applicable), an accounting
manager, a legal/technical manager, and an education/communications
educator.
3. Women-owned businesses.
4. Non-profit and educational organizations (the 403(b)market).
Turnkey approach:
The retirement plans offered by the Advisor are designed to be
streamlined and simple to administer. To this end, the Advisor has invested
heavily in the equipment, systems, and people necessary to adopt or convert a
plan, and to keep it running smoothly. The Advisor provides all aspects of the
plan, including plan design, administration, recordkeeping, and investment
management. To streamline plan design, the Advisor provides customizable
IRS-approved prototype documents. The Advisor's services also include annual
government reporting and testing as well as daily valuation of each
participant's account. This structure is intended to eliminate the confusion
and complication often associated with dealing with multiple vendors. It is
also designed to save plan sponsors time and expense.
The Advisor strives to provide one-stop retirement savings programs
that combine the advantages of proven investment management, flexible plan
design and a wide range of investment options. The open architecture design of
the plans allow for the use of the family of mutual funds managed by the
Advisor as well as a stable asset value option. Large company plans may
supplement these options with their company stock (if publicly traded) or funds
from other well-known mutual fund families.
Education:
Participant education and communication is key to the success of any
retirement program, and therefore is one of the most important services that
the Advisor provides. The Advisor's goal is twofold: to make sure that plan
participants fully understand their options and to educate them about the
lifelong investment process. To this end, the Advisor provides attractive,
readable print materials that are supplemented with audio and video tapes and
retirement education programs.
Service:
The Advisor's goal is to provide a world class level of service. One
aspect of that service is an experienced, knowledgeable team that provides
ongoing support for plan sponsors, both at adoption or conversion and
throughout the life of a plan. The Advisor is committed to delivering accurate
and timely information, evidenced by straightforward, complete, and
understandable reports, participant account statements and plan summaries.
The Advisor has designed both "high-tech" and "high-touch" systems,
providing an automated telephone system as well as personal contact.
Participants can access daily account information, conduct transactions, or
have questions answered in the way that is most comfortable for them.
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<PAGE> 102
STRONG FINANCIAL ADVISORS GROUP
The Strong Financial Advisors Group is dedicated to helping financial
advisors better serve their clients. Financial advisors receive regular
updates on the mutual funds managed by the Advisor, access to portfolio
managers through special conference calls, consolidated mailings of duplicate
confirmation statements, access to the Advisor's network of regional
representatives, and other specialized services. For more information on the
Strong Financial Advisors Group, call 1-800-368-1683.
PORTFOLIO MANAGEMENT
Each portfolio manager works with a team of analysts, traders, and
administrative personnel. From time to time, marketing materials may discuss
various members of the team, including their education, investment experience,
and other credentials.
The Advisor believes that actively managing each Fund's portfolio and
adjusting the average portfolio maturity according to the Advisor's interest
rate outlook 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. Through its active
management approach, the Advisor seeks to avoid or reduce any negative change
in the Fund's net asset value per share during the periods of falling bond
prices and provide consistently positive annual returns throughout the seasons
of investment.
The Advisor's investment philosophy includes the following basic beliefs:
- - Active management pursued by a team with a uniform discipline across
the fixed income spectrum can produce results that are superior to
those produced through passive management.
- - Controlling risk by making only moderate deviations from the
defined benchmark is the cornerstone of successful fixed income
investing.
- - Successful fixed income management is best pursued on a top-down basis
utilizing fundamental techniques.
The investment process includes decisions made at four levels that are
consistent with the Advisor's viewpoint of the path of economic activity,
interest rates, and the supply of and demand for credit.
The goal is to derive equivalent amounts of excess performance and risk control
over the long run from each of the four levels of decision- making:
1. Duration. Each Fund's portfolio duration is managed within a range
relative to its respective benchmark.
2. Yield Curve. Modest overweights and underweights along the yield curve
are made to benefit from changes in the yield curve's shape.
3. Sector/Quality. Sector weightings are generally maintained between
zero and two times those of the benchmark.
4. Security Selection. Quantitative analysis drives issue selection in
the Treasury and mortgage marketplace. Proactive credit research
drives corporate issue selection.
Risk control is pursued at three levels:
1. Portfolio structure. In structuring the portfolio, the Advisor
carefully considers such factors as position sizes, duration,
benchmark characteristics, and the use of illiquid securities.
2. Credit research. Proactive credit research is used to identify issues
which the Advisor believes will be candidates for credit upgrade.
This research includes visiting company management, establishing
appropriate values for credit ratings, and monitoring yield spread
relationships.
3. Portfolio monitoring. Portfolio fundamentals are re-evaluated
continuously, and buy/sell targets are established and generally
adhered to.
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LEGAL COUNSEL
Godfrey & Kahn, S.C., 780 North Water Street, Milwaukee, Wisconsin
53202, acts as outside legal counsel for the Funds.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 411 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, are the independent accountants for the Funds, providing audit
services and assistance and consultation with respect to the preparation of
filings with the SEC.
FINANCIAL STATEMENTS
The Annual Report for the Short-Term Bond, Government, Corporate Bond,
and High-Yield Funds that is attached hereto contains the following audited
financial information for the Funds:
(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) Reports of Independent Accountants.
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<PAGE> 104
APPENDIX
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms
of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy,
reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors'
rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The 'BB' rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied 'BBB-' rating.
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<PAGE> 105
B Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' rating. The 'C' rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest
is being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grade period. The 'D' rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
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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 and preferred stock ratings provide a
guide to investors in determining the credit risk associated with a particular
security. The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt or preferred issue in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds and preferred stock carrying the same rating are of similar but
not necessarily identical credit quality since the rating categories do not
fully reflect small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds and preferred stock considered to be investment grade
and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and/or dividends
and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because
bonds and preferred stock rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of the issuers is
generally rated 'F-1+'.
A Bonds and preferred stock considered to be investment grade
and of high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than debt or preferred
securities with higher ratings.
BBB Bonds and preferred stock considered to be investment grade
and of satisfactory credit quality. The obligor's ability to
pay interest or dividends and repay principal is considered to
be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact
on these securities and, therefore, impair timely payment.
The likelihood that
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the ratings of these bonds or preferred will fall below
investment grade is higher than for securities with higher
ratings.
Fitch speculative grade bond or preferred stock ratings provide a
guide to investors in determining the credit risk associated with a particular
security. The ratings ('BB' to 'C') represent Fitch's assessment of the
likelihood of timely payment of principal and interest or dividends in
accordance with the terms of obligation for issues not in default. For
defaulted bonds or preferred stock, the rating ('DDD' to 'D') is an assessment
of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer or possible recovery value in
bankruptcy, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's future financial strength.
Bonds or preferred stock that have the same rating are of similar but
not necessarily identical credit quality since the rating categories cannot
fully reflect the differences in the degrees of credit risk.
BB Bonds or preferred stock are considered speculative. The
obligor's ability to pay interest or dividends and repay
principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its
debt service requirements.
B Bonds or preferred stock are considered highly speculative.
While bonds in this class are currently meeting debt service
requirements or paying dividends, the probability of continued
timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the
issue.
CCC Bonds or preferred stock have certain identifiable
characteristics that, if not remedied, may lead to default.
The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds or preferred stock are minimally protected. Default in
payment of interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal or suspension of preferred stock dividends is
imminent.
DDD, DD,
and D Bonds are in default on interest and/or principal payments or
preferred stock dividends are suspended. Such securities are
extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization
of the obligor. 'DDD' represents the highest potential for
recovery of these securities, and 'D' represents the lowest
potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
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Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture
restrictions is important to the analysis of a company's operating and
financial constraints. From time to time, Duff & Phelps Credit Rating Co.
places issuers or security classes on Rating Watch. The Rating Watch Status
results from a need to notify investors and the issuer that there are
conditions present leading us to re-evaluate the current rating(s). A listing
on Rating Watch, however, does not mean a rating change is inevitable. The
Rating Watch Status can either be resolved quickly or over a longer period of
time, depending on the reasons surrounding the placement on Rating Watch. The
"up" designation means a rating may be upgraded; the "down" designation means a
rating may be downgraded, and the uncertain designation means a rating may be
raised or lowered.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities. Structured finance issues, including real
estate, asset-backed and mortgage-backed financings, use this same rating scale
with minor modification in the definitions. Thus, an investor can compare the
credit quality of investment alternatives across industries and structural
types. A "Cash Flow Rating" (as noted for specific ratings) addresses the
likelihood that aggregate principal and interest will equal or exceed the rated
amount under appropriate stress conditions.
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
BBB+ Below-average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according to
BB- industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
</TABLE>
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<PAGE> 109
<TABLE>
<S> <C>
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>
________________________________________________________________________________
IBCA LONG-TERM DEBT RATINGS
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk, albeit not very significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
BB - Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists,
but is susceptible over time to adverse changes in business, economic or
financial conditions.
B - Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
CCC - Obligations for which there is a current perceived possibility
of default. Timely repayment of principal and interest is dependent on
favorable business, economic or financial conditions.
CC - Obligations which are highly speculative or which have a high
risk of default.
C - Obligations which are currently in default.
NOTES: "+" or "-" may be appended to a rating below AAA to denote
relative status within major rating categories. Ratings of BB and below are
assigned where it is considered that speculative characteristics are present.
A-6
<PAGE> 110
THOMSON BANKWATCH LONG-TERM DEBT RATINGS
Long-Term Debt Ratings assigned by Thomson BankWatch also weigh
heavily government ownership and support. The quality of both the company's
management and franchise are of even greater importance in the Long-Term Debt
Rating decisions. Long-Term Debt Ratings look out over a cycle and are not
adjusted frequently for what we believe are short-term performance aberrations.
Long-Term Debt Ratings can be restricted to local currency debt -
ratings will be identified by the designation LC. In addition, Long- Term Debt
Ratings may include a plus (+) or minus (-) to indicate where within the
category the issue is placed. BankWatch Long-Term Debt Ratings are based on
the following scale:
Investment Grade
AAA (LC-AAA) - Indicates that the ability to repay principal and
interest on a timely basis is extremely high.
AA (LC-AA) - Indicates a very strong ability to repay principal and
interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
A (LC-A) - Indicates the ability to repay principal and interest is
strong. Issues rated A could be more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings.
BBB (LC-BBB) - The lowest investment-grade category; indicates an
acceptable capacity to repay principal and interest. BBB issues are more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Non-Investment Grade - may be speculative in the likelihood of timely repayment
of principal and interest
BB (LC-BB) - While not investment grade, the BB rating suggests that
the likelihood of default is considerably less than for lower- rated issues.
However, there are significant uncertainties that could affect the ability to
adequately service debt obligations.
B (LC-B) - Issues rated B show higher degree of uncertainty and
therefore greater likelihood of default than higher-rated issues. Adverse
developments could negatively affect the payment of interest and principal on a
timely basis.
CCC (LC-CCC) - Issues rated CCC clearly have a high likelihood of
default, with little capacity to address further adverse changes in financial
circumstances.
CC (LC-CC) - CC is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
D (LC-D) - Default.
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-7
<PAGE> 111
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating.
- The following criteria will be used in making the assessment:
- Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
- Source of payment - the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime- 1
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established industries,
(ii) high rates of return on funds employed, (iii) conservative capitalization
structure with moderate reliance on debt and ample asset protection, (iv) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and (v) well established access to a range of financial markets and
assured sources of alternate liquidity.
A-8
<PAGE> 112
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated 'F-1+'.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the
margin of safety is not as great as for issues assigned 'F-1+'
and 'F-1' ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating
criteria used by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
A-9
<PAGE> 113
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those
differences.
From time to time, Duff & Phelps places issuers or security classes on
Rating Watch. The Rating Watch status results from a need to notify investors
and the issuer that there are conditions present leading us to re-evaluate the
current rating(s). A listing on Rating Watch, however, does not mean a rating
change is inevitable.
The Rating Watch status can either be resolved quickly or over a
longer period of time, depending on the reasons surrounding the placement on
Rating Watch. The "up" designation means a rating may be upgraded; the "down"
designation means a rating may be downgraded, and the "uncertain" designation
means a rating may be raised or lowered.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely payment. Short-Term
liquidity, including internal operating factors
and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing
requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt
service. Operating factors and market access may be
subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or
interest payments.
A-10
<PAGE> 114
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
The TBW Short-Term Ratings apply, unless otherwise noted, to specific
debt instruments of the rated entities with a maturity of one year or less.
TBW Short-Term Ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3 The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA SHORT-TERM RATINGS
IBCA Short-Term Ratings assess the borrowing characteristics of banks
and corporations, and the capacity for timely repayment of debt obligations.
The Short-Term Ratings relate to debt which has a maturity of less than one
year.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit
feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or which
are currently in default.
A-11
<PAGE> 115
ANNUAL REPORT
STRONG CORPORATE BOND FUND
Incorporated by Reference to the Registrant's Annual Report filed on Form
N-30D (File No. 2-99820), which was filed with the Securities and Exchange
Commission on or about December 27, 1996 (Edgar Reference No.
0000869297-96-000031).
<PAGE> 116
STRONG CORPORATE BOND FUND, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (all included or incorporated by reference in
Parts A & B)
Schedules of Investments in Securities
Statements of Operations
Statements of Assets and Liabilities
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
(b) Exhibits
(1) Articles of Incorporation dated July 31, 1996
(2) Bylaws dated October 20, 1995(2)
(3) Inapplicable
(4) Specimen Stock Certificate(1)
(5) Investment Advisory Agreement(1)
(6) Distribution Agreement(2)
(7) Inapplicable
(8) Custody Agreement(2)
(8.1) Global Custody Agreement(2)
(8.1.1) Amendment to Global Custody Agreement dated August 26, 1996
(9) Shareholder Servicing Agent Agreement(2)
(10) Inapplicable
(11) Consent of Auditor
(12) Inapplicable
(13) Inapplicable
(14.1) Prototype Defined Contribution Retirement Plan - No. 1(2)
(14.1.1) Prototype Defined Contribution Retirement Plan - No. 2(2)
(14.2) Individual Retirement Custodial Account(2)
(14.3) Section 403(b)(7) Retirement Plan(2)
(14.4) Simplified Employee Pension Plan
(15) Inapplicable
(16) Computation of Performance Figures
(17) Financial Data Schedule
(18) Inapplicable
(19) Power of Attorney dated February 25, 1997
(20) Letter of Representation
(21.1) Code of Ethics for Access Persons dated October 18, 1996
(21.2) Code of Ethics for Non-Access Persons dated October 18, 1996
- ---------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A of Registrant filed on or about
April 24, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A of Registrant filed on or about
February 27, 1996.
C-1
<PAGE> 117
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant neither controls any person nor is under common
control with any other person.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of January 31, 1997
----------------------------- ------------------------
<S> <C>
Common Stock, $.001 par value 15,431
</TABLE>
Item 27. Indemnification
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Group, First State
Insurance Company, Chubb Group, and Gulf Insurance Companies in the aggregate
amount of $40,000,000, subject to certain deductions. Pursuant to the
authority of the Wisconsin Business Corporation Law, Article VII of
Registrant's Bylaws provides as follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01. Mandatory Indemnification. The Corporation shall
indemnify, to the full extent permitted by the WBCL, as in effect from
time to time, the persons described in Sections 180.0850 through 180.0859
(or any successor provisions) of the WBCL or other provisions of the law
of the State of Wisconsin relating to indemnification of directors and
officers, as in effect from time to time. The indemnification afforded
such persons by this section shall not be exclusive of other rights to
which they may be entitled as a matter of law.
SECTION 7.02. Permissive Supplementary Benefits. The Corporation
may, but shall not be required to, supplement the right of indemnification
under Section 7.01 by (a) the purchase of insurance on behalf of any one
or more of such persons, whether or not the Corporation would be obligated
to indemnify such person under Section 7.01; (b) individual or group
indemnification agreements with any one or more of such persons; and (c)
advances for related expenses of such a person.
SECTION 7.03. Amendment. This Article VII may be amended or
repealed only by a vote of the shareholders and not by a vote of the Board
of Directors.
SECTION 7.04. Investment Company Act. In no event shall the
Corporation indemnify any person hereunder in contravention of any
provision of the Investment Company Act.
Item 28. Business and Other Connections of Investment Advisor
The information contained under "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.
Item 29. Principal Underwriters
(a) Strong Funds Distributors, Inc., principal underwriter for Registrant,
also serves as principal underwriter for Strong Advantage Fund, Inc.; Strong
Asia Pacific Fund, Inc.; Strong Asset Allocation Fund, Inc.; Strong Common
Stock Fund, Inc.; Strong Conservative Equity Funds, Inc.; Strong Discovery
Fund, Inc.; Strong Equity Funds, Inc.; Strong Government Securities Fund, Inc.;
Strong Heritage Reserve Series, Inc.; Strong High-Yield Municipal Bond Fund,
Inc.; Strong Income Funds, Inc.; Strong Institutional Funds, Inc.; Strong
International Bond Fund, Inc.; Strong International Stock Fund, Inc.; Strong
Money Market Fund, Inc.; Strong Municipal Bond Fund, Inc.; Strong Municipal
Funds, Inc.; Strong Opportunity Fund, Inc.; Strong Schafer Value Fund, Inc.;
Strong Short-Term Bond Fund, Inc.; Strong Short-Term Global Bond Fund, Inc.;
Strong Short-Term Municipal Bond Fund, Inc.; Strong Special Fund II, Inc.;
Strong Total Return Fund, Inc.; and Strong Variable Insurance Funds, Inc.
C-2
<PAGE> 118
(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 Vice President,
Thomas P. Lemke, at Registrant's corporate offices, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
Item 31. Management Services
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings
The Registrant undertakes to furnish to each person to whom a prospectus
is delivered, upon request and without charge, a copy of the Registrant's
latest annual report to shareholders.
C-3
<PAGE> 119
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
all the requirements for effectiveness of this Post-Effective Amendment No. 14
to the Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment No. 14 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Village of Menomonee Falls, and State of Wisconsin on
the 26th day of February, 1997.
STRONG CORPORATE BOND FUND, INC.
(Registrant)
By: /s/ John Dragisic
------------------------
John Dragisic, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------- -------------------------------------- -----------------
<S> <C> <C>
President (Principal Executive
Officer and acting Principal
Financial and Accounting Officer) and
/s/ John Dragisic a Director February 26, 1997
- ---------------------
John Dragisic
/s/ Richard S. Strong Chairman of the Board and a Director February 26, 1997
- ---------------------
Richard S. Strong
- --------------------- Director February 26, 1997
Marvin E. Nevins*
- --------------------- Director February 26, 1997
Willie D. Davis*
- --------------------- Director February 26, 1997
William F. Vogt*
- --------------------- Director February 26, 1997
Stanley Kritzik*
</TABLE>
* John S. Weitzer signs this document pursuant to powers of attorney filed with
this Post-Effective Amendment No. 14 to the Registration Statement on Form
N-1A.
By: /s/John S. Weitzer
------------------
John S. Weitzer
<PAGE> 120
EXHIBIT INDEX
<TABLE>
<CAPTION>
EDGAR
Exhibit No. Exhibit Exhibit No.
- ----------- ------------------------------------- ------------
<S> <C> <C>
(1) Articles of Incorporation EX-99.B1
(8.1.1) Amendment to Global Custody Agreement EX-99.B8.1.1
(11) Consent of Auditor EX-99.B11
(14.4) Simplified Employee Pension Plan EX-99.B14.4
(16) Computation of Performance Figures EX-99.B16
(17) Financial Data Schedule EX-27.CLASSA
(19) Power of Attorney EX-99.B19
(20) Letter of Representation EX-99.B20
(21.1) Code of Ethics for Access Persons EX-99.B21.1
(21.2) Code of Ethics for Non-Access Persons EX-99.B21.2
</TABLE>
<PAGE> 1
EXHIBIT 99.B1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF STRONG CORPORATE BOND FUND, INC.
These Amended and Restated Articles of Incorporation shall supersede and
replace the heretofore existing Articles of Incorporation of Strong Corporate
Bond Fund, Inc., as amended to date, a corporation organized under Chapter 180
of the Wisconsin Statutes:
ARTICLE I
The name of the corporation (hereinafter, the "Corporation") is:
Strong Corporate Bond Fund, Inc.
ARTICLE II
The period of existence of the Corporation shall be perpetual.
ARTICLE III
The purpose for which the Corporation is organized is, without limitation,
to act as a registered management investment company under 15 USC 80a-1 to
80a-64, as amended from time to time (the "Investment Company Act"), and for
any other purposes for which corporations may be organized under Chapter 180 of
the Wisconsin Statutes, as amended from time to time (the "WBCL").
ARTICLE IV
A. The Corporation shall have the authority to issue an indefinite number
of shares with a par value of $.001 per share, initially consisting of a single
class designated as Common Stock. Prior to the reclassification of any unissued
shares of the Corporation's Common Stock, such Common Stock shall have
unlimited voting rights as provided by the WBCL, shall be entitled to receive
the net assets of the Corporation upon liquidation and shall be entitled to
such dividends or distributions, in shares or in cash or in both, as may be
declared from time to time by the Board of Directors. The Board of Directors
shall have the authority to redesignate the outstanding Common Stock upon the
reclassification of any unissued shares of Common Stock into different classes
and series of classes, provided the redesignation does not affect the
preferences, limitations, and relative rights of outstanding shares of Common
Stock (or such other designation for such Common Stock as is determined by the
Board of Directors pursuant to this sentence) and upon such redesignation and
reclassification, outstanding shares shall be subject to subparagraphs 1-7 of
paragraph B of this Article IV. Thereafter, the Corporation's Common Stock
shall consist of such classes and series as is designated by the Board of
Directors in accordance with paragraph B of this Article IV.
B. The Board of Directors is authorized to classify or to reclassify (i.e.
into classes and series of classes), from time to time, any unissued shares of
the Corporation by setting, changing, or eliminating the distinguishing
designation and the preferences, limitations, and relative rights, in whole or
in part, to the fullest extent permissible under the WBCL.
Unless otherwise provided by the Board of Directors prior to the issuance
of shares, the shares of any and all classes and series shall be subject to the
following:
1. The Board of Directors may redesignate a class or series whether or not
shares of such class or series are issued and outstanding, provided that such
redesignation does not affect the preferences, limitations, and relative
rights, in whole or in part, of such class or series.
<PAGE> 2
2. The assets and liabilities and the income and expenses for each class
shall be attributable to that class. The assets and liabilities and the income
and expenses of each series within a class shall be determined separately and,
accordingly, the net asset value of shares may vary from series to series
within a class. The income or gain and the expense or liabilities of the
Corporation shall be allocated to each class or series as determined by or
under the direction of the Board of Directors.
3. Shares of each class or series shall be entitled to such dividends or
distributions, in shares or in cash or both, as may be declared from time to
time by the Board of Directors with respect to such class or series. Dividends
or distributions shall be paid on shares of a class or series only out of the
assets belonging to that class or series.
4. Any shares redeemed by the Corporation shall be deemed to be canceled
and restored to the status of authorized but unissued shares of the particular
class or series.
5. In the event of the liquidation or dissolution of the Corporation, the
holders of a class or series shall be entitled to receive, as a class or
series, out of the assets of the Corporation available for distribution to
shareholders, the assets belonging to that class or series less the liabilities
allocated to that class or series. The assets so distributable to the holders
of a class or series shall be distributed among such holders in proportion to
the number of shares of that class or series held by them and recorded on the
books of the Corporation. In the event that there are any assets available for
distribution that are not attributable to any particular class or series, such
assets shall be allocated to all classes or series in proportion to the net
asset value of the respective class or series.
6. All holders of shares shall vote as a single class and series except
with respect to any matter which affects only one or more series or class of
shares, in which case only the holders of shares of the class or series
affected shall be entitled to vote.
7. For purposes of the Corporation's Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940, including all prospectuses and Statements of
Additional Information, and other reports filed under the Investment Company
Act of 1940, references therein to "classes" of the Corporation's common stock
shall mean "series", as used in these Articles of Incorporation and the WBCL,
and references therein to "series" shall mean "classes", as used in these
Articles of Incorporation and the WBCL.
C. The Corporation may issue fractional shares. Any fractional shares
shall carry proportionately all the rights of whole shares, including, without
limitation, the right to vote and the right to receive dividends and
distributions.
D. The Board of Directors of the Corporation may authorize the issuance
and sale of any class or series of shares from time to time in such amount and
on such terms and conditions, for such purposes and for such amounts or kind of
consideration as the Board of Directors shall determine, subject to any limits
required by then applicable law. Nothing in this paragraph shall be construed
in any way as limiting the Board of Directors authority to issue the
Corporation's shares in connection with a share dividend under the WBCL.
E. Subject to the suspension of the right of redemption or postponement of
the date of payment or satisfaction upon redemption in accordance with the
Investment Company Act, each holder of any class or series of the Common Stock
of the Corporation, upon request and after complying with the redemption
procedures established by or under the supervision of the Board of Directors,
shall be entitled to require the Corporation to redeem out of legally available
funds all or any part of the Common Stock standing in the name of such holder
on the books of the Corporation at the net asset value (as determined in
2
<PAGE> 3
accordance with the Investment Company Act) of such shares (less any
applicable redemption fee). Any such redeemed shares shall be canceled and
restored to the status of authorized but unissued shares.
F. The Board of Directors may authorize the Corporation, at its option and
to the extent permitted by and in accordance with the Investment Company Act,
to redeem any shares of Common Stock of any class or series of the Corporation
owned by any shareholder under circumstances deemed appropriate by the Board of
Directors in its sole discretion from time to time, including without
limitation the failure to maintain ownership of a specified minimum number or
value of shares of Common Stock of any class or series of the Corporation, at
the net asset value (as determined in accordance with the Investment Company
Act) of such shares (less any applicable redemption fee).
G. The Board of Directors of the Corporation may, upon reasonable notice
to the holders of Common Stock of any class or series of the Corporation,
impose a fee for the redemption of shares, such fee to be not in excess of the
amount set forth in the Corporation's then existing Bylaws and to apply in the
case of such redemptions and under such terms and conditions as the Board of
Directors shall determine. The Board of Directors shall have the authority to
rescind imposition of any such fee in its discretion and to reimpose the
redemption fee from time to time upon reasonable notice.
H. No holder of the Common Stock of any class or series of the Corporation
shall, as such holder, have any right to purchase or subscribe for any shares
of the Common Stock of any class or series of the Corporation which it may
issue or sell other than such right, if any, as the Board of Directors, in its
sole discretion, may determine.
I. With respect to any class or series, the Board of Directors may adopt
provisions to seek to maintain a stable net asset value per share. Without
limiting the foregoing, the Board of Directors may determine that the net asset
value per share of any class or series should be maintained at a designated
constant value and may establish procedures, not inconsistent with applicable
law, to accomplish that result. Such procedures may include a requirement, in
the event of a net loss with respect to the particular class or series from
time to time, for automatic pro rata capital contributions from each
shareholder of that class or series in amounts sufficient to maintain the
designated constant share value.
ARTICLE V
The number of directors shall be fixed by the Bylaws of the Corporation.
ARTICLE VI
The Corporation reserves the right to enter into, from time to time,
investment advisory agreements providing for the management and supervision of
the investments of the Corporation, the furnishing of advice to the Corporation
with respect to the desirability of investing in, purchasing or selling
securities or other assets and the furnishing of clerical and administrative
services to the Corporation. Such agreements shall contain such other terms,
provisions and conditions as the Board of Directors of the Corporation may deem
advisable and as are permitted by the Investment Company Act.
The Corporation may, without limitation, designate distributors,
custodians, transfer agents, registrars and/or disbursing agents for the stock
and assets of the Corporation and employ and fix the powers, rights, duties,
responsibilities and compensation of each such distributor, custodian, transfer
agent, registrar and/or disbursing agent.
3
<PAGE> 4
ARTICLE VII
If the Board of Directors redesignate the outstanding Common Stock in
accordance with paragraph A of Article IV, the Board of Directors shall
designate the corporation with a generic name that is consistent with the name
of the first series and any subsequent series.
ARTICLE VIII
The registered office of the Corporation is located at 100 Heritage
Reserve, in the Village of Menomonee Falls, Waukesha County, Wisconsin 53051
and the name of the registered agent at such address is Thomas P. Lemke.
This instrument was drafted by:
John S. Weitzer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
4
<PAGE> 1
AMENDMENT TO THE SUBCUSTODIAN AGREEMENT
AMENDMENT entered into as of this 26th day of August, 1996 to the
Subcustodian Agreement among FIRSTAR TRUST COMPANY (the "Custodian") and the
STRONG FUNDS (the "Funds") listed in Appendix B and BROWN BROTHERS HARRIMAN &
CO. (the "Subcustodian") dated as of December 22, 1993 (the "Agreement").
In consideration of the Subcustodian's offering subcustodial services to
the Custodian and the Funds in Russia, the Custodian the Funds and the
Subcustodian agree that the Agreement is hereby amended as follows:
1. Section 2. 1, Safekeeping, is amended by the addition of the
following phrase at the end of said Section:
"provided, however, that the Subcustodian's responsibility for safekeeping
equity securities of Russian issuers ("Russian Equities") hereunder shall be
limited to the safekeeping of relevant share extracts from the share
registration books maintained by the entities providing share registration
services to issuers of Russian Equities (each a "Registrar") indicating an
investor's ownership of such securities (each a "Share Extract")."
2. Section 2.3, Registration, is amended by the addition of the
following at the end of said Section:
"However, with respect to Russian Equities, the Subcustodian shall
instruct a Sub-Subcustodian to ensure that registration thereof shall be
reflected on the books of the issuer's Registrar, subject to the following
conditions, but shall in no event be liable for losses or costs incurred as a
result of delays or failures in the registration process, including without
limitation the inability to obtain or enforce relevant Share Extracts, unless
such delays or failures are due to the Subcustodian's or Sub-Subcustodian's
negligence, fraud, or willful default. Such registration may be in the name of
a nominee of a Sub-Subcustodian. In the event registration is in the name of a
Fund, such Fund hereby acknowledges that only the Subcustodian or
Sub-Subcustodian may give instructions to the Registrar to transfer or engage
in other transactions involving the Russian Equities so registered.
<PAGE> 2
A Sub-Subcustodian may from time to time enter into contracts with
Registrars with respect to the registration of Russian Equities ("Registrar
Contracts"). The Subcustodian shall provide the Funds with a list of the
Russian Equities with respect to which the Sub-Subcustodian has entered into a
Registrar Contract, and will promptly provide the Funds with updates to that
list whenever the Sub-Subcustodian enters into any new Registrar Contracts.
Such Registrar Contracts will include (i) regular share confirmations by the
Sub-Subcustodian, (ii) reregistrations within set timeframes, (iii) use of a
Sub-Subcustodian's nominee name, (iv) direct access by auditors of the
Sub-Subcustodian or its clients to share registers, and (v) specification of
the Registrar's responsibilities and liabilities. It is hereby acknowledged
and agreed that the Subcustodian does not represent or warrant that such
Registrar Contracts are enforceable.
If a Fund instructs the Subcustodian to settle a purchase of a Russian
Equity, the Subcustodian will instruct a Sub-Subcustodian to use reasonable
efforts to reregister the Russian Equity and obtain a Share Extract in a timely
manner.
After completion of reregistration of a Russian Equity in respect of which
a Sub-Subcustodian has entered into a Registrar Contract, the Subcustodian
shall instruct the Sub-Subcustodian to monitor such registrar using reasonable
efforts and to promptly notify the Subcustodian upon the Sub-Subcustodian's
obtaining knowledge of the occurrence of any of the following events
("Registrar Events"): (i) a Registrar has eliminated a shareholder from the
register or has altered registration records; (ii) a Registrar has refused to
register securities in the name of a particular purchaser and the purchaser or
seller has alleged that the registrar's refusal to so register was unlawful;
(iii) a Registrar holds for its own account shares of an issuer for which it
serves as registrar; (iv) if a Registrar Contract is in effect with a
Registrar, and the Registrar notifies the Sub-Subcustodian that it will no
longer be able materially to comply with the terms of the Registrar Contract;
or the Subcustodian has actual knowledge that a registrar has engaged in
conduct that indicates it will not materially comply with the provisions. or
(v) if the Registrar has materially breached such Contract. The Subcustodian
shall promptly infonn the Fund of the occurrence of a Registrar Event provided
the Subcustodian has actual notice of the Registrar Event.
It shall be the sole responsibility of the Custodian and each Fund to
promptly contact the Subcustodian prior to executing any transaction in a
Russian Equity to determine whether a Registrar Contract exists in respect of
an issuer not included on the list provided to the Fund.
If a Fund instructs the Subcustodian by Proper Instruction to settle a
purchase of a Russian Equity in respect of which the Sub-Subcustodian has not
entered into a Registrar Contract, then the Subcustodian shall instruct the
Sub-Subcustodian to endeavor to settle such transaction in accordance with the
Proper Instruction and with the provisions of Section 2.4 of this Agreement,
notwithstanding the absence of any such Registrar Contract and subject to the
requirement that the Subcustodian provide and promptly update the Registrar
Contract list with the respect to Russian Equities and without the Subcustodian
being required to notify the Fund that no such Registrar Contract is then in
effect, and it being understood that neither the Subcustodian nor the
Sub-Subcustodian shall be required to follow the procedure set forth in the
second preceding paragraph."
3. Section 2.4, Purchases, is amended by the addition of the
following at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of purchases of securities in
Russia. Unless otherwise instructed by Proper Instructions acceptable to the
Subcustodian, the Subcustodian shall
2
<PAGE> 3
only authorize a Sub-Subcustodian to make payment for purchases of Russian
Equities upon receipt of the relevant Share Extract in respect of the Fund's
purchases. With respect to securities other than Russian Equities, settlement
of purchases shall be made in accordance with securities processing or
settlement practices which the Subcustodian in its discretion determines to be
a market practice. Subject to the exercise of reasonable care, the
Subcustodian shall only be responsible for securities purchased upon actual
receipt of such securities at the premises of its Sub-Subcustodian, provided
that the Subcustodian's responsibility for securities represented by Share
Extracts shall be limited to the safekeeping of the relevant Share Extract upon
actual receipt of such Share Extract at the premises of the Sub-Subcustodian."
4. Section 2.5, Exchanges, is amended by inserting after the word
"exchange" in the second line thereof, the following phrase:
", in accordance with the registration procedures described in Section
2.3, of this Agreement,"
5. Section 2.6 Sales of Securities, is amended by the addition of the
following at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of sales of securities in
Russia. Unless otherwise expressly instructed by Proper Instructions
acceptable to the Subcustodian, settlement of sales of securities shall be made
in accordance with securities processing or settlement practices which the
Subcustodian in its discretion determines to be a market practice. Each Fund
hereby expressly acknowledges that such market practice might require delivery
of securities prior to receipt of payment and that the Fund bears the risk of
payment in instances where delivery of securities is made prior to receipt of
payment therefor in accordance with Proper Instructions received by the
Subcustodian or pursuant to the Subcustodian's determination in its discretion
that such delivery is in accordance with market practice. Subject to the
exercise of reasonable care, the Subcustodian shall not be responsible for any
securities delivered from the premises of the Sub-Subcustodian from the time
they leave such premises."
6. Section 2.8, Exercise of Rights; Tender Offers, is replaced in its
entirety with the following:
3
<PAGE> 4
Section 2.8, Exercise of Rights Tender Offers -- Upon timely receipt of
Proper Instructions, to use reasonable efforts to take any action required by
the terms of a rights offer, tender offer, put, call, merger, consolidation,
reorganization or other corporate action affecting securities held on behalf of
a Fund. The Subcustodian shall use reasonable efforts to act on such Proper
Instructions but will not be held liable for any losses or costs incurred as a
result of such actions or as a result of the Subcustodian's inability for
reasons beyond its control to take the actions requested by such Proper
Instructions, provided however, that the Subcustodian or Sub-Subcustodian was
not negligent in performing its duties under this section. The Subcustodian
shall promptly inform the Fund whenever it is unable to take any actions
requested by Proper Instructions."
7. Section 2.9 Stock Dividends, Rights, Etc., is modified by the
addition of the following paragraph at the end of said Section:
"With respect to Russian Equities, to request a Sub-Subcustodian to obtain
a Share Extract with respect to all Russian Equities issued by reason of a
stock dividend, bonus issue or other distibution resulting from a corporate
action not requiring instructions from the shareholder of the security,
provided that the Subcustodian shall not be responsible for its inability to
obtain any such Share Extract or for the failure of a Registrar or any agent
thereof to record the Fund's ownership on the issuer's records, unless such
inability is due to the negligence, fraud, or willful default of the
Subcustodian or Sub-Subcustodian or Agent selected by the Subcustodian or
Sub-Subcustodian"
8. Section 3 Powers and Duties of the Subcustodian with Resi)ect to the
Appointment of Secondary, Sub-Subcustodians, is modified by the insertion of
the following at the end of the first paragraph of Section 3:
"With respect to Russia, each Fund hereby expressly acknowledges that a
Sub- Subcustodian for Russian securities may utilize the services of
Rosvneshtorgbank (also called Vneshtorgbank RF) ("VTB") which, as of the date
of this amendment, meets the requirements of Rule 17f-5 under the Investment
Company Act of 1940. The Custodian and each Fund acknowledge that the rights
of the Sub-Subcustodian against the VTB may consist only of a contractual
claim. Neither the Subcustodian nor the Sub-Subeustodian shall be responsible
or liable to the Custodian or a Fund or its shareholders for the acts or
omissions of the VTB unless any loss results from the negligence, fraud or
willful default of the Subcustodian or Sub-Subcustodian.. In the event of a
loss of securities or cash held on behalf of a Fund through the VTB, the
Subcustodian shall not be responsible to the Custodian, a Fund or its
shareholders unless and to the extent it in fact recovers from the
Sub-Subcustodian."
4
<PAGE> 5
9. Section 6.2 Liability of the Subcustodian with Respect to Use of
Securities Systems and Foreign Depositories, is amended by the insertion of the
following at the end of said Section:
"Notwithstanding anything in this Agreement to the contrary, neither the
Subcustodian nor the Sub-Subcustodian shall be responsible or liable to the
Custodian a Fund or its shareholders for the acts or omissions of a Foreign
Depository in Russia, and in addition, neither the Subcustodian nor a
Sub-Subcustodian shall be responsible or liable to the Custodian, a Fund or its
shareholders for the failure of the Subcustodian or Sub-Subcustodian to assert
rights effectively against any such Foreign Depository unless due to the
negligence, fraud, or willful default of the Subcustodian or Sub-Subcustodian."
10. The first paragraph of Section 6.4, Standard of Care; Liability;
Inderrmification, is replaced in its entirety with the following:
"The Subcustodian shall be held only to the exercise of reasonable care in
carrying out the provisions of this Agreement, provided that the Subcustodian
shall not thereby be required to take any action which is in contravention of
any applicable law, rule or regulation or any order or judgment of any court of
competent jurisdiction. With respect to securities issued by Russian issuers
or settlement in Russia of securities transactions, reasonable care shall mean
reasonable practices under the circumstances as measured by prevailing
custodial practices wnong international financial institutions in Russia, and
negligence as used herein shall mean the failure to exercise reasonable care as
defined in this sentence. The Subcustodian shall in no event be liable for
consequential or indirect losses or from loss of goodwill.
"Notwithstanding the foregoing, the Subcustodian shall have no liability
in respect of any loss, damage or expense suffered by the Custodian a Fund or
any shareholder of a Fund insofar as such loss, damage or expense arises from
investment risk inherent in investing in capital markets or in holding assets
in a particular country or jurisdiction, including without limitation, (i)
political, legal, economic, settlement and custody infrastructure, and currency
and exchange rate risks; (ii) investment and repatriation restrictions; (iii) a
Fund's inability to protect and enforce any local legal rights including rights
of title and beneficial ownership; (iv) corruption and crime in the local
market; (v) unreliable information which emanates from the local market; (vi)
volatility of banking and financial systems and infrastructure; (vii)
bankruptcy and insolvency risks of any and all local banking agents,
counterparties to cash and securities transactions or registrars or transfer
agents; and (vii) risk of issuer insolvency or default.
"It is understood that no Registrar, whether or not any such Registrar has
entered into a contract or other arrangement with a Sub-Subcustodian or Foreign
Depository, is or shall be considered or deemed to be a Foreign Depository or
an agent of the Subcustodian or any Sub-Subcustodian, aud accordingly neither
the Subcustodian nor the Sub-Subcustodian shall be responsible for or liable
to the Custodian, a Fund or to the shareholders of a Fund for the acts or
omissions of any such Registrar unless such acts or
5
<PAGE> 6
omissions result from the negligence, fraud or willful default of the
Subcustodian or Sub-Subcustodian. It is also agreed that each Fund shall
be responsible for preparation and filing of tax returns, reports and other
documents on any activities it undertakes in Russia which are to be filed
with any relevant governmental or other authority and for the payment of
any taxes, levies, duties or similar liability the Fund incurs in respect
of property held or sold in Russia or of payments or distributions received
in respect thereof in Russia. Accordingly, the Custodian and each Fund
hereby agree to indemnify and hold harmless the Subcustodian from any loss,
cost or expense resulting from the imposition or assessment of any such
tax, duty, levy or liability or any expenses related thereto."
11. A new Section 15., Risk Disclosure Acknowledgment, is added at the
end of the present Section 14:
"Each Fund hereby acknowledges that it has received, has read and has
understood the Subcustodian's Risk Disclosure Statement, a copy of which is
attached hereto and is incorporated herein by reference. Each Fund further
acknowledges that the Risk Disclosure Statement is not comprehensive, and
warrants and represents to the Subcustodian that it has undertaken its own
review of the risks associated with investment in Russia and has concluded that
such investment is appropriate for the Fund and in no way conflicts with the
Fund's constitutive documents, investment objective, duties to its shareholders
or with any regulatory requirements applicable to the Fund."
12. A new Section 16., Registrar System Reports, is added at the end of the new
section 15:
"Credit Suisse (Moscow) Ltd., a Sub-Subcustodian will prepare for
distribution to the Board of Directors a quarterly report identifying any
concerns Credit Suisse (Moscow) Ltd. has regarding the Russian share
registration system that should be brought to the Board of Directors'
attention. This report will include detailed information regarding the steps
Credit Suisse (Moscow) Ltd. has taken during the reporting period to ensure
that the Fund's interests continue to be appropriately recorded. This duty to
report will commence upon Board of Director approval of investment in Russia.
The first quarterly report will be submitted to the Board of Directors after
the first full quarter of the Fund's investment in Russia. Each report will
contain only new information from the date of the last quarterly report."
Except as amended above, all the provisions of the Agreement as heretofore in
effect shall remain in full force and effect.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
FIRSTAR TRUST COMPANY BROWN BROTHERS HARRIMAN &
CO.
/s/ Joe D. Redwine /s/ Stokley P. Towles
- --------------------------- --------------------------
Name: Joe D. Redwine Name: Stokley P. Towles
Title: First Vice President Title: Partner
STRONG FUNDS LISTED IN APPENDIX B
/s/ John S. Weitzer
- ---------------------------
Name: John S. Weitzer
Title: Vice President
7
<PAGE> 8
APPENDIX B
(REVISED AS OF DECEMBER 30,1996)
Strong Total Return Fund, Inc.
Strong Discovery Fund, Inc.
Strong Opportunity Fund, Inc.
Strong Advantage Fund, Inc.
Strong Short-Term Bond Fund, Inc.
Strong Corporate Bond Fund, Inc.
Strong Asset Allocation Fund, Inc.
Strong Common Stock Fund, Inc.
Strong Special Fund II, Inc.
Strong Money Market Fund, Inc.
Strong Variable Insurance Funds, Inc.
Strong Advantage Fund II
Strong Variable Insurance Funds, Inc.
Strong Asset Allocation Fund II
Strong Variable Insurance Funds, Inc.
Strong Discovery Fund II
Strong Variable InsuranceFunds, Inc.
Strong Growth Fund II
Strong Equity Funds, Inc.
Strong Growth Fund
Strong Equity Funds, Inc.
Strong Small Cap Fund
Strong Equity Funds, Inc.
Strong Mid Cap Fund
Strong Conservative Equity Funds, Inc.
Strong American Utilities Fund
Strong Conservative Equity Funds, Inc.
Strong Equity Income Fund
Strong Conservative Equity Funds, Inc.
Strong Growth and Income Fund
Strong Income Funds, Inc.
Strong High-Yield Bond Fund
Strong Institutional Funds, Inc.
Strong Institutional Bond Fund
FIRSTAR TRUST COMPANY BROWN BROTHERS HARRIMAN & CO
By: /s/ Per Pro: /s/
----------------------- ---------------------
Title: Vice President
FUNDS LISTED ABOVE
By: /s/
----------------
Title: Vice President
8
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Strong Corporate Bond Fund, Inc.
We consent to the incorporation by reference in Post-Effective Amendment No. 14
to the Registration Statement of Strong Corporate Bond Fund, Inc. on Form N-1A
of our report dated December 4, 1996 on our audit of the financial statements
and financial highlights of Strong Corporate Bond Fund, Inc., which report is
included in the Annual Report to Shareholders for the year ended October 31,
1996, which is also incorporated by reference in the Registration Statement.
We also consent to the reference to our Firm under the caption "Independent
Accountants" in the Statement of Additional Information.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
February 26, 1997
<PAGE> 1
BASIC PLAN DOCUMENT
UNIVERSAL SIMPLIFIED EMPLOYEE PENSION PLAN
EXHIBIT 14.4
[STRONG FUNDS LOGO]
STRONG FUNDS
1 ESTABLISHMENT AND PURPOSE OF PLAN
1.01 PURPOSE The purpose of this Plan is to provide, in accordance with
its provisions, a Simplified Employee Pension Plan providing benefits
upon retirement for the individuals who are eligible to participate
hereunder.
1.02 INTENT TO QUALIFY It is the intent of the Employer that this Plan shall
be for the exclusive benefit of its Employees and shall qualify for
approval under Section 408(k) of the Internal Revenue Code, as
amended from time to time (for corresponding provisions of any
subsequent Federal law at that time in effect). In case of any
ambiguity, it shall be interpreted to accomplish such result. It is
further intended, that it comply with the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA) as amended from time to
time.
1.03 WHO MAY ADOPT An employer who has ever maintained a defined benefit
plan which is now terminated may not participate in this prototype
Simplified Employee Pension Plan. If, subsequent to adopting this
Plan, any defined benefit plan of the Employer terminates, the
employer will no longer participate in this prototype plan and will
be considered to have an individually designed plan.
1.04 USE WITH IRA This prototype Simplified Employee Pension Plan must be
used with an Internal Revenue Service model IRA (Form 5305 or Form
5305-A) or an Internal Revenue Service approved master or prototype
IRA.
1.05 FOR MORE INFORMATION To obtain more information concerning the rules
governing this Plan, contact the Prototype Sponsor listed in Section
5 of the Adoption Agreement.
<PAGE> 2
2 DEFINITIONS
2.01 ADOPTION AGREEMENT Means the document executed by the Employer
through which it adopts the Plan and thereby agrees to be bound by
all terms and conditions of the Plan.
2.02 CODE Means the Internal Revenue Code of 1986 as amended.
2.03 COMPENSATION Compensation for the purposes of the $300 limit of
Section 408(k)(2)(C) of the Code shall be defined as Section 414(q)(7)
Compensation.
For all other purposes, Compensation shall mean all of a Participant's
wages as defined in Section 3401(a) of the Code for the purposes of
income tax withholding at the source (that is, W-2 wages) but
determined without regard to any rules that limit the remuneration
included in wages based on the nature or location of the employment or
the services performed (such as the exception for agricultural labor
in Section 3401(a)(2) of the Code).
For any Self-Employed Individual covered under the Plan, Compensation
will mean Earned Income.
Compensation shall include only that Compensation which is actually
paid to the Participant during the Plan Year.
Compensation shall include any amount which is contributed by the
Employer pursuant to a salary reduction agreement and which is not
includible in the gross income of the Employee under Sections
125,402(a)(8), 402(h) or 403(b) of the Code.
The annual Compensation of each Participant taken into account under
the Plan for any year shall not exceed $200,000. This limitation
shall be adjusted by the Secretary at the same time and in the same
manner as under Section 415(d) of the Code, except the dollar
increase in effect on January 1 of any calendar year is effective for
years beginning in such calendar year and the first adjustment to the
$200,000 limitation is effected on January 1, 1990. If a Plan
determines Compensation on a period of time that contains fewer than
12 calendar months, then the annual Compensation limit is an amount
equal to the annual Compensation limit for the calendar year in which
the compensation period begins multiplied by the ratio obtained by
dividing the number of full months in the period by 12.
In determining the Compensation of a Participant the rules of Section
414(q)(6) of the Code shall apply, except in applying such rules, the
term "family" shall include only the spouse of the Participant and
any lineal descendants of the Participant who have not attained age
19 before the close of the year. If, as a result of the application
of such rules the adjusted $200,000 limitation is exceeded, then
(except for purposes of determining the portion of Compensation up to
the integration level if this Plan provides for permitted disparity),
the limitation shall be prorated among the affected individuals in
proportion to each such individual's Compensation as determined under
this section prior to the application of this limitation.
In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the contrary,
for Plan Years beginning on or after January 1, 1994, the annual
Compensation of each Employee taken into account under the Plan shall
not exceed the OBRA '93 annual Compensation limit. The OBRA '93
annual Compensation limit is $150,000, as adjusted by the
Commissioner for increases in the cost of living in accordance with
Section 401(a)(17)(B) of the Internal Revenue Code. The
cost-of-living adjustment in effect for a calendar year applies to any
period, not exceeding 12 months, over which Compensation is determined
(determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93
annual Compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination
period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference
in this Plan to the limitation under Section 401(a)(17) of the Code
shall mean the OBRA '93 annual Compensation limit set forth in this
provision.
<PAGE> 3
2.04 EARNED INCOME Means the net earnings from self-employment in
the trade or business with respect to which the Plan is
established, for which personal services of the individual
are a material income-producing factor. Net earnings will be
determined without regard to items not included in gross
income and the deductions allocable to such items. Net
earnings are reduced by contributions by the Employer to
a qualified plan or to a Simplified Employee Pension Plan
to the extent deductible under Section 404 of the Code.
Net earnings shall be determined with regard to the
deduction allowed to the Employer by Section 164(f)
of the Code for taxable years beginning after
December 31, 1989.
2.05 EFFECTIVE DATE Means the date the Plan becomes
effective as indicated in the Adoption Agreement.
2.06 EMPLOYEE Means any person who is a natural person
employed by the Employer as a common law employee
and if the Employer is a sole proprietorship or
partnership, any Self-Employed Individual who performs
services with respect to the trade or business of the
Employer. Further, any employee of any other employer
required to be aggregated under Section 414(b), (c), (m),
or (o) of the Code and any leased employee required to be
treated as an employee of the Employer under Section 414(n)
of the Code shall also be considered an Employee.
2.07 EMPLOYER Means any corporation, partnership or sole
proprietorship named in the Adoption Agreement and any
successor who by merger, consolidation, purchase or
otherwise assumes the obligations of the Plan. A partnership
is considered to be the Employer of each of the partners and
a sole proprietorship is considered to be the Employer of
the sole proprietor.
2.08 EMPLOYER CONTRIBUTION Means the amount contributed
by the Employer to this Plan.
2.09 IRA Means the designated Individual Retirement
Account or Individual Retirement Annuity, which satisfies
the requirements of Section 408 of the Code, and which is
maintained by a Participant with the Prototype Sponsor
(unless the Prototype Sponsor allows Participants to
maintain their IRAs with other organizations).
2.10 PARTICIPANT Means any Employee who has met the
participation requirements of Section 3.01 and who is or
may become eligible to receive an Employer Contribution.
2.11 PLAN Means this plan document plus the corresponding
Adoption Agreement as completed and signed by the Employer.
2.12 PLAN YEAR Means the calendar year or the 12 consecutive month
period which coincides with the Employer's taxable year.
2.13 PRIOR PLAN Means a plan which was amended or replaced by
adoption of this plan document, as indicated in the Adoption
Agreement.
2.14 PROTOTYPE SPONSOR Means the entity specified in the
Adoption Agreement which sponsors this prototype Plan.
2.15 SELF-EMPLOYED INDIVIDUAL Means an individual who
has Earned Income for a Plan Year from the trade or business
for which the Plan is established; also, an individual who
would have had Earned Income but for the fact that the trade
or business had no net profits for the Plan Year.
2.16 SERVICE Means the performance of duties by an Employee for
the Employer, for any period of time, however
short, for which the Employee is paid or entitled to payment.
When the Employer maintains the Plan of a predecessor
employer, an Employee's Service will include his or her
service for such predecessor employer.
2.17 TAXABLE WAGE BASE Means the maximum amount of earnings which
may be considered wages for a year under Section 312(a)(1) of
the Code in effect as of the beginning of the Plan Year.
<PAGE> 4
3. ELIGIBILITY AND PARTICIPATION
3.01 ELIGIBILITY REQUIREMENTS Except for those Employees excluded
pursuant to Section 3.02, each Employee of the Employer who fulfills the
eligibility requirements specified in the Adoption Agreement shall, as
a condition for further employment, become a participant. Each
Participant must establish an IRA with the Prototype Sponsor to which
Employer Contributions under this Plan will be made.
3.03 ADMITTANCE AS A PARTICIPANT
A. Prior Plan If this Plan is an amendment or continuation of a Prior
Plan, each Employee of the Employer who immediately before the
Effective Date was a participant in said Prior Plan shall be a
Participant in this Plan as of said date.
B. Notification of Eligibility The Employer shall notify each
Employee who becomes a Participant of his or her status as a
Participant in the Plan and of his or her duty to establish an IRA
with the Prototype Sponsor to which Employer Contributions may be
made.
C. Establishment of an IRA If a Participant fails to establish an
IRA for whatever reason, the Employer may execute any necessary
documents to establish an IRA on behalf of the Participant.
3.02 EXCLUSION OF CERTAIN EMPLOYEES If the Employer has so indicated in the
Adoption Agreement, the following Employees shall not be eligible to
become a participant in the Plan: (a) Those Employees included in a unit
of Employees covered by the terms of a collective bargaining agreement,
provided retirement benefits were the subject of good faith bargaining;
and (b) those Employees who are nonresident aliens, who have received no
earned income from the Employer which constitutes earned income from
sources within the United States.
3.04 DETERMINATIONS UNDER THIS SECTION The Employer shall determine the
eligibility of each Employee to be a Participant. This determination
shall be conclusive and binding upon all persons except as otherwise
provided herein or by law.
3.05 LIMITATION RESPECTING EMPLOYMENT Neither the fact of the establishment
of the Plan nor the fact that a common-law employee has become a
Participant shall give to that common-law employee any right to
continued employment; nor shall either fact limit the right of the
Employer to discharge or to deal otherwise with a common-law employee
without regard to the effect such treatment may have upon the Employee's
rights under the Plan.
<PAGE> 5
4. CONTRIBUTIONS AND ALLOCATIONS
4.01 EMPLOYER CONTRIBUTIONS
A. Allocation Formula Employer Contributions shall be allocated in
accordance with the allocation formula selected in the Adoption
Agreement. Each Employee who has satisfied the eligibility
requirements pursuant to Section 3.01 (thereby becoming a
Participant) will share in such allocation.
If the Employer has selected the pro rata allocation formula in
the Adoption Agreement, then Employer Contributions for each
Plan Year shall be allocated to the IRA of each Participant in the
same proportion as such Participant's Compensation (not in excess
of $200,000, indexed for cost of living increases in accordance
with Section 408(k)(8) of the Code) for the Plan Year bears to the
total Compensation of all Participants for such year.
Employer Contributions made for a Plan Year on behalf of any
Participant shall not exceed the lesser of 15% of Compensation or
the limitation in effect under Code Section 415(c)(1)(A)(indexed
for cost of living increases in accordance with Code Section
415(d)).
B. Integrated Allocation Formula If the Employer has selected the
integrated allocation formula in the Adoption Agreement, then
Employer Contributions for the Plan Year will be allocated to
Participants' IRA as follows:
Step 1 Employer Contributions will be allocated to each
Participant's IRA in the ratio that each Participant's
total Compensation bears to all Participants' total
Compensation, but not in excess of 3% of each
Participant's Compensation.
Step 2 Any Employer Contributions remaining after the allocation
in Step 1 will be allocated to each Participant's IRA
in the ratio that each Participant's Compensation for the
Plan Year in excess of the integration level bears to the
Compensation of all Participants' in excess of the
integration level, but not in excess of 3%.
Step 3 Any Employer Contributions remaining after the allocation
in Step 2 will be allocated to each Participant's IRA
in the ratio that the sum of each Participant's total
Compensation and Compensation in excess of the integration
level bears to the sum of all Participants' total
Compensation and Compensation in excess of the integration
level, but not in excess of the maximum disparity rate
described in the following table.
Step 4 Any Employer Contributions remaining after the allocation
in Step 3 will be allocated to each Participant's IRA
in the ratio that each Participant's total Compensation
for the Plan Year bears to all Participants' total
Compensation for that Plan Year.
The integration level shall be equal to the Taxable Wage
Base or such lesser amount elected by the Employer in the
Adoption Agreement.
<TABLE>
<CAPTION>
Integration Level Maximum Disparity Rate
- --------------------------------------------------------------------------------
<S> <C>
Taxable Wage Base (TWB) 2.7%
More than $0 but not more than X* 2.7%
More than X* of TWB but not more than 80% of TWB 1.3%
More than 80% of TWB but not more than TWB 2.4%
</TABLE>
*X means the greater of $10,000 or 20% of TWB.
C. Timing of Employer Contribution Employer Contributions, if any,
made on behalf of Participants for a Plan Year shall be
allocated and deposited to the IRA of each Participant no later
than the due date for filing the Employer's tax return (including
extensions).
4.02 DEDUCTIBILITY OF CONTRIBUTIONS Contributions to the Plan are
deductible by the Employer for the taxable year with or within
which the Plan Year of the Plan ends. Contributions made for a
particular taxable year and contributed by the due date of the
Employer's income tax return, including extensions, are deemed made in
that taxable year.
4.03 VESTING, WITHDRAWAL RIGHTS TO CONTRIBUTIONS All Employer Contributions
made under the Plan on behalf of Employees shall be fully
vested and nonforfeitable at all times. Each Employee shall have an
unrestricted right to withdraw at any time all or a portion of the
Employer Contributions made on his or her behalf. However,
withdrawals taken are subject to the same taxation and penalty
provisions of the Code which are applicable to IRA distributions.
4.04 SIMPLIFIED EMPLOYER REPORTS The Employer shall furnish reports,
relating to contributions made under the Plan, in the time and
manner and containing the information prescribed by the Secretary of
the Treasury, to Participants. Such reports shall be furnished at
least annually and shall disclose the amount of the contribution made
under the Plan to the Participant's IRA.
<PAGE> 6
5 AMENDMENT OR TERMINATION OF PLAN
5.01 AMENDMENT BY EMPLOYER The Employer reserves the right to amend
the elections made or not made on the Adoption Agreement by
executing a new Adoption Agreement and delivering a copy of the
same to the Prototype Sponsor. The Employer shall not have the
right to amend any nonelective provision of the Adoption Agreement
nor the right to amend provisions of this plan document. If the
Employer adopts an amendment to the Adoption Agreement or plan
document in violation of the preceding sentence, the Plan will be
deemed to be an individually designed plan and may no longer
participate in this prototype Plan.
5.02 AMENDMENT BY PROTOTYPE SPONSOR By adopting this Plan, the
Employer delegates to the Prototype Sponsor the power to amend or
replace the Adoption Agreement of the Plan to conform them to the
provisions of any law, regulations or administrative rulings
pertaining to Simplified Employee Pensions and to make such other
changes to the Plan, which, in the judgement of the Prototype
Sponsor, are necessary or appropriate. The Employer shall be
deemed to have consented to all such amendments, provided however,
that no changes may be made without the consent of the Employer if
the effect would be to substantially change the costs or benefits
under the Plan. The Prototype Sponsor shall not have the
obligation to exercise or not to exercise the power delegated to
it nor shall the Prototype Sponsor incur liability of any nature
for any act done or failed to be done by the Prototype Sponsor in
good faith in the exercise or nonexercise of the power delegated
hereunder. The Prototype Sponsor shall notify the Employer should
it discontinue sponsorship of the Plan.
5.03 LIMITATIONS ON POWER TO AMEND No amendment by either the Employer
or the Prototype Sponsor shall reduce or otherwise adversely
affect any benefits of a Participant or Beneficiary acquired
prior to such amendment unless it is required to maintain
compliance with any law, regulation or administrative ruling
pertaining to Simplified Employee Pensions.
5.04 TERMINATION While the Employer expects to continue the Plan
indefinitely, the Employer shall not be under any obligation or
liability to continue contributions or to maintain the Plan for
any given length of time. The Employer may terminate this Plan at
any time by appropriate action of its managing body. This Plan
shall terminate on the occurrence of any of the following events:
A. Delivery to the Prototype Sponsor of a notice of termination
executed by the Employer specifying the effective date of the
Plan's termination.
B. Adjudication of the Employer as bankrupt or the liquidation or
dissolution of the Employer.
5.05 NOTICE OF AMENDMENT, TERMINATION Any amendment or termination
shall be communicated by the Employer to all appropriate parties
as required by law. Amendments made by the Prototype Sponsor shall
be furnished to the Employer and communicated by the Employer to
all appropriate parties as required by law. Any filings required
by the Internal Revenue Service or any other regulatory body
relating to the amendment or termination of the Plan shall be
made by the Employer.
5.06 CONTINUANCE OF PLAN BY SUCCESSOR EMPLOYER A successor of the
Employer may continue the Plan and be substituted in the place of
the present Employer. The successor and present Employer (or if
deceased, the executor of the estate of a deceased Self-Employed
Individual who was the Employer) must execute a written instrument
authorizing such substitution and the successor must complete and
sign a new Adoption Agreement.
<PAGE> 7
6 SALARY DEFERRAL SEP PROVISIONS
In addition to Sections 1 through 5, the provisions of this
Section 6 shall apply if the Employer is an Eligible Employer and
has adopted a salary deferral Simplified Employee Pension Plan by
indicating in the Adoption Agreement that Retirement Savings
Contributions are permitted.
If the Employer has so indicated in the Adoption Agreement, the
Employer agrees to permit Retirement Savings Contributions to be
made which will be contributed by the Employer to the IRA
established by or on behalf of each Contributing Participant. This
arrangement is intended to qualify as a salary reduction
simplified employee pension ("SARSEP") under Section 480(k)(6) of
the Code and the regulations thereunder.
The SARSEP portion of this Plan shall be effective upon adoption.
No Retirement Savings Contributions may be based on Compensation
an Employee could have received before adoption of the SARSEP and
execution by the Employee of a Retirement Savings Agreement.
6.100 DEFINITIONS
6.101 COMPENSATION Means Compensation as defined in Section 2.03 of
the Plan and shall include any amount which is contributed by the
Employer as a Retirement Savings Contribution pursuant to a
Retirement Savings Agreement which is not includible in the gross
income of the Employee under Section 402(h) of the Code.
6.102 CONTRIBUTING PARTICIPANT Means a person who has met the
participation requirements and who has enrolled as a Contributing
Participant pursuant to Section 6.201 and on whose behalf the
Employer is contributing Retirement Savings Contributions.
6.103 ELIGIBLE EMPLOYER Means an Employer which: (a) has no more than
25 Employees who are eligible to participate in the Plan (or would
have been eligible to participate if this Plan had been
maintained) at any time during the preceding Plan Year; (b) has no
leased employees within the meaning of Section 414(n)(2) of the
Code; (c) is not a state or local government or political
subdivision thereof, or any agency or instrumentality thereof, or
an organization exempt from tax under Subtitle A of the Code; and
(d) does not currently maintain or has not maintained a defined
benefit plan, even if now terminated.
6.104 ENROLLMENT DATE Means the first day of any Plan Year, the first
day of the seventh month of any Plan Year and any more frequent
dates as the Employer may designate in a uniform and
nondiscriminatory manner.
6.105 EXCESS CONTRIBUTION Means the amount of each Highly Compensated
Employee's Retirement Savings Contributions that exceeds the
actual deferral percentage test limits described in Section
6.303(B) of the Plan for a Plan Year.
6.106 HIGHLY COMPENSATED EMPLOYEE Means a Participant described in
Section 414(q) of the Code who during the current or preceding
year; (a) was a 5% owner of the Employer as defined in Section
416(i)(1)(B)(i) of the Code; (b) received Compensation in excess
of $50,000, as adjusted pursuant to Section 415(d), and was in the
top-paid group (the top 20% of Employees, by Compensation); (c)
received Compensation in excess of $75,000, as adjusted pursuant
to section 415(d); or (d) was an officer and received Compensation
in excess of 50% of the dollar limit under Section 415 of the Code
for defined benefit plans.
6.107 KEY EMPLOYEE Means any Employee or former Employee or
beneficiaries of these Employees who at any time during the Plan
Year or the four preceding Plan Years is or was: (a) an officer of
the Employer (if the Employee's annual Compensation exceeds 50% of
the dollar limitation under Section 415(b)(1)(A) of the Code); (b)
an owner of one of the 10 largest interests in the Employer (if
the Employee's annual Compensation exceeds 100% of the dollar
limitation under Section 415(c)(1)(A) of the Code); (c) a 5% owner
of the Employer as defined in Section 416(i)(1)(B)(i) of the Code;
or (d) a 1% owner of Employer (if the Employee has annual
Compensation in excess of $150,000).
6.108 RETIREMENT SAVINGS AGREEMENT Means an agreement, on a form
provided by the Employer pursuant to which a Contributing
Participant may elect to have his or her Compensation reduced and
paid as a Retirement Savings Contribution to his or her IRA by the
Employer.
6.109 RETIREMENT SAVINGS CONTRIBUTIONS Means contributions made by the
Employer on behalf of the Contributing Participant pursuant to
Section 6.301. Retirement Savings Contributions shall be deemed to
be Employer Contributions for purposes of (a) the contribution
limits described in Section 4.01(A) of the Plan; (b) the vesting
and withdrawal rights described in Section 4.03 of the Plan; and
(c) determining whether this Plan is a Top-Heavy Plan.
6.110 TOP-HEAVY PLAN This Plan is a Top-Heavy Plan for any Plan Year
if, as of the last day of the previous Plan Year (or current Plan
Year if this is the first year of the Plan) the total of the
Employer Contributions made on behalf of Key Employees for all the
years this Plan has been in existence exceeds 60% of such
contributions for all Employees. If the Employer maintains (or
maintained within the prior five years) any other SEP or defined
contribution plan in which a Key Employee participates (or
participated), the contributions or account balances, whichever is
applicable, must be aggregated with the contributions made to the
Plan. The contributions (and account balances, if applicable) of
an Employee who ceases to be a Key Employee or of an individual
who has not been in the employ of the Employer for the previous
five years shall be disregarded. The identification of Key
Employees and the top-heavy calculation shall be determined in
accordance with Section 416 of the Code and the regulations
thereunder.
<PAGE> 8
6.200 CONTRIBUTING PARTICIPANT
6.201 REQUIREMENTS TO ENROLL AS A CONTRIBUTING PARTICIPANT
A. Enrollment Each Employee who becomes a Participant may enroll
as a Contributing Participant. A Participant shall be eligible
to enroll as a Contributing Participant on any Enrollment
Date.
B. Initial Enrollment Notwithstanding the time set forth in
Section 6.201(A) as of which a Participant may enroll as a
Contributing Participant, the Employer shall have the
authority to designate, in a uniform and nondiscriminatory
manner, additional Enrollment Dates during the twelve month
period beginning on the Effective Date in order that an
orderly first enrollment might be completed.
6.202 MODIFICATION OF RETIREMENT SAVINGS AGREEMENT A Contributing
Participant may modify his or her Retirement Savings Agreement to
increase or decrease (within the limits placed on Retirement
Savings Contributions in the Adoption Agreement) the amount of his
or her Compensation deferred into his or her IRA under the Plan.
Such modification may only be prospectively made effective as of
an Enrollment Date, or as of any other more frequent date(s) if
the Employer so permits in a uniform and nondiscriminatory manner.
A Contributing Participant who desires to make such a modification
shall complete, sign and file a new Retirement Savings Agreement
with the Employer at least 30 days (or such lesser period of days
as the Employer shall permit in a uniform and nondiscriminatory
manner) before the modification is to become effective.
6.203 WITHDRAWAL AS A CONTRIBUTING PARTICIPANT A Participant may
withdraw as a Contributing Participant as of the last date
preceding any Enrollment Date (or as of any other date if the
Employer so permits in a uniform and nondiscriminatory manner) by
revoking his or her authorization to the Employer to make
Retirement Savings Contributions on his or her behalf. A
Participant who desires to withdraw as a Contributing Participant
shall give written notice of withdrawal to the Employer at least
30 days (or such lesser period of days as the Employer shall
permit in a uniform and nondiscriminatory manner) before the
effective date of withdrawal. A Participant shall cease to be a
Contributing Participant upon his or her termination of
employment, or on account of termination of the Plan.
6.204 RETURN AS CONTRIBUTING PARTICIPANT AFTER WITHDRAWAL A Participant
who has withdrawn as a Contributing Participant under Section
6.203 may not again become a Contributing Participant until the
first day of the first Plan Year following the effective date of
his or her withdrawal as Contributing Participant.
6.300 RETIREMENT SAVINGS CONTRIBUTIONS
6.301 SALARY DEFERRAL ARRANGEMENT The Employer shall contribute
Retirement Savings Contributions on behalf of all Contributing
Participants for each Plan Year that the following requirements
are satisfied:
A. The Employer is an Eligible Employer; and
B. Not less than 50% of the Employees eligible to participate
elect to have Retirement Savings Contributions contributed to
the Plan on their behalf.
Subject to the limits described in Section 6.303, the amount of
Retirement Savings Contributions so contributed shall be the
amount required by the Retirement Savings Agreements of
Contributing Participants.
No Retirement Savings Contribution may be based on Compensation a
Participant received, or had a right to receive, before execution
of a Retirement Savings Agreement by the Participant.
6.302 FAILURE TO SATISFY 50% PARTICIPATION REQUIREMENT If the 50%
participation requirement described in Section 6.301(B) is not
satisfied as of the end of any Plan Year, all the Retirement
Savings Contributions made by Employees for the Plan Year shall be
considered "Disallowed Deferrals," i.e., IRA contributions that
are not SEP-IRA contributions. The Employer shall notify each
affected Employee, within 2-1/2 months after the end of the Plan
Year to which the Disallowed Deferrals relate, that the deferrals
are no longer considered SEP-IRA contributions. Such notification
shall specify the amount of the Disallowed Deferrals and the
calendar year of the Employee in which they are includible in
income and must provide an explanation of applicable penalties if
the Disallowed Deferrals are not withdrawn in a timely fashion.
The notice to each affected Employee must state specifically; (a)
the amount of the Disallowed Deferrals; (b) that the Disallowed
Deferrals are includible in the Employee's gross income for the
calendar year or years in which the amounts deferred would have
been received by the Employee in cash had he or she not made an
election to defer and that the income allocable to such Disallowed
Deferrals is includible in the year withdrawn from the IRA; and
(c) that the Employee must withdraw the Disallowed Deferrals (and
allocable income) from the SEP-IRA by April 15 following the
calendar year of notification by the Employer. Those Disallowed
Deferrals not withdrawn by April 15 following the year of
notification will be subject to the IRA contribution limitations
of Sections 219 and 408 of the Code and thus may be considered an
excess contribution to the Employee's IRA. Disallowed Deferrals
may be subject to the 6% tax on excess contributions under Section
4973 of the Code. If income allocable to a Disallowed Deferral is
not withdrawn by April 15 following the year of notification by
the Employer, the income may be subject to the 10% tax on early
distributions under Section 72(t) of the Code when withdrawn.
Disallowed Deferrals are reported in the same manner as are Excess
Contributions.
<PAGE> 9
6.303 LIMITS ON RETIREMENT SAVINGS CONTRIBUTIONS
A. Maximum Amount No Contributing Participant shall be permitted
to have Retirement Savings Contributions made under this Plan
during any calendar year in excess of $7,000 (as indexed
pursuant to Code Section 402(g)(5)). The $7,000 (indexed)
limit applies to the total elective deferrals the Contributing
Participant makes for the calendar year under this Plan and
under any cash or deferred arrangement described in Section
401(k) of the Code and any salary reduction arrangement
described in Section 403(b) of the Code. The limit may be
increased to $9,500 if the Contributing Participant makes
elective deferrals to a salary reduction arrangement under
Section 403(b) of the Code.
Under no circumstances may an Employee's Retirement Savings
Contributions in any calendar year exceed the lesser of: (1)
the limitation under Section 402(g) of the Code based on all
of the plans of the Employer; or (2) 15% of his or her
Compensation (less any amount contributed by the Employer as a
Retirement Savings Contribution). Compute the amount of this
15% limit by using the following formula:
Compensation (before subtracting Retirement Savings
Contributions) X 13.0435%.
If an Employer maintains any other SEP plan to which
non-elective SEP Employer Contributions are made for a Plan
Year, or any qualified plan to which contributions are made
for such Plan Year, then an Employee's Retirement Savings
Contribution may be limited to the extent necessary to satisfy
the maximum contribution limitation under Section 415(c)(1)(A)
of the Code.
In addition to the dollar limitation of Section 415(c)(1)(A),
which is $30,000 in 1991, Employer Contributions to this Plan,
when aggregated with contributions to all other SEP plans and
qualified plans of the Employer, generally may not exceed 15%
of Compensation (less any amount contributed by the Employer
as a Retirement Savings Contribution) for any Employee. If
these limits are exceeded on behalf of any Employee for a
particular Plan Year, that Employee's Retirement Savings
Contributions for that year must be reduced to the extent of
the excess.
B. Actual Deferred Percentage (ADP) Test Limits Retirement
Savings Contributions by a Highly Compensated Employee must
satisfy the actual deferral percentage (hereinafter "ADP")
limitation under Section 408(k)(6) of the Code. Amounts in
excess of the ADP limitation will be deemed Excess
Contributions on behalf of the affected Highly Compensated
Employee or Employees. The ADP of any Highly Compensated
Employee who is eligible to be a Contributing Participant
shall not be more than the product obtained by multiplying the
average of the ADPs of all non-Highly Compensated Employees
who are eligible to be Contributing Participants by 1.25. For
purposes of this Section 6.303, an Employee's ADP is the ratio
(expressed as a percentage) of his or her Retirement Savings
Contributions for the Plan Year to his or her Compensation for
the Plan Year. The ADP of an Employee who is eligible to be a
Contributing Participant, but who does not make Retirement
Savings Contributions during the Plan Year is zero. The
determination of the ADP for any Employee is to be made in
accordance with Section 408(k)(6) of the Code and should
satisfy such other requirements as may be provided by the
Secretary of the Treasury.
C. Special Rule for Family Members For purposes of determining
the ADP of a Highly Compensated Employee, the Retirement
Savings Contributions and Compensation of the Employee will
also include the Retirement Savings Contribution and
Compensation of any family member. This special rule applies
only if the Highly Compensated Employee is in one of the
following groups: (a) a more than 5% owner of the Employer; or
(b) one of a group of the 10 most Highly Compensated
Employees.
The Retirement Savings Contributions and Compensation of
family members used in this special rule do not count in
computing the average of the ADPs of non-Highly Compensated
Employees.
For purposes of this special rule, a family member is an
individual who is related to a Highly Compensated Employee as
a spouse, or as a lineal ascendent or descendent or the
spouses of such lineal ascendents or descendents in accordance
with Section 414(q) of the Code and the regulations
thereunder.
6.304 DISTRIBUTION OF EXCESS RETIREMENT SAVINGS CONTRIBUTIONS To the
extent that a Contributing Participant's Retirement Savings
Contributions for a calendar year exceed the limit described in
Section 6.303(A) (i.e., the $7,000 (indexed) limit), the
Contributing Participant must withdraw the excess Retirement
Savings Contributions (and any income allocable to such amount) by
April 15 following the year of the deferral.
6.305 DISTRIBUTION OF EXCESS CONTRIBUTIONS The Employer shall notify
each Employee, no later than 2-1/2 months following the close of
the Plan Year of the amount, if any, of any Excess Contribution to
that Employee's IRA for such Plan Year. If the Employer does not
so notify Employees by such date, the Employer must pay a tax
equal to 10% of the Excess Contributions for the Plan Year
pursuant to Section 4979 of the Code. If the Employer fails to
notify Employees by the end of the Plan Year following the Plan
Year of the Excess Contributions, the SEP no longer will be
considered to meet the requirements of Section 408(k)(6) of the
Code. This means that the earnings on the SEP are subject to tax
immediately, that no more Retirement Savings Contributions may be
made under the SEP, and
<PAGE> 10
that Retirement Savings Contributions of all Employees with
uncorrected Excess Contributions must be included in their income
in that year. If the SEP no longer meets the requirements of
Section 408(k)(6), then any contribution to an Employee's IRA will
be subject to the IRA contribution limitations of Section 219 and
408 of the Code and thus may be considered an excess contribution
to the Employee's IRA.
The Employer's notification to each affected Employee of the
Excess Contributions must specifically state in a manner
calculated to be understood by the average Plan Participant: (a)
the amount of the Excess Contributions attributable to that
Employee's Retirement Savings Contributions; (b) the Plan Year for
which the Excess Contributions were made; (c) that the Excess
Contributions are includible in the affected Employee's gross
income for the calendar year in which such Excess Contributions
were made; and (d) that the Employee must withdraw the Excess
Contributions (and allocable income) from the IRA by April 15
following the year of notification by the Employer. Those Excess
Contributions not withdrawn by April 15 following the year of
notification will be subject to the IRA contribution limitations
of Sections 219 and 408 of the Code for the preceding calendar
year and thus may be considered an excess contribution to the
Employee's IRA. Such excess contributions may be subject to the 6%
tax on excess contributions under Section 4973 of the Code. If
income allocable to an Excess Contribution is not withdrawn by
April 15 following the year of notification by the Employer, the
income may be subject to the 10% tax on early distributions under
Section 72(t) of the Code when withdrawn. However, if the Excess
Contributions (not including allocable income) total less than
$100, then the Excess Contributions are includible in the
Employee's gross income in the year of notification. Income
allocable to the Excess Contributions is includible in the year of
withdrawal from the IRA.
6.306 DETERMINATION OF INCOME For purposes of Sections 6.302, 6.304 and
6.305, the income allocable to Disallowed Deferrals, excess
Retirement Savings Contributions or Excess Contributions for a
year shall be determined by multiplying the income earned on the
IRA for the period which begins on the first day of such year and
ends on the date of distribution from the IRA by a fraction, the
numerator of which is the Disallowed Deferral, excess Retirement
Savings Contribution or Excess Contribution for such year and the
denominator of which is the sum of the account balance of the IRA
as of the beginning of such year and the total contributions made
to the IRA for such year.
6.307 RESTRICTION ON TRANSFERS AND WITHDRAWALS The Employer shall
notify each Contributing Participant that, until the earlier of
2-1/2 months after the end of a particular Plan Year or the date
the Employer notifies its employees that the actual deferral
percentage limitations have been calculated, any transfer or
distribution from the Contributing Participant's IRA of Retirement
Savings Contributions (or income on these contributions)
attributable to Retirement Savings Contributions made during that
Plan Year will be includible in income for purposes of Sections
72(t) and 408(d)(1) of the Code.
6.308 ALLOCATION OF RETIREMENT SAVINGS CONTRIBUTIONS Retirement Savings
Contributions made on behalf of Contributing Participants for a
Plan Year shall be allocated and deposited to the IRA of each
Contributing Participant by the Employer as soon as is
administratively feasible.
6.400 SPECIAL RULES FOR TOP-HEAVY PLANS
6.401 MINIMUM ALLOCATION The following mandatory minimum allocation
applies when this Plan is a Top-Heavy Plan:
Unless another plan of the Employer is designated in the space
below to satisfy the top-heavy requirements of Section 416 of the
Code, each year this Plan is a Top-Heavy Plan, the Employer will
make a minimum contribution to the IRA of each Participant who is
not a Key Employee, which, in combination with other non-elective
contributions, if any, is equal to the lesser of 3% of such
Participant's Compensation or a percentage of Compensation equal
to the percentage of Compensation at which elective and non-
elective contributions are made under the Plan for the Plan Year
for the Key Employee for whom such percentage is the largest.
The top-heavy minimum will be met in the following plan:
________________________________________________________________
_________________________________________________________________
_________________________________________________________________
(If applicable, name the plan other than this Plan in which the
minimum top-heavy contribution will be made).
6.402 RETIREMENT SAVINGS CONTRIBUTIONS CANNOT BE USED FOR MINIMUM
ALLOCATION For purposes of satisfying the minimum allocation
requirement of Section 416 of the Code, Retirement Savings
Contributions contributed for the benefit of Employees who are not
Key Employees may not be used to satisfy the minimum allocation
requirement.
<PAGE> 1
Strong Corporate Bond Fund, Inc.
EXHIBIT 16
----------
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. CURRENT ANNUALIZED YIELD: 30 days ended October 31, 1996
A. Formula
a-b 6
YIELD = 2[(----------+1) -1]
cd
Where: a = dividends and interest earned during
the period.
b = expenses accrued for the period
(net of reimbursements).
c = the average daily number of shares
outstanding during the period.
d = the maximum offering price per share
on the last day of the period.
B. Calculation
1,998,480.80 - 271,721.43 6
YIELD = 2[(-------------------------+1) -1]
27,814,744.542 x 10.64
YIELD = 7.10%
II. AVERAGE ANNUAL TOTAL RETURN
A. Formula
n n ____
P(1 + T) = ERV or T = \ /ERV/P - 1
Where: P = a hypothetical initial payment of $10,000
T = average annual total return
n = number of years
EVR = ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the
stated periods at the end of the stated periods.
<PAGE> 2
B. Calculation
n _____
T = \ /ERV/P-1
1. One-year period 10-31-95 through 10-31-96
1 _______________
7.98% = \ /10,798/10,000-1
2. Five-year period 10-31-91 through 10-31-96
5 _______________
11.11% = \ /16,935/10,000-1
3. Ten-year period 10-31-86 through 10-31-96
10 _____________
7.70% = \ /21,006/10,000-1
4. Since inception 12-12-85 through 10-31-96
10.885_______________
9.87% = \ / 27,858/10,000-1
III. TOTAL RETURN
A. Formula
EV-IV
_____
IV = TR
Where: EV = Value at the end of the periods, including
reinvestment of all dividends and capital gains
distributions
IV = Initial value of a hypothetical investment at
the net asset value
TR = Total Return
B. Calculation
EV-IV
_____
IV = TR
One-year period ended October 31, 1996
10,798-10,000
_____________
10,000 = 7.98%
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 308,950
<INVESTMENTS-AT-VALUE> 314,862
<RECEIVABLES> 7,615
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 322,477
<PAYABLE-FOR-SECURITIES> 22,506
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,363
<TOTAL-LIABILITIES> 24,869
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 336,367
<SHARES-COMMON-STOCK> 27,967
<SHARES-COMMON-PRIOR> 20,656
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (44,501)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,742
<NET-ASSETS> 297,608
<DIVIDEND-INCOME> 312
<INTEREST-INCOME> 21,352
<OTHER-INCOME> 0
<EXPENSES-NET> (2,709)
<NET-INVESTMENT-INCOME> 18,955
<REALIZED-GAINS-CURRENT> (78)
<APPREC-INCREASE-CURRENT> 1,078
<NET-CHANGE-FROM-OPS> 19,955
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18,955)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,680
<NUMBER-OF-SHARES-REDEEMED> (16,839)
<SHARES-REINVESTED> 1,470
<NET-CHANGE-IN-ASSETS> 79,547
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (44,423)
<OVERDISTRIB-NII-PRIOR> (421)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,702
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,709
<AVERAGE-NET-ASSETS> 272,519
<PER-SHARE-NAV-BEGIN> 10.56
<PER-SHARE-NII> .73
<PER-SHARE-GAIN-APPREC> .08
<PER-SHARE-DIVIDEND> .73
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.64
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE> 1
STRONG CORPORATE BOND FUND, INC.
(Registrant)
POWER OF ATTORNEY
Each person whose signature appears below, constitutes and appoints
John Dragisic, Thomas P. Lemke, Lawrence A. Totsky, Stephen J. Shenkenberg and
John S. Weitzer, and each of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign this Registration
Statement on Form N-1A, and any and all amendments thereto, and to file the
same, with all exhibits, and any other documents in connection therewith, with
the Securities and Exchange Commission and any other regulatory body granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to
all intents and purposes, as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
NAME TITLE DATE
----- ------ ----
President of the Board (Principal
Officer and acting Principal
/s/ John Dragisic Financial Accounting Officer)
- ---------------------- and a Director February 25, 1997
John Dragisic
/s/ Richard S. Strong Chairman of the Board and a
- ---------------------- Director
Richard S. Strong February 25, 1997
/s/ Marvin E. Nevins
- ---------------------- Director
Marvin E. Nevins February 25, 1997
/s/ Willie D. Davis
- ----------------------
Willie D. Davis Director February 25, 1997
/s/ William F. Vogt
- ---------------------- Director February 25, 1997
William F. Vogt
/s/ Stanley Krizik Director February 25, 1997
- ----------------------
Stanley Krizik
<PAGE> 1
EXHIBIT 99.B20
[GODFREY & KAHN, S.C. LETTERHEAD]
February 25, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Strong Corporate Bond Fund, Inc.
Gentlemen:
We represent Strong Corporate Bond Fund, Inc. (the "Company"),
in connection with its filing of Post-Effective Amendment No. 14 (the
"Post-Effective Amendment") to the Company's Registration Statement
(Registration Nos. 2-99820; 811-4390) on Form N-1A under the Securities Act of
1933 (the "Securities Act") and the Investment Company Act of 1940. The
Post-Effective Amendment is being filed pursuant to Rule 485(b) under the
Securities Act.
We have reviewed the Post-Effective Amendment and, in accordance with Rule
485(b)(4) under the Securities Act, hereby represent that the Post-Effective
Amendment does not contain disclosures which would render it ineligible to
become effective pursuant to Rule 485(b).
Very truly yours,
GODFREY & KAHN, S.C.
/s/ Scott A. Moehrke
Scott A. Moehrke
<PAGE> 1
EXHIBIT 99.B21.1
CODE OF ETHICS
FOR ACCESS PERSONS OF
THE STRONG FAMILY OF MUTUAL FUNDS,
STRONG CAPITAL MANAGEMENT, INC.,
AND STRONG FUNDS DISTRIBUTORS, INC.
[STRONG FUNDS LOGO]
STRONG CAPITAL MANAGEMENT, INC.
October 18, 1996
<PAGE> 2
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
Table of Contents
I. INTRODUCTION ..............................................................1
A. Fiduciary Duty ............................................................1
1. Place the interests of Advisory Clients first .............................1
2. Avoid taking inappropriate advantage of their position ....................1
3. Conduct all Personal Securities Transactions in full compliance with
this Code including both the preclearance and reporting requirements ......1
B. Appendices to the Code ....................................................2
1. Definitions ...............................................................2
2. Contact Persons ...........................................................2
3. Disclosure of Personal Holdings in Securities .............................2
4. Acknowledgment of Receipt of Code of Ethics and Limited Power of Attorney..2
5. Preclearance Request for Access Persons ...................................2
6. Annual Code of Ethics Questionnaire .......................................2
7. List of Broad-Based Indices ...............................................2
8. Form Letter to Broker or Bank .............................................2
9. Gift Policy ...............................................................2
C. Application of the Code to Independent Fund Directors .....................2
D. Application of the Code to Funds Subadvised by SCM ........................2
II. PERSONAL SECURITIES TRANSACTIONS ..........................................2
A. Annual Disclosure of Personal Holdings by Access Persons ..................2
B. Preclearance Requirements for Access Persons ..............................3
1. General Requirement .......................................................3
2. Transactions Exempt from Preclearance Requirements ........................3
a. Mutual Funds ..............................................................3
b. No Knowledge ..............................................................3
c. Certain Corporate Actions .................................................3
d. Rights ....................................................................3
e. Miscellaneous .............................................................3
3. Application to Commodities, Futures, Options on Futures and Options
on Broad-Based Indices ....................................................4
C. Preclearance Requests .....................................................4
1. Trade Authorization Request Forms .........................................4
2. Review of Form ............................................................4
3. Access Person Designees ...................................................4
D. Prohibited Transactions ...................................................5
1. Prohibited Securities Transactions ........................................5
i
<PAGE> 3
a. Initial Public Offerings ..................................................5
b. Pending Buy or Sell Orders ................................................5
c. Seven Day Blackout ........................................................5
d. Intention to Buy or Sell for Advisory Client ..............................5
e. 60-Day Blackout ...........................................................6
2. Always Prohibited Securities Transactions .................................6
a. Inside Information ........................................................6
b. Market Manipulation .......................................................6
c. Large Positions in Non-Strong Funds .......................................6
d. Others ....................................................................6
3. Private Placements ........................................................6
4. No Explanation Required for Refusals ......................................6
E. Execution of Personal Securities Transactions .............................7
F. Length of Trade Authorization Approval ....................................7
G. Trade Reporting Requirements ..............................................7
1. Reporting Requirement .....................................................7
2. Disclaimers ...............................................................8
3. Quarterly Review ..........................................................8
4. Availability of Reports ...................................................8
5. Record Retention ..........................................................8
III. FIDUCIARY DUTIES ........................................................9
A. Confidentiality ...........................................................9
B. Gifts .....................................................................9
1. Accepting Gifts ...........................................................9
2. Solicitation of Gifts .....................................................9
3. Giving Gifts ..............................................................9
C. Payments to Advisory Clients ..............................................9
D. Corporate Opportunities ...................................................9
E. Undue Influence ...........................................................9
F. Service as a Director ....................................................10
G. Involvement in Criminal Matters or Investment-Related Civil Proceedings ..10
IV. COMPLIANCE WITH THIS CODE OF ETHICS .....................................10
A. Code of Ethics Review Committee ..........................................10
1. Membership, Voting, and Quorum ...........................................10
2. Investigating Violations of the Code .....................................10
3. Annual Reports ...........................................................11
B. Remedies .................................................................11
1. Sanctions ................................................................11
2. Sole Authority ...........................................................11
3. Review ...................................................................11
C. Exceptions to the Code ...................................................12
D. Compliance Certification .................................................12
E. Inquiries Regarding the Code .............................................12
ii
<PAGE> 4
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
Table of Appendices
Appendix 1 (Definitions) ....................................................13
Appendix 2 (Contact Persons) ................................................16
Appendix 3 (Disclosure of Personal Holdings in Securities)...................17
Appendix 4 (Acknowledgment of Receipt of Code of Ethics and
Limited Power of Attorney) .................................................18
Appendix 5 (Preclearance Request for Access Persons) ........................19
Appendix 6 (Annual Code of Ethics Questionnaire) ............................20
Appendix 7 (List of Broad-Based Indices) ....................................23
Appendix 8 (Form Letter to Broker or Bank) ..................................24
Appendix 9 (Gift Policy) ....................................................25
iii
<PAGE> 5
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
I. INTRODUCTION
A. Fiduciary Duty. This Code of Ethics is based upon the principle that
directors, officers, and employees of Strong Capital Management, Inc. ("SCM"),
Strong Funds Distributors, Inc. ("the Distributor"), and the Strong Family of
Mutual Funds ("the Strong Funds") have a fiduciary duty to place the interests
of clients ahead of their own. The Code applies to all Access Persons and
focuses principally on preclearance and reporting of personal transactions in
securities. Capitalized words are defined in Appendix 1. Access Persons must
avoid activities, interests, and relationships that might interfere with making
decisions in the best interests of the Advisory Clients of SCM.
As fiduciaries, Access Persons must at all times:
1. Place the interests of Advisory Clients first. Access Persons
must scrupulously avoid serving their own personal interests ahead of the
interests of the Advisory Clients of SCM. An Access Person may not
induce or cause an Advisory Client to take action, or not to take action,
for personal benefit, rather than for the benefit of the Advisory Client.
For example, an Access Person would violate this Code by causing an
Advisory Client to purchase a Security he or she owned for the purpose of
increasing the price of that Security.
2. Avoid taking inappropriate advantage of their position. The
receipt of investment opportunities, perquisites, or gifts from persons
seeking business with the Strong Funds, SCM, the Distributor, or their
clients could call into question the exercise of an Access Person's
independent judgment. Access persons may not, for example, use their
knowledge of portfolio transactions to profit by the market effect of
such transactions.
3. Conduct all Personal Securities Transactions in full compliance
with this Code including both the preclearance and reporting
requirements.
Doubtful situations should be resolved in favor of Advisory Clients.
Technical compliance with the Code's procedures will not automatically insulate
from scrutiny any trades that indicate an abuse of fiduciary duties.
1
<PAGE> 6
B. Appendices to the Code. The appendices to this Code are attached
hereto and are a part of the Code, and include the following:
1. Definitions--capitalized words as defined in the Code--(Appendix
1),
2. Contact Persons, including the Preclearance Officer designees,
and the Code of Ethics Review Committee (Appendix 2),
3. Disclosure of Personal Holdings in Securities (Appendix 3),
4. Acknowledgment of Receipt of Code of Ethics and Limited Power of
Attorney (Appendix 4),
5. Preclearance Request for Access Persons (Appendix 5),
6. Annual Code of Ethics Questionnaire (Appendix 6),
7. List of Broad-Based Indices (Appendix 7),
8. Form Letter to Broker or Bank (Appendix 8), and
9. Gift Policy (Appendix 9).
C. Application of the Code to Independent Fund Directors. This Code
applies to Independent Fund Directors, and requires Independent Fund Directors
and their Immediate Families to report Securities Transactions to the
Compliance Department in accordance with Section II.G. However, provisions of
the Code requiring the disclosure of personal holdings (Section II.A.),
preclearance of trades (Section II.B.), prohibited transactions (II.D.1.),
private placements (Section II.D.3.), restrictions on serving as a director of
a publicly-traded company (Section III.F.), and receipt of gifts (Section
III.B.) do not apply to Independent Fund Directors.
D. Application of the Code to Funds Subadvised by SCM. This Code does
not apply to the directors, officers, and general partners of Funds for which
SCM serves as a subadviser.
II. PERSONAL SECURITIES TRANSACTIONS
A. Annual Disclosure of Personal Holdings by Access Persons. Upon
designation as an Access Person, and thereafter on an annual basis, all Access
Persons must disclose on the Disclosure of Personal Holdings In Securities Form
(Appendix 3) (or a substantially similar form) all Securities in which they
have a Beneficial Interest and all Securities in non-client accounts for which
they make investment decisions (previously reported holdings need not be
reported). This provision does not apply to Independent Fund Directors.
2
<PAGE> 7
B. Preclearance Requirements for Access Persons.
1. General Requirement. Except for the transactions set forth in
Section II.B.2., all Securities Transactions in which an Access Person or
a member of his or her Immediate Family has a Beneficial Interest must be
precleared with the Preclearance Officer or his designee. This provision
does not apply to transactions of Independent Fund Directors and their
Immediate Families.
2. Transactions Exempt from Preclearance Requirements. The
following Securities Transactions are exempt from the preclearance
requirements set forth in Section II.B.1. of this Code:
a. Mutual Funds. Securities issued by any registered open-end
investment companies (including but not limited to the Strong
Funds);
b. No Knowledge. Securities Transactions where neither SCM,
the Access Person nor an Immediate Family member knows of the
transaction before it is completed (for example, Securities
Transactions effected for an Access Person by a trustee of a blind
trust or discretionary trades involving an investment partnership
or investment club in which the Access Person is neither consulted
nor advised of the trade before it is executed);
c. Certain Corporate Actions. Any acquisition of Securities
through stock dividends, dividend reinvestments, stock splits,
reverse stock splits, mergers, consolidations, spin-offs, or other
similar corporate reorganizations or distributions generally
applicable to all holders of the same class of Securities;
d. Rights. Any acquisition of Securities through the exercise
of rights issued by an issuer pro rata to all holders of a class of
its Securities, to the extent the rights were acquired in the
issue; and
e. Miscellaneous. Any transaction in the following: (1)
bankers acceptances, (2) bank certificates of deposit ("CDs"), (3)
commercial paper, (4) repurchase agreements, (5) Securities that
are direct obligations of the U.S. government, (6) equity
securities held in dividend reinvestment plans ("DRIPs"), (7)
Securities of the employer of a member of the Access Person's
Immediate Family if such securities are beneficially owned through
participation by the Immediate Family member in a Profit Sharing
plan, 401(k) plan, ESOP, or other similar plan, and (8) other
Securities as may from time to time be designated in writing by the
Code of Ethics Review Committee on the grounds that the risk of
abuse is minimal or non-existent.
THE SECURITIES TRANSACTIONS LISTED ABOVE ARE NOT EXEMPT FROM THE
REPORTING REQUIREMENTS SET FORTH IN SECTION II.G.
3
<PAGE> 8
3. Application to Commodities, Futures, Options on Futures and
Options on Broad-Based Indices. Commodities, futures (including currency
futures and futures on securities comprising part of a broad-based,
publicly traded market based index of stocks), options on futures,
options on currencies, and options on certain indices designated by the
Compliance Department as broad-based are not subject to the preclearance,
seven day black out, 60-day profit disgorgement, and prohibited
transaction provisions of Section II.D.I of the Code, but are subject to
transaction reporting. The options on indices designated by the
Compliance Department as broad-based may be changed from time to time and
are listed in Appendix 7. The options on indices that are not designated
as broad-based are subject to the preclearance, seven-day blackout,
60-day profit disgorgement, prohibited transaction, and reporting
provisions of the Code.
C. Preclearance Requests.
1. Trade Authorization Request Forms. Prior to entering an order
for a Securities Transaction that requires preclearance, the Access
Person must complete, IN WRITING, a Preclearance Request For Access
Persons Form as set forth in Appendix 5 and submit the completed form to
the Preclearance Officer (or his designee). The Preclearance Request For
Access Persons Form requires Access Persons to provide certain
information and to make certain representations. Proposed Securities
Transactions of the Preclearance Officer that require preclearance must
be submitted to his designee.
2. Review of Form. After receiving the completed Preclearance
Request For Access Persons Form, the Preclearance Officer (or his
designee) will (a) review the information set forth in the form, (b)
independently confirm whether the Securities are held by any Funds or
other accounts managed by SCM and whether there are any unexecuted orders
to purchase or sell the Securities by any Fund or accounts managed by
SCM, and (c) as soon as reasonably practicable, determine whether to
clear the proposed Securities Transaction. The authorization, date, and
time of the authorization must be reflected on the Preclearance Request
For Access Persons Form. The Preclearance Officer (or his designee) will
keep one copy of the completed form for the Compliance Department, send
one copy to the Access Person seeking authorization, and send the third
copy to the Trading Department, which will cause the transaction to be
executed.
No order for a securities transaction for which preclearance
authorization is sought may be placed prior to the receipt of written
authorization of the transaction by the preclearance officer (or his
designee). Verbal approvals are not permitted.
3. Access Person Designees. If an Access Person is away from SCM's
principal office and desires to effect a personal Securities Transaction
prior to his or her return, such Access Person may designate an
individual at SCM to complete and submit
4
<PAGE> 9
for preclearance on his or her behalf a Preclearance Request for Access
Persons Form provided the following requirements are satisfied:
a. The Access Person communicates the details of the trade and
affirms the accuracy of the representations and warranties
contained on the Form directly to such designated person; and
b. The designated person completes the Preclearance Request
For Access Persons Form on behalf of the Access Person in
accordance with the requirements of the Code and then executes the
Access Person Designee Certification contained in the Form. The
Access Person does not need to sign the Form so long as the
foregoing certification is provided.
D. Prohibited Transactions.
1. Prohibited Securities Transactions. The following Securities
Transactions for accounts in which an Access Person or a member of his or
her Immediate Family have a Beneficial Interest, to the extent they
require preclearance under Section II.B. above, are prohibited and will
not be authorized by the Preclearance Officer (or his designee) absent
exceptional circumstances:
a. Initial Public Offerings. Any purchase of Securities in an
initial public offering (other than a new offering of a registered
open-end investment company);
b. Pending Buy or Sell Orders. Any purchase or sale of
Securities on any day during which any Advisory Client has a
pending "buy" or "sell" order in the same Security (or Equivalent
Security) until that order is executed or withdrawn;
c. Seven Day Blackout. Purchases or sales of Securities by a
Portfolio Manager within seven calendar days of a purchase or sale
of the same Securities (or Equivalent Securities) by an Advisory
Client managed by that Portfolio Manager, unless the purchase or
sale is a Program Trade. For example, if a Fund trades in a
Security on day one, day eight is the first day the Portfolio
Manager may trade that Security for an account in which he or she
has a beneficial interest;
d. Intention to Buy or Sell for Advisory Client. Purchases or
sales of Securities at a time when that Access Person intends, or
knows of another's intention, to purchase or sell that Security (or
an Equivalent Security) on behalf of an Advisory Client. This
prohibition applies whether the Securities Transaction is in the
same (e.g., two purchases) or the opposite (a purchase and sale)
direction of the transaction of the Advisory Client; and
5
<PAGE> 10
e. 60-Day Blackout. (1) Purchases of a Security in which an
Access Person acquires a Beneficial Interest within 60 days of the
sale of the Security (or an Equivalent Security) in which the same
Access Person had a Beneficial Interest, and (2) sales of a
Security in which an Access Person had a Beneficial Interest within
60 days of the purchase of the Security (or an Equivalent Security)
in which the same Access Person has a Beneficial Interest, unless,
in each case, the Access Person agrees to give up all profits on
the transaction to a charitable organization specified in
accordance with Section IV.B.1.
2. Always Prohibited Securities Transactions. The following
Securities Transactions are prohibited and will not be authorized under
any circumstances:
a. Inside Information. Any transaction in a Security while in
possession of material nonpublic information regarding the Security
or the issuer of the Security;
b. Market Manipulation. Transactions intended to raise,
lower, or maintain the price of any Security or to create a false
appearance of active trading;
c. Large Positions in Non-Strong Funds. Transactions in a
registered investment company (other than the Strong Funds) which
result in the Access Person owning five percent or more of any
class of securities in such investment company; and
d. Others. Any other transactions deemed by the Preclearance
Officer (or his designee) to involve a conflict of interest,
possible diversion of corporate opportunity, or an appearance of
impropriety.
3. Private Placements. Acquisitions of Beneficial Interests in
Securities in a private placement by an Access Person is strongly
discouraged. The Preclearance Officer (or his designee) will give
permission only after considering, among other facts, whether the
investment opportunity should be reserved for Advisory Clients and
whether the opportunity is being offered to an Access Person by virtue of
his or her position as an Access Person. Access Persons who have been
authorized to acquire and have acquired securities in a private placement
are required to disclose that investment to the Compliance Department
when they play a part in any subsequent consideration of an investment in
the issuer by an Advisory Client and the decision to purchase securities
of the issuer by an Advisory Client must be independently authorized by a
Portfolio Manager with no personal interest in the issuer. This
provision does not apply to Independent Fund Directors.
4. No Explanation Required for Refusals. In some cases, the
Preclearance Officer (or his designee) may refuse to authorize a
Securities Transaction for a reason that
6
<PAGE> 11
is confidential. The Preclearance Officer is not required to give an
explanation for refusing to authorize any Securities Transaction.
E. Execution of Personal Securities Transactions. Unless an exception
is provided in writing by the Compliance Department, all transactions in
Securities subject to the preclearance requirements for which an Access Person
or a member of his or her Immediate Family has a Beneficial Interest shall be
executed by the Trading Department. IN ALL INSTANCES, THE TRADING DEPARTMENT
MUST GIVE PRIORITY TO CLIENT TRADES OVER ACCESS PERSON TRADES.
F. Length of Trade Authorization Approval. The authorization provided
by the Preclearance Officer (or his designee) is effective until the earlier of
(1) its revocation, (2) the close of business on the second trading day after
the authorization is granted (for example, if authorization is provided on a
Monday, it is effective until the close of business on Wednesday), or (3) the
Access Person learns that the information in the Trade Authorization Request
Form is not accurate. If the order for the Securities Transaction is not
placed within that period, a new advance authorization must be obtained before
the Securities Transaction is placed. If the Securities Transaction is placed
but has not been executed within two trading days after the day the
authorization is granted (as, for example, in the case of a limit order or a
not held order), no new authorization is necessary unless the person placing
the original order for the Securities Transaction amends it in any way.
G. Trade Reporting Requirements.
1. Reporting Requirement. EVERY ACCESS PERSON AND MEMBERS OF HIS OR
HER IMMEDIATE FAMILY (INCLUDING INDEPENDENT FUND DIRECTORS AND THEIR
IMMEDIATE FAMILIES) MUST ARRANGE FOR THE COMPLIANCE DEPARTMENT TO RECEIVE
DIRECTLY FROM ANY BROKER, DEALER, OR BANK THAT EFFECTS ANY SECURITIES
TRANSACTION, DUPLICATE COPIES OF EACH CONFIRMATION FOR EACH SUCH
TRANSACTION AND PERIODIC STATEMENTS FOR EACH BROKERAGE ACCOUNT IN WHICH
SUCH ACCESS PERSON HAS A BENEFICIAL INTEREST. Attached hereto as
Appendix 8 is a form letter that may be used to request such documents
from such entities. An Access Person must arrange to have duplicate
confirmations and periodic statements sent within 30 days of the sooner
of (1) designation as an Access Person, or (2) the establishment of the
account at the broker, dealer or bank. If the Access Person is unable to
arrange for the above, the Access Person must immediately notify the
Compliance Department. THE FOREGOING DOES NOT APPLY TO TRANSACTIONS AND
HOLDINGS IN (1) OPEN-END INVESTMENT COMPANIES INCLUDING BUT NOT LIMITED
TO THE STRONG FUNDS, (2) BANK CERTIFICATES OF DEPOSIT ("CDS"), (3)
EQUITY SECURITIES HELD IN DIVIDEND REINVESTMENT PLANS ("DRIPS"), OR (4)
SECURITIES OF THE EMPLOYER OF A MEMBER OF THE ACCESS PERSON'S IMMEDIATE
FAMILY IF SUCH SECURITIES ARE BENEFICIALLY OWNED THROUGH PARTICIPATION BY
THE IMMEDIATE FAMILY MEMBER IN A PROFIT SHARING PLAN, 401(K) PLAN, ESOP,
OR OTHER SIMILAR PLAN.
7
<PAGE> 12
2. Disclaimers. Any report of a Securities Transaction for the
benefit of a person other than the individual in whose account the
transaction is placed may contain a statement that the report should not
be construed as an admission by the person making the report that he or
she has any direct or indirect beneficial ownership in the Security to
which the report relates.
3. Quarterly Review. At least quarterly, for Securities
Transactions requiring preclearance under this Code, the Preclearance
Officer (or his designee) shall compare the confirmations and periodic
statements provided pursuant to Section II.G.1. above, to the approved
Trade Authorization Request Forms. Such review shall include:
a. Whether the Securities Transaction complied with this Code;
b. Whether the Securities Transaction was authorized in
advance of its placement;
c. Whether the Securities Transaction was executed within two
full trading days of when it was authorized;
d. Whether any Fund or accounts managed by SCM owned the
Securities at the time of the Securities Transaction, and;
e. Whether any Fund or separate accounts managed by SCM
purchased or sold the Securities in the Securities Transaction
within at least 10 days of the Securities Transaction.
4. Availability of Reports. All information supplied pursuant to
this Code will be available for inspection by the Boards of Directors of
SCM and SFDI, the Board of Directors of each Strong Fund, the Code of
Ethics Review Committee, the Compliance Department, the Access Person's
department manager (or designee), any party to which any investigation is
referred by any of the foregoing, the SEC, any self-regulatory
organization of which the Strong Funds, SCM or the Distributor is a
member, and any state securities commission, as well as any attorney or
agent of the foregoing, the Strong Funds, SCM, or the Distributor.
5. Record Retention. SCM shall keep and maintain for at least six
years records of the procedures it follows in connection with the
preclearance and reporting requirements of this Code and, for each
Securities Transaction, the information relied on by the Preclearance
Officer (or his designee) in authorizing the Securities Transaction and
making the post-Securities Transaction determination of Section II.G.3.
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<PAGE> 13
III. FIDUCIARY DUTIES
A. Confidentiality. Access Persons are prohibited from revealing
information relating to the investment intentions, activities or portfolios of
Advisory Clients except to persons whose responsibilities require knowledge of
the information.
B. Gifts. The following provisions on gifts apply only to employees of
SCM and the Distributor.
1. Accepting Gifts. On occasion, because of their position with
SCM, the Distributor, or the Strong Funds, employees may be offered, or
may receive without notice, gifts from clients, brokers, vendors, or
other persons not affiliated with such entities. Acceptance of
extraordinary or extravagant gifts is not permissible. Any such gifts
must be declined or returned in order to protect the reputation and
integrity of SCM, the Distributor, and the Strong Funds. Gifts of a
nominal value (i.e., gifts whose reasonable value is no more than $100 a
year), and customary business meals, entertainment (e.g., sporting
events), and promotional items (e.g., pens, mugs, T-shirts) may be
accepted. Please see the Gift Policy Reminder memorandum dated December
1, 1994 (Appendix 9) for additional information.
If an employee receives any gift that might be prohibited under this
Code, the employee must inform the Compliance Department.
2. Solicitation of Gifts. Employees of SCM or the Distributor may
not solicit gifts or gratuities.
3. Giving Gifts. Employees of SCM or the Distributor may not give
any gift with a value in excess of $100 per year to persons associated
with securities or financial organizations, including exchanges, other
member organizations, commodity firms, news media, or clients of the
firm. Please see the Gift Policy Reminder memorandum dated December 1,
1994 (Appendix 9) for additional information.
C. Payments to Advisory Clients. Access Persons may not make any payments
to Advisory Clients in order to resolve any type of Advisory Client complaint.
All such matters must be handled by the Legal Department.
D. Corporate Opportunities. Access Persons may not take personal
advantage of any opportunity properly belonging to any Advisory Client, SCM, or
the Distributor. This includes, but is not limited to, acquiring Securities
for one's own account that would otherwise be acquired for an Advisory Client.
E. Undue Influence. Access Persons may not cause or attempt to cause any
Advisory Client to purchase, sell, or hold any Security in a manner calculated
to create any personal benefit to the Access Person. If an Access Person or
Immediate Family Member stands
9
<PAGE> 14
to materially benefit from an investment decision for an Advisory
Client that the Access Person is recommending or participating in, the Access
Person must disclose to those persons with authority to make investment
decisions for the Advisory Client (or to the Compliance Department if the
Access Person in question is a person with authority to make investment
decisions for the Advisory Client), any Beneficial Interest that the Access
Person (or Immediate Family) has in that Security or an Equivalent Security, or
in the issuer thereof, where the decision could create a material benefit to
the Access Person (or Immediate Family) or the appearance of impropriety. The
person to whom the Access Person reports the interest, in consultation with the
Compliance Department, must determine whether the Access Person will be
restricted in making investment decisions.
F. Service as a Director. No Access Person, other than an Independent
Fund Director, may serve on the board of directors of a publicly-held company
not affiliated with SCM, the Distributor, or the Strong Funds absent prior
written authorization by the Code of Ethics Review Committee. This
authorization will rarely, if ever, be granted and, if granted, will normally
require that the affected Access Person be isolated, through "Chinese Wall" or
other procedures, from those making investment decisions related to the issuer
on whose board the Access Person sits.
G. Involvement in Criminal Matters or Investment-Related Civil
Proceedings. Each Access Person must notify the Compliance Department, as soon
as reasonably practical, if arrested, arraigned, indicted, or pleads no contest
to, any criminal offense (other than minor traffic violations), or if named as
a defendant in any Investment-Related civil proceedings, or any administrative
or disciplinary action.
IV. COMPLIANCE WITH THIS CODE OF ETHICS
A. Code of Ethics Review Committee.
1. Membership, Voting, and Quorum. The Code of Ethics Review
Committee shall initially consist of the General Counsel, President, and
Chief Financial Officer of SCM. The Committee shall vote by majority
vote with two members serving as a quorum. Vacancies may be filled and,
in the case of extended absences or periods of unavailability, alternates
may be selected, by the majority vote of the remaining members of the
Committee; provided, however, in the event that the General Counsel is
unavailable, at least one member of the Committee shall also be a member
of the Compliance Department.
2. Investigating Violations of the Code. The General Counsel or his
or her designee is responsible for investigating any suspected violation
of the Code and shall report the results of each investigation to the
Code of Ethics Review Committee. The Code of Ethics Review Committee is
responsible for reviewing the results of any investigation of any
reported or suspected violation of the Code. Any material violation of
10
<PAGE> 15
the Code by an employee of SCM or the Distributor for which significant
remedial action was taken will be reported to the Boards of Directors of
the Strong Funds not later than the next regularly scheduled quarterly
Board meeting.
3. Annual Reports. The Code of Ethics Review Committee will review
the Code at least once a year, in light of legal and business
developments and experience in implementing the Code, and will prepare an
annual report to the Boards of Directors of SCM, the Distributor, and
each Strong Fund that:
a. Summarizes existing procedures concerning personal
investing and any changes in the procedures made during the past
year;
b. Identifies any violation requiring significant remedial
action during the past year, and
c. Identifies any recommended changes in existing restrictions
or procedures based on its experience under the Code, evolving
industry practices, or developments in applicable laws or
regulations.
B. Remedies.
1. Sanctions. If the Code of Ethics Review Committee determines
that an Access Person has committed a violation of the Code, the
Committee may impose sanctions and take other actions as it deems
appropriate, including a letter of caution or warning, suspension of
personal trading rights, suspension of employment (with or without
compensation), fine, civil referral to the SEC, criminal referral, and
termination of the employment of the violator for cause. The Code of
Ethics Review Committee may also require the Access Person to reverse the
trade(s) in question and forfeit any profit or absorb any loss derived
therefrom. The amount of profit shall be calculated by the Code of
Ethics Review Committee and shall be forwarded to a charitable
organization. No member of the Code of Ethics Review Committee may review
his or her own transaction.
2. Sole Authority. The Code of Ethics Review Committee has sole
authority, subject to the review set forth in Section IV.B.3. below, to
determine the remedy for any violation of the Code, including appropriate
disposition of any moneys forfeited pursuant to this provision. Failure
to promptly abide by a directive to reverse a trade or forfeit profits
may result in the imposition of additional sanctions.
3. Review. Whenever the Code of Ethics Review Committee determines
that an Access Person has committed a violation of this Code that merits
significant remedial action, it will report promptly to the Boards of
Directors of SCM and/or the Distributor (as appropriate), and no less
frequently than the quarterly meeting to the Boards of Directors of the
applicable Strong Funds, information relating to the investigation of the
violation, including any sanctions imposed. The Boards of Directors of
SCM, the
11
<PAGE> 16
Distributor, and the Strong Funds may modify such sanctions as they deem
appropriate. Such Boards shall have access to all information considered
by the Code of Ethics Review Committee in relation to the case. The Code
of Ethics Review Committee may determine whether to delay the imposition
of any sanctions pending review by the applicable Boards of Directors.
C. Exceptions to the Code. Although exceptions to the Code will rarely,
if ever, be granted, the General Counsel of SCM may grant exceptions to the
requirements of the Code on a case by case basis if he finds that the proposed
conduct involves negligible opportunity for abuse. All material exceptions
must be in writing and must be reported as soon as practicable to the Code of
Ethics Review Committee and to the Boards of Directors of the SCM Funds at
their next regularly scheduled meeting after the exception is granted.
D. Compliance Certification. At least annually, all Access Persons will
be required to certify on the Annual Code of Ethics Questionnaire set forth in
Appendix 6 or on a document substantially in the form of Appendix 6 that they
have complied with the Code in all respects.
E. Inquiries Regarding the Code. The Compliance Department will answer
any questions about this Code or any other compliance-related matters.
October 18, 1996
12
<PAGE> 17
Appendix 1
DEFINITIONS
"Access Person" means (1) every director, officer, and general partner of
SCM, the Distributor and the Strong Funds; (2) every employee of SCM and the
Distributor who, in connection with his or her regular functions, makes,
participates in, or obtains information regarding the purchase or sale of a
security by an Advisory Client's account; (3) every employee of SCM and the
Distributor who is involved in making purchase or sale recommendations for an
Advisory Client's account; (4) every employee of SCM and the Distributor who
obtains information concerning such recommendations prior to their
dissemination, and (5) such agents of SCM, the Distributor, or the Funds as the
Compliance Department shall designate who may be deemed an Access Person if
they were an employee of the foregoing. Any uncertainty as to whether an
individual is an Access Person should be brought to the attention of the
Compliance Department. Such questions will be resolved in accordance with, and
this definition shall be subject to, the definition of "Access Person" found in
Rule 17j-1(e)(1) promulgated under the Investment Company Act of 1940.
"Advisory Client" means any client (including both investment companies
and managed accounts) for which SCM serves as an investment adviser or
subadviser, renders investment advice, or makes investment decisions.
"Beneficial Interest" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise,
to profit, or share in any profit derived from, a transaction in the subject
Securities. An Access Person is deemed to have a Beneficial Interest in
Securities owned by members of his or her Immediate Family. Common examples of
Beneficial Interest include joint accounts, spousal accounts, UTMA accounts,
partnerships, trusts, and controlling interests in corporations. Any
uncertainty as to whether an Access Person has a Beneficial Interest in a
Security should be brought to the attention of the Compliance Department. Such
questions will be resolved by reference to the principles set forth in the
definition of "beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated
under the Securities Exchange Act of 1934.
"Code" means this Code of Ethics.
"Compliance Department" means the designated persons in the SCM Legal
Department listed on Appendix 2, as such Appendix shall be amended from time to
time.
"The Distributor" means Strong Funds Distributors, Inc.
"Equivalent Security" means any Security issued by the same entity as the
issuer of a subject Security that is convertible into the equity Security of
the issuer. Examples include options, rights, stock appreciation rights,
warrants, and convertible bonds.
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<PAGE> 18
"Fund" means an investment company registered under the Investment Company
Act of 1940 (or a portfolio or series thereof, as the case may be) for which
SCM serves as an adviser or subadviser.
"Immediate Family" of an Access Person means any of the following persons
who reside in the same household as the Access Person:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the General Counsel determines could
lead to the possible conflicts of interest, diversions of corporate
opportunity, or appearances of impropriety which this Code is intended to
prevent.
"Independent Fund Director" means an independent director of an investment
company for which SCM serves as the advisor.
"Legal Department" means the SCM Legal Department.
"Portfolio Manager" means a person who has or shares principal day-to-day
responsibility for managing the portfolio of an Advisory Client.
"Preclearance Officer" means the person designated as the Preclearance
Officer in Appendix 2 hereof.
"Program Trade" means where a Portfolio Manager directs a trader to do
trades in, at a minimum, 25-30% of the Securities in an account. Program
Trades, generally, arise in three situations: (1) cash or other assets are
being added to an account and the Portfolio Manager instructs the trader that
new securities are to be bought in a manner that maintains the account's
existing allocations; (2) cash is being withdrawn from an account and the
Portfolio Manager instructs the trader that securities are to be sold in a
manner that maintains the account's current securities allocations; and (3) a
new account is established and the Portfolio Manager instructs the trader to
buy specific securities in the same allocation percentages as are held by other
client accounts.
"SEC" means the Securities and Exchange Commission.
"Security" includes stock, notes, bonds, debentures, and other evidences
of indebtedness (including loan participations and assignments), limited
partnership interests, investment contracts, and all derivative instruments of
the foregoing, such as options and warrants. Security
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<PAGE> 19
does not include futures, options on futures, or options on currencies, but the
purchase and sale of such instruments are nevertheless subject to the reporting
requirements of the Code.
"Securities Transaction" means a purchase or sale of Securities in which
an Access Person or a members of his or her Immediate Family has or acquires a
Beneficial Interest.
"SCM" means Strong Capital Management, Inc.
"Strong Funds" means the investment companies comprising the Strong Family
of Mutual Funds.
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<PAGE> 20
Appendix 2
CONTACT PERSONS
PRECLEARANCE OFFICER
1. Thomas P. Lemke, General Counsel of SCM
DESIGNEES OF PRECLEARANCE OFFICER
1. Jeffrey C. Nellessen
2. Stephen J. Shenkenberg
COMPLIANCE DEPARTMENT
1. Thomas P. Lemke
2. Jeffrey C. Nellessen
3. Stephen J. Shenkenberg
4. Jeffery A. Arnson
5. Donna J. Lelinski
CODE OF ETHICS REVIEW COMMITTEE
1. John Dragisic, President of SCM
2. Chief Financial Officer of SCM
3. Thomas P. Lemke, General Counsel of SCM
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<PAGE> 21
Appendix 3
PERSONAL HOLDINGS IN SECURITIES
In accordance with Section II.A. of the Code of Ethics, please provide a
list of all Securities (other than open-end investment companies) in which each
Access Person has a Beneficial Interest, including those in accounts of the
Immediate Family of the Access Person and all Securities in non-client accounts
for which the Access Person makes investment decisions.
(1) Name of Access Person: _________________________
(2) If different than (1), name of the person
in whose name the account is held: _________________________
(3) Relationship of (2) to (1): _________________________
(4) Broker at which Account is maintained: _________________________
(5) Account Number: _________________________
(6) Contact person at Broker and phone number _________________________
(7) For each account, attach the most recent account statement listing
Securities in that account. If the Access Person owns Beneficial
Interests in Securities that are not listed in an attached account
statement, list them below:
Name of Security Quantity Value Custodian
---------------- -------- ----- ---------
1. ____________________________________________________________________________
2. ____________________________________________________________________________
3. ____________________________________________________________________________
4. ____________________________________________________________________________
5. ____________________________________________________________________________
6. ____________________________________________________________________________
(ATTACH SEPARATE SHEET IF NECESSARY.)
I certify that this form and the attached statements (if any) constitute
all of the Securities in which I have a Beneficial Interest, including those
held in accounts of my Immediate Family.
________________________
Access Person Signature
Dated: _____________ ________________________
Print Name
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<PAGE> 22
Appendix 4
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
AND LIMITED POWER OF ATTORNEY
I acknowledge that I have received the Code of Ethics dated October 18,
1996, and represent that:
1. In accordance with Section II.A. of the Code of Ethics, I
will fully disclose the Securities holdings in which I have, or a
member of my Immediate Family has, a Beneficial Interest.*
2. In accordance with Section II.B.1. of the Code of Ethics,
I will obtain prior authorization for all Securities Transactions
in which I have, or a member of my Immediate Family has, a
Beneficial Interest except for transactions exempt from
preclearance under Section II.B. 2. of the Code of Ethics.*
3. In accordance with Section II.G.1 of the Code of Ethics, I
will report all Securities Transactions in which I have, or a
member of my Immediate Family has, a Beneficial Interest, except
for transactions exempt from reporting under Section II.G.1. of
the Code of Ethics.
4. I will comply with the Code of Ethics in all other
respects.
5. I agree to disgorge and forfeit any profits on prohibited
transactions in accordance with the requirements of the Code.*
I hereby appoint Strong Capital Management, Inc. as my attorney-in-fact
for the purpose of placing orders for and on my behalf to buy, sell, tender,
exchange, covert, and otherwise effectuate transactions in any and all stocks,
bonds, options, and other securities. I agree that Strong Capital Management,
Inc. shall not be liable for the consequences of any errors made by the
executing brokers in connection with such transactions.*
__________________________
Access Person Signature
__________________________
Print Name
Dated: __________
* Representations (1), (2) and (5) and the Limited Power of Attorney do
not apply to Independent Fund Directors.
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<PAGE> 23
Ctrl. No:_________________________ Appendix 5
STRONG CAPITAL MANAGEMENT, INC.
PRECLEARANCE REQUEST FOR ACCESS PERSONS
1. Name of Access Person (and trading entity, if different): __________________
2. Name and symbol of Security: _______________________________________________
3. Maximum quantity to be purchased or sold: __________________________________
4. Name and phone number of broker to effect transaction: _____________________
<TABLE>
<S> <C> <C> <C>
5. Check if applicable: Purchase ____ Market Order ____
Sale ____ Limit Order ____ (Limit Order Price: ___________)
Not Held Order ____
</TABLE>
6. In connection with the foregoing transaction, I hereby make the foregoing
representations and warranties:
(a) I do not possess any material nonpublic information regarding the
Security or the issuer of the Security.
(b) To my knowledge:
(1) The Securities or "equivalent" securities (i.e., securities
issued by the same issuer) [ ARE / ARE NOT ] (circle one) held by
any investment companies or other accounts managed by SCM;
(2) There are no outstanding purchase or sell orders for this
Security (or any equivalent security) by any investment companies or
other accounts managed by SCM; and
(3) None of the Securities (or equivalent securities) are actively
being considered for purchase or sale by any investment companies or
other accounts managed by SCM.
(c) The Securities are not being acquired in an initial public offering.
(d) The Securities are not being acquired in a private placement or, if
they are, I have reviewed Section II.D.3. of the Code and have attached
hereto a written explanation of such transaction.
(e) If I am a Portfolio Manager, none of the accounts I manage purchased
or sold these Securities (or equivalent securities) within the past
seven calendar days and I do not expect any such client accounts to
purchase or sell these Securities (or equivalent securities) within
seven calendar days of my purchase or sale.
(f) If I am purchasing these Securities, I have not directly or
indirectly (through any member of my Immediate Family, any account in
which I have a Beneficial Interest or otherwise) sold these Securities
(or equivalent securities) in the prior 60 days.
(g) If I am selling these Securities, I have not directly or indirectly
(through any member of my Immediate Family, any account in which I have
a beneficial Interest or otherwise) purchased these Securities (or
equivalent securities) in the prior 60 days.
(h) I have read the SCM Code of Ethics within the prior 12 months and
believe that the proposed trade fully complies with the requirements of
the Code.
______________________________ ______________________________
Access Person Print Name
CERTIFICATION OF ACCESS PERSON DESIGNEE
The undersigned hereby certifies that the above Access Person (a) directly
instructed me to complete this Form on his or her behalf, (b) to the best of my
knowledge, was out of the office at the time of such instruction and has not
returned, and (c) confirmed to me that the representations and warranties
contained in this form are accurate.
________________________________ ______________________________
Access Person Designee Print Name
AUTHORIZATION
Authorized By: _____________________ Date: _____________ Time: _____________
PLACEMENT
Trader:____________________ Date:___________ Time:_____________ Qty:_________
EXECUTION
Trader:____________________ Date:___________ Time:_____________
Qty:____________ Price:________________________
(Original to Compliance Department, Yellow copy to Trading
Department, Pink copy to Access Person)
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<PAGE> 24
Confidential Appendix 6
ANNUAL CODE OF ETHICS QUESTIONNAIRE (1)
For ACCESS PERSONS of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
September 18, 1996
Associate: ____________________________
I. Introduction
Access Persons (2) are required to answer all of the questions below for the
year September 1, 1995, through August 31, 1996, and then sign and return the
questionnaire by FRIDAY, SEPTEMBER 27 to Jeff Nellessen in the Legal
Department. ANSWERS OF "NO" TO ANY OF THE QUESTIONS MUST BE EXPLAINED ON THE
"ATTACHMENT" ON PAGE 3. All information provided is kept confidential to the
maximum extent possible. If you have any questions, please contact Jeff
Nellessen at extension 3514.
II. Annual certification of compliance with the Code of Ethics
A. Have you, in accordance with Section II.B.1. of the Code of Ethics,
obtained preclearance for all Securities (3) Transactions in which you
have, or a member of your Immediate Family has, a Beneficial Interest,
except for transactions exempt from preclearance under Section II.B.2.
of the Code of Ethics? (If there have been no Securities Transactions,
circle "Yes".)
YES NO (CIRCLE ONE)
B. Have you, in accordance with Section II.G.1. of the Code of Ethics,
reported all Securities Transactions in which you have, or a member of
your Immediate Family has, a Beneficial Interest, except for
transactions exempt from reporting under Section II.G.1. of the Code of
Ethics? In particular, have you arranged for the Legal Department to
receive directly from your broker duplicate transaction confirmations
and duplicate periodic statements for each brokerage account in which
you have, or a member of your Immediate Family has, a Beneficial
Interest? (4) (If there are no brokerage accounts, circle "Yes".)
YES NO (CIRCLE ONE)
- -------------------------
1 All definitions used in this questionnaire have the same meaning as those in
the Code of Ethics.
2 Independent Fund Directors of the Strong Funds must complete a separate
questionnaire.
3 Security, as defined, does NOT include open-end investment companies,
including the Strong Funds.
4 Please contact Jeff Nellessen (extension 3514) if you are uncertain as to
what confirmations and statements you have arranged for the Legal Department to
receive.
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<PAGE> 25
C. Have you complied with the Code of Ethics in all other respects,
including the gift policy (Section III.B.)?
YES NO (CIRCLE ONE)
LIST ON THE ATTACHMENT ALL REPORTABLE5 GIFTS6 GIVEN OR RECEIVED FOR THE
YEAR SEPTEMBER 1, 1995, THROUGH AUGUST 31, 1996, NOTING THE MONTH,
"COUNTERPARTY," GIFT DESCRIPTION, AND ESTIMATED VALUE. IF NONE, SO STATE.
III. Annual certification of compliance with Insider Trading Policy
Have you complied in all respects with the Insider Trading Policy (dated
October 20, 1995)?
YES NO (CIRCLE ONE)
IV. Disclosure of directorships statement
A. I am not, nor is any member of my Immediate Family, a director and/or
an officer of any for-profit, privately held companies.7 (If you are
NOT, answer YES.)
YES NO (CIRCLE ONE)
If "NO", please list on the Attachment each company for which you are, or
a member of your Immediate Family is, a director.
B. If the response to A. is "NO", is there a reasonable expectation that
any of the companies for which you are, or a member of your Immediate
Family is, a director and/or an officer, will go public or be acquired
within the next 12 months?
YES NO (CIRCLE ONE)
(If the answer is "YES", please be prepared to discuss this matter with a
member of the Legal Department in the near future.)
ANSWERS OF "NO" TO ANY OF THE ABOVE QUESTIONS MUST BE EXPLAINED ON THE
"ATTACHMENT" ON PAGE 3.
I hereby represent that, to the best of my knowledge, the foregoing responses
are true and complete. I understand that any untrue or incomplete response may
be subject to disciplinary action by the firm.
___________________________________
Access Person Signature
Dated: _________________________
Print Name ________________________
____________________________
5 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
6 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
7 Per Section III.F. of the Code of Ethics, no Access Person, other than an
Independent Fund Director, may serve on the board of directors of a publicly
held company.
21
<PAGE> 26
ATTACHMENT TO
ANNUAL CODE OF ETHICS QUESTIONNAIRE
(to explain all "NO" answers and to list reportable(8) gifts(9) )
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
GIFTS(8),(9) for the year September 1, 1995, through August 31, 1996.
(If NONE, so state):
Month Gift Giver / Receiver Gift Description Estimated Value
----- --------------------- ---------------- ---------------
1. _____________________________________________________________________________
2. _____________________________________________________________________________
3. _____________________________________________________________________________
4. _____________________________________________________________________________
5. _____________________________________________________________________________
6. _____________________________________________________________________________
7. _____________________________________________________________________________
8. _____________________________________________________________________________
9. _____________________________________________________________________________
10._____________________________________________________________________________
(CONTINUE ON AN ADDITIONAL SHEET IF NECESSARY.)
__________________
8 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
9 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
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<PAGE> 27
Appendix 7
LIST OF BROAD-BASED INDICES
Listed below are the broad-based indices as designated by the Compliance
Department. See Section II.B.3. for additional information.
- -------------------------------------------------
DESCRIPTION OF OPTION SYMBOL EXCHANGE
- -------------------------------------------------
Computer Technology XCI AMEX
- -------------------------------------------------
Eurotop 100 ERT AMEX
- -------------------------------------------------
Hong Kong Option Index HKO AMEX
- -------------------------------------------------
Inter@ctive Wk. Internet Index INX CBOE
- -------------------------------------------------
Japan Index JPN AMEX
- -------------------------------------------------
Major Market Index * XMI AMEX
- -------------------------------------------------
Morgan Stanley High Tech Index MSH AMEX
- -------------------------------------------------
NASDAQ-100 NDX CBOE
- -------------------------------------------------
Pacific High Tech Index XPI PSE
- -------------------------------------------------
Russell 2000 * RUT CBOE
- -------------------------------------------------
Semiconductor Sector SOX PHLX
- -------------------------------------------------
S & P 100 * OEX CBOE
- -------------------------------------------------
S & P 500 * SPX CBOE
- -------------------------------------------------
Technology Index TXX CBOE
- -------------------------------------------------
Value Line Index * VLE PHLX
- -------------------------------------------------
Wilshire Small Cap Index WSX PSE
- -------------------------------------------------
- -------------------------------------------------
* Includes LEAPS.
- -------------------------------------------------
23
<PAGE> 28
Appendix 8
FORM LETTER TO BROKER OR BANK
[DATE]
<Broker Name>
<Broker Address>
<Broker City, State and Zip>
Subject: Account Number_____________________
Account Registration_______________
Dear ____________:
Strong Capital Management, Inc. ("SCM"), my employer, is a registered
investment adviser as well as the indirect parent of an NASD member firm. The
Code of Ethics of SCM requires that I have certain personal securities
transactions placed on my behalf by the trading desk of SCM. Accordingly,
please send me the necessary forms or instructions that you will require in
order to enable the securities traders of SCM to place orders on my behalf.
In addition, you are requested to send duplicate confirmations of individual
transactions as well as duplicate periodic statements for the referenced
account to SCM. Please address the confirmations and statements directly to:
Confidential
Chief Compliance Officer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Your cooperation is most appreciated. If you have any questions regarding these
requests, please contact me or Mr. Jeffrey C. Nellessen of Strong at (414)
359-3400.
Sincerely,
<Name of Access Person>
Copy: Mr. Jeffrey C. Nellessen
24
<PAGE> 29
Appendix 9
GIFT POLICY
MEMORANDUM
TO: All Associates
FROM: Thomas P. Lemke
DATE: December 1, 1994
SUBJECT: Gift Policy Reminder
With the Holiday season upon us, I wanted to remind you of our firm's gift
policy, which covers both GIVING GIFTS TO and ACCEPTING GIFTS FROM clients,
brokers, persons with whom we do business, or others (collectively, "vendors").
It is based on the applicable requirements of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. ("NASD") and is included
as part of the firm's Codes of Ethics.
Under our policy, associates may not give gifts to or accept gifts from
vendors with a value in excess of $100 per person per year and must report to
the firm annually if they accept certain types of gifts. The NASD defines a
"gift" to include any kind of gratuity. Since giving or receiving any gifts in
a business setting may give rise to an appearance of impropriety or may raise a
potential conflict of interest, we are relying on your professional attitude
and good judgment to ensure that our policy is observed to the fullest extent
possible. The discussion below is designed to assist you in this regard.
If you have any questions about the appropriateness of any gift, contact
Legal.
1. GIFTS GIVEN BY ASSOCIATES
Under applicable NASD rules, an associate may not give any gift with a
value in excess of $100 per year to any person associated with a securities or
financial organization, including exchanges, broker-dealers, commodity firms,
the news media, or clients of the firm. Please note, however, that the firm
may not take a tax deduction for any gift with a value exceeding $25.
This memorandum is not intended to authorize any associate to give a gift
to a vendor -- appropriate supervisory approval must be obtained before giving
any gifts.
2. GIFTS ACCEPTED BY ASSOCIATES
On occasion, because of their position within the firm, associates may
be offered, or may receive without notice, gifts from vendors. Associates may
not accept any gift or form of entertainment from vendors (e.g., tickets to the
theater or a sporting event where the vendor does not
25
<PAGE> 30
accompany the associate) other than gifts of NOMINAL VALUE, which the
NASD defines as under $100 in total from any vendor in any year (managers may,
if they deem it appropriate for their department, adopt a lower dollar
ceiling). Any gift accepted by an associate must be reported to the firm,
subject to certain exceptions (see heading 4 below). In addition, note that
our gift policy does not apply to normal and customary business entertainment
or to personal gifts (see heading 3 below).
Associates may not accept a gift of cash or a cash equivalent (e.g., gift
certificates) in ANY amount, and under no circumstances may an associate
solicit a gift from a vendor.
Associates may wish to have gifts from vendors donated to charity,
particularly where it might be awkward or impolite for an associate to decline
a gift not permitted by our policy. In such case, the gift should be forwarded
to Mary Beitzel in Legal, who will arrange for it to be donated to charity.
Similarly, associates may wish to suggest to vendors that, in lieu of an annual
gift, the vendors make a donation to charity. In either situation discussed
in this paragraph, an associate would not need to report the gift to the firm
(see heading 4 below).
3. EXCLUSION FOR BUSINESS ENTERTAINMENT/PERSONAL GIFTS
Our gift policy does not apply to normal and customary business meals and
entertainment with vendors. For example, if an associate has a business meal
and attends a sporting event or show with a vendor, that activity would not be
subject to our gift policy, provided the vendor is present. If, on the other
hand, a vendor gives an associate tickets to a sporting event and the associate
attends the event without the vendor also being present, the tickets would be
subject to the dollar limitation and reporting requirements of our gift policy.
Under no circumstances may associates accept business entertainment that is
extraordinary or extravagant in nature.
In addition, our gift policy does not apply to usual and customary gifts
given to or received from vendors based on a personal relationship (e.g., gifts
between an associate and a vendor where the vendor is a family member or
personal friend).
4. REPORTING
The NASD requires gifts to be reported to the firm. Except as noted
below, associates must report annually all gifts given to or accepted from
vendors (Legal will distribute the appropriate reporting form to associates).
Associates are NOT required to report the following: (i) usual and
customary promotional items given to or received from vendors (e.g., hats,
pens, T-shirts, and similar items marked with a firm's logo), (ii) items
donated to charity through Mary Beitzel in Legal, or (iii) food items consumed
on the firm's premises (e.g., candy, popcorn, etc.).
26
<PAGE> 1
EXHIBIT 99.B21.2
CODE OF ETHICS
FOR NON-ACCESS PERSONS OF
STRONG CAPITAL MANAGEMENT, INC.,
STRONG FUNDS DISTRIBUTORS, INC., AND
HERITAGE RESERVE DEVELOPMENT
CORPORATION, INC.
[STRONG FUNDS LOGO]
STRONG CAPITAL MANAGEMENT, INC.
October 18, 1996
<PAGE> 2
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
Table of Contents
I. INTRODUCTION .............................................................1
A. Fiduciary Duty ...........................................................1
1. Place the interests of clients first .....................................1
2. Avoid taking inappropriate advantage of their position ...................1
3. Conduct all personal Securities Transactions in full compliance with this
Code including the reporting requirements ....................................1
B. Appendices to the Code ...................................................1
1. Definitions ..............................................................1
2. Acknowledgment of Receipt of Code of Ethics ..............................2
3. Annual Code of Ethics Questionnaire ......................................2
4. Form Letter to Broker or Bank ............................................2
5. Gift Policy ..............................................................2
II. TRADE REPORTING REQUIREMENTS .............................................2
A. Reporting Requirement ....................................................2
B. Disclaimers ..............................................................2
C. Availability of Reports ..................................................2
D. Record Retention .........................................................2
III. FIDUCIARY DUTIES .......................................................3
A. Confidentiality ..........................................................3
B. Gifts To or From Employees ...............................................3
1. Accepting Gifts ..........................................................3
2. Solicatation of Gifts ....................................................3
3. Giving Gifts .............................................................3
C. Payments to Advisory Clients or Shareholders .............................3
D. Corporate Opportunities ..................................................3
E. Service as a Director ....................................................3
F. Involvement in Criminal Matters or Investment-Related Civil Proceedings ..4
IV. COMPLIANCE WITH THIS CODE OF ETHICS .....................................4
A. Code of Ethics Review Committee ..........................................4
1. Membership, Voting, and Quorum ...........................................4
2. Investigating Violations of the Code .....................................4
B. Remedies .................................................................4
C. Compliance Certification .................................................4
D. Inquiries Regarding the Code .............................................4
i
<PAGE> 3
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
Table of Appendices
Appendix 1 (Definitions).................................................... 5
Appendix 2 (Acknowledgment of Receipt of Code of Ethics) ................... 7
Appendix 3 (Annual Code of Ethics Questionnaire) ........................... 8
Appendix 4 (Form Letter to Broker or Bank) .................................11
Appendix 5 (Gift Policy)....................................................12
ii
<PAGE> 4
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
I. INTRODUCTION
A. Fiduciary Duty. This Code of Ethics is based upon the principle that
employees of Strong Capital Management, Inc. ("SCM"), Strong Funds
Distributors, Inc. ("the Distributor"), Heritage Reserve Development
Corporation, Inc. ("HRDC"), and such other affiliated entities of the foregoing
that may from time to time adopt this Code (each of which is individually
referred to herein as a "Company") have a fiduciary duty to place the interests
of clients ahead of their own. Employees must avoid activities, interests, and
relationships that might interfere with making decisions in the best interests
of each Company and its clients.
As fiduciaries, employees must at all times:
1. Place the interests of clients first. Employees must
scrupulously avoid serving their own personal interests ahead of the
interests of the clients of each Company. An employee may not induce or
cause a client to take action, or not to take action, for personal
benefit, rather than for the benefit of the client.
2. Avoid taking inappropriate advantage of their position. The
receipt of investment opportunities, perquisites, or gifts from persons
seeking business with the Strong Funds, any of the Companies, or their
clients could call into question the exercise of an employee's
independent judgment. Employees may not, for example, use their
knowledge of portfolio transactions to profit by the market effect of
such transactions.
3. Conduct all personal Securities Transactions in full compliance
with this Code including the reporting requirements.
Doubtful situations should be resolved in favor of clients and each
Company. Technical compliance with the Code's procedures will not
automatically insulate from scrutiny any personal Securities Transactions that
indicate an abuse of fiduciary duties.
B. Appendices to the Code. The appendices to this Code, including the
definitions set forth in Appendix 1, are attached to and are a part of the
Code. The appendices include the following:
1. Definitions (capitalized terms in the Code are defined in
Appendix 1),
1
<PAGE> 5
2. Acknowledgment of Receipt of Code of Ethics (Appendix 2),
3. Annual Code of Ethics Questionnaire (Appendix 3),
4. Form Letter to Broker or Bank (Appendix 4), and
5. Gift Policy (Appendix 5)
II. TRADE REPORTING REQUIREMENTS
A. Reporting Requirement. EVERY EMPLOYEE AND MEMBERS OF HIS OR HER
IMMEDIATE FAMILY MUST ARRANGE FOR THE COMPLIANCE DEPARTMENT TO RECEIVE DIRECTLY
FROM ANY BROKER, DEALER, OR BANK THAT EFFECTS ANY SECURITIES TRANSACTION, A
DUPLICATE COPY OF EACH CONFIRMATION FOR EACH SUCH TRANSACTION AND PERIODIC
STATEMENTS FOR EACH BROKERAGE ACCOUNT IN WHICH SUCH EMPLOYEE HAS A BENEFICIAL
INTEREST. Attached hereto as Appendix 4 is a form letter that may be used to
request such documents from such entities. An employee must arrange to have
duplicate confirmations and periodic statements sent within 30 days. If unable
to make such arrangements, the employee must immediately notify the Compliance
Department. THE FOREGOING DOES NOT APPLY TO TRANSACTIONS AND HOLDINGS IN (1)
MUTUAL FUNDS (INCLUDING BUT NOT LIMITED TO THE STRONG FUNDS), (2) BANK
CERTIFICATES OF DEPOSIT ("CDS"), (3) EQUITY SECURITIES HELD IN DIVIDEND
REINVESTMENT PLANS ("DRIPS"), OR (4) SECURITIES OF THE EMPLOYER OF A MEMBER OF
THE EMPLOYEE'S IMMEDIATE FAMILY IF SUCH SECURITIES ARE BENEFICIALLY OWNED
THROUGH PARTICIPATION BY THE IMMEDIATE FAMILY MEMBER IN A PROFIT SHARING PLAN,
401(K) PLAN, ESOP, OR OTHER SIMILAR PLAN.
B. Disclaimers. Any employee who files a report of a Securities
Transaction for the benefit of a person other than the employee may include in
such report a statement that the report should not be construed as an admission
by the employee making the report that he or she has any direct or indirect
beneficial ownership in the Security to which the report relates.
C. Availability of Reports. All information supplied pursuant to this
Code will be available for inspection by the Boards of Directors of SCM and
SFDI, the Board of Directors of each Strong Fund, the Code of Ethics Review
Committee, the Compliance Department, the employees department manager (or
designee), any party to which any investigation is referred by any of the
foregoing, the SEC, any self-regulatory organization of which the Strong Funds,
SCM, or the Distributor is a member, any state securities commission, as well
as any attorney or agent of the foregoing, the Strong Funds, SCM, or the
Distributor.
D. Record Retention. The Company shall keep and maintain for at least six
years records of the procedures it follows in connection with the reporting
requirements of this Code.
2
<PAGE> 6
III. FIDUCIARY DUTIES
A. Confidentiality. Employees are prohibited from revealing information
relating to the investment intentions, activities, or portfolios of Advisory
Clients except to persons whose responsibilities require knowledge of the
information.
B. Gifts To or From Employees.
1. Accepting Gifts. On occasion, because of their relationship with
the Company and its affiliates, employees thereof may be offered, or may
receive without notice, gifts from clients, brokers, vendors, or other
persons not affiliated with the Company. Acceptance of extraordinary or
extravagant gifts is not permissible. Any such gifts must be declined or
returned in order to protect the reputation and integrity of the Company.
Gifts of a nominal value (i.e., gifts whose reasonable value is no more
than $100 a year), and customary business meals, entertainment (e.g.,
sporting events), and promotional items (e.g., pens, mugs, T-shirts) may
be accepted. Please see the Gift Policy Reminder memorandum dated
December 1, 1994 (Appendix 5) for additional information.
If an employee receives any gift that might be prohibited under this
Code, the employee must inform the Compliance Department immediately.
2. Solicitation of Gifts. Employees may not solicit gifts or
gratuities from clients, brokers, vendors, or other persons with which
the Company has a relationship.
3. Giving Gifts. Employees may not give any gift with a value in
excess of $100 per year to persons associated with securities or
financial organizations, including exchanges, other member organizations,
commodity firms, news media, or clients of the Company. Please see the
Gift Policy Reminder memorandum dated December 1, 1994 (Appendix 5) for
additional information.
C. Payments to Advisory Clients or Shareholders. Employees may not make
any payments to Advisory Clients or Shareholders in order to resolve any type
of Advisory Client or Shareholder complaint. All such matters must be handled
by the Legal Department.
D. Corporate Opportunities. Employees may not take personal advantage of
any opportunity properly belonging to any client or Company.
E. Service as a Director. No employee may serve on the board of directors
of a publicly-held company not affiliated with a Company or the Strong Funds
absent prior written authorization by the Code of Ethics Review Committee.
This authorization will rarely, if ever, be granted and, if granted, will
normally require that the affected employee be isolated, through "Chinese Wall"
or other procedures, from those making investment decisions related to the
issuer on whose board the employee sits.
3
<PAGE> 7
F. Involvement in Criminal Matters or Investment-Related Civil
Proceedings. Each Non-Access Person must notify the Compliance Department, as
soon as reasonably practical, if arrested, arraigned, indicted, or pleads no
contest to, any criminal offense (other than minor traffic violations), or if
named as a defendant in any Investment-Related civil proceedings, or any
administrative or disciplinary action.
IV. COMPLIANCE WITH THIS CODE OF ETHICS
A. Code of Ethics Review Committee.
1. Membership, Voting, and Quorum. The Code of Ethics Review
Committee shall initially consist of the General Counsel, President, and
Chief Financial Officer of SCM. The Committee shall vote by majority
vote with two members serving as a quorum. Vacancies may be filled and,
in the case of extended absences or periods of unavailability, alternates
may be selected, by the majority vote of the remaining members of the
Committee; provided, however, in the event that the General Counsel is
unavailable, at least one member of the Committee shall also be a member
of the Compliance Department.
2. Investigating Violations of the Code. The General Counsel or his
or her designee is responsible for investigating any suspected violation
of the Code and shall report the results of each investigation to the
Code of Ethics Review Committee. The Code of Ethics Review Committee is
responsible for reviewing the results of any investigation of any
reported or suspected violation of the Code.
B. Remedies. If the Code of Ethics Review Committee determines that an
employee has committed a violation of the Code, the Committee may impose
sanctions and take other actions as it deems appropriate, including, but not
limited to, suspension of employment (with or without compensation) and
termination of the employment of the violator for cause. The Code of Ethics
Review Committee may also require the employee to reverse the trade(s) in
question and forfeit any profit or absorb any loss derived therefrom. Any
profit shall be forwarded to a charitable organization.
C. Compliance Certification. At least annually, all employees will be
required to certify on the Annual Code of Ethics Questionnaire set forth in
Appendix 2 or on a document substantially in the form of Appendix 2 that they
have complied with the Code in all respects.
D. Inquiries Regarding the Code. The Compliance Department will answer
any questions about this Code or any other compliance-related matters.
October 18, 1996
4
<PAGE> 8
Appendix 1
DEFINITIONS
"Advisory Client" means any client (including both investment companies
and managed accounts) for which SCM serves as an investment adviser or
subadviser, renders investment advice, or makes investment decisions.
"Beneficial Interest" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise,
to profit, or share in any profit derived from, a transaction in the subject
Securities. An employee is deemed to have a Beneficial Interest in Securities
owned by members of his or her Immediate Family. Common examples of Beneficial
Interest include joint accounts, spousal accounts, UTMA accounts, partnerships,
trusts, and controlling interests in corporations. Any uncertainty as to
whether an employee has a Beneficial Interest in a Security should be brought
to the attention of the Compliance Department. Such questions will be resolved
in accordance with, and this definition shall be subject to, the definition of
"beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated under the
Securities Exchange Act of 1934.
"Company" means "SCM", "the Distributor", "HRDC", and such other
affiliated entities of the foregoing that may from time to time adopt this
Code.
"Code" means this Code of Ethics.
"Compliance Department" means the designated persons in the Strong Legal
Department.
"Distributor" means Strong Funds Distributors, Inc.
"HRDC" means Heritage Reserve Development Corporation, Inc.
"Immediate Family" of an employee means any of the following persons who
reside in the same household as the employee:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the General Counsel determines could
lead to the possible conflicts of interest, diversions of corporate
opportunity, or appearances of impropriety which this Code is intended to
prevent.
"Legal Department" means the SCM Legal Department.
5
<PAGE> 9
"SEC" means the Securities and Exchange Commission.
"Security" includes stock, notes, bonds, debentures, and other evidences
of indebtedness (including loan participations and assignments), limited
partnership interests, investment contracts, and all derivative instruments of
the foregoing, such as options and warrants. Security does not include
futures, options on futures, or options on currencies, but the purchase and
sale of such instruments are nevertheless subject to the reporting requirements
of the Code.
"Securities Transaction" means a purchase or sale of Securities in which
an employee or a members of his or her Immediate Family has or acquires a
Beneficial Interest.
"Shareholder" means a shareholder in any of the Strong Funds.
"SCM" means Strong Capital Management, Inc.
"Strong Funds" means the investment companies comprising the Strong Family
of Mutual Funds.
6
<PAGE> 10
Appendix 2
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
I acknowledge that I have received and read the Code of Ethics dated
October 18, 1996, and represent that:
1. I will report all Securities Transactions in which I have, or a
member of my Immediate Family has, a Beneficial Interest, except for
transactions and holdings in (1) mutual funds (including but not limited
to the Strong Funds), (2) bank certificates of deposit ("CDs"), (3)
equity securities held in dividend reinvestment plans ("DRIPs"), or (4)
securities of the employer of a member of the employee's Immediate Family
if such securities are beneficially owned through participation by the
Immediate Family member in a Profit Sharing plan, 401(k) plan, ESOP, or
other similar plan.
2. I will comply with the Code of Ethics in all other respects.
_________________________________
Employee Signature
_________________________________
Print Name
Dated: ________________________________
7
<PAGE> 11
Confidential Appendix 3
ANNUAL CODE OF ETHICS QUESTIONNAIRE (1)
For NON-ACCESS PERSONS (2) of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc.,
and Heritage Reserve Development Corporation.
September 18, 1996
Associate: ____________________________
I. Introduction
Non-Access Persons are required to answer all of the questions below for the
year September 1, 1995, through August 31, 1996, sign the questionnaire and
return it to the Legal Department (an intra-office mail slip is copied on the
back of the last page) by FRIDAY, SEPTEMBER 27. ANSWERS OF "NO" TO ANY OF
THE QUESTIONS MUST BE EXPLAINED ON THE "ATTACHMENT" ON PAGE 3. If you have
any questions, please contact Jeffery Arnson (x3590) or Donna Lelinski
(x3362) in the Legal Department.
II. Annual certification of compliance with the Code of Ethics
A. Have you, in accordance with Section II.A. of the Code of Ethics,
reported all Securities Transactions in which you have, or a member of
your Immediate Family has, a Beneficial Interest, except for
transactions in mutual funds (including the Strong Funds), dividend
reinvestment plans ("DRIPs"), and certificates of deposit (CDs"). (If
there are no brokerage accounts, circle "Yes".)
YES NO (CIRCLE ONE)
B. Have you complied with the Code of Ethics in all other respects,
including the gift policy (Section III.B.)?
YES NO (CIRCLE ONE)
LIST ON THE ATTACHMENT ALL REPORTABLE (3) GIFTS (4) GIVEN OR RECEIVED FOR
THE YEAR SEPTEMBER 1, 1995, THROUGH AUGUST 31, 1996, NOTING THE MONTH,
"COUNTERPARTY," GIFT DESCRIPTION, AND ESTIMATED VALUE. IF NONE, SO STATE.
________________________
1 All definitions used in this questionnaire have the same meaning as those in
the Code of Ethics.
2 Access Persons must complete a separate questionnaire.
3 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
4 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
8
<PAGE> 12
III. Annual certification of compliance with Insider Trading Policy
Have you complied in all respects with the Insider Trading Policy (dated
October 20, 1995)?
YES NO (CIRCLE ONE)
IV. Disclosure of directorships statement
A. I am not, nor is any member of my Immediate Family, a director and/or
an officer of any for-profit, privately held companies.(5) (If you are
NOT, answer YES.)
YES NO (CIRCLE ONE)
If "NO", please list on the Attachment each company for which you are,
or a member of your Immediate Family is, a director.
B. If the response to A. is "NO", is there a reasonable expectation that
any of the companies for which you are, or a member of your Immediate
Family is, a director and/or an officer, will go public or be acquired
within the next 12 months?
YES NO (CIRCLE ONE)
(If the answer is "YES", please be prepared to discuss this matter
with a member of the Legal Department in the near future.)
**********************
ANSWERS OF "NO" TO ANY OF THE ABOVE QUESTIONS MUST BE
EXPLAINED ON THE "ATTACHMENT" ON PAGE 3.
**********************
I hereby represent that, to the best of my knowledge, the foregoing responses
are true and complete. I understand that any untrue or incomplete response may
be subject to disciplinary action by the firm.
_____________________________
Non-Access Person Signature
Dated: ________________ _____________________________
Print Name
_________________________
(5) Per Section III.E. of the Code of Ethics, no associate may serve on the
board of directors of a publicly held company.
9
<PAGE> 13
ATTACHMENT TO
ANNUAL CODE OF ETHICS QUESTIONNAIRE
(to explain all "NO" answers and to list reportable(6) gifts(7) )
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
______________GIFTS(6),(7) for the year September 1, 1995, through August 31,
1996. (If NONE, so state):
Month Gift Giver / Receiver Gift Description Estimated Value
----- --------------------- ---------------- ---------------
1. _____________________________________________________________________________
2. _____________________________________________________________________________
3. _____________________________________________________________________________
4. _____________________________________________________________________________
5. _____________________________________________________________________________
6. _____________________________________________________________________________
7. _____________________________________________________________________________
8. _____________________________________________________________________________
9. _____________________________________________________________________________
10._____________________________________________________________________________
(CONTINUE ON AN ADDITIONAL SHEET IF NECESSARY.)
___________________________
(6) Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
(7) Entertainment -- i.e., a meal or activity with the vendor present -- does
not have to be reported.
10
<PAGE> 14
Appendix 4
FORM LETTER TO BROKER OR BANK
[DATE]
<Broker Name>
<Broker Address>
<Broker City, State and Zip>
Subject: Account Number____________________
Account Registration______________
Dear ____________:
Please send duplicate confirmations of individual transactions as well as
duplicate periodic statements for the referenced account to:
Confidential
------------
Chief Compliance Officer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Your cooperation is most appreciated. If you have any questions regarding this
request, please contact me or the Compliance Department of Strong Capital
Management at (414) 359-3400.
Sincerely,
<Name of Employee>
copy: Chief Compliance Officer
Strong Capital Management, Inc.
11
<PAGE> 15
Appendix 5
GIFT POLICY
MEMORANDUM
----------
TO: All Associates
FROM: Thomas P. Lemke
DATE: December 1, 1994
SUBJECT: Gift Policy Reminder
With the Holiday season upon us, I wanted to remind you of our firm's gift
policy, which covers both GIVING GIFTS TO and ACCEPTING GIFTS FROM clients,
brokers, persons with whom we do business, or others (collectively, "vendors").
It is based on the applicable requirements of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. ("NASD") and is included
as part of the firm's Codes of Ethics.
Under our policy, associates may not give gifts to or accept gifts from
vendors with a value in excess of $100 per person per year and must report to
the firm annually if they accept certain types of gifts. The NASD defines a
"gift" to include any kind of gratuity. Since giving or receiving any gifts in
a business setting may give rise to an appearance of impropriety or may raise a
potential conflict of interest, we are relying on your professional attitude
and good judgment to ensure that our policy is observed to the fullest extent
possible. The discussion below is designed to assist you in this regard.
If you have any questions about the appropriateness of any gift, contact
Legal.
1. GIFTS GIVEN BY ASSOCIATES
Under applicable NASD rules, an associate may not give any gift with a
value in excess of $100 per year to any person associated with a securities or
financial organization, including exchanges, broker-dealers, commodity firms,
the news media, or clients of the firm. Please note, however, that the firm
may not take a tax deduction for any gift with a value exceeding $25.
This memorandum is not intended to authorize any associate to give a gift
to a vendor -- appropriate supervisory approval must be obtained before giving
any gifts.
2. GIFTS ACCEPTED BY ASSOCIATES
12
<PAGE> 16
On occasion, because of their position within the firm, associates may
be offered, or may receive without notice, gifts from vendors. Associates may
not accept any gift or form of entertainment from vendors (e.g., tickets to the
theater or a sporting event where the vendor does not accompany the associate)
other than gifts of NOMINAL VALUE, which the NASD defines as under $100 in
total from any vendor in any year (managers may, if they deem it appropriate
for their department, adopt a lower dollar ceiling). Any gift accepted by an
associate must be reported to the firm, subject to certain exceptions (see
heading 4 below). In addition, note that our gift policy does not apply to
normal and customary business entertainment or to personal gifts (see heading 3
below).
Associates may not accept a gift of cash or a cash equivalent (e.g., gift
certificates) in ANY amount, and under no circumstances may an associate
solicit a gift from a vendor.
Associates may wish to have gifts from vendors donated to charity,
particularly where it might be awkward or impolite for an associate to decline
a gift not permitted by our policy. In such case, the gift should be forwarded
to Mary Beitzel in Legal, who will arrange for it to be donated to charity.
Similarly, associates may wish to suggest to vendors that, in lieu of an annual
gift, the vendors make a donation to charity. In either situation discussed
in this paragraph, an associate would not need to report the gift to the firm
(see heading 4 below).
3. EXCLUSION FOR BUSINESS ENTERTAINMENT/PERSONAL GIFTS
Our gift policy does not apply to normal and customary business meals and
entertainment with vendors. For example, if an associate has a business meal
and attends a sporting event or show with a vendor, that activity would not be
subject to our gift policy, provided the vendor is present. If, on the other
hand, a vendor gives an associate tickets to a sporting event and the associate
attends the event without the vendor also being present, the tickets would be
subject to the dollar limitation and reporting requirements of our gift policy.
Under no circumstances may associates accept business entertainment that is
extraordinary or extravagant in nature.
In addition, our gift policy does not apply to usual and customary gifts
given to or received from vendors based on a personal relationship (e.g., gifts
between an associate and a vendor where the vendor is a family member or
personal friend).
4. REPORTING
The NASD requires gifts to be reported to the firm. Except as noted
below, associates must report annually all gifts given to or accepted from
vendors (Legal will distribute the appropriate reporting form to associates).
Associates are NOT required to report the following: (i) usual and
customary promotional items given to or received from vendors (e.g., hats,
pens, T-shirts, and similar items marked with a firm's logo), (ii) items
donated to charity through Mary Beitzel in Legal, or (iii) food items consumed
on the firm's premises (e.g., candy, popcorn, etc.).
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