<PAGE> 1
STRONG CONSERVATIVE EQUITY FUNDS
<TABLE>
<S> <C>
STRONG ASSET ALLOCATION FUND STRONG FUNDS
STRONG AMERICAN UTILITIES FUND P.O. Box 2936
STRONG TOTAL RETURN FUND Milwaukee, Wisconsin 53201
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. Three Strong Conservative Equity 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 January 15, 1996, 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.
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------
Dated January 15, 1996
---------------------
PROSPECTUS PAGE I-1
<PAGE> 2
STRONG CONSERVATIVE EQUITY FUNDS
Strong Asset Allocation Fund, Inc. and Strong Total Return Fund, Inc. are
separately incorporated, diversified, open-end management investment companies.
Strong American Utilities Fund is a non-diversified series of Strong
Conservative Equity Funds, Inc., which is an open-end management investment
company.
STRONG ASSET ALLOCATION FUND (the "Asset Allocation Fund") seeks high total
return consistent with reasonable risk over the long term. The Fund allocates
its assets globally among a diversified portfolio of equity securities, bonds,
and short-term fixed income securities.
STRONG AMERICAN UTILITIES FUND (the "American Utilities Fund") seeks total
return by investing for both income and capital growth. The Fund invests
primarily in the equity securities of public utility companies headquartered in
the United States.
STRONG TOTAL RETURN FUND (the "Total Return Fund") seeks high total return by
investing for capital growth and income. Using a conservative approach to equity
management, the Fund emphasizes investments in large companies with steady or
growing dividends.
---------------------
PROSPECTUS PAGE I-2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
EXPENSES................................ I-4
FINANCIAL HIGHLIGHTS.................... I-5
HIGHLIGHTS.............................. I-9
INVESTMENT OBJECTIVES AND POLICIES...... I-10
Comparing the Funds............ I-11
Strong Asset Allocation Fund... I-11
Strong American Utilities
Fund......................... I-13
Strong Total Return Fund....... I-13
IMPLEMENTATION OF POLICIES AND RISKS.... I-14
ABOUT THE FUNDS......................... I-25
SHAREHOLDER MANUAL...................... II-1
APPENDIX A.............................. A-1
APPENDIX B.............................. B-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and each Fund's
Statement of Additional Information, and if given or made, such information or
representations may not be relied upon as having been authorized by the Strong
Conservative Equity 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> 4
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Funds, will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<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 others who
may charge a commission or other transaction fee for their services. (See
"Shareholder Manual - How to Buy Shares" and "- How to Sell Shares.")
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Management Other 12b-1 Operating
Fund Fees Expenses Fees Expenses
<S> <C> <C> <C> <C> <C>
Asset Allocation .81% .42% NONE 1.23%
American Utilities .75 .89 NONE 1.64
Total Return .80 .40 NONE 1.20
</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 any of the Funds. The expenses specified in the table above
are based on actual expenses incurred for the year ended December 31, 1994. For
additional information concerning fees and expenses, see "About the Funds -
Management."
---------------------
PROSPECTUS PAGE I-4
<PAGE> 5
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>
Asset Allocation $13 $39 $68 $149
American Utilities 17 52 89 194
Total Return 12 38 66 145
</TABLE>
- ----------------------------------------------------------------------------
The Example is based on each Fund's "Total Operating Expenses," 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 that has
completed a fiscal year has been audited by Coopers & Lybrand L.L.P.,
independent certified public accountants. Their report for the fiscal year ended
December 31, 1994 is included in the Funds' Annual Report that is contained in
the Funds' Statement of Additional Information. The Financial Highlights for the
Funds for the semiannual period ended June 30, 1995 are unaudited. The Financial
Highlights for the Funds should be read in conjunction with the Financial
Statements and related notes included in the Funds' Annual and Semiannual
Reports. Additional information about each Fund's performance is contained in
the Funds' Annual and Semiannual Reports, which may be obtained without charge
by calling or writing Strong Funds. The following presents information relating
to a share of capital stock of each of the Funds, outstanding for the entire
period.
---------------------
PROSPECTUS PAGE I-5
<PAGE> 6
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
STRONG ASSET ALLOCATION FUND
1995** 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF
PERIOD $ 17.91 $ 19.06 $ 18.49 $ 19.68 $ 17.50 $ 18.41 $ 17.57 $ 17.60 $ 22.18 $ 20.12 $ 17.62
INCOME
FROM
INVESTMENT
OPERATIONS
Net
Investment
Income 0.41 0.70 0.82 0.87 0.94 1.12 1.22 1.39 0.85 0.89 0.84
Net
Realized
and
Unrealized
Gains
(Losses)
on
Invest-
ments 1.45 (0.99) 1.81 (0.25) 2.41 (0.65) 0.73 0.19 (0.70) 2.54 2.45
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL FROM
INVESTMENT
OPERATIONS 1.86 (0.29) 2.63 0.62 3.35 0.47 1.95 1.58 0.15 3.43 3.29
LESS
DISTRIBU-
TIONS
From Net
Invest-
ment
Income (0.38) (0.70) (0.82) (0.87) (0.97) (1.38) (0.97) (1.38) (1.78) (0.95) (0.75)
From Net
Realized
Gains -- -- (1.24) (0.94) (0.20) -- (0.14) -- (2.95) (0.42) (0.04)
In
Excess
of Net
Realized
Gains -- (0.16) -- -- -- -- -- -- -- -- --
Returns
of
Capital -- -- -- -- -- -- -- (0.23) -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL
DISTRIB-
UTIONS (0.38) (0.86) (2.06) (1.81) (1.17) (1.38) (1.11) (1.61) (4.73) (1.37) (0.79)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSET
VALUE,
END OF
PERIOD $ 19.39 $ 17.91 $ 19.06 $ 18.49 $ 19.68 $ 17.50 $ 18.41 $ 17.57 $ 17.60 $ 22.18 $ 20.12
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total
Return +10.5% -1.5% +14.5% +3.2% +19.6% +2.8% +11.2% +9.2% -0.3% +17.6% +19.4%
Net
Assets,
End of
Period
(In
Thousands) $251,517 $248,647 $254,439 $208,368 $214,951 $203,562 $240,549 $256,089 $272,899 $339,405 $220,556
Ratio of
Expenses
to
Average
Net
Assets 1.3%* 1.2% 1.2% 1.2% 1.3% 1.3% 1.3% 1.2% 1.1% 1.1% 1.1%
Ratio of
Net
Investment
Income
to
Average
Net
Assets 4.3%* 3.8% 4.2% 4.4% 5.1% 6.1% 6.6% 7.5% 4.2% 4.7% 5.4%
Portfolio
Turnover
Rate 235.6% 359.7% 348.3% 320.4% 418.4% 319.6% 206.5% 426.2% 336.5% 80.4% 143.6%
</TABLE>
*Calculated on an annualized basis.
**For the six months ended June 30, 1995 (Unaudited). Total return and portfolio
turnover rate are not annualized.
---------------------
PROSPECTUS PAGE I-6
<PAGE> 7
-----------------------------------------------
STRONG AMERICAN UTILITIES FUND
<TABLE>
<CAPTION>
1995*** 1994 1993**
-------- ------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.46 $ 10.19 $ 10.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.16 0.46 0.18
Net Realized and Unrealized
Gains (Losses) on Investments 1.11 (0.73) 0.27
-------- ------- --------
TOTAL FROM INVESTMENT OPERATIONS 1.27 (0.27) 0.45
LESS DISTRIBUTIONS
From Net Investment Income (0.16) (0.46) (0.18)
From Net Realized Gains -- -- (0.05)
In Excess of Net Realized Gains -- -- (0.03)
-------- ------- --------
TOTAL DISTRIBUTIONS (0.16) (0.46) (0.26)
-------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 10.57 $ 9.46 $ 10.19
======= ======= =======
Total Return +13.6% -2.6% +4.5%
Net Assets, End of Period
(In Thousands) $ 66,721 $37,944 $ 32,457
Ratio of Expenses to Average
Net Assets 1.3%* 0.5% 0.0%*
Ratio of Expenses to Average Net
Assets Without Waivers and
Absorptions 1.3%* 1.6% 1.4%*
Ratio of Net Investment Income
to Average Net Assets 3.7%* 4.8% 5.6%*
Portfolio Turnover Rate 38.3% 105.4% 178.6%*
</TABLE>
*
Calculated on an annualized basis.
**
Inception date is July 1, 1993. Total return is not annualized.
***
For the six months ended June 30, 1995 (Unaudited). Total return and portfolio
turnover rate are not annualized.
---------------------
PROSPECTUS PAGE I-7
<PAGE> 8
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRONG TOTAL RETURN FUND
1995** 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------- ------- ------- ------ ------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF
PERIOD $ 23.62 $ 24.30 $ 20.17 $ 20.24 $ 15.34 $ 17.72 $ 18.96 $ 18.37 $ 21.61 $ 19.56 $ 16.35
INCOME
FROM
INVESTMENT
OPERATIONS
Net
Investment
Income 0.17 0.25 0.33 0.18 0.22 0.95 1.55 1.95 0.97 0.66 0.59
Net
Realized
and
Unrealized
Gains
(Losses)
on
Investments 3.10 (0.59) 4.18 (0.08) 4.90 (2.19) (0.97) 0.85 0.61 3.13 3.40
------- ------- ------- ------ ------- ------- -------- ------- -------- -------- --------
TOTAL FROM
INVESTMENT
OPERATIONS 3.27 (0.34) 4.51 0.10 5.12 (1.24) 0.58 2.80 1.58 3.79 3.99
LESS
DISTRIBUTIONS
From Net
Investment
Income (0.17) (0.26) (0.33) (0.17) (0.22) (1.14) (1.31) (1.96) (1.65) (0.70) (0.58)
In Excess
of Net
Investment
Income (0.02) (0.08) -- -- -- -- -- -- -- -- --
From Net
Realized
Gains -- -- -- -- -- -- (0.51) -- (3.17) (1.04) (0.20)
In Excess
of Net
Realized
Gains -- -- (0.05) -- -- -- -- -- -- -- --
Returns of
Capital -- -- -- -- -- -- -- (0.25) -- -- --
------- ------- ------- ------ ------- ------- -------- ------- -------- -------- --------
TOTAL
DISTRI-
BUTIONS (0.19) (0.34) (0.38) (0.17) (0.22) (1.14) (1.82) (2.21) (4.82) (1.74) (0.78)
------- ------- ------- ------ ------- ------- --------- ------- -------- -------- --------
NET
ASSET
VALUE,
END OF
PERIOD $ 26.70 $ 23.62 $ 24.30 $20.17 $20.24 $ 15.34 $ 17.72 $ 18.96 $ 18.37 $ 21.61 $ 19.56
======== ======== ======= ====== ====== ======= ========= ======== ======== ======== ========
Total
Return +13.9% -1.4% +22.5% +0.6% +33.6% -7.1% +2.6% +15.6% +6.0% +20.0% +25.4%
Net Assets,
End of
Period
(In
Thou-
sands) $643,199 $606,814 $630,349 $587,873 $691,327 $646,579 $1,065,278 $1,005,192 $802,442 $518,760 $233,956
Ratio of
Expenses
to
Average
Net
Assets 1.2%* 1.2% 1.2% 1.3% 1.4% 1.4% 1.2% 1.2% 1.1% 1.1% 1.1%
Ratio of
Net
Investment
Income
to Average
Net Assets 1.4%* 1.1% 1.4% 0.9% 1.3% 5.4% 7.7% 10.1% 5.2% 4.3% 5.0%
Portfolio
Turnover
Rate 141.4% 290.4% 271.3% 371.8% 426.4% 312.3% 305.3% 281.1% 224.4% 153.5% 304.6%
</TABLE>
* Calculated on an annualized basis.
** For the six months ended June 30, 1995 (Unaudited). Total return and
portfolio turnover rate are not annualized.
---------------------
PROSPECTUS PAGE I-8
<PAGE> 9
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has distinct investment objectives and policies. Each Fund seeks
total return consistent with its investment objective and policies. The
investment objective of each Fund is set forth under "Investment Objectives and
Policies."
IMPLEMENTATION OF POLICIES AND RISKS
Subject to certain limitations, each Fund may invest in foreign securities
and engage in foreign currency and derivative transactions, including options,
futures, and options on futures transactions. Each Fund may invest in repurchase
agreements, when-issued securities, and illiquid securities. The Asset
Allocation Fund may engage in substantial short-term trading, which may result
in high portfolio turnover rates. These investment practices and techniques
involve risks that are different in some respects from those associated with
similar funds that do not use them. The American Utilities Fund is a "non-
diversified" investment company, which means that it may invest a larger
proportion of its assets in the securities of a single issuer than diversified
funds. The Funds may invest in non-investment-grade debt obligations (commonly
called "junk bonds") within specified limits. (See "Implementation of Policies
and Risks.")
MANAGEMENT
The Advisor, Strong Capital Management, Inc., serves as investment advisor to
the Funds. The Advisor provides investment management services for mutual funds
and other investment portfolios representing assets of over $15 billion. W.H.
Reaves & Co., Inc. (the "Subadvisor") is the subadvisor for the American
Utilities Fund. (See "About the Funds - Management.")
PURCHASE AND REDEMPTION OF SHARES
You may purchase or redeem shares of a Fund at net asset value. There are no
redemption or 12b-1 charges. The net asset values change daily with the value of
each Fund's portfolio. You can locate the net asset value for a Fund in
newspaper listings of mutual fund prices under the "Strong Funds" heading. (See
"Shareholder Manual - How to Buy Shares" and "- How to Sell Shares.")
---------------------
PROSPECTUS PAGE I-9
<PAGE> 10
SHAREHOLDER SERVICES
Strong shareholder benefits include: telephone purchase, exchange, and
redemption privileges; professional representatives available 24 hours a day;
automatic investment, automatic dividend reinvestment, payroll direct deposit,
automatic exchange and systematic withdrawal plans; and a no-minimum investment
program. (See "Shareholder Manual - Shareholder Services.")
DIVIDENDS AND OTHER DISTRIBUTIONS
The policy of each Fund is to pay dividends from net investment income
quarterly and to distribute substantially all net realized capital gains
annually. (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
Fund's investment objective is discussed below in connection with the Fund's
investment policies. Because of the risks inherent in all investments, there can
be no assurance that the Funds will meet their objectives.
The Funds are each required or permitted to invest a substantial portion of
their assets in equity securities. Accordingly, each Fund's net asset value will
fluctuate based upon changes in the value of the securities in its portfolio.
Although they are considered conservative equity funds - meaning, each Fund's
net asset value is likely to be less volatile than that of a Fund invested
principally for growth of capital - each Fund's net asset value is likely to
fluctuate more than that of a fund invested principally for income. The Funds,
therefore, are not appropriate for investors' short-term financial needs.
----------------------
PROSPECTUS PAGE I-10
<PAGE> 11
COMPARING THE FUNDS
The following chart is intended to distinguish the Funds and help you
determine their suitability for your investments.
<TABLE>
<CAPTION>
Maximum
Equity Bond Cash
Fund Range Range Position Diversified Focus
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asset Allocation 10-60% 20-60% 100%* Yes Allocated Across
Asset Classes
- ----------------------------------------------------------------------------
American Utilities 65-100% 0-35% 100%* No Utility and
Energy Stocks
- ----------------------------------------------------------------------------
Total Return 60-100% 0-40% 40% Yes Large-Cap and
Dividend-Paying
Stocks
- ----------------------------------------------------------------------------
</TABLE>
*Temporary defensive position only.
Each Fund has adopted certain fundamental investment restrictions that are
set forth in the Funds' Statement of Additional Information ("SAI"). Those
restrictions, a Fund's investment objective, and any other investment policies
identified as "fundamental" cannot be changed without shareholder approval. To
further guide investment activities, each Fund has also instituted a number of
non-fundamental operating policies, which are described throughout this
Prospectus and in the SAI. Although operating policies may be changed by a
Fund's Board of Directors without shareholder approval, a Fund will promptly
notify shareholders of any material change in operating policies.
Except as limited below, each Fund may invest in a diversified portfolio of
securities without regard to objective investment criteria, such as company
size, exchange listing, earnings history, or other factors. When selecting
securities, the Advisor will, except as otherwise limited below, be limited only
by its best judgment as to what will help achieve each Fund's investment
objective.
STRONG ASSET ALLOCATION FUND
The Asset Allocation Fund seeks high total return consistent with reasonable
risk over the long term. The Fund allocates its assets globally among a
diversified portfolio of equity securities, bonds, and short-term fixed income
securities.
Under normal market conditions, the Fund's net assets will be allocated
according to a benchmark of 40% equities, 40% bonds, and 20% short-term fixed
income securities. The Advisor intends to actively manage the Fund's assets,
maintaining a balance over time between investment opportunities and their
associated potential risks. In response to changing market and economic
conditions, the Advisor may reallocate the Fund's net assets among these asset
----------------------
PROSPECTUS PAGE I-11
<PAGE> 12
categories. Those allocations normally will be within the ranges indicated
below. However, in pursuit of total return, the Advisor may under-allocate or
over-allocate the Fund's net assets in a particular category. Furthermore, when
the Advisor determines that market conditions warrant adopting a temporary
defensive position, the Fund may invest without limitation in cash and short-
term fixed income securities.
ASSET-ALLOCATION CATEGORIES
<TABLE>
<CAPTION>
Percentage of Fund
Net Assets
--------------------
Category of Investment Benchmark Range
<S> <C> <C>
- -----------------------------------------------------------
Equities 40% 10-60%
Bonds 40% 20-60%
Short-Term Fixed Income Securities 20% 0-70%
- -----------------------------------------------------------
</TABLE>
Equity securities in which the Fund may invest include common stocks,
preferred stocks, and securities that are convertible into common stocks, such
as warrants and convertible bonds. Bonds purchased by the Fund will be primarily
investment-grade debt obligations, although the Fund may invest up to, but not
including, 35% of its total assets in non-investment-grade debt obligations.
(See "Implementation of Policies and Risks - Debt Obligations.")
The Fund also has the flexibility to take advantage of investment
opportunities around the world by investing in foreign securities. While the
Fund may invest without limitation in foreign securities, the Advisor does not
expect that, under normal market conditions, the Fund will invest more than 40%
of its total assets in foreign securities. Foreign investments involve risks not
normally found when investing in securities of U.S. issuers. (See
"Implementation of Policies and Risks - Foreign Securities and Currencies.")
Within the asset-allocation categories described above, the Advisor will
allocate the Fund's investments among countries, geographic regions, and
currencies in response to changing market and economic trends. In making
geographical allocations of investments, the Advisor will consider such factors
as the historical and prospective relationships among currencies and
governmental policies that influence currency-exchange rates, current and
anticipated interest rates, inflation levels, and business conditions within
various countries, as well as other macroeconomic, social, and political
factors. While there are no prescribed limits on the Fund's geographic
allocations, the Advisor anticipates that the Fund generally will invest in
issuers in industrialized countries and in major currencies, including the
United States, Canada, the countries of Western Europe, Japan, Australia, and
New Zealand. The Fund may also, however, invest in securities of issuers in
developing countries.
----------------------
PROSPECTUS PAGE I-12
<PAGE> 13
STRONG AMERICAN UTILITIES FUND
The American Utilities Fund seeks total return by investing for both income
and capital growth.
The Fund normally will invest at least 65% of its total assets in the equity
securities of public utility companies headquartered in the United States.
Equity securities in which the Fund may invest include common stocks, preferred
stocks, and securities that are convertible into common stocks, such as warrants
and convertible bonds. Public utility companies include those engaged in the
manufacture, production, generation, transmission, sale and/or distribution of
water, gas, and electric energy, as well as those engaged in the communications
industry, including providers of telephone, telegraph, satellite, cable
television, microwave, and other communication facilities for the public,
excluding public broadcasting companies. (See "Implementation of Policies and
Risks - Public Utility Companies.")
The balance of the Fund, up to 35% of its total assets, may be invested in
any type of security, including debt obligations and equity securities of
companies in other industries. The Fund intends to use this allowance primarily
to invest in the equity securities of energy companies, which may compose up to
25% of the Fund's total assets. (See "Implementation of Policies and Risks -
Energy Companies.") Although the debt obligations in which it invests will be
primarily investment grade, the Fund may invest up to 5% of its total assets in
non-investment-grade debt securities. (See "Implementation of Policies and Risks
- - Debt Obligations.")
The Fund may invest up to 15% of its total assets directly in the securities
of foreign issuers and may invest up to 35% of its total assets in foreign
securities in domestic markets through depositary receipts. See "Implementation
of Policies and Risks - Foreign Securities and Currencies" for the special risks
associated with foreign investments.
Under normal market conditions, the Fund expects to be fully invested in the
equity securities of companies in the public utility and energy industries.
However, when the Advisor or W.H. Reaves & Co., Inc. (the "Subadvisor")
determines that market conditions warrant a temporary defensive position, the
Fund may invest without limitation in cash and short-term fixed income
securities.
STRONG TOTAL RETURN FUND
The Total Return Fund seeks high total return by investing for capital growth
and income. Using a conservative approach to equity management, the Fund
emphasizes investments in large companies with steady or growing dividends. (See
"Implementation of Policies and Risks - Debt Obligations.")
The Fund will invest at least 60% of its total assets in equity securities,
including common stocks, preferred stocks, and securities that are convertible
into common stocks, such as warrants and convertible bonds. Under normal market
conditions, the Fund expects to be at least 80% of its total assets
----------------------
PROSPECTUS PAGE I-13
<PAGE> 14
invested in equity securities. At times, however, it may invest up to 40% of its
total assets in intermediate- to long-term corporate or U.S. government bonds.
Although the bonds in which it invests will be primarily investment grade, the
Fund may invest up to 5% of its total assets in non-investment-grade bonds. When
the Advisor determines that market conditions warrant a temporary defensive
position, the Fund may use the above allowance to invest up to 40% of its total
assets in cash and short-term fixed income securities. The Fund may invest up to
5% of its assets in the securities of foreign issuers, either through direct
investment or depositary receipts. See "Implementation of Policies and Risks -
Foreign Currencies" for the special risks associated with foreign investments.
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. Each
Fund may also engage in reverse repurchase agreements and mortgage dollar roll
transactions. A more complete discussion of certain of these securities and
investment techniques and the associated risks is contained in the Funds' SAI.
DEBT OBLIGATIONS
IN GENERAL. The market value of all debt obligations is affected by changes
in the prevailing interest rates. The market value of such instruments generally
reacts inversely to interest rate changes. If the prevailing interest rates
decline, the market value of debt obligations generally increases. If the
prevailing interest rates increase, the market value of debt obligations
generally decreases. In general, the longer the maturity of a debt obligation,
the greater its sensitivity to changes in interest rates.
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
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<PAGE> 15
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) U.S. government
securities; (x) mortgage-backed securities, collateralized mortgage obligations,
and similar securities; and (xi) municipal obligations.
RATINGS. Investment-grade debt obligations include:
- - U.S. government securities (as defined below);
- - bonds or bank obligations rated in one of the four highest rating categories
(e.g., BBB or higher by Standard & Poor's Ratings Group or "S&P");
- - short-term notes rated in one of the two highest rating categories (e.g., SP-2
or higher by S&P);
- - short-term bank obligations rated in one of the three highest rating
categories (e.g., A-3 or higher by S&P), with respect to obligations maturing
in one year or less;
- - commercial paper rated in one of the three highest rating categories (e.g.,
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.
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.
Securities rated in the fourth highest category (e.g., BBB by S&P), although
considered investment grade, have speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities.
Non-investment-grade debt obligations include:
- - securities rated as low as C by S&P or their equivalents;
- - commercial paper rated as low as C by S&P or its equivalent; and
- - unrated debt securities judged to be of comparable quality by the Advisor.
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
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<PAGE> 16
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 Appendix B for information concerning the credit quality of the Asset
Allocation Fund's investments in debt obligations in 1994.
GOVERNMENT SECURITIES. U.S. government securities are issued or guaranteed by
the U.S. government or its agencies or instrumentalities. Securities issued by
the government include U.S. Treasury obligations, such as Treasury bills, notes,
and bonds. Securities issued by government agencies or instrumentalities
include, for example, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, and the Government
National Mortgage Association, including GNMA pass-through
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<PAGE> 17
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.
SHORT-TERM FIXED INCOME SECURITIES. Short-term fixed income securities in
which the Funds may invest include, but are not limited to, debt securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, commercial paper, banker's acceptances, certificates of
deposit, and time deposits. The Funds may invest in obligations of domestic and
foreign banks and their subsidiaries and branches.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES. Each Fund may invest in
zero-coupon, step-coupon, and pay-in-kind securities. These securities are debt
securities that do not make regular cash interest payments. Zero-coupon and
step-coupon securities are sold at a deep discount to their face value.
Pay-in-kind securities pay interest through the issuance of additional
securities. Because such securities do not pay current cash income, the price of
these securities can be volatile when interest rates fluctuate. While these
securities do not pay current cash income, federal income tax law requires the
holders of zero-coupon, step-coupon, and pay-in-kind securities to include in
income each year the portion of the original issue discount (or deemed discount)
and other non-cash income on such securities accrued during that year. In order
to qualify as a "regulated investment company" under the Internal Revenue Code
and avoid a certain excise tax, a Fund may be required to distribute a portion
of such discount and income and may be required to dispose of other portfolio
securities, which may occur in periods of adverse market prices, in order to
generate cash to meet these distribution requirements.
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<PAGE> 18
PUBLIC UTILITY COMPANIES (AMERICAN UTILITIES FUND)
Under normal market conditions, at least 65% of the American Utilities Fund's
total assets will be invested in the equity securities of public utility
companies headquartered in the United States. Accordingly, the Fund's
performance will depend in part on conditions in the public utility industry.
Stocks of public utility companies have traditionally been attractive to
conservative stock market investors because they have generally paid consistent
and above-average dividends. The Fund's investments in public utility securities
may or may not pay consistent and above-average dividends. Moreover, the
securities of public utility companies can still be affected by the risks of the
stock market, as well as factors specific to public utility companies.
Government regulation of public utility companies can limit their ability to
expand their businesses or to pass cost increases onto customers. Additionally,
companies providing power or energy-related services may also be affected by the
following factors: increases in fuel and other operating costs; high costs of
borrowing to finance capital construction during inflationary periods;
operational restrictions, increased costs, and delays associated with compliance
with environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks associated with constructing and operating nuclear
power plants; the effects of energy conservation; and the effects of regulatory
changes. Some public utility companies are facing increased competition, which
may reduce their profits. All of these factors are subject to rapid change,
which may affect utility companies independently from the stock market as a
whole. Equity securities issued by public utility companies tend to be more
affected by changes in interest rates than are the equity securities of other
issuers and, therefore, may react to such changes somewhat like debt
instruments. (See "Debt Obligations" above.)
In accordance with its investment objective and fundamental investment
restrictions, the Fund will normally concentrate its investments in the public
utility industry. This means that more than 25% of the value of the Fund's total
assets will normally be invested in the public utility industry. The Fund does
not have set policies to concentrate within any particular segment of the public
utilities industry; however, the Subadvisor generally emphasizes investments in
established electric utility, telephone, natural gas, and energy stocks with
sound financial structures.
Due to the Fund's concentration of investments in the public utility
industry, an investment in the Fund may be subject to greater fluctuations in
value than a Fund that does not concentrate its investments in a similar manner.
For example, as discussed above, certain economic factors or specific events may
exert a disproportionate impact upon the prices of equity securities of
companies within the public utilities industry relative to their impact on the
prices of securities of companies engaged in other industries. Additionally,
changes in the market price of the equity securities of a particular company
that occupies
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<PAGE> 19
a dominant position in an industry may tend to influence the market prices of
other companies within the same industry. As a result of the foregoing factors,
the net asset value of the Fund may be more susceptible to change than those of
investment companies that diversify their investments over many different
industries.
ENERGY COMPANIES (AMERICAN UTILITIES FUND)
Under normal market conditions, the American Utilities Fund anticipates it
may invest a substantial portion, but not more than 25% of its total assets, in
the equity securities of energy companies. Energy companies are generally
defined as companies in the conventional areas of oil, gas, electricity, and
coal, as well as those involved in alternative sources of energy, such as
nuclear, geothermal, shale, and solar power. The business activities of energy
companies may include production, generation, refining, transmission,
transportation, marketing, control, or measurement of energy or energy fuels;
providing component parts or services to companies engaged in these energy
activities; energy research or experimentation; and environmental activities
related to the solution of energy problems, such as energy conservation and
pollution control. For purposes of this 25% investment limitation, energy
companies shall exclude companies that are also public utility companies.
To the extent the Fund makes significant investments in energy companies, the
Fund's performance will depend in part on conditions in the energy industry. The
securities of companies in the energy industry are subject to changes in value
and dividend yield that depend to a large extent on the price and supply of
energy fuels. Swift price and supply fluctuations of energy fuels may be caused
by events relating to international politics, energy conservation, the success
of exploration projects, currency exchange rate fluctuations, and tax and other
regulatory policies of various governments.
WHEN-ISSUED SECURITIES
Each Fund may invest without limitation in securities purchased on a when-
issued or delayed delivery basis. Although the payment and interest terms of
these securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date,
generally within 45 days. Purchasing when-issued securities allows a Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when a Fund purchases a when-issued security, it immediately assumes the risk of
ownership, including the risk of price fluctuation.
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
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<PAGE> 20
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.
FOREIGN SECURITIES AND CURRENCIES
Each Fund may invest in foreign securities either directly or through the use
of depositary receipts. (See "Investment Objectives and Policies.") Depositary
receipts are generally issued by banks or trust companies and evidence ownership
of underlying foreign securities. Foreign investments may include other
investment companies which may involve frequent or layered fees and also are
subject to limitations under the Investment Company Act of 1940 (the "1940
Act"). 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 are
less liquid and their prices more volatile than comparable U.S. securities.
Although the Funds generally invest only in securities that are regularly traded
on recognized exchanges or in over-the-counter markets, from time to time
foreign securities may be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign investing, such as custody
charges and brokerage costs, are higher than those attributable to domestic
investing.
The Asset Allocation Fund may invest a significant portion of its assets in
the foreign securities of issuers in developing countries. The risks of foreign
investments are generally intensified for investments in developing countries.
Risks of investing in such markets include:
- - less social, political, and economic stability;
- - smaller securities markets and the lower trading volume, which may result in a
lack of liquidity and greater price volatility;
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<PAGE> 21
- - certain national policies that may restrict the Fund's investment
opportunities, including restrictions on investments in issuers or industries
deemed sensitive to national interests, or expropriation or confiscation of
assets or property, which could result in the Fund's loss of its entire
investment in that market; and
- - less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes,
and other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
The Asset Allocation Fund may also invest a significant portion of its assets
in debt obligations issued or guaranteed by foreign governments or their
agencies, instrumentalities or political subdivisions, or by supranational
issuers (collectively, sovereign debt). Investment in sovereign debt involves
special risks. Certain foreign countries, particularly developing countries,
have experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties, and extreme poverty and
unemployment. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or interest when due in accordance with the terms of such debt, and the Fund may
have limited legal recourse in the event of default.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Asset Allocation Fund, and to a lesser extent the
other Funds, could be affected by changes in foreign currency exchange rates to
some extent. The value of a Fund's assets denominated in foreign currencies will
increase or decrease in response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Currency exchange rates can be volatile
at times in response to supply and demand in the currency exchange markets,
international balances of payments, governmental intervention, speculation, and
other political and economic conditions.
The Funds may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options, and futures transactions
for hedging or any other lawful purpose. (See "Derivative Instruments.")
DERIVATIVE INSTRUMENTS
Derivative instruments may be used by the Funds for any lawful purpose
consistent with each Fund's investment objective, including hedging or
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<PAGE> 22
managing risk but not for speculation. Derivative instruments are securities or
agreements whose value is derived from the value of some underlying asset, for
example, securities, currencies, reference indexes, or commodities. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which the holder of the option
has the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer 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 seller 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. Derivative
transactions may include elements of leverage and, accordingly, the fluctuation
of the value of the derivative transaction in relation to the underlying asset
may be magnified. In addition to options, futures, and options on futures
transactions, derivative transactions may include short sales against the box,
in which a Fund sells a security it owns for delivery at a future date; swaps,
in which the two parties agree to exchange a series of cash flows in the future,
such as interest-rate payments; interest-rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; and interest-rate floors,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a specified level, or
"floor." Derivative transactions may also include forward currency contracts and
foreign currency exchange-related securities.
Derivative instruments may be exchange-traded or traded in over-the-counter
transactions between private parties. Over-the-counter transactions are subject
to the credit risk of the counterparty to the instrument and are less liquid
than exchange-traded derivatives since they often can only be closed out with
the other party to the transaction. When required by SEC guidelines, a Fund will
set aside permissible liquid assets or securities positions that substantially
correlate to the market movements of the derivative transactions in a segregated
account to secure its obligations under derivative transactions. In order to
maintain its required cover for a derivative transaction, a Fund may need to
sell portfolio securities at disadvantageous prices or times since it may not be
possible to liquidate a derivative position.
The successful use of derivative transactions by a Fund is dependent upon the
Advisor's ability to correctly anticipate trends in the underlying asset. To the
extent that a Fund is engaging in derivative transactions other than for hedging
purposes, the Fund's successful use of such transactions is more dependent upon
the Advisor's ability to correctly anticipate such trends, since
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PROSPECTUS PAGE I-22
<PAGE> 23
losses in these transactions may not be offset by gains in the Fund's portfolio
or in lower purchase prices for assets it intends to acquire. The Advisor's
prediction of trends in underlying assets may prove to be inaccurate, which
could result in substantial losses to a Fund. Hedging transactions are also
subject to risks. 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 an imperfect correlation between a Fund's
derivative transactions and the instruments being hedged.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators and investors in mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers, and special purpose
entities (collectively, "private lenders"). Mortgage-backed securities issued by
private lenders may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any governmental guarantee of the underlying mortgage assets but
with some form of non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first-lien mortgage
loans or interests therein; 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 securities. Among the principal differences are
that interest and principal payments are made more frequently on mortgage-and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if a Fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal
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<PAGE> 24
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 such market
value may be extremely volatile. With respect to certain stripped securities,
such as interest-only ("IO") and principal-only ("PO") classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
SMALL COMPANIES
The Asset Allocation Fund may, from time to time, invest a substantial
portion of its assets in small companies. While smaller companies generally have
potential for rapid growth, investments in smaller companies often involve
greater risks than investments in larger, more established companies because
smaller companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In
addition, in many instances the securities of smaller companies are traded only
over-the-counter or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Therefore, the securities of smaller companies may be subject to
greater and more abrupt price fluctuations. When making large sales, the Fund
may have to sell portfolio holdings at discounts from quoted prices or may have
to make a series of small sales over an extended period of time due to the
trading volume of smaller company securities. Investors should be aware that,
based on the foregoing factors, an investment in the Fund may be subject to
greater price fluctuations than an investment in a fund that invests primarily
in larger, more established companies. The Advisor's research efforts may also
play a greater role in selecting securities for the Fund than in a fund that
invests in larger, more established companies.
DIVERSIFICATION
The American Utilities Fund is non-diversified. Because the Fund may invest a
larger portion of its assets in the securities of a single issuer than
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<PAGE> 25
diversified funds, an investment in the Fund may be subject to greater
fluctuations in value than an investment in a diversified fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are those securities that are not readily marketable,
including restricted securities and repurchase obligations maturing in more than
seven days. Certain restricted securities that may be resold to institutional
investors under Rule 144A under the Securities Act and Section 4(2) commercial
paper may be determined to be liquid under guidelines adopted by each Fund's
Board of Directors.
PORTFOLIO TURNOVER
Historical portfolio turnover rates for the Asset Allocation, American
Utilities, and Total Return 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 Asset Allocation and Total Return Funds each have a wide
investment scope and an active management investment policy. Their portfolio
turnover rates may be as much as 400% or more. Under normal market conditions,
it is anticipated that the rate of portfolio turnover of the American Utilities
Funds generally will not exceed 200%. These rates should not be considered as
limiting factors. The Asset Allocation Fund may engage in substantial short-term
trading, which involves significant risk and may be deemed speculative. Such
trading will result in a higher portfolio turnover rate and correspondingly
higher brokerage costs.
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
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<PAGE> 26
agreements, the Advisor manages each Fund's investments and business
affairs subject to the supervision of each Fund's Board of Directors.
ADVISOR. The Advisor began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and profit-sharing
plans, as well as mutual funds, several of which are funding vehicles for
variable insurance products. As of November 30, 1995, the Advisor had over $15
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: Asset Allocation and Total Return Funds,
.85% of the Fund's average daily net assets up to $35,000,000 and .80% of each
Fund's average daily net assets in excess of $35,000,000; and American Utilities
Fund, .75%. Such fees are in excess of fees paid by many other funds. From time
to time, the Advisor may voluntarily waive all or a portion of its management
fee and/or absorb certain Fund expenses without further notification of the
commencement or termination of such waiver or absorption. Any such waiver or
absorption will temporarily lower a Fund's overall expense ratio and increase a
Fund's overall return to investors.
Except for expenses assumed by the Advisor or Strong Funds Distributors,
Inc., each Fund is responsible for all its other expenses, including, without
limitation, interest charges, taxes, brokerage commissions, and similar
expenses; expenses of issue, sale, repurchase, or redemption of shares; expenses
of registering or qualifying shares for sale with the states and the SEC;
expenses of printing and distribution of prospectuses to existing shareholders;
charges of custodians (including fees as custodian for keeping books and similar
services for a Fund), transfer agents (including the printing and mailing of
reports and notices to shareholders), registrars, auditing and legal services,
and clerical services related to recordkeeping and shareholder relations;
printing of stock certificates; fees for directors who are not "interested
persons" of the Advisor; expenses of indemnification; extraordinary expenses;
and costs of shareholder and director meetings.
SUBADVISORY AGREEMENT - AMERICAN UTILITIES FUND. Under a subadvisory
agreement between the Advisor and W.H. Reaves & Co., Inc. (the "Subadvisory
Agreement"), the Subadvisor, pursuant to the oversight and supervision of the
American Utilities Fund's Board of Directors and the Advisor, provides a
continuous investment program for the American Utilities Fund. Under the
Subadvisory Agreement, the Subadvisor is responsible for determining the
securities to be purchased and sold by the Fund and for executing those
transactions. However, the Advisor is responsible for managing the short-term
fixed income securities maintained by the Fund in the ordinary course of its
business, which are expected to equal approximately 5% - 7% of the Fund's total
----------------------
PROSPECTUS PAGE I-26
<PAGE> 27
assets. As compensation for its services, the Advisor (not the Fund) pays the
Subadvisor a monthly fee at an annual rate of .50% on the first $200 million of
the Fund's average daily net assets plus 40% of the Advisor's net management fee
(after any waivers thereof) on that portion of the Fund's average daily net
assets in excess of $200 million except that the foregoing percentage will be
50% on those average daily net assets between $1.0 billion and $1.5 billion. The
Subadvisor bears all of its own expenses in providing subadvisory services to
the Fund.
The Subadvisor began conducting business in 1961. Since then, its principal
business has been providing continuous investment supervision to institutional
investors such as corporations, corporate pension funds, employee savings plans,
foundations, and endowments. The Subadvisor is a Delaware corporation. Mr.
William H. Reaves is the controlling shareholder of the Subadvisor. As of
November 30, 1995, the Subadvisor had over $1 billion under management. Its
address is 10 Exchange Place, Jersey City, New Jersey 07302.
The Subadvisor may also act as a broker for the American Utilities Fund. In
order for the Subadvisor to effect any portfolio transactions for the Fund on an
exchange, the commissions, fees, or other remuneration received by the
Subadvisor must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with transactions
involving similar securities being purchased or sold on any exchange during a
comparable period of time. This standard would allow the Subadvisor to receive
no more than the remuneration that would be expected to be received by an
unaffiliated broker in a commensurate arm's-length transaction.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Strong Conservative Equity Funds.
STRONG ASSET ALLOCATION FUND
BRADLEY C. TANK. Mr. Tank leads the Fund's investment team and allocates the
Fund's assets among equities, bonds, and short-term fixed income securities. In
addition, Mr. Tank co-manages the Fund's bond component. Before joining the
Advisor in June 1990, he spent eight years at Salomon Brothers, Inc., where he
was a fixed-income specialist and, for the last six years, a vice president. Mr.
Tank received his B.A. in 1980 from the University of Wisconsin-Eau Claire and
his M.B.A. in 1982 from the University of Wisconsin-Madison, where he also
completed the Applied Securities Analysis Program. In addition to his Asset
Allocation Fund duties, Mr. Tank co-manages the Strong Short-Term Bond Fund,
manages the Strong Government Securities Fund and chairs the Advisor's Fixed
Income Investment Committee.
Equity Component
ANTHONY L.T. CRAGG. Mr. Cragg co-manages the equity component of the Fund.
Mr. Cragg joined the Advisor in April 1993 to develop the Advisor's
----------------------
PROSPECTUS PAGE I-27
<PAGE> 28
international investment activities. During the prior seven years, he helped
establish Dillon, Read International Asset Management, where he was in charge of
Japanese, Asian, and Australian investments. A graduate of Christ Church, Oxford
University, Mr. Cragg began his investment career as an international investment
manager in 1980 at Gartmore, Ltd., where his tenure included assignments in
London, Hong Kong, and Tokyo. He has co-managed the Fund since December 1994 and
managed the Strong International Stock Fund since he joined the Advisor. He has
also managed the Strong Asia Pacific Fund since its inception in December 1993.
RONALD C. OGNAR. Mr. Ognar co-manages the equity component of the Fund. Mr.
Ognar, a Chartered Financial Analyst with more than 25 years of investment
experience, joined the Advisor in April 1993 after two years as a principal and
portfolio manager with RCM Capital Management. For approximately three years
prior to that, he was a portfolio manager at Kemper Financial Services in
Chicago. Mr. Ognar began his investment career in 1968 at LaSalle National Bank
in Chicago after serving two years in the U.S. Army. He received his bachelor's
degree in accounting from the University of Illinois in 1968. Mr. Ognar has
co-managed the Fund since December 1994. He has managed the Strong Growth Fund
since its inception in December 1993 and managed the Strong Total Return Fund
from April 1993 until October 1994, when Mr. Ian J. Rogers joined him as a
co-manager.
RICHARD S. STRONG. Mr. Strong co-manages the equity component of the Fund.
Mr. Strong founded the Advisor in 1974. He began his investment career at
Employers Insurance of Wausau in 1966, after receiving his master's degree in
finance from the University of Wisconsin-Madison that January. He received his
undergraduate degree in 1963 from Baldwin-Wallace College. Mr. Strong has
co-managed the Fund since December 1994. He has also managed the Strong
Discovery Fund since its inception in December 1987. In addition to his role as
a portfolio manager, he is currently the Chairman of the Board, Director, Chief
Investment Officer, and a member of the Advisor's Executive Committee.
RICHARD T. WEISS. Mr. Weiss co-manages the equity component of the Fund. Mr.
Weiss joined the Advisor in 1991 from Chicago-based Stein Roe & Farnham, where
he began his career as a research analyst in 1975. He was named a portfolio
manager in 1981. Mr. Weiss attended Harvard Graduate School of Business
Administration, where he was awarded his M.B.A. in 1975, and the University of
Southern California, where he received his bachelor's degree in business
administration in 1973. Mr. Weiss has co-managed the Fund since December 1994.
He has also co-managed the Strong Opportunity and Common Stock Funds since 1991.
In addition, Mr. Weiss is a member of the Advisor's Executive Committee.
Bond Component
JEFFREY A. KOCH. Mr. Koch co-manages the bond component of the Fund. Mr. Koch
joined the Advisor as a portfolio manager and securities analyst in
----------------------
PROSPECTUS PAGE I-28
<PAGE> 29
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. Mr. Koch has co-managed the bond component of the
Fund since December 1994. In addition, Mr. Koch manages the Strong Advantage and
High-Yield Bond Funds and co-manages the Strong Corporate Bond Fund.
SHIRISH T. MALEKAR. Mr. Malekar co-manages the bond component of the Fund.
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 bond component of the Fund
since December 1994. In addition, Mr. Malekar has managed the Strong Short-Term
Global Bond and International Bond Funds since their inception in March 1994.
Short-Term Component
JAY N. MUELLER. Mr. Mueller manages the Fund's short-term component. Mr.
Mueller joined the Advisor in September 1991 as a securities analyst and
portfolio manager. For four years prior to that, he was a securities analyst and
portfolio manager with R. Meeder & Associates of Dublin, Ohio. Mr. Mueller
received his bachelor's degree in economics in 1982 from the University of
Chicago. Mr. Mueller is also a Chartered Financial Analyst. Mr. Mueller has
managed the Fund's short-term component since 1993. He has also managed the
Strong Money Market and U.S. Treasury Money Funds since October 1991, the Strong
Heritage Money Fund since June 1995, and the Strong Institutional Money Fund
since September 1995.
STRONG AMERICAN UTILITIES FUND
WILLIAM H. REAVES. Mr. Reaves, the Fund's senior co-manager, has been the
President and Chief Investment Officer, Portfolio Manager, and Utilities Analyst
of the Subadvisor since 1961. He has worked as a utilities analyst since 1946.
WILLIAM A. FERER. Mr. Ferer, a co-manager of the Fund, has been a Vice
President, Portfolio Manager, and Energy Analyst of the Subadvisor since 1987.
He has worked as a securities analyst since 1971.
RONALD J. SORENSON. Mr. Sorenson, a co-manager of the Fund, has been a Vice
President and Portfolio Manager of the Subadvisor since 1991. For three years
prior to that, he was a Partner and Portfolio Manager of PVF Inc. For a
----------------------
PROSPECTUS PAGE I-29
<PAGE> 30
two-year period prior to that, Mr. Sorenson was the Chairman of the Board and
Chairman of the Investment Committee of The American Life Insurance Company of
New York. Mr. Sorenson has acted as President of RWS Energy Services, Chief
Financial Officer of Emerging Market Services A.G., Controller of Triad Holding
Corporation S.A., and a C.P.A. for Arthur Young & Co.
MARK D. LUFTIG. Mr. Luftig, a co-manager of the Fund, has been a Vice
President and Utilities Analyst of the Subadvisor since January 1995. Prior to
joining the Subadvisor, he was the Executive Vice President and Director of
Equity Research at Kemper Securities, Inc., where he worked since 1992. For
approximately three years prior to that, Mr. Luftig served as the Vice President
of the National Economic Research Association, Inc. From 1975 until 1989, he
worked at Salomon Brothers, Inc. as the Director of Research.
STRONG TOTAL RETURN FUND
RONALD C. OGNAR. Information concerning Mr. Ognar is set forth above under
"Strong Asset Allocation Fund."
IAN J. ROGERS. In October 1994, Mr. Rogers joined Mr. Ognar as co-portfolio
manager of the Fund. Mr. Rogers has worked with Mr. Ognar as an equity analyst
since joining the Advisor in August 1993. Prior to joining the Advisor, Mr.
Rogers worked for seven years as an equity analyst with Kemper Financial
Services in Chicago. For approximately two years prior to that, he was an equity
analyst for Allstate Insurance. Mr. Rogers began his investment career in 1983
as an equity analyst for Comerica Bank in Detroit. He received his M.B.A. from
Central Michigan University in 1983 and his bachelor's degree in Business
Administration from Ferris State College in 1966.
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor, 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. The Asset Allocation and Total Return Funds are Wisconsin
corporations that are authorized to issue shares of common stock
----------------------
PROSPECTUS PAGE I-30
<PAGE> 31
and series and classes of series of shares of common stock. The American
Utilities Fund is a series of common stock of Strong Conservative Equity Funds,
Inc., a Wisconsin corporation that is authorized to issue shares of common stock
and series and classes of series of shares of common stock. Each share of the
Funds has one vote, and all shares participate equally in dividends and other
capital gains distributions by the respective Fund and in the residual assets of
the respective Fund in the event of liquidation. Certificates will be issued for
shares held in your account only upon your written request. You will, however,
have full shareholder rights whether or not you request certificates. Generally,
the Funds will not hold an annual meeting of shareholders unless required by the
1940 Act.
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.
PRINCIPAL SHAREHOLDER. As of November 30, 1995, Charles Schwab & Co., Inc.
("Schwab") owned of record approximately 26% of the American Utilities Fund.
Schwab's record ownership of greater than 25% of the Fund's shares may result in
it being deemed a controlling entity of the Fund.
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. You may elect to have all your
dividends and capital gain distributions from a Fund automatically reinvested in
additional shares of that Fund or in shares of another Strong Fund at the net
asset value determined on the payment date. If you request in writing that your
dividends and other distributions be paid in cash, a Fund will credit your bank
account by Electronic Funds Transfer ("EFT") or issue a check to you within five
business days of the payment date. You may change your election at any time by
calling or writing Strong Funds. Strong Funds must receive any such change 7
days (15 days for EFT) prior to a dividend or capital gain distribution payment
date in order for the change to be effective for that payment. The policy of
each Fund is to pay dividends from net investment income quarterly and to
distribute substantially all net realized capital gains and gains from foreign
currency transactions annually. Each Fund may make additional distributions if
necessary to avoid imposition of a 4% excise tax on undistributed income and
gains.
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 of net capital gain
----------------------
PROSPECTUS PAGE I-31
<PAGE> 32
(the excess of net long-term capital gain over net short-term capital loss),
when designated as such by a Fund, are taxable to you as long-term capital
gains, regardless of how long you have held your Fund shares. The Funds'
distributions are taxable in the year they are paid, whether they are taken in
cash or reinvested in additional shares, except that certain distributions
declared in the last three months of the year and paid in January are taxable as
if paid on December 31.
If a Fund's distributions exceed its investment company taxable income and
net capital gain in any year, as a result of currency-related losses or
otherwise, all or a portion of those distributions may be treated as a return of
capital to shareholders for tax purposes.
YEAR-END TAX REPORTING. After the end of each calendar year, you will receive
a statement (Form 1099) of the federal income tax status of all dividends and
other distributions paid (or deemed paid) during the year.
SHARES SOLD OR EXCHANGED. Your redemption of Fund shares may result in
taxable gain or loss to you, depending upon whether the redemption proceeds
payable to you are more or less than your adjusted cost basis for the redeemed
shares. Similar tax consequences generally will result from an exchange of Fund
shares for shares of another Strong Fund. If you purchase shares of a Fund
within thirty days before or after redeeming shares of 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 retirement
account, you will be subject to withholding for federal income tax purposes
unless you transfer the distribution directly to an "eligible retirement plan."
BUYING A DISTRIBUTION. A distribution paid shortly after you have purchased
shares in a Fund will reduce the net asset value of the shares by the amount of
the distribution, which nevertheless will be taxable to you even though it
represents a return of a portion of your investment.
BACKUP WITHHOLDING. If you are an individual or certain other noncorporate
shareholder and do not furnish a Fund with a correct taxpayer identification
number, the Fund is required to withhold federal income tax at a rate of 31%
(backup withholding) from all dividends, capital gain distributions, and
redemption proceeds payable to you. Withholding at that rate from dividends and
capital gain distributions payable to you also is required if you otherwise are
subject to backup withholding. To avoid backup withholding, you must provide a
taxpayer identification number and state that you are not subject to backup
withholding due to the underreporting of your income. This certification is
included as part of your application. Please complete it when you open your
account.
----------------------
PROSPECTUS PAGE I-32
<PAGE> 33
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 "average annual total return," "total return,"
"cumulative total return," and "yield." Each of these figures is based upon
historical results and does not represent the future performance of a Fund.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund assuming
the reinvestment of all dividends and distributions. Total return figures are
not annualized and simply represent the aggregate change of a Fund's investments
over a specified period of time.
Yield is an annualized figure, which means that it is assumed that a Fund
generates the same level of net investment income over a one-year period. A
Fund's yield is a measure of the net investment income per share earned by the
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.
----------------------
PROSPECTUS PAGE I-33
<PAGE> 34
This page has been left blank intentionally.
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PROSPECTUS PAGE I-34
<PAGE> 35
SHAREHOLDER MANUAL
<TABLE>
<S> <C>
HOW TO BUY SHARES...................... II-1
DETERMINING YOUR SHARE PRICE........... II-5
HOW TO SELL SHARES..................... II-6
SHAREHOLDER SERVICES................... II-9
REGULAR INVESTMENT PLANS............... II-10
SPECIAL SITUATIONS..................... II-12
</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 values change daily, your purchase price will be
the next net asset value determined after Strong receives and accepts your
purchase order.
Whether you are opening a new account or adding to an existing one, Strong
provides you with several methods to buy Fund shares.
----------------------
PROSPECTUS PAGE II-1
<PAGE> 36
- ------------------------------------------------------------------------------
<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, 100 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- Call 1-800-368-3863 for instructions on
establishing an account with an exchange by mail.
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
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 the Fund through a
broker-dealer or other institution that may charge a
transaction fee.
- Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account
from the broker-dealer.
</TABLE>
----------------------
PROSPECTUS PAGE II-2
<PAGE> 37
- --------------------------------------------------------------------------------
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, 100 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
1-800-368-3863 for details.
- --------------------------------------------------------------------------------
- - 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> 38
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 may decline to accept your purchase order upon receipt when, in the
judgment of the Advisor, it would not be in the best interests of the existing
shareholders.
- - The exchange privilege is available in all 50 states because all Strong Funds
intend to continue to qualify their shares for sale in all 50 states.
- - Minimum Investment Requirements:
- ----------------------------------------------------------------------------
To open a regular account
Total Return and Asset Allocation Funds...........................$250
American Utilities Fund.........................................$1,000
To open an IRA or Defined Contribution account........................$250
To open a 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-11). Unless you participate in
the Strong No-Minimum Investment Program, please ensure your purchases meet the
minimum investment requirements.
Under certain circumstances (for example, if you discontinue a No-Minimum
Investment Program before you reach a Fund's minimum initial investment), 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.
----------------------
PROSPECTUS PAGE II-4
<PAGE> 39
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
THROUGH A BROKER-DEALER
- - If you purchase shares through a program of services offered or administered
by a broker-dealer, financial institution, or other service provider, you
should read the program's materials, including information relating to fees,
in connection with a Fund's Prospectus. Certain features of a Fund may not be
available or may be modified in connection with the program of services
provided.
- - Certain broker-dealers, financial institutions, or other service providers
that have entered into an agreement with the Distributor may enter purchase
orders on behalf of their customers by phone, with payment to follow within
several days as specified in the agreement. The Funds may affect such purchase
orders at the net asset value next determined after receipt of the telephone
purchase order. It is the responsibility of the broker-dealer, financial
institution, or other service provider to place the order with the Funds on a
timely basis. If payment is not received within the time specified in the
agreement, the broker-dealer, financial institution, or other service provider
could be held liable for any resulting fees or losses.
DETERMINING YOUR SHARE PRICE
Generally, when you make any purchases, sales, or exchanges, the price of
your shares will be the net asset value ("NAV") next determined after Strong
Funds receives your request in proper form. If Strong Funds receives such
request prior to the close of the New York Stock Exchange (the "Exchange") on a
day on which the Exchange is open, your share price will be the NAV determined
that day. The NAV for each Fund is normally determined as of 3:00 p.m. Central
Time ("CT") each day the Exchange is open. The Funds reserve the right to change
the time at which purchases, redemptions, and exchanges are priced if the
Exchange closes at a time other than 3:00 p.m. CT or if an emergency exists.
Each Fund's NAV is calculated by taking the fair value of a Fund's total assets,
subtracting all its liabilities, and dividing by the total number of shares
outstanding. Expenses are accrued daily and applied when determining the NAV.
A Fund's portfolio securities are valued based on market quotations or at
fair value as determined by the method selected by each Fund's Board of
Directors. Equity securities traded on a national securities exchange or NASDAQ
are valued at the last sales price on the national securities exchange or NASDAQ
on which such securities are primarily traded. Securities traded on NASDAQ for
which there were no transactions on a given day or securities not listed on an
exchange or NASDAQ are valued at the average of the most recent bid and asked
prices. Other exchange traded securities (generally foreign securities) will be
valued based on market quotations. Debt securities are valued by a pricing
service that utilizes electronic data processing techniques to determine values
for normal institutional-sized trading units of debt
----------------------
PROSPECTUS PAGE II-5
<PAGE> 40
securities without regard to sale or bid prices when such techniques are
believed to more accurately reflect the fair market value for such securities.
Otherwise, sale or bid prices are used. Any securities or other assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Directors. Debt securities having
remaining maturities of 60 days or less when purchased are valued by the
amortized cost method when the Board of Directors determines that the fair value
of such securities is their amortized cost. Under this method of valuation, a
security is initially valued at its acquisition cost, and thereafter,
amortization of any discount or premium is assumed each day, regardless of the
impact of the fluctuating rates on the market value of the instrument.
Securities quoted in foreign currency are valued daily in U.S. dollars at the
foreign currency exchange rates that are prevailing at the time the daily NAV
per share is determined. Although the Funds value their foreign assets in U.S.
dollars on a daily basis, they do not intend to convert their holdings of
foreign currencies into U.S. dollars on a daily basis. Foreign currency exchange
rates are generally determined prior to the close of trading on the Exchange.
Occasionally, events affecting the value of foreign investments and such
exchange rates occur between the time at which they are determined and the close
of trading on the Exchange. Such events would not normally be reflected in a
calculation of a Fund's NAV on that day. If events that materially affect the
value of a Fund's foreign investments or the foreign currency exchange rates
occur during such period, the investments will be valued at their fair value as
determined in good faith by or under the direction of the Board of Directors.
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.
----------------------
PROSPECTUS PAGE II-6
<PAGE> 41
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO SELL SHARES
- -----------------------------------------------------------------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
- Write a "letter of instruction" that includes the
following information: your account number, the
dollar amount or number of shares you wish to
redeem, each owner's name, your street address, and
the signature of each owner as it appears on the
account.
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to 100 Heritage Reserve, Menomonee
Falls, Wisconsin 53051.
FOR TRUST ACCOUNTS
- Same as above. Please ensure that all trustees sign
the letter of instruction.
FOR OTHER REGISTRATIONS
- Call 1-800-368-3863 for instructions.
- -----------------------------------------------------------------------------
TELEPHONE
Sign up for telephone redemption services when you
1-800-368-3863 open 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 ($500 minimum) by phone and arrange
to receive the proceeds in one of three ways:
TO RECEIVE A CHECK BY MAIL
- At no charge, we will mail a check to the address
to which your account is registered.
TO DEPOSIT BY EFT
- At no charge, we will transmit the proceeds by
Electronic Funds Transfer (EFT) to a pre-authorized
bank account. Usually, the funds will arrive at
your bank two banking days after we process your
redemption.
TO DEPOSIT BY WIRE
- For a $10 fee, we will transmit the proceeds by
wire to a pre-authorized bank account. Usually, the
funds will arrive at your bank the next banking day
after we process your redemption.
You may also use Strong DirectSM, Strong Funds'
automated telephone response system. Call
1-800-368-3863 for details.
- -----------------------------------------------------------------------------
AUTOMATICALLY
You can set up automatic withdrawals from your
account at regular intervals. To establish the
Systematic Withdrawal Plan, request a form by calling
1-800-368-3863.
- -----------------------------------------------------------------------------
BROKER-DEALER
You may also redeem shares through broker-dealers or
others who may charge a commission or other
transaction fee.
</TABLE>
----------------------
PROSPECTUS PAGE II-7
<PAGE> 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.
- - 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
The Funds has 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 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.
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.
----------------------
PROSPECTUS PAGE II-8
<PAGE> 43
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Funds and their transfer
agent employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. The Funds may incur liability if they do not follow
these procedures.
- - Because of increased telephone volume, you may experience difficulty in
implementing a telephone redemption during periods of dramatic economic or
market changes.
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus.
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, and
perform purchases, exchanges or redemptions among your existing Strong accounts.
Your account information is protected by a personal code that you establish. For
more information on this service, call 1-800-368-3863.
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 semiannual report and an annual report
containing audited financial statements.
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
More complete information regarding each Fund's investment policies and
services is contained in its SAI, which you may request by calling or writing
----------------------
PROSPECTUS PAGE II-9
<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 your accounts' 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
FREE EXCHANGE PRIVILEGE. You may exchange shares between identically
registered Strong Funds accounts, either in writing or by telephone. By
establishing the telephone exchange services, you authorize the Fund and its
agents to act upon your instruction by telephone to exchange shares from any
account you specify. For tax purposes, an exchange is considered a sale and a
purchase. Please obtain and read the appropriate prospectus before investing in
any of the Strong Funds. Since an excessive number of exchanges may be
detrimental to the Funds, each Fund reserves the right to discontinue the
exchange privilege of any shareholder who makes more than five exchanges in a
year or three exchanges in a calendar quarter.
REGULAR INVESTMENT PLANS
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
-----------------------
PROSPECTUS PAGE II-10
<PAGE> 45
fluctuating share values, you should consider your ability to continue the
program through periods of both low and high share-price levels.
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in a Fund from your bank checking or NOW
account. You may choose to make investments on any day of the month in amounts
of $50 or more. You can set up the Automatic Investment Plan with any financial
institution that is a member of the Automated Clearing House. Because each Fund
has the right to close an investor's account for failure to reach the minimum
initial investment, please consider your ability to continue this Plan until you
reach the minimum initial investment. Such closing may occur in periods of
declining share prices. To establish the Plan, complete the 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 Direct Deposit for your account, call 1-800-368-3863 to obtain
an Authorization for Payroll Direct Deposit to a Strong Funds Account form. Once
the Plan is established, you may alter the amount of the deposit, alter the
frequency of the deposit, or terminate your participation in the program by
notifying your employer.
AUTOMATIC EXCHANGE PLAN. The Automatic Exchange Plan allows you to make
regular, systematic exchanges (minimum $50) from one Strong Funds account into
another Strong Funds account. By setting up the Plan, you authorize the Fund and
its agents to redeem a set dollar amount or number of shares from the first
account and purchase shares of a second Strong Fund. In addition, you authorize
a Fund and its agents to accept telephone instructions to change the dollar
amount and frequency of the exchange. An exchange transaction is a sale and
purchase of shares for federal income tax purposes and may result in a capital
gain or loss. To establish the Plan, request a form by calling 1-800-368-3863.
To participate in the Automatic Exchange Plan, you must have an initial
account balance of $2,500 in the first account and at least the minimum initial
-----------------------
PROSPECTUS PAGE II-11
<PAGE> 46
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. As an alternative, you may complete a Certification of Authorized
Individuals form, which can be obtained from the Funds. Until a valid corporate
resolution or Certification of Authorized Individuals is received by the Fund,
services such as telephone and wire redemption will not be established.
If you are investing as a trustee, please include the date of the trust. All
trustees must sign the application. If they do not, services such as telephone
and wire redemption will not be established. All trustees must sign redemption
requests unless proper documentation to the contrary is provided to the Fund.
Failure to provide these documents or signatures as required when you invest may
result in delays in processing redemption requests.
-----------------------
PROSPECTUS PAGE II-12
<PAGE> 47
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you and
the Funds against fraudulent transactions by unauthorized persons. In the
following instances, the Funds will require a signature guarantee for all
authorized owners of an account:
- - when you add the telephone redemption option to your existing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $25,000;
- - when you request to redeem or redeposit shares that have been issued in
certificate form;
- - if you open an account and later decide that you want certificates;
- - when you request that redemption proceeds be sent to a different name or
address than is registered on your account;
- - if you add/change your name or add/remove an owner on your account; and
- - if you add/change the beneficiary on your transfer on death account.
A signature guarantee may be obtained from any eligible guarantor
institution, as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms, and others. PLEASE NOTE THAT A
NOTARY PUBLIC STAMP OR SEAL IS NOT ACCEPTABLE.
-----------------------
PROSPECTUS PAGE II-13
<PAGE> 48
APPENDIX A
RATINGS OF DEBT OBLIGATIONS:
<TABLE>
<CAPTION>
Moody's Standard & Fitch
Investors Poor's Ratings Investors
Service, Inc. Group Service, Inc. Definition
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper medium grade
Baa BBB BBB Medium grade
Ba BB BB Low grade
B B B Speculative
Caa, Ca, C CCC, CC, C CCC, CC, C Submarginal
D D DDD, DD, D Probably in default
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Moody's S&P Fitch
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM MIG1/VMIG1 Best quality SP-+ Very strong quality F-1+ Exceptionally strong
quality
-----------------------------------------------------------------
MIG2/VMIG2 High quality SP-1 Strong quality F-1 Very strong quality
-----------------------------------------------------------------
MIG3/VMIG3 Favorable SP-2 Satisfactory grade F-2 Good credit quality
quality
-----------------------------------------------------------------
MIG4/VMIG4 Adequate F-3 Fair credit quality
quality
-----------------------------------------------------------------
SG Speculative SP-3 Speculative grade F-S Weak credit quality
grade
- ----------------------------------------------------------------------------
COMMERCIAL P-1 Superior quality A-1+ Extremely strong F-1+ Exceptionally strong
PAPER quality quality
-----------------------------------------------------------------
A-1 Strong quality F-1 Very strong quality
-----------------------------------------------------------------
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
-----------------------------------------------------------------
P-3 Acceptable quality A-3 Adequate quality F-3 Fair credit quality
-----------------------------------------------------------------
B Speculative quality F-S Weak credit quality
-----------------------------------------------------------------
Not Prime C Doubtful quality D Default
- ----------------------------------------------------------------------------
</TABLE>
----------------------
PROSPECTUS PAGE A-1
<PAGE> 49
APPENDIX B
WEIGHTED AVERAGE RATINGS OF DEBT OBLIGATIONS1
-----------------------------------
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Percentage of Assets Held Percentage of Assets Held on
During 1994(2) December 31, 1994
- --------------------------------------------- ---------------------------------------------
Asset Allocation Fund(3) Asset Allocation Fund(3)
---------------- ----------------
Equivalent Equivalent
S&P Moody's Rated Unrated(4) S&P Moody's Rated Unrated(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa(5) 26.8 % - AAA Aaa(5) 27.7 % -
AA Aa 3.0 - AA Aa 2.0 -
A A 5.1 - A A 10.0 -
BBB Baa 17.9 - BBB Baa 16.1 -
BB Ba 0.2 - BB Ba - -
B B - - B B - -
CCC Caa - - CCC Caa - -
CC Ca - - CC Ca - -
C C - - C C - -
Totals 53.0 % 0% Totals 55.8 % 0%
</TABLE>
WEIGHTED AVERAGE RATINGS OF CORPORATE COMMERCIAL PAPER
-------------------------------------
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Percentage of Assets Held Percentage of Assets Held on December 31, 1994
During 1994(2)
- ------------------------------------------------ ------------------------------------------------
Asset Asset
S&P Moody's Allocation S&P Moody's Allocation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A1 P1(6) 7.4% A1 P1(6) 2.8%
A2 P2(6) 3.7 A2 P2(6) 3.3
A3 P3 - A3 P3 -
Totals 11.1% Totals 6.1%
</TABLE>
(1)
A security rated differently by two or more rating services is included in the
category representing the higher of the ratings assigned to the security.
(2)
Based on a weighted average of the securities held at the end of each month.
Investment-grade debt obligations are those rated in one of the four highest
categories by an NRSRO and investment-grade commercial paper rated in one of the
top three categories by such organizations. See "Implementation of Policies and
Risks - Debt Obligations" in this Prospectus for a discussion of the risks
associated with non-investment-grade debt obligations and Appendix A and the SAI
for a description of credit ratings. This Appendix does not contain information
on the Total Return and American Utilities Funds since these Funds do not invest
more than 5% of their assets in non-investment-grade debt obligations.
(3)
On December 28, 1994, the Asset Allocation Fund was authorized by the Fund's
Board of Directors to invest up to, but not including, 35% of its total assets
in non-investment-grade debt obligations. Previously, the Fund could not invest
in non-investment-grade debt obligations.
(4)
This category represents the comparable quality of unrated securities, as
determined by the Advisor.
(5)
Includes all U.S. government obligations.
(6)
Includes commercial paper rated in an equivalent category by either D&P or
Fitch.
----------------------
PROSPECTUS PAGE B-1
<PAGE> 50
NOTES
<PAGE> 51
NOTES
<PAGE> 52
NOTES
<PAGE> 53
STATEMENT OF ADDITIONAL INFORMATION
STRONG ASSET ALLOCATION FUND
STRONG AMERICAN UTILITIES FUND
STRONG TOTAL RETURN FUND
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: 1-414-359-1400
Toll-Free: 1-800-368-3863
This Statement of Additional Information is not a Prospectus and
should be read in conjunction with the Prospectus of the Strong Asset
Allocation Fund, Inc. (the "Asset Allocation Fund"); Strong Total Return Fund,
Inc. (the "Total Return Fund"); and Strong American Utilities Fund (the
"American Utilities Fund"), which is a series of Strong Conservative Equity
Funds, Inc. (hereinafter collectively referred to as the "Funds") dated
January 15, 1996. Requests for copies of the Prospectus should be made by
calling one of the numbers listed above. The financial statements appearing in
the Asset Allocation, Total Return, and American Utilities Funds' Annual
Report, which accompanies this Statement of Additional Information, are
incorporated herein by reference.
This Statement of Additional Information is dated January 15, 1996.
<PAGE> 54
STRONG CONSERVATIVE EQUITY FUNDS
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
COMMON INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Cash Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Debt Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Variable- or Floating-Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
High-Yield (High-Risk) Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Mortgage- and Asset-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Lending of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
When-Issued Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Depositary Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Foreign Investment Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mortgage Dollar Rolls and Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
INVESTMENT POLICIES AND TECHNIQUES -
ASSET ALLOCATION AND TOTAL RETURN FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Small Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
INVESTMENT POLICIES AND TECHNIQUES - ASSET ALLOCATION FUND . . . . . . . . . . . . . . . . . . . . . . . . . 22
Sovereign Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INVESTMENT POLICIES AND TECHNIQUES -- AMERICAN UTILITIES FUND . . . . . . . . . . . . . . . . . . . . . . . . 24
Public Utility Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Energy Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
DIRECTORS AND OFFICERS OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
INVESTMENT ADVISOR, SUBADVISOR, AND DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ADDITIONAL SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FUND ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
PORTFOLIO MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated January 15, 1996, 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> 55
INVESTMENT RESTRICTIONS
The investment objective of the Asset Allocation Fund is to seek high
total return consistent with reasonable risk over the long term. The
investment objective of the American Utilities Fund is to seek total return by
investing for both income and capital growth. The investment objective of the
Total Return Fund is to seek a high total return by investing for capital
growth and income. 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 (however, with respect to the American Utilities
Fund only, under normal market conditions, it will invest more than
25% of its total assets in the securities of issuers in the public
utility industry).
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prohibit the Fund from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objective, policies, and restrictions as the
Fund.
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<PAGE> 56
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
management investment company with substantially the same fundamental
investment objective, restrictions and policies as the Fund.
6. Purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its total
assets would be invested in the securities of issuers that, including
predecessor or unconditional guarantors, have a record of less than
three years of continuous operation. This policy does not apply to
securities of pooled investment vehicles or mortgage or asset-backed
securities.
7. Invest in direct interests in oil, gas, or other mineral exploration
programs or leases; however, the Fund may invest in the securities of
issuers that engage in these activities.
8. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act
and, in accordance with Rule 4.5, will use futures or options on
futures transactions solely for bona fide hedging transactions (within
the meaning of the Commodity Exchange Act), provided, however, that
the Fund may, in addition to bona fide hedging transactions, use
futures and options on futures transactions if the aggregate initial
margin and premiums required to establish such positions, less the
amount by which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed 5% of the
Fund's net assets.
In addition, (i) the aggregate value of securities underlying call
options on securities written by the Fund or obligations underlying
put options on securities written by the Fund determined as of the
date the options are written will not exceed 50% of the Fund's net
assets; (ii) the aggregate premiums paid on all options purchased by
the Fund and which are being held will not exceed 20% of the Fund's
net assets; (iii) the Fund will not purchase put or call options,
other than hedging positions, if, as a result thereof, more than 5% of
its total assets would be so invested; and (iv) the aggregate margin
deposits required on all futures and options on futures transactions
being held will not exceed 5% of the Fund's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Fund except as
may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging, or hypothecating may
not exceed 33 1/3% of the Fund's total assets at the time of the
borrowing or investment.
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<PAGE> 57
10. Purchase or retain the securities of any issuer if any officer or
director of the Fund or its investment advisor (or subadvisor, in the
case of the American Utilities Fund) beneficially owns more than 1/2
of 1% of the securities of such issuer and such officers and directors
together own beneficially more than 5% of the securities of such
issuer.
11. Purchase warrants, valued at the lower of cost or market value, in
excess of 5% of the Fund's net assets. Included in that amount, but
not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on any stock exchange. Warrants acquired by the Fund in
units or attached to securities are not subject to these restrictions.
12. Borrow money except (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities
when bank borrowings exceed 5% of its total assets.
13. Make any loans other than loans of portfolio securities, except
through (i) purchases of debt securities or other debt instruments, or
(ii) engaging in repurchase agreements.
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.
COMMON INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds'
investment objective, policies, and techniques that are described in detail in
the Prospectus under the captions "Investment Objectives and Policies" and
"Implementation of Policies and Risks." Investment policies and techniques
that are unique to the Asset Allocation, American Utilities, or Total Return
Funds are discussed below.
CASH MANAGEMENT
From time to time the Advisor may determine to use a non-affiliated
money market fund to manage some or all of the Fund's short-term cash
positions. The Advisor will do this only when the Advisor reasonably
believes that this action will result in a return to the Fund that is equal to,
or better than, the return that could be achieved by direct investments in
money market instruments. In such cases, to ensure no double charging of fees,
the Advisor will credit any management or other fees of the non-affiliated
money market fund against the Advisor's management fee.
ILLIQUID SECURITIES
The Funds may invest in illiquid securities (i.e., securities that are
not readily marketable). However, a Fund will not acquire illiquid securities
if, as a result, they would comprise more than 15% of the value of the Fund's
net assets (or such other amounts as may be permitted under the 1940 Act). 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 liquid or illiquid for purposes of this limitation. Certain
securities exempt from registration or issued in transactions exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), including securities that may be resold pursuant to Rule 144A under the
Securities Act, may be considered liquid. The Board of Directors of each Fund
has delegated to Strong Capital Management, Inc. (the "Advisor") the day-to-day
determination of the liquidity of a security, although it has retained
oversight and ultimate responsibility for such determinations. Although no
definitive liquidity criteria are used, the Board of Directors has directed the
Advisor to look to such factors as (i) the nature of the market for a security
(including the institutional private resale market), (ii) the terms of certain
securities or other instruments allowing for the disposition to a third party
or the issuer thereof (e.g., certain repurchase obligations and demand
instruments), (iii) the availability of market quotations (e.g., for securities
quoted in the PORTAL system), and (iv) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, 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 each Fund.
If through the appreciation of restricted securities or the depreciation of
unrestricted securities, a Fund should be in a position where more than 15% of
the value of its net assets are invested in illiquid assets, including
restricted securities which are not readily marketable, the Fund will take such
steps as is deemed advisable, if any, to protect liquidity.
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<PAGE> 58
A 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 a 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.
Notwithstanding the above, the Advisor intends, as a matter of
internal policy, to limit each Fund's investments in illiquid securities to 10%
of its net assets.
SHORT SALES AGAINST THE BOX
The Funds 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.
WARRANTS
The Funds 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. A Fund will
not purchase warrants, valued at the lower of cost or market value, in excess
of 5% of the Fund's net assets. Included in that amount, but not to exceed 2%
of the Fund's net assets, may be warrants that are not listed on any stock
exchange. 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 more speculative than
certain other types of investments. In addition, the value of a warrant does
not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
DEBT OBLIGATIONS
Each Fund may invest a portion of its assets in debt obligations,
including U.S. government securities, commercial paper, banker's acceptances,
certificates of deposit, and time deposits. Issuers of debt obligations have a
contractual obligation to pay interest at a specified rate on specified dates
and to repay principal on a specified maturity date. Certain debt obligations
(usually intermediate- and long-term bonds) have provisions that allow the
issuer to redeem or "call" a bond before its maturity. Issuers are most likely
to call such securities during periods of falling interest rates.
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. 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.
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<PAGE> 59
CREDIT QUALITY. The values of debt obligations may also be affected
by changes in the credit rating or financial condition of their issuers.
Generally, the lower the quality rating of a security, the higher the degree of
risk as to the payment of interest and return of principal. To compensate
investors for taking on such increased risk, those issuers deemed to be less
creditworthy generally must offer their investors higher interest rates than do
issuers with better credit ratings.
In conducting its credit research and analysis, the Advisor or, with
respect to the American Utilities Fund, W.H. Reaves & Co., Inc., the subadvisor
to the American Utilities Fund (the "Subadvisor"), considers both qualitative
and quantitative factors to evaluate the creditworthiness of individual
issuers. The Advisor and Subadvisor also rely, in part, on credit ratings
compiled by a number of NRSROs. See the Appendix for additional information.
TEMPORARY DEFENSIVE POSITION. 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
Each Fund may invest in securities which offer a variable- or
floating-rate of interest. Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities provide for automatic
adjustment of the interest rate whenever some specified interest rate index
changes. The interest rate on variable- or floating-rate securities is
ordinarily determined by reference to or is a percentage of a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial
paper, bank certificates of deposit, an index of short-term interest rates, or
some other objective measure.
Variable- or floating-rate securities frequently include a demand
feature entitling the holder to sell the securities to the issuer at par. In
many cases, the demand feature can be exercised at any time on 7 days' notice;
in other cases, the demand feature is exercisable at any time on 30 days'
notice or on similar notice at intervals of not more than one year. Some
securities, which do not have variable or floating interest rates, may be
accompanied by puts producing similar results and price characteristics. When
considering a maturity of any instrument which may be sold or put to the issuer
or a third party, a Fund may consider that instrument's maturity to be shorter
than its stated maturity.
Variable-rate demand notes include master demand notes, which are
obligations that permit a Fund to invest fluctuating amounts that may change
daily without penalty, pursuant to direct arrangements between the Fund, as
lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct-lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded. There generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, a Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and, if not so rated, a Fund may invest
in them only if the Fund's Advisor or Subadvisor, as the case may be, determine
that, at the time of investment, the obligations are of comparable quality to
the other obligations in which the Fund may invest. The Funds' Advisor, or
Subadvisor in the case of the American Utilities Fund, on behalf of the Funds,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating- and variable-rate demand obligations in the Funds' portfolio.
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<PAGE> 60
A Fund will not invest more than 15% of its net assets in variable-
and floating-rate demand obligations that are not readily marketable (a
variable- or floating-rate demand obligation that may be disposed of on not
more than seven days notice will be deemed readily marketable and will not be
subject to this limitation). (See "Common Investment Policies and Techniques -
Illiquid Securities" and "Investment Restrictions.") In addition, each
variable- or floating-rate obligation must meet the credit quality requirements
applicable to all the Funds' investments at the time of purchase. When
determining whether such an obligation meets a Fund's credit quality
requirements, the Fund may look to the credit quality of the financial
guarantor providing a letter of credit or other credit support arrangement.
HIGH-YIELD (HIGH-RISK) SECURITIES
IN GENERAL. The American Utilities and Total Return Funds have the
authority to invest up to 5% of their respective net assets in non-investment
grade debt obligations, and the Asset Allocation Fund has the authority to
invest up to, but not including, 35% of its net assets in such securities.
Non-investment grade debt obligations (hereinafter referred to as
"lower-quality securities") include (i) bonds rated as low as C by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"),
or Fitch Investors Service, Inc. ("Fitch"), or CCC by Duff & Phelps, Inc.
("D&P"); (ii) commercial paper rated as low as C by S&P, Not Prime by Moody's,
or Fitch 4 by Fitch; and (iii) unrated debt obligations of comparable quality.
Lower-quality securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to the Appendix of
this Statement of Additional Information 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 an
economic downturn could severely disrupt the market for and adversely affect
the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower-quality and comparable unrated securities also tend to be
more sensitive to economic conditions than are higher-rated securities. As a
result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, a Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in 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 reduce the Fund's asset base
over which expenses could be allocated and could result in a reduced rate of
return for the Fund.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or
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<PAGE> 61
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
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.
RECENT AND PROPOSED LEGISLATION. Recent legislation has been adopted,
and from time to time proposals have been discussed, regarding new legislation
designed to limit the use of certain lower-quality and comparable unrated
securities by certain issuers. An example of legislation is a recent law which
requires federally insured savings and loan associations to divest their
investments in these securities over time. It is not currently possible to
determine the impact of the recent legislation or the proposed legislation on
the lower-quality and comparable unrated securities market. However, it is
anticipated that if additional legislation is enacted or proposed, it could
have a material affect on the value of these securities and the existence of a
secondary trading market for the securities.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations
in, or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
collateralized mortgage obligations. Such securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, such as the
Government National Mortgage Association and the Federal National Mortgage
Association, or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by private lenders may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
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<PAGE> 62
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property, and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal
and interest on asset-backed securities may be supported by non-governmental
credit enhancements similar to those utilized in connection with
mortgage-backed securities.
The yield characteristics of mortgage- and asset-backed securities
differ from those of traditional debt obligations. Among the principal
differences are that interest and principal payments are made more frequently
on mortgage- and asset-backed securities, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other
assets generally may be prepaid at any time. As a result, if a Fund purchases
these securities at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing the yield to maturity.
Conversely, if a Fund purchases these securities at a discount, a prepayment
rate that is faster than expected will increase yield to maturity, while a
prepayment rate that is slower than expected will reduce yield to maturity.
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.
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.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. As discussed in the Prospectus, the Funds may
use a variety of derivative instruments, including options, futures contracts
(sometimes referred to as "futures"), options on futures contracts or forward
currency contracts for any lawful purpose consistent with each Fund's
investment objective, such as hedging the Fund's portfolio or risk management,
but not for speculation.
The use of these instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several options and
futures exchanges upon which they may be traded, the Commodity Futures Trading
Commission ("CFTC") and various state regulatory authorities. In addition, the
Funds' ability to use these instruments will be limited by tax considerations.
In addition to the products, strategies and risks described below and
in the Prospectus, the Advisor or, with respect to the American Utilities Fund,
the Subadvisor, may expect to discover additional derivative instruments and
other hedging techniques. These new opportunities may become available as the
Advisor, or Subadvisor, develop new techniques or as regulatory authorities
broaden the range of permitted transactions. The Advisor, or Subadvisor, may
utilize these opportunities to the extent that they are consistent with the
Funds' investment objective and permitted by the Funds' investment limitations
and applicable regulatory authorities.
SPECIAL RISKS OF THESE INSTRUMENTS. The use of derivative instruments
involves special considerations and risks as described below. Risks pertaining
to particular instruments are described in the sections that follow.
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(1) Successful use of most of these instruments depends upon the
Advisor's, or Subadvisor's, ability to predict movements of the overall
securities and currency markets, which requires different skills than
predicting changes in the prices of individual securities. While the Advisor
and Subadvisor are experienced in the use of these instruments, there can be no
assurance that any particular strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might
occur due to factors unrelated to the value of the investments being hedged,
such as speculative or other pressures on the markets in which these
instruments are traded. The effectiveness of hedges using instruments on
indices will depend on the degree of correlation between price movements in the
index and price movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. For example, if a Fund entered into
a short hedge because the Advisor projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the instrument. Moreover, if the price of the
instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss.
(4) As described below, a Fund might be required to maintain assets
as "cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If a Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair 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 close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ("counter party") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to a Fund.
For a discussion of the federal income tax treatment of the Funds'
derivative instruments, see "TAXES - Derivative Instruments" below.
GENERAL LIMITATIONS ON CERTAIN DERIVATIVE TRANSACTIONS. 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. Pursuant to Rule 4.5 of the
regulations under the Commodity Exchange Act (the "CEA"), the notice of
eligibility for a Fund includes representations that the Fund will use futures
contracts and related options solely for bona fide hedging purposes within the
meaning of CFTC regulations, provided that the Fund may hold other positions in
futures contracts and related options that do not qualify as a bona fide
hedging position if the aggregate initial margin deposits and premiums required
to establish these positions, less the amount by which any such options
positions are "in the money," do not exceed 5% of the Fund's net assets.
Adoption of these guidelines does not limit the percentage of a Fund's assets
at risk to 5%.
In addition, (i) the aggregate value of securities underlying call
options on securities written by a Fund or obligations underlying put options
on securities written by a Fund determined as of the date the options are
written will not exceed 50% of the Fund's net assets; (ii) the aggregate
premiums paid on all options purchased by a Fund and which are being held will
not exceed 20% of the Fund's net assets; (iii) a Fund will not purchase put or
call options, other than hedging positions, if, as a result thereof, more than
5% of its total assets would be so invested; and (iv) the aggregate margin
deposits required on all futures and options on futures transactions being held
will not exceed 5% of a Fund's total assets.
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The foregoing limitations are not fundamental policies of the Funds
and may be changed by the Funds' Board of Directors without shareholder
approval as regulatory agencies permit.
Transactions using options (other than purchased options) and forward
currency contracts expose the Funds to counterparty risk. To the extent
required by SEC guidelines, a Fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
other options, or futures or (2) cash and liquid high grade debt obligations
with a value sufficient at all times to cover its potential obligations to the
extent not covered as provided in (1) above. 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 position in the
corresponding option or futures contract is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a Fund's
assets to segregated accounts as a cover 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 of foreign
country. In such cases, when a Fund uses a derivative instrument to increase
or decrease exposure to an asset class or foreign country 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 will
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. Each Fund may purchase or write put and call options on
securities, on indices of and on foreign currencies 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 "Common Investment Policies and Techniques--Illiquid Securities."
Writing put options serves as a limited long hedge because increases in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions. Options used by the Funds may
include European-style options. This means that the option is only exercisable
at its expiration. This is in contrast to American-style options which are
exercisable at any time prior to the expiration date of the option. Options
that expire unexercised have no value.
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 the Funds to
realize the profit or limit the loss on an option position prior to its
exercise or expiration.
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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. 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
inability to enter into a closing purchase transaction for a covered call
option written by a Fund could cause material losses because the Fund would be
unable to sell the investment used as a cover for the written option until the
option expires or is exercised.
The Funds may purchase and write put and call options on indices in
much the same manner as the options discussed above, except the index options
may serve as a hedge against overall fluctuations in the securities markets 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 the effectiveness of attempted
hedging.
SPREAD TRANSACTIONS. The Funds 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. The Funds 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'
futures transactions may be entered into for any lawful purpose consistent with
each Fund's investment objective, such as hedging purposes or risk management,
but not for speculation. The Funds may also write put options on futures
contracts while at the same time purchasing call options on the same futures
contracts in order to create synthetically a long futures contract position.
Such options would have the same strike prices and expiration dates. The Funds
will engage in this strategy only when the Advisor believes it is more
advantageous to the Funds than is purchasing the futures contract.
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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. A foreign currency contract is a bilateral
agreement pursuant to which one party agrees to make and the other party agrees
to accept delivery of a specified type of currency at a specified future time
and at a specified price. 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,
U.S. government securities or other liquid, high grade debt obligations, in an
amount generally equal to 10% or less of the contract value. High grade
securities include securities rated "A" or better by an NRSRO. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin 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 CURRENCY-RELATED DERIVATIVE STRATEGIES - SPECIAL
CONSIDERATIONS. 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."
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The effective use of currency-related derivative instruments by a Fund in a
cross hedge is dependent upon a correlation between price movements of the two
currency instruments and the underlying security involved, and the use of two
currencies magnifies the risk that movements in the price of one instrument may
not correlate or may correlate unfavorably with the foreign currency being
hedged. Such a lack of correlation might occur due to factors unrelated to the
value of the currency instruments used or investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded.
A Fund also might seek to hedge against changes in the value of a
particular currency when no hedging instruments on that currency are available
or such hedging instruments are more expensive than certain other hedging
instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using currency-related derivative
instruments on another foreign currency or a basket of currencies, the values
of which the Advisor believes will have a high degree of positive correlation
to the value of the currency being hedged. The risk that movements in the
price of the hedging instrument will not correlate perfectly with movements in
the price of the currency being hedged is magnified when this strategy is used.
The use of currency-related derivative instruments by a Fund involves
a number of risks. The value of currency-related derivative instruments
depends on the value of the underlying currency relative to the U.S. dollar.
Because foreign currency transactions occurring in the interbank market might
involve substantially larger amounts than those involved in the use of such
derivative instruments, a Fund could be disadvantaged by having to deal in the
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than
for round lots (generally consisting of transactions of greater than $1
million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments
might be required to take place within the country issuing the underlying
currency. Thus, a Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by 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
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the maintenance of a liquid market, and there can be no assurance that a liquid
market will exist for any instrument at any specific time. In the case of a
privately-negotiated instrument, a Fund will be able to realize the value of
the instrument only by entering into a closing transaction with the issuer or
finding a third party buyer for the instrument. While a Fund will enter into
privately-negotiated transactions only with entities who are expected to be
capable of entering into a closing transaction, there can be no assurance that
a Fund will in fact be able to enter into such closing transactions.
The precise matching of currency-related derivative instrument amounts
and the value of the portfolio securities involved generally will not be
possible because the value of such securities, measured in the foreign
currency, will change after the currency-related derivative instrument position
has been established. Thus, a Fund might need to purchase or sell foreign
currencies in the spot (cash) market. The projection of short-term currency
market movements is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded
primarily in the OTC market. Although options on foreign currencies are traded
primarily in the OTC market, the Funds will normally purchase or sell OTC
options on foreign currency only when the Advisor reasonably believes a liquid
secondary market will exist for a particular option at any specific time.
There will be a cost to a Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. A Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to a Fund at one rate, while offering a lesser
rate of exchange should the Fund desire to resell that currency to the dealer.
When required by the SEC guidelines, the Funds will set aside
permissible liquid assets in segregated accounts or otherwise cover their
respective potential obligations under currency-related derivatives
instruments. To the extent a Fund's assets are so set aside, they cannot be
sold while the corresponding currency position is open, unless they are
replaced with similar assets. As a result, if a large portion of a Fund's
assets are so set aside, this could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
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.
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SWAP AGREEMENTS. The Funds may enter into interest rate, securities
index and currency exchange rate swap agreements for any lawful purpose
consistent with each Fund's investment objective, such as for the purpose of
attempting to obtain or preserve a particular desired return or spread at a
lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return or spread. A Fund also may enter into swaps
in order to protect against an increase in the price of, or the currency
exchange rate applicable to, securities that the Fund anticipates purchasing at
a later date. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to several
years. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. Swap agreements may
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap;" interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor;" and interest rate
collars, under which a party sells a cap and purchases a floor, or vice versa,
in an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is only 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 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 into swap agreements only with banks and
recognized securities dealers believed by the Advisor to present minimal credit
risks in accordance with guidelines established by each Fund's Board of
Directors. 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.
LENDING OF PORTFOLIO SECURITIES
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. However, the Funds do not presently intend to engage in such
lending. In determining whether to lend securities to a particular
broker-dealer or institutional investor, the Advisor will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. Each Fund 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. Each Fund will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest and other distributions, when retaining such
rights is considered to be in the Fund's interest.
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WHEN-ISSUED SECURITIES
The Funds may from time to time purchase securities on a "when-issued"
basis. The price of debt securities purchased on a when-issued basis, which
may be expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase. During the period between the purchase and settlement, no payment is
made by a Fund to the issuer and no interest on debt securities accrues to the
Fund. Forward commitments involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of a 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 respective net asset
values or income will be adversely affected by the purchase of securities on a
when-issued basis.
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, the Funds will meet their
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 Funds'
payment obligation).
DEPOSITARY RECEIPTS
As indicated in the Prospectus, each Fund may invest in foreign
securities by purchasing depositary receipts, including American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
convertible into securities or issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement. For purposes of the Funds' investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership of common stock will be
treated as common stock.
ADR facilities may be established as either "unsponsored" or
"sponsored." While ADRs issued under these two types of facilities are in some
respects similar, there are distinctions between them relating to the rights
and obligations of ADR holders and the practices of market 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 distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. Sponsored ADR facilities are created in generally the same manner
as unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the 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.
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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. 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 investment companies and up to 5%
of its assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
REPURCHASE AGREEMENTS
The Funds may invest in 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. If the value of such securities is less than
the repurchase price, plus any agreed-upon additional amount, the other party
to the agreement will be required to provide additional collateral so that at
all times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The Advisor will monitor, on an ongoing basis,
the value of the underlying securities to ensure that the value always equals
or exceeds the repurchase price plus accrued interest. Repurchase agreements
could involve certain risks in the event of a default or insolvency of the
other party to the agreement, including possible delays or restrictions upon a
Fund's ability to dispose of the underlying securities. Although no definitive
creditworthiness criteria are used, the Advisor reviews the creditworthiness of
the banks and non-bank dealers with which the Funds enter into repurchase
agreements to evaluate those risks. A Fund may, under certain circumstances,
deem repurchase agreements collateralized by U.S. government securities to be
investments in U.S. government securities.
BORROWING
Each Fund may borrow money from banks, limited by each Fund's
fundamental investment restriction to 33 1/3% of its total assets and may
engage in mortgage dollar roll transactions and reverse repurchase agreements
which may be considered a form of borrowing. (See "Mortgage Dollar Rolls and
Reverse Repurchase Agreements" below.) In addition, each Fund may borrow up to
an additional 5% of its total assets from banks for temporary or emergency
purposes. A Fund will not purchase securities when bank borrowings exceed 5%
of the Fund's total assets.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
Each Fund may 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.
Each Fund may also 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
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agreement, it may be considered a borrowing. When required by guidelines of
the SEC, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligation to repurchase the security.
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 securities or repurchase
agreements that mature on or before the settlement date on the related mortgage
dollar roll or reverse repurchase agreement. Since a Fund will receive interest
on the securities or repurchase agreements in which it invests the transaction
proceeds, such transactions may involve leverage. However, since such
securities or repurchase agreements will be high quality and will mature on or
before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, the Advisor believes that such arbitrage transactions do not present
the risks to the Funds that are associated with other types of leverage.
FOREIGN SECURITIES
The Asset Allocation Fund may invest without limitation in foreign
securities. In addition, the American Utilities Fund may invest up to 15% of
its total assets directly in securities of foreign issuers and up to 35% of its
total assets in foreign securities in domestic markets through depositary
receipts. The Total Return Fund may invest up to 5% of its assets in the
securities of foreign issuers, either through direct investment or depositary
receipts. Many of the foreign securities held by the Funds will not be
registered with the SEC, nor will the issuers thereof 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. A 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 a Fund must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing.
Costs associated with the exchange of currencies also make foreign investing
more expensive than domestic investing. Investment income on certain foreign
securities in which a Fund may invest may be subject to foreign withholding or
other government taxes that could reduce the return of these securities. Tax
treaties between the United States and foreign countries, however, may reduce
or eliminate the amount of foreign tax to which a Fund would be subject.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
failed to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of 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 attractive 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.
INVESTMENT POLICIES AND TECHNIQUES -
ASSET ALLOCATION AND TOTAL RETURN FUNDS
SMALL COMPANIES
The Fund may, from time to time, invest a substantial portion of its
assets in small companies. While smaller companies generally have the
potential for rapid growth, investments in smaller companies often involve
greater risks than investments in larger, more established companies because
smaller companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In
addition, in many instances the securities of
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smaller companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, the securities of smaller
companies may be subject to greater and more abrupt price fluctuations. When
making large sales, the Fund may have to sell portfolio holdings at discounts
from quoted prices or may have to make a series of small sales over an extended
period of time due to the trading volume of smaller company securities.
Investors should be aware that, based on the foregoing factors, an investment
in the Fund may be subject to greater price fluctuations than an investment in
a fund that invests primarily in larger, more established companies. The
Advisor's research efforts may also play a greater role in selecting securities
for the Fund than in a fund that invests in larger, more established companies.
INVESTMENT POLICIES AND TECHNIQUES - ASSET ALLOCATION FUND
SOVEREIGN DEBT
Sovereign debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in the
courts of the defaulting party. Legal recourse is therefore limited.
Political conditions, especially a sovereign entity's willingness to meet the
terms of its debt obligations, are of considerable significance. Also, there
can be no assurance that the holders of commercial bank loans to the same
sovereign entity may not contest payments to the holders of sovereign debt in
the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints to
which a sovereign debtor may be subject. A country whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international price of such commodities. Increased protectionism on the part
of a country's trading partners, or political changes in those countries, could
also adversely affect its exports. Such events could diminish a country's
trade account surplus, if any, or the credit standing of a particular local
government or agency. Another factor bearing on the ability of a country to
repay sovereign debt is the level of the country's international reserves.
Fluctuations in the level of these reserves can affect the amount of foreign
exchange readily available for external debt payments and, thus, could have a
bearing on the capacity of the country to make payments on its sovereign debt.
To the extent that a country has a current account deficit (generally
when exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt
obligations can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are adjusted
periodically based upon international rates.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. At times certain emerging
market countries have declared moratoria on the payment of principal and
interest on external debt.
Certain emerging market countries have experienced difficulty in
servicing their sovereign debt on a timely basis which led to defaults on
certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds (discussed below), and obtaining new credit to finance interest
payments. Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors. The interests of holders of sovereign debt could be
adversely affected in the course of restructuring arrangements or by certain
other factors referred to below. Furthermore, some of the participants in the
secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may
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therefore have access to information not available to other market
participants. Obligations arising from past restructuring agreements may
affect the economic performance and political and social stability of certain
issuers of sovereign debt. There is no bankruptcy proceeding by which
sovereign debt on which a sovereign has defaulted may be collected in whole or
in part.
Foreign investment in certain sovereign debt is restricted or
controlled to varying degrees. These restrictions or controls may at times
limit or preclude foreign investment in such sovereign debt and increase the
costs and expenses of the Fund. Certain countries in which the Fund will
invest require governmental approval prior to investments by foreign persons,
limit the amount of investment by foreign persons in a particular issuer, limit
the investment by foreign persons only to a specific class of securities of an
issuer that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries, or impose additional taxes on
foreign investors. Certain issuers may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments, the country could impose temporary restrictions
on foreign capital remittances. The Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments. Investing in local markets may require the Fund to adopt special
procedures, seek local government approvals or take other actions, each of
which may involve additional costs to the Fund.
The sovereign debt in which the Fund may invest includes Brady Bonds,
which are securities issued under the framework of the Brady Plan, an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness. In restructuring its external debt
under the Brady Plan framework, a debtor nation negotiates with its existing
bank lenders as well as multilateral institutions such as the International
Monetary Fund ("IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of commercial bank debt for newly issued Brady Bonds.
Brady Bonds may also be issued in respect of new money being advanced by
existing lenders in connection with the debt restructuring. The World Bank and
the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.
There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change. Investors should
recognize that Brady Bonds have been issued only recently, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan
to date are designed to achieve debt and debt-service reduction through
specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt, which carry a below-market
stated rate of interest (generally known as par bonds), bonds issued at a
discount from the face value of such debt (generally known as discount bonds),
bonds bearing an interest rate which increases over time, and bonds issued in
exchange for the advancement of new money by existing lenders. Regardless of
the stated face amount and stated interest rate of the various types of Brady
Bonds, the Fund will purchase Brady Bonds in secondary markets, as described
below, in which the price and yield to the investor reflect market conditions
at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF,
the World Bank, and the debtor nations' reserves. In the event of a default
with respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1) the
collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments, and (4) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds are to be viewed
as speculative. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for
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payment of interest and (except in the case of principal collateralized Brady
Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories.
INVESTMENT POLICIES AND TECHNIQUES -- AMERICAN UTILITIES FUND
PUBLIC UTILITY COMPANIES
Under normal conditions at least 65% of the Fund's total assets will
be invested in the equity securities of public utility companies headquartered
in the United States. Accordingly, the Fund's performance will depend in part
on conditions in the public utility industry. Stocks of public utility
companies have traditionally been popular among more conservative stock market
investors because they have generally paid consistent and above-average
dividends. The Fund's investments in pubic utility securities may or may not
pay consistent and above-average dividends. Moreover, the securities of public
utility companies can still be affected by the risks of the stock market as
well as factors specific to public utility companies. Government regulation of
public utility companies can limit their ability to expand their businesses or
to pass cost increases on to customers. Companies providing power or
energy-related services may also be affected by increases in fuel and other
operating costs; high costs of borrowing to finance capital construction during
inflationary periods; restrictions on operations and increased costs and delays
associated with compliance with environmental and nuclear safety regulations;
the difficulties involved in obtaining natural gas for resale or fuel for
generating electricity at reasonable prices; the risks in connection with the
construction and operation of nuclear power plants; the effects of energy
conservation and the effects of regulatory changes. Some public utility
companies are facing increased competition, which may reduce their profits.
All of these factors are subject to rapid change, which may affect utility
companies independently from the stock market as a whole. Securities issued by
public utility companies are particularly sensitive to movements in interest
rates; therefore, the equity securities of such companies are more affected by
changes in interest rates than are the equity securities of other issuers.
ENERGY COMPANIES
Under normal market conditions, the Fund anticipates it may invest a
substantial portion, but not more than 25%, of its total assets, in the equity
securities of energy companies. Accordingly, the performance of this portion
of the Fund's investments will depend in part on conditions in the energy
industry. The securities of companies in the energy industry are subject to
changes in value and dividend yield which depend to a large extent on the price
and supply of energy fuels. Swift price and supply fluctuations of energy
fuels may be caused by events relating to international politics, energy
conservation, the success of exploration projects, currency exchange rate
fluctuations and tax and other regulatory policies of various governments.
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 following registered investment
companies and any series thereof: Strong Advantage Fund, Inc.; Strong Asia
Pacific Fund, Inc.; Strong Common Stock Fund, Inc.; Strong Corporate Bond Fund,
Inc.; Strong Discovery Fund, Inc.; Strong Equity Funds, Inc.; Strong Government
Securities Fund, Inc.; Strong Heritage Reserve Series, Inc.; Strong High-Yield
Municipal Bond Fund, Inc.; Strong Income Funds, Inc.; Strong Insured Municipal
Bond Fund, Inc.; Strong International Bond Fund, Inc.; Strong International
Stock Fund, Inc.; Strong Money Market Fund, Inc.; Strong Municipal Bond Fund,
Inc.; Strong Municipal Funds, Inc.; Strong Opportunity Fund, Inc.; Strong
Short-Term Bond Fund, Inc.; Strong Short-Term Global Bond Fund, Inc.; and
Strong Short-Term Municipal Bond Fund, Inc. (collectively, the "Strong Funds");
and Strong Institutional Funds, Inc.; Strong Special Fund II, Inc.; and Strong
Variable Insurance Funds, Inc.
24
<PAGE> 77
*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. Since October 1993, Mr. Strong has been Chairman and a director
of Strong Holdings, Inc., a Wisconsin corporation and subsidiary of the Advisor
("Holdings"), and the Fund's underwriter, Strong Funds Distributors, Inc., a
Wisconsin corporation and subsidiary of Holdings ("Distributor"). Since
January 1994, Mr. Strong has been Chairman and a director of Heritage Reserve
Development Corporation, a Wisconsin Corporation and subsidiary of Holdings;
and since February 1994, Mr. Strong has been a member of the Managing Boards of
Fussville Real Estate Holdings L.L.C., a Wisconsin Limited Liability Company
and subsidiary of the Advisor, and Fussville Development L.L.C., a Wisconsin
Limited Liability Company and subsidiary of the Advisor, and certain of its
subsidiaries. Mr. Strong has served as (i) a director and Chairman of the
Board of the American Utilities Fund since April 1993; and (ii) a director of
the Asset Allocation and Total Return Funds since the inception of each Fund in
1981 and as the Chairman of the Board of each Fund since July 1986. Mr. Strong
has been in the investment management business since 1967.
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
as a director of (i) the American Utilities Fund since April 1993; and (ii) the
Asset Allocation and Total Return Funds since 1981.
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 as a director of
the American Utilities, Asset Allocation, and Total Return Funds since July
1994.
*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, Holdings, and Distributor since July 1994. Mr.
Dragisic previously served as a director of the American Utilities Fund from
April 1993 until July 1994, and as a director of the Asset Allocation and Total
Return Funds from July 1991 until July 1994, and as Vice Chairman of the Funds
from July 1994 until October 1995. Mr. Dragisic was the President and Chief
Executive Officer of Grunau Company, Inc. (a mechanical contracting and
engineering firm), Milwaukee, Wisconsin from 1987 until July 1994. From 1981
to 1987, he was an Executive Vice President with Grunau Company, Inc. From
1969 until 1973, Mr. Dragisic worked for the Inter American Development Bank.
Mr. Dragisic received his Ph.D. in Economics in 1971 from the University of
Wisconsin-Madison, and his B.A. degree in Economics in 1962 from Lake Forest
College. Mr. Dragisic has served as (i) President of the American Utilities,
Asset Allocation, and Total Return Funds since November 1995; and (ii) director
of the American Utilities, Asset Allocation, and Total Return Funds since April
1995.
25
<PAGE> 78
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. He has served as a director of the American Utilities, Asset
Allocation, and Total Return Funds since April 1995.
William F. Vogt (DOB 7/19/47), Director of the Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc.
since 1990. From 1982 until 1990, he served as Executive Director of
University Physicians of the University of Colorado. Mr. Vogt is the Past
President of the Medical Group Management Association and a Fellow of the
American College of Medical Practice Executives. He has served as a director
of the American Utilities, Asset Allocation, and Total Return Funds since
April 1995.
Lawrence A. Totsky (DOB 5/6/59), C.P.A., Vice President of the Funds.
Mr. Totsky has been Vice President of the Advisor since December 1992.
Mr. Totsky acted as the Advisor's Manager of Shareholder Accounting and
Compliance from June 1987 to June 1991 when he was named Director of Mutual
Fund Administration. Mr. Totsky has been a Vice President of the (i) American
Utilities Fund since April 1993; and (ii) Asset Allocation and Total Return
Funds since May 1993.
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 been a Vice President of the American Utilities, Asset Allocation,
and Total Return Funds since October 1994.
Ann E. Oglanian (DOB 12/7/61), Secretary of the Funds.
Ms. Oglanian has been an Associate Counsel of the Advisor since
January 1992. Ms. Oglanian acted as Associate Counsel for the Chicago-based
investment management firm, Kemper Financial Services, Inc. from June 1988
until December 1991. Ms. Oglanian has been the Secretary of the American
Utilities, Asset Allocation, and Total Return Funds since May 1994.
Ronald A. Neville (DOB 5/21/47), C.P.A., Treasurer of the Funds.
Mr. Neville has been the Senior Vice President and Chief Financial
Officer of the Advisor since January 1995. For fourteen years prior to that,
Mr. Neville worked at Twentieth Century Companies, Inc., most notably as Senior
Vice President and Chief Financial Officer (1988 until December 1994). Mr.
Neville received his M.B.A. in 1972 from the University of Missouri - Kansas
City and his B.A. degree in Business Administration and Economics in 1969 from
Drury College. Mr. Neville has been the Treasurer of the American Utilities,
Asset Allocation, and Total Return Funds since April 1995.
26
<PAGE> 79
Except for Messrs. Nevins, Davis, Kritzik and Vogt, the address of all
of the above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 33963. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301, Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 2830 East Third Avenue, Denver, Colorado
80206.
The mutual fund complex that is managed by the Advisor, which is
composed of 26 open-end management investment companies consisting of 37 mutual
funds, of which the Funds are a part, 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 mutual fund. In addition, each disinterested director
is reimbursed by the mutual funds for travel and other expenses incurred in
connection with attendance at such meetings. Other officers and directors of
the mutual funds receive no compensation or expense reimbursement from the
mutual funds.
As of March 31, 1995, the officers and directors of the Fund in the
aggregate beneficially owned less than 1% of each Fund's then outstanding
shares.
PRINCIPAL SHAREHOLDERS
As of March 31, 1995, the following persons owned of record or are
known by the Funds to own of record more than 5% of a Fund's outstanding
shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS FUND/SHARES PERCENT OF CLASS
---------------- ----------- ----------------
<S> <C> <C>
Charles Schwab & Co., Inc. American Utilities / 1,450,850 26.05%
101 Montgomery Street Asset Allocation / 683,983 5.09%
San Francisco, California 94104
</TABLE>
A shareholder owning more than 25% of a Fund's shares may be
considered a "controlling person" of the Fund. Accordingly, its vote could
have a more significant effect on matters presented to shareholders for
approval than the vote of other Fund shareholders.
INVESTMENT ADVISOR, SUBADVISOR, AND DISTRIBUTOR
The Advisor to the Funds is Strong Capital Management, Inc. Mr. Richard
S. Strong controls the Advisor. Mr. Strong is the Chairman and a Director of
the Advisor, Mr. Dragisic is the President and a Director of the Advisor, Mr.
Totsky is a Senior Vice President of the Advisor, Mr. Lemke is a Senior Vice
President, Secretary, and General Counsel of the Advisor, Mr. Neville is a
Senior Vice President and Chief Financial Officer of the Advisor, and Ms.
Oglanian is an 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 American Utilities, Asset Allocation, and
Total Return Funds, dated May 1, 1995, were last approved by shareholders at
the annual meeting of shareholders held on April 13, 1995. Each Advisory
Agreement is required to be approved annually by 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 also 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, and will terminate
automatically in the event of its assignment.
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<PAGE> 80
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. In addition, the Advisory Agreement between
the Advisor and the American Utilities Fund authorizes the Advisor to delegate
its duties under that agreement to another advisor. As discussed below, the
Advisor has retained W.H. Reaves & Co., Inc. as Subadvisor with respect to the
American Utilities Fund's investments. At its expense, the Advisor provides
office space and all necessary office facilities, equipment and personnel for
servicing the investments of each Fund. In addition, the Advisor places all
orders for the purchase and sale of each Fund's portfolio securities at the
Fund's expense.
As compensation for its services, the American Utilities Fund pays to the
Advisor a monthly management fee at the annual rate of .75% of the average
daily net asset value of the Fund, and the Asset Allocation and Total Return
Funds pay to the Advisor a monthly management fee at the annual rate of .85% of
the first $35,000,000 of the Fund's average daily net asset value and at the
annual rate of .80% of the Fund's average daily net asset value in excess of
$35,000,000. (See "Shareholder Manual - Determining Your Share Price" in the
Prospectus.) From time to time, the Advisor may voluntarily waive all or a
portion of its management fee for a Fund. The organizational expenses of the
American Utilities Fund, which were $35,100, were advanced by the Advisor and
will be reimbursed by the Fund over a period of not more than 60 months from
the Fund's date of inception.
The following table sets forth certain information concerning management fees
for each Fund that has completed a fiscal year:
<TABLE>
<CAPTION>
Management Fee
Incurred Management Fee Management Fee
by Fund Waiver Paid by Fund
---------- -------------- ------------
<S> <C> <C> <C>
Asset Allocation Fund
1992 $1,698,048 $ 0 $1,698,048
1993 $1,843,753 $ 0 $1,843,753
1994 $2,077,850 $ 0 $2,077,850
American Utilities Fund
1993(1) $ 71,977 $ 71,977 $ 0
1994 $ 262,428 $208,638 $ 53,790
Total Return Fund
1992 $4,995,179 $ 0 $4,995,179
1993 $4,614,268 $ 0 $4,614,268
1994 $4,973,614 $ 0 $4,973,614
</TABLE>
_____________________________
(1) Commenced operations on July 1, 1993.
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 a percentage of the average net asset value of the Fund for
such year. Such excess is determined by valuations made as of the close of
each business day of the year, which is the most restrictive percentage
provided by the laws of the various states in which the Fund's common stock is
qualified for sale; or if the states in which the Fund's common stock is
qualified for sale impose no restrictions, the Advisor shall reimburse the Fund
in the event the expenses and charges payable by the Fund in any fiscal year
(as described above) exceed 2%. The most restrictive percentage limitation
currently applicable to a Fund is 2 1/2% of its average daily net assets up to
$30,000,000, 2% on the next $70,000,000 of its average daily net assets and 1
1/2% of its average daily net assets in excess of $100,000,000. Reimbursement
of expenses in excess of the applicable limitation will be made on a monthly
basis and will be paid to the Fund by reduction of the
28
<PAGE> 81
management's fee, subject to later adjustment, month by month, for the
remainder of the Fund's fiscal year. The Advisor may from time to time
voluntarily absorb expenses for a Fund in addition to the reimbursement of
expenses in excess of applicable limitations.
On July 12, 1994, the Securities and Exchange Commission (the "SEC")
filed an administrative action (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 alleged
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 alleged 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.
The staff of the U.S. Department of Labor (the "Staff") has contacted the
Advisor regarding alleged cross-trading of securities between 1987 and early
1990 involving various customer accounts subject to the Employee Retirement
Security Act of 1974 ("ERISA") and managed by the Advisor. The Advisor has
informed the Staff of the basis for its position that the trades complied with
ERISA and that, in any event, any alleged noncompliance was not the cause of
any losses to the accounts. The Staff has stated that it disagrees with the
Advisor's positions, although to date it has not filed any action against the
Advisor. At this time, the Advisor is negotiating with the Staff regarding a
possible resolution of the matter, but it cannot presently determine whether
the matter will be settled or litigated or, if it is settled or litigated, how
it ultimately will be resolved. However, management presently believes, based
on current knowledge and the Advisor's insurance coverage, that the ultimate
resolution of this matter should not have a material adverse effect on the
Advisor's financial position.
As indicated above, the Subadvisor to the American Utilities Fund is W.H.
Reaves & Co., Inc. (the "Subadvisor"). The American Utilities Fund's
subadvisory agreement, dated June 25, 1993 (the "Subadvisory Agreement"), was
last approved by shareholders at the annual meeting of shareholders held on
April 13, 1995. Under the terms of the Subadvisory Agreement, the Subadvisor
furnishes investment advisory and portfolio management services to the Fund
with respect to its investments. The Subadvisor is responsible for decisions
to buy and sell the Fund's investments and all other transactions related to
investment therein and the negotiation of brokerage commissions, if any, except
that the Advisor is responsible for managing the cash equivalent investments
maintained by the Fund in the ordinary course of its business and which, on
average, are expected to equal approximately five to seven percent of the
Fund's total assets. Purchases and sales of securities on a securities
exchange are effected through brokers who charge a negotiated commission for
their services. However, because the Subadvisor is a member of the New York
Stock Exchange, it is anticipated that the Subadvisor will directly effect
purchases and sales of securities on the Exchange and be paid a commission for
such services commensurate with the commissions charged by unaffiliated brokers
in arm's-length transactions. (See "Portfolio Transactions and Brokerage.")
During the term of the Subadvisory Agreement, the Subadvisor will bear all
expenses incurred by it in connection with its services under such agreement.
The Subadvisory Agreement requires the Advisor, not the American
Utilities Fund, to pay the Subadvisor a fee, computed and paid monthly, at an
annual rate of 0.50% on the first $200 million of the Fund's average daily net
assets plus 40% of the Advisor's net management fee (after any waivers thereof)
on that portion of the Fund's average daily net assets in excess of $200
million, except that the foregoing percentage will be 50% on average daily net
assets between $1.0 billion and $1.5 billion. In 1994, the Subadvisor received
$172,390 in subadvisory fees from the Advisor pursuant to the Subadvisory
Agreement. The Subadvisory Agreement also requires the Subadvisor to
contribute to the payment by the Advisor of certain start-up costs of the
American Utilities Fund at the rate of 0.25% of the Fund's average daily net
asset value until the earlier of the Fund reaching $100 million in net assets
or one year from the date the Fund commenced operations and at the rate of
0.15% of the Fund's average daily net asset value until the earlier of the Fund
reaching $200 million in net assets or two years from the date the Fund
commenced operations.
29
<PAGE> 82
The Subadvisory Agreement may be terminated at any time, without payment
of any penalty, by vote of the Board of Directors of the American Utilities
Fund or by a vote of a majority of the outstanding voting securities of the
Fund on 60 days' written notice to the Subadvisor. The Subadvisory Agreement
may also be terminated by the Advisor for breach upon 20 days' notice,
immediately in the event that the Subadvisor becomes unable to discharge its
duties and obligations, and upon 60 days' notice for any reason. The
Subadvisory Agreement may be terminated by the Subadvisor upon 180 days' notice
for any reason. The Subadvisory Agreement will terminate automatically in the
event of its unauthorized assignment.
Except for expenses assumed by the Advisor, and the Subadvisor if
applicable, as set forth above, or by the Distributor, as described below with
respect to the distribution of a Fund's shares, each Fund is responsible for
all its other expenses, including, without limitation, interest charges, taxes,
brokerage commissions and similar expenses; organizational expenses; expenses
of issue, sale, repurchase or redemption of shares; expenses of registering or
qualifying shares for sale with the states and the SEC; expenses for printing
and distributing Prospectuses and quarterly financial statements to existing
shareholders; charges of custodians, transfer 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, and printing of stock certificates; and fees for directors who are
not "interested persons" of the Advisor.
The Advisor has 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 Advisor's 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 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, at the time, is 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
which prohibit trading by Access Persons who are portfolio managers within
seven calendar days of trading in the same securities by any mutual fund or
other account managed by the portfolio manager.
In addition, the Subadvisor to the American Utilities Fund has also
adopted a Code of Ethics (the "Reaves Code") which is identical to the Code
discussed above in all but two respects. First, instead of a flat prohibition
against profiting on short-term trading in securities, the Reaves Code gives a
Reaves' compliance official the authority to require forfeiture of such profits
if such person believes that the profits were gained at the expense of an
advisory client. Second, the Reaves Code modifies the seven day trading "black
out" period as contained in the Code to prohibit only like transactions by a
portfolio manager (e.g., a purchase by both the American Utilities Fund and a
portfolio manager of the Fund) within seven calendar days of the establishment
of an initial position or liquidation of a position of the same securities by
the Fund or other account of the Subadvisor managed by that portfolio manager.
Under a Distribution Agreement dated December 1, 1993 with the American
Utilities, Asset Allocation, and Total Return Funds (the "Distribution
Agreement"), Strong Funds Distributors, Inc. acts as underwriter of each Fund's
shares ("Distributor"). Each Distribution Agreement provides 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 costs of printing Prospectuses and shareholder
reports which are used for selling purposes, as well as advertising and other
costs attributable to the distribution of 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 American Utilities, Asset Allocation, and Total Return Funds. On December
1, 1993, the Distributor
30
<PAGE> 83
succeeded to the broker-dealer registration of the Advisor and, in connection
therewith, the Distribution Agreements for the American Utilities, Asset
Allocation, and Total Return Funds were executed on substantially identical
terms as the former distribution agreement with the Advisor as distributor.
Each Distribution Agreement is subject to the same termination and renewal
provisions as are described above with respect to the Advisory Agreements.
From time to time, the Distributor may hold in-house sales incentive
programs for its associated persons under which these persons may receive
non-cash compensation awards in connection with the sale and distribution of a
Fund's shares. These awards may include items such as, but not limited to,
gifts, merchandise, gift certificates, and payment of travel expenses, meals
and lodging. As required by the National Association of Securities Dealers,
Inc. or NASD's proposed rule amendments in this area, any in-house sales
incentive program will be multi-product oriented, i.e., any incentive will be
based on an associated person's gross production of all securities within a
product type and will not be based on the sales of shares of any specifically
designated mutual fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor, and the Subadvisor with respect to the American Utilities
Fund only, are 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, and the Subadvisor, 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, and
the Subadvisor, 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. In selecting broker-dealers and in negotiating
commissions, the Advisor, and the Subadvisor, consider a variety of factors,
including best price and execution, the full range of brokerage services
provided by the broker, as well as its capital strength and stability, and the
quality of the research and research services provided by the broker.
Brokerage will not be allocated based on the sale of a Fund's shares.
With respect to the American Utilities Fund only, because the Subadvisor
is a member of the New York Stock Exchange, it expects to act as a broker for
transactions in the Fund's securities. In order for the Subadvisor to effect
any portfolio transactions for the American Utilities Fund on an exchange, the
commissions, fees or other remuneration received by the Subadvisor must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time. This standard would allow the Subadvisor to receive no more
than the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. During 1993 and 1994, the
American Utilities Fund paid approximately $68,000 and $136,000, respectively,
to the Subadvisor in brokerage commissions. The payments made to the
Subadvisor during 1994 represent 99.45% of the Fund's aggregate brokerage
commissions paid during the year.
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, 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, and
Subadvisory Agreement if applicable, the Advisor, and Subadvisor, may cause the
Funds to pay a broker, which provides brokerage and research services to the
Advisor, or Subadvisor, a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting the
transaction. The Advisor, and Subadvisor, believe it is important to the
decision-making process to have access to independent research. Each Advisory
Agreement provides that such higher commissions will not be paid by a Fund
unless (a) the Advisor
31
<PAGE> 84
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 a Fund
under its Advisory Agreement are not reduced as a result of the Advisor's
receipt of research services. The American Utilities Fund paid approximately
$3,000 in brokerage commissions in 1993 and $0 in 1994 (exclusive of the
amounts paid to the Subadvisor, as noted above). The Asset Allocation Fund
paid approximately $520,000, $630,000 and $626,000 in brokerage commissions
during 1992, 1993 and 1994, respectively. The Total Return Fund paid
approximately $4,467,000, $4,309,000 and $4,403,000 in brokerage commissions
during 1992, 1993 and 1994, respectively.
Generally, research services provided by brokers 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 such cases,
research services are generated by third parties but are provided to the
Advisor by or through brokers. Such brokers may pay for all or a portion of
computer hardware and software costs relating to the pricing of securities.
Where the Advisor itself receives both administrative benefits and
research and brokerage services from the services provided by brokers, it makes
a good faith allocation between the administrative benefits and the research
and brokerage services, and will pay for any administrative benefits with cash.
In making good faith allocations between administrative benefits and research
and brokerage services, a conflict of interest may exist by reason of the
Advisor's allocation of the costs of such benefits and services between those
that primarily benefit the Advisor and those that primarily benefit the Funds
and other advisory clients.
From time to time, the Advisor may purchase securities for a Fund in a
fixed price offering. In these situations, the seller may be a member of the
selling group that will, in addition to selling the securities to the Funds and
other advisory clients, provide the Advisor with research. The National
Association of Securities Dealers has adopted rules expressly permitting these
types of arrangements under certain circumstances. Generally, the seller will
provide research "credits" in these situations at a rate that is higher than
that which is available for typical secondary market transactions. These
arrangements may not fall within the safe harbor of Section 28(e).
Each year, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Funds and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
During its last fiscal year, the Advisor had an arrangement with various
brokers whereby, in consideration of the providing of research services, the
Advisor allocated 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.
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.
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<PAGE> 85
The Advisor and Subadvisor place 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, and Subadvisor, in
servicing all of their accounts; not all of such services may be used by the
Advisor, and Subadvisor, in connection with the Funds. In the opinion of the
Advisor, it is not possible to separately measure the benefits from research
services to each of the accounts (including 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 a Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the 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 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.
CUSTODIAN
As custodian of the Funds' 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 is in no
way responsible for any of the investment policies or decisions of the Funds.
33
<PAGE> 86
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
$21.75 plus certain out-of-pocket expenses and a $4.20 charge per account per
annum on all closed accounts, payable monthly. The Advisor also acts as
investment advisor for the Funds. 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 Agreements. In
addition, the Advisor provides certain printing and mailing services for the
Funds, such as printing and mailing of shareholder account statements, checks,
and tax forms.
The following table sets forth certain information concerning amounts
paid by each Fund that has completed a fiscal year for transfer agency and
dividend disbursing and printing and mailing services:
<TABLE>
<CAPTION>
Transfer Agency and Dividend Disbursement
Services Charges Incurred
----------------------------------------------------------------------------
Per Printing and Amounts Net Amount
Account Out-of-Pocket Mailing Waived By Paid By
Fund Charges Expenses Services Advisor Fund
-------- ------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Asset Allocation Fund
1992 $ 515,216 $101,948 $ 11,600 $ 0 $ 628,764
1993 524,693 64,072 12,746 0 601,511
1994 594,683 158,509 14,340 0 767,532
American Utilities Fund
1993(1) $ 0 $ 0 $ 0 $ 0 $ 0
1994 56,756 451 798 0 58,005
Total Return Fund
1992 $ 1,944,126 $ 385,737 $ 44,675 $ 0 $ 2,374,538
1993 1,596,596 360,677 37,559 0 1,994,832
1994 1,617,511 341,401 36,448 0 1,995,360
- ----------------------------------------------------------------------
</TABLE>
(1) The American Utilities Fund commenced operations on July 1, 1993.
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, answering inquiries relating to a Fund, transmitting,
on behalf of a Fund, proxy statements, annual reports, updated Prospectuses,
other communications regarding the Fund, and related services as the Fund or
beneficial owners may reasonably request. In such cases, the Funds will not
pay fees at a rate that is greater than the rate the Funds are currently paying
the Advisor for providing these services to Fund shareholders.
TAXES
GENERAL
As indicated under "About the Funds - Distributions and Taxes" in the
Prospectus, 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.
34
<PAGE> 87
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 Requirements") and must meet several
additional requirements. Among these requirements are the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities, foreign currencies, or other
income (including gains from options, futures, or forward contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following that was held for less than three months -- options or
futures (other than those on foreign currencies), or foreign currencies (or
options, futures, or forward contracts thereon) that are not directly related
to the Fund's principal business of investing in securities (or options and
futures with respect to securities), or forward contracts ("30% Limitation");
(3) at the close of each quarter of the Fund's taxable year, at least 50% of
the value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs, and other securities, with
these other securities limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (4)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
FOREIGN TRANSACTIONS
Interest and dividends received by a Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
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).
Each Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain on disposition of the stock (collectively,
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC
income will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If a Fund invests in a PFIC and elects to treat the PFIC
as a "qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) -- which probably would have to be distributed to its
35
<PAGE> 88
shareholders to satisfy the Distribution Requirement and avoid imposition of
the Excise Tax -- even if those earnings and gain were not received by the
Fund. In most instances it will be very difficult, if not impossible, to make
this election because of certain requirements thereof.
The "Tax Simplification and Technical Corrections Bill of 1993," passed
in May 1994 by the House of Representatives, would substantially modify the
taxation of U.S. shareholders of foreign corporations, including eliminating
the provisions described above dealing with PFICs and replacing them (and other
provisions) with a regulatory scheme involving entities called "passive foreign
corporations." Three similar bills were passed by Congress in 1991 and 1992 and
were vetoed. It is unclear at this time whether, and in what form, the
proposed modifications may be enacted into law.
Pursuant to proposed regulations, open-end RICs such as the Funds would
be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures and entering into foreign currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Funds realize
in connection therewith. Gains from the disposition of foreign currencies
(except certain gains therefrom that may be excluded by future regulations),
and income from transactions in options, futures, and forward currency
contracts derived by a Fund with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
Income Requirement. However, income from the disposition of options and
futures (other than those on foreign currencies) will be subject to the 30%
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward contracts
on foreign currencies, that are not directly related to a Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the 30% Limitation if they are held for
less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
30% Limitation. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. 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, and forward currency contracts that are subject to section 1256 of the
Code ("Section 1256 Contracts") and are held by the Fund as of the end of the
year, as well as gains and losses on Section 1256 Contracts actually realized
during the year. Except for Section 1256 Contracts that are part of a "mixed
straddle" and with respect to which a Fund makes a certain election, any gain
or loss recognized with respect to Section 1256 Contracts is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Section 1256 Contract. Unrealized
gains on Section 1256 Contracts that have been held by a Fund for less than
three months as of the end of its taxable year, and that are recognized for
federal income tax purposes as described above, will not be considered gains on
investments held for less than three months for purposes of the 30% Limitation.
36
<PAGE> 89
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
Each Fund may acquire zero-coupon, step-coupon, or other securities
issued with original issue discount. As a holder of those securities, a Fund
must include in its income the original issue discount that accrues on the
securities during the taxable year, even if the Fund receives no corresponding
payment on the securities during the year. Similarly, a Fund must include in
its income securities it receives as "interest" on pay-in-kind securities.
Because a Fund annually must distribute substantially all of its investment
company taxable income, including any original issue discount and other
non-cash income, to satisfy the Distribution Requirement and avoid imposition
of the Excise Tax, it may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions may be made from the proceeds on sales of
portfolio securities, if necessary. A Fund may realize capital gains or losses
from those sales, which would increase or decrease its investment company
taxable income or net capital gain, or both. In addition, any such gains may
be realized on the disposition of securities held for less than three months.
Because of the 30% Limitation, any such gains would reduce a Fund's ability to
sell other securities, or certain options, 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 NYSE is open for trading Monday through
Friday except New Year's Day, President's 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 such
holiday falls on a Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or the yearly accounting period.
Debt obligations are valued by a pricing service that utilizes electronic
data processing techniques to determine values for normal institutional-sized
trading units of debt obligations without regard to sale or bid prices when
such values are believed to more accurately reflect the fair market value for
such securities. Otherwise, sale or bid prices are used. Any securities or
other assets for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Directors of each
Fund. Debt obligations having remaining maturities of 60 days or less when
purchased are valued by the amortized cost method when a Fund's Board of
Directors determines that the fair value of such securities is their amortized
cost. Under this method of valuation, a security is initially valued at its
acquisition cost, and thereafter, amortization of any discount or premium is
assumed each day, regardless of the impact of the fluctuating rates on the
market value of the instrument.
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<PAGE> 90
ADDITIONAL SHAREHOLDER INFORMATION
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGES AND AUTOMATIC EXCHANGE PLAN
Shares of a Fund and any other funds sponsored by the Advisor may be
exchanged for each other at relative net asset values. Exchanges will be
effected by redemption of shares of the Fund held and purchase of shares of the
fund for which Fund shares are being exchanged (the "New Fund"). For federal
income tax purposes, any such exchange constitutes a sale upon which a capital
gain or loss will be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis. If
you are interested in exercising any of these exchange privileges, you should
obtain Prospectuses of other funds sponsored by the Advisor from the Advisor.
Upon a telephone exchange, the transfer agent establishes a new account in the
New Fund with the same registration and dividend and capital gains options as
the redeemed account, unless otherwise specified, and confirms the purchase to
you.
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.
The Telephone Exchange and Redemption Privileges and Automatic Exchange
Plan are available only in states where shares of the New Fund may be sold, and
may be modified or discontinued at any time. Additional information regarding
the Telephone Exchange and Redemption Privileges and Automatic Exchange Plan is
contained in the Funds' Prospectus.
RETIREMENT PLANS
Individual Retirement Account (IRA): Everyone under age 70 1/2 with earned
income may contribute to a tax-deferred IRA. The Strong Funds offer a prototype
plan for you to establish your own IRA. You are allowed to contribute up to the
lesser of $2,000 or 100% of your earned income each year to your IRA. Under
certain circumstances, your contribution will be deductible.
Direct Rollover IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or Code section
403(b) plan distribution directly into an IRA. This tax cannot be avoided if
you receive a distribution and then roll it over into an IRA. The amount of
your Direct Rollover IRA contribution will not be included in your taxable
income for the year.
Simplified Employee Pension Plan (SEP-IRA): A SEP-IRA allows an employer to
make deductible contributions to separate IRA accounts established for each
eligible employee.
Salary Reduction Simplified Employee Pension Plan (SAR SEP-IRA): A SAR SEP-IRA
is a type of SEP-IRA in which an employer may allow employees to defer part of
their salaries and contribute into an IRA account. These deferrals help lower
the employees' taxable income.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. There are three plan types: a profit-sharing
plan, a money purchase pension plan, and a paired plan (a combination of a
profit-sharing plan and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed to a retirement plan which
will earn tax-deferred income. A 401(k) plan is funded by employee
contributions, employer contributions, or a combination of both.
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.
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<PAGE> 91
FUND ORGANIZATION
The Asset Allocation and Total Return 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 American Utilities Fund is a
series of common stock of Strong Conservative Equity 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 Corporations 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.
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 Asset Allocation Fund, Inc. 09/03/81 300,000,000 .01
Strong Conservative Equity Funds, Inc. 12/28/90 10,000,000,000 .00001
- Strong American Utilities Fund 12/28/90 300,000,000 .00001
- Strong Equity Income Fund* 10/27/95 300,000,000 .00001
- Strong Growth and Income Fund* 10/27/95 300,000,000 .00001
Strong Total Return Fund 9/03/81 300,000,000 .01
</TABLE>
* These Funds are described in different prospectuses and statements of
additional information.
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.
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<PAGE> 92
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 "average annual total return," "total return," and
"cumulative total return." In addition, the American Utilities Fund's
performance may be shown in the form of "yield" and "distribution rate." From
time to time, the Advisor may agree to waive or reduce its management fee and
to absorb certain operating expenses for a Fund. Without these waivers and
absorption of expenses, 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 the Funds.
AVERAGE ANNUAL TOTAL RETURN
The Funds' 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 a 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 a
Fund's shares on the first day of the period and computing the "ending value"
of that investment at the end of the period. The total return percentage is
then determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The calculation assumes that all income and capital gains
dividends paid by a Fund have been reinvested at net asset value of the Fund on
the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period.
Total return figures for various periods are set forth in the table below.
CUMULATIVE TOTAL RETURN
Cumulative total return represents the simple change in value of an
investment over a stated period and may be quoted as a percentage or as a
dollar amount. Total returns and cumulative total returns may be broken down
into their components of income and capital (including capital gains and
changes in share price) in order to illustrate the relationship between these
factors and their contributions to total return.
A Fund's performance figures are based upon historical results and do not
represent future performance. Each Fund's shares are sold at net asset value
per share. The Funds' returns and net asset value will fluctuate and shares
are redeemable at the then current net asset value of each Fund, which may be
more or less than original cost. Factors affecting a Fund's performance
include general market conditions, operating expenses, and investment
management. Any additional fees charged by a dealer or other financial
services firm would reduce the returns described in this section.
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<PAGE> 93
The figures below show performance information for the period ended
December 31, 1994. No adjustment has been made for taxes, if any, payable on
dividends. Securities prices fluctuated during these periods.
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
Average
Annual
Total Total
Return Return
------ ------
Initial
$10,000 Ending Value Percentage Percentage
Investment December 31, 1994 Increase Increase
---------- ----------------- -------- --------
<S> <C> <C> <C> <C>
Life of Fund
(1) $10,000 $51,679 416.79 % 13.47 %
Ten Years 10,000 24,338 143.38 9.30
Five Years 10,000 14,314 43.14 7.44
One Year 10,000 9,849 -1.51 -1.51
</TABLE>
- -----------------------------
(1) December 30, 1981
AMERICAN UTILITIES FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment December 31, 1994 Increase Increase
---------- ----------------- -------- --------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $10,178 1.78 %
1.18 %
One Year 10,000 9,739 -2.61 -2.61
</TABLE>
-----------------------
(1) July 1, 1993
TOTAL RETURN FUND
<TABLE>
<CAPTION>
Average
Annual
Total Total
Return Return
------ ------
Initial
$10,000 Ending Value Percentage Percentage
Investment December 31, 1994 Increase Increase
---------- ----------------- -------- --------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $59,027 490.27 % 14.63 %
Ten Years 10,000 28,536 185.36 11.06
Five Years 10,000 15,081 50.81 8.56
One Year 10,000 9,862 -1.38 -1.38
</TABLE>
------------------------
(1) December 30, 1981
The American Utilities, Asset Allocation, and Total Return Funds'
total return for the three months ending March 31, 1995 were -6.11%, 3.62%, and
6.63%, respectively.
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<PAGE> 94
YIELD
A Fund's yield is computed in accordance with a standardized method
prescribed by rules of the SEC. Under that method, the current yield quotation
for the Fund is based on a one month or 30-day period. The 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:
6
YIELD = 2[( a-b + 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 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 December 30, 1994, the American Utilities
Fund's yield was 3.93%. In computing its yield, the Fund follows certain
standardized accounting practices specified by rules of the SEC. These
practices are not necessarily consistent with those that the Fund uses to
prepare annual and interim financial statements in conformity with generally
accepted accounting principles.
DISTRIBUTION RATE
The distribution rate for the a Fund is computed, according to a
non-standardized formula, by dividing the total amount of actual distributions
per share paid by the Fund over a twelve month period by the Fund's net asset
value on the last day of the period. The distribution rate differs from the
Fund's yield because the distribution rate includes distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains. Therefore, a Fund's
distribution rate may be substantially different than its yield. Both a Fund's
yield and distribution rate will fluctuate.
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 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.
42
<PAGE> 95
(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 gains 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 the Fund, especially those with similar
objectives. Sources for Fund performance and articles about a Fund may include
publications such as Money, Forbes, Kiplinger's, Smart Money, Financial World,
Business Week, U.S. News and World Report, The Wall Street Journal, Barron's
and a variety of investment newsletters.
(7) INDICES
The Funds may compare their performance to a wide variety of indices
including the following:
(a) The Consumer Price Index
(b) Dow Jones Average of 30 Industrials
(c) Dow Jones Utility Average
(d) Standard & Poor's 500 Stock Index
(e) Standard & Poor's Utility Index
(f) NASDAQ Over-the-Counter Composite Index
(g) Russell 1000 Stock Index
(h) Russell 1000 Growth Index
(i) Russell 2000 Small Stock Index
(j) Russell 2500 Stock Index
(k) Russell 3000 Stock Index
(l) Russell Midcap Index
(m) Russell Midcap Growth Index
(n) Salomon Brothers 3-Month Treasury Bill Index
(o) Salomon Brothers Broad Investment-Grade Bond Index
(p) Lehman Brothers Aggregate Bond Index
(q) Lehman Brothers Intermediate Government/Corporate Bond Index
(r) A blend index consisting of: Standard & Poor's 500 Stock
Index (40% weighted), Salomon Brothers Broad Investment-Grade
Bond Index (40% weighted), and Salomon Brothers 3-Month Treasury
Bill Index (20% weighted)
(s) A blend index consisting of: Standard & Poor's 500 Stock Index
(40% weighted), Lehman Brothers Intermediate Government/Corporate
Bond Index (40% weighted), and Salomon Brothers 3-Month Treasury
Bill Index (20% weighted)
There are differences and similarities between the investments that a
Fund may purchase and the investments measured by the indices which are noted
herein.
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<PAGE> 96
(8) HISTORICAL ASSET CLASS RETURNS
From time to time, marketing materials may portray the historical returns
of various asset classes. Such presentations will typically compare the
average annual rates of return of inflation, U.S. Treasury bills, bonds, common
stocks, and small stocks. There are important differences between each of these
investments that should be considered in viewing any such comparison. The
market value of stocks will fluctuate with market conditions, and small-stock
prices generally will fluctuate more than large-stock prices. Stocks are
generally more volatile than bonds. In return for this volatility, stocks have
generally performed better than bonds or cash over time. Bond prices generally
will fluctuate inversely with interest rates and other market conditions, and
the prices of bonds with longer maturities generally will fluctuate more than
those of shorter-maturity bonds. Interest rates for bonds may be fixed at the
time of issuance, and payment of principal and interest may be guaranteed by
the issuer and, in the case of U.S. Treasury obligations, backed by the full
faith and credit of the U.S. Treasury.
(9) 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.
44
<PAGE> 97
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVE
<S> <C>
Strong U.S. Treasury Money Fund Current income, a stable share price, and daily liquidity.
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 Bond Fund Total return by investing for a high level of current income with a 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 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 Insured Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a moderate degree of share-price fluctuation.
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
Strong Corporate Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
Strong International Bond Fund High total return by investing for both income and capital appreciation.
Strong High-Yield Bond Fund Total return by investing for a high level of current income and capital
growth.
Strong High-Yield Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income.
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 Value Fund Capital growth.
Strong Opportunity Fund Capital growth.
Strong Growth Fund Capital growth.
Strong Common Stock Fund* Capital growth.
Strong Small Cap Fund Capital growth.
Strong Discovery Fund Capital growth.
Strong International Stock Fund Capital growth.
Strong Asia Pacific Fund Capital growth.
</TABLE>
* The Fund is currently closed to new investors.
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
45
<PAGE> 98
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 Conservative Equity Funds and determine which Fund or
combination of Funds best meets your personal investment objectives, they are
described in the same Prospectus. Though they appear in the same Prospectus,
each of the Conservative Equity Funds is a separately incorporated investment
company. Because the Funds share a Prospectus, there may be the possibility of
cross liability between the Funds.
(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>
U.S. Treasury Money Fund Advantage Fund Government Securities Total Return Fund
Money Market Fund Municipal Advantage Fund Fund Opportunity Fund
Heritage Money Fund Insured Municipal Bond Growth Fund
Municipal Money Market 2 TO 4 YEARS Fund Common Stock Fund*
Fund ------------ Municipal Bond Fund Discovery Fund
Short-Term Bond Fund Corporate Bond Fund International Stock
Short-Term Municipal Bond International Bond Fund Fund
Fund High-Yield Municipal Bond Asia Pacific Fund
Short-Term Global Bond Fund Value Fund
Fund Asset Allocation Fund Small Cap Fund
American Utilities Fund Equity Income Fund
High-Yield Bond Fund Growth and Income
Fund
</TABLE>
*This fund is currently closed to new investors.
ADDITIONAL FUND INFORMATION
(1) 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.
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<PAGE> 99
(2) 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 a 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:
2
Standard deviation = the square root of E(x - x)
i m
-----------
n-1
where E = "the sum of",
x = each individual return during the time period,
i
x = the average return over the time period, and
m
n = the number of individual returns during the time period.
Statistics may also be used to discuss a Fund's relative performance. One
such measure is alpha. Alpha measures the actual return of a fund compared to
the expected return of a fund given its risk (as measured by beta). The
expected return is based on how the market as a whole performed, and how the
particular fund has historically performed against the market. Specifically,
alpha is the actual return less the expected return. The expected return is
computed by multiplying the advance or decline in a market representation by
the fund's beta. A positive alpha quantifies the value that the fund manager
has added, and a negative alpha quantifies the value that the fund manager has
lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor, owned
by professionals active in its management. Recognizing that investors are the
focus of its business, the Advisor strives for excellence both in investment
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery. Through its
commitment to excellence, the Advisor intends to benefit investors and to
encourage them to think of Strong Funds as their mutual fund family.
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.
47
<PAGE> 100
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. Large company plans.
2. 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.
ASSET ALLOCATION FUND
The Advisor believes that active management is the best way to achieve the
Asset Allocation Fund's objective. This policy is based on the fundamental
belief that economic and financial conditions create favorable and unfavorable
investment periods (or seasons) and that these different seasons require
different investment approaches. During favorable investment periods, the Fund
seeks to generate real (inflation plus) growth, and its portfolio may be more
heavily weighted in equities. During uncertain periods, income and capital
preservation may be emphasized, and the Fund's portfolio may be more heavily
weighted in bonds or short-term securities. Through their understanding and
willingness to change with investment cycles or periods, the co-managers of the
Fund seek to achieve the Fund's objectives throughout the seasons of
investment.
The Fund's co-managers intend to employ an investment strategy which will
permit it to participate in a rising market in equities with less risk and
volatility and more income than a fund which concentrates its investments in
stocks. On the other hand, since the Fund's portfolio will generally have
significant holdings in equities, it will be subject to greater volatility and
produce less income than a fund which concentrates its investments solely in
bonds or money market instruments.
In allocating the Fund's assets among equities, bonds, and short-term
securities, the team's lead portfolio manager will employ top-down fundamental
analysis in evaluating the attractiveness of the three asset components on the
basis of economic trends such as inflation, growth of corporate profits and
Federal Reserve Board policies in conjunction with measures of market valuation
such as price-earnings ratios, dividend yields and real interest rates. The
relative weights of the Fund's three asset components are adjusted gradually,
perhaps as often as several times a year, rather than making dramatic
reallocations in anticipation of a major shift in the attractiveness of one
asset category over another. Therefore, the Fund should be viewed as a
long-term investment suitable for investors with an investment horizon of five
years or more. In light of the nature of the Fund and its long-term investment
horizon, it may be most appropriate for persons attempting to achieve long-term
goals such as accumulating funds for retirement, college tuition or a better
life for one's family.
AMERICAN UTILITIES FUND
In selecting securities for the American Utilities Fund, the Subadvisor
looks for certain investment attributes including strong financial quality,
seasoned management, a favorable regulatory environment, and attractive stock
valuations. The Subadvisor also seeks positive changes that are not yet fully
recognized by the marketplace. The Subadvisor continually monitors the
utilities industry for what it believes are attractive stocks or sectors. When
market conditions warrant, the Subadvisor may advocate opportunistic purchases
or focus on a particular sector of the utilities industry. The Subadvisor
believes that individual stock selection is the key to successfully managing a
sector fund. The team approach utilized by the Subadvisor allows the analysis
of companies and situations from many points of view.
50
<PAGE> 103
TOTAL RETURN FUND
Conventional wisdom often divides fund managers into two schools -- growth
and value. Growth-style managers look for companies that exhibit
faster-than-average gains in earnings and profits. Value-style managers
generally concentrate more on the price side of the equation, looking for
companies that are undervalued and selling at a discount to what they believe
is their intrinsic value.
The style of the portfolio managers for the Total Return Fund, Mr. Ronald
C. Ognar and Mr. Ian J. Rogers, leans more toward growth, although they keep an
eye on valuations. The Advisor invests chiefly in the stocks of large,
dividend-paying companies. However, the Fund's charter also enables it to
invest in small and mid-sized companies and to hold up to 40% of its assets in
bonds or cash reserves. In selecting its equity investments, the Advisor looks
for growth of both sales and earnings. The Advisor believes that, in general,
good growth companies exhibit accelerating sales and earnings, high return on
equity, and, typically, low debt. They offer products or services that should
show strong future growth, and their market share is expanding. In short, they
offer some unique, sustainable competitive advantage, such as low cost
production or innovative products and services. The key, however, is the
management. Members of the portfolio management team meet face-to-face with
the management of many companies, which helps them get to know and trust a
company and the people in charge of it.
Currently, the Advisor is focusing on some companies that are undergoing
positive change. Oftentimes, a new product, a new technology, or a change in
management can positively affect a company's earnings growth prospects. Themes
also play a part in the investment strategy. Some examples would be the aging
population, telecommunications, and the rapid development of foreign economies
where U.S. companies have strong revenue growth. The Advisor seeks to manage
risk by adhering to price disciplines, diversifying holdings across sectors,
and, when appropriate, building cash reserves.
As was true with respect to its management of the Asset Allocation Fund,
the Advisor believes that active management is the best way to achieve the
Total Return 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 understanding and willingness to
change with these investment cycles, the Advisor seeks to achieve the Fund's
objectives throughout the seasons of investment.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 411 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, are the independent accountants for the Funds, providing audit
services and assistance and consultation with respect to the preparation of
filings with the SEC.
LEGAL COUNSEL
Godfrey & Kahn, S.C., 780 North Water Street, Milwaukee, Wisconsin 53202,
acts as outside legal counsel for the Funds.
51
<PAGE> 104
FINANCIAL STATEMENTS
The Annual Report for the American Utilities, Asset Allocation, and Total
Return 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) Report of Independent Accountants.
The Semiannual Report for the American Utilities, Asset Allocation, and
Total Return Funds that is attached hereto contains the following unaudited
financial information for the six months ended June 30, 1995 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.
In the opinion of management of the Funds, the unaudited financial
statements reflect all adjustments which are necessary to a fair statement of
the results for the six months ended June 30, 1995. All such adjustments are
of a normal recurring nature.
52
<PAGE> 105
APPENDIX
BOND RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
the 'BB' rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied 'BBB-' rating.
A-1
<PAGE> 106
B Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI the rating 'CI' is reserved for income bonds on which no interest
is being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grade period. The 'D' rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
A-2
<PAGE> 107
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch Investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated 'AAA'. Because bonds rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of the issuers is
generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
A-3
<PAGE> 108
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the risk
factor varies from industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD,
DD,
AND D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. 'DDD' represents the highest
potential for recovery of these bonds, and 'D' represents the
lowest potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
A-4
<PAGE> 109
Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture
restrictions is important to the analysis of a company's operating and
financial constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
<TABLE>
<CAPTION>
Rating Scale Definition
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
- ----------------------------------------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
- ----------------------------------------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
- ----------------------------------------------------------------------------------------------------------------
BBB+ Below average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
- ----------------------------------------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according to
BB- industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
- ----------------------------------------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will not be met
B when due. Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a higher
or lower rating grade.
- ----------------------------------------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable uncertainty exists as to
timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
A-5
<PAGE> 110
DD Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- -----------------------------------------------------------------------------
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 graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
STANDARD & POOR'S NOTE RATINGS
A 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 considered a note.
The 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.
A-6
<PAGE> 111
SP-2 Satisfactory capacity to pay interest and principal, 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 COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933, nor
does it represent that any specific note is a valid obligation of a rated
issuer or issued in conformity with any applicable law. Moody's employs the
following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
(i) leading market positions in well established industries, (ii) high rates of
return on funds employed, (iii) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (iv) broad margins in
earnings coverage of fixed financial charges and high internal cash generation,
and (v) well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the prime rating
categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All
security elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
A-7
<PAGE> 112
SG This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
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.
A-8
<PAGE> 113
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
<TABLE>
<CAPTION>
RATING SCALE: DEFINITION:
------------ ----------
<S> <C>
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent and supported by good
fundamental protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
----------
Duff 2 Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
------------------
DUFF 3 Satisfactory liquidity and other protection factors qualify issue as to investment grade. Risk factors
are larger and subject to more variation. Nevertheless, timely payment is expected.
Non-investment Grade
--------------------
DUFF 4 Speculative investment characteristics. Liquidity is not sufficient to insure against disruption in
debt service. Operating factors and market access may be subject to a high degree of variation.
Default
-------
DUFF 5 Issuer failed to meet scheduled principal and/or interest payments.
</TABLE>
A-9
