<PAGE> 1
As filed with the Securities and Exchange Commission on or about June 26, 1996
Securities Act Registration No. 33-61358
Investment Company Act Registration No. 811-7656
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
---
Post-Effective Amendment No. 8 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 10 [X]
---
(Check appropriate box or boxes)
STRONG CONSERVATIVE EQUITY FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
THOMAS P. LEMKE
STRONG CAPITAL MANAGEMENT, INC.
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Name and Address of Agent for Service)
Copies to
SCOTT A. MOEHRKE
GODFREY & KAHN, S.C.
780 NORTH WATER STREET
MILWAUKEE, WISCONSIN 53202
Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Securities Act of 1933; the Registrant's Rule 24f-2 Notice
for the ten-month fiscal year ended October 31, 1995 was filed on or about
November 16, 1995.
It is proposed that this filing will become effective (check appropriate
box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on June 28, 1996 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
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<PAGE> 2
STRONG CONSERVATIVE EQUITY FUNDS, INC.
CROSS REFERENCE SHEET
FOR STRONG AMERICAN UTILITIES FUND
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
--------------------- --------------------------------------
<S> <C>
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Expenses; Highlights
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Strong Growth and Income Funds; Investment
Objectives and Policies; Implementation of
Policies and Risks; About the Funds -
Organization
5. Management of the Fund About the Funds - Management; Financial
Highlights
5A. Management's Discussion of Fund Performance *
6. Capital Stock and Other Securities About the Funds - Organization, -
Distributions and Taxes; Shareholder Manual -
Shareholder Services
7. Purchase of Securities Being Offered Shareholder Manual - How to Buy Shares,
- Determining Your Share Price, - Shareholder
Services
8. Redemption or Repurchase Shareholder Manual - How to Sell Shares,
- Determining Your Share Price, - Shareholder
Services
9. Pending Legal Proceedings Inapplicable
PART B - INFORMATION REQUIRED IN STATEMENT OF
ADDITIONAL INFORMATION
10. Cover Page Cover page
11. Table of Contents Table of Contents
12. General Information and History **
13. Investment Objectives and Policies Investment Restrictions; Investment Policies
and Techniques
14. Management of the Fund Directors and Officers of the Funds
15. Control Persons and Principal Holders of Principal Shareholders; Directors and Officers
Securities of the Funds; Investment Advisor, Subadvisor,
and Distributor
16. Investment Advisory and Other Services Investment Advisor, Subadvisor, and
Distributor; About the Funds - Management (in
Prospectus); Custodian; Transfer Agent and
Dividend-Disbursing Agent; Independent
Accountants; Legal Counsel
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- ------------------------------------------------------ -----------------------------------------------
<S> <C>
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Included in Prospectus under the heading About
the Funds - Organization and in the Statement
of Additional Information under the heading
Shareholder Meetings
19. Purchase, Redemption and Pricing of Securities Included in Prospectus under the headings:
Being Offered Shareholder Manual - How to Buy Shares,
- Determining Your Share Price, - How to Sell
Shares, - Shareholder Services; and in the
Statement of Additional Information under the
headings: Additional Shareholder Information;
Investment Advisor, Subadvisor, and
Distributor; and Determination of Net Asset
Value
20. Tax Status Included in Prospectus under the heading About
the Funds - Distributions and Taxes; and in
the Statement of Additional Information under
the heading Taxes
21. Underwriters Investment Advisor, Subadvisor, and Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
* Complete answer to Item is contained in Fund's Annual Report.
** Complete answer to Item is contained in Fund's Prospectus.
<PAGE> 4
STRONG CONSERVATIVE EQUITY FUNDS, INC.
CROSS REFERENCE SHEET
FOR STRONG EQUITY INCOME FUND AND
STRONG GROWTH AND INCOME FUND
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- ------------------------------------------------------ ----------------------------------------
<S> <C>
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objective and Policies;
Implementation of Policies and Risks;
About the Fund - Organization
5. Management of the Fund About the Fund - Management
5A. Management's Discussion of Fund Performance Inapplicable
6. Capital Stock and Other Securities About the Fund - Organization, -
Distributions and Taxes; Shareholder
Manual - Shareholder Services
7. Purchase of Securities Being Offered Shareholder Manual - How to Buy Shares,
- Determining Your Share Price, -
Shareholder Services
8. Redemption or Repurchase Shareholder Manual - How to Sell Shares,
- Determining Your Share Price, -
Shareholder Services
9. Pending Legal Proceedings Inapplicable
PART B - INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover page
11. Table of Contents Table of Contents
12. General Information and History *
13. Investment Objectives and Policies Investment Restrictions; Investment
Policies and Techniques
14. Management of the Fund Directors and Officers of the Fund
15. Control Persons and Principal Holders of Principal Shareholders; Directors and
Securities Officers of the Fund; Investment
Advisor and Distributor
16. Investment Advisory and Other Services Investment Advisor and Distributor;
About the Fund - Management (in
Prospectus); Custodian; Transfer Agent
and Dividend-Disbursing Agent;
Independent Accountants; Legal Counsel
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------- ---------------------------------------
<S> <C>
18. Capital Stock and Other Securities Included in Prospectus under the
heading About the Fund - Organization
and in the Statement of Additional
Information under the heading
Shareholder Meetings
19. Purchase, Redemption and Pricing Included in Prospectus under the
of Securities Being Offered headings: Shareholder Manual - How to
Buy Shares,
- Determining Your Share Price, - How
to Sell Shares, - Shareholder
Services; and in the Statement of
Additional Information under the
headings: Additional Shareholder
Information; Investment Advisor and
Distributor; and Determination of Net
Asset Value
20. Tax Status Included in Prospectus under the
heading About the Fund - Distributions
and Taxes; and in the Statement of
Additional Information under the
heading Taxes
21. Underwriters Investment Advisor and Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
* Complete answer to Item is contained in each Fund's Prospectus.
<PAGE> 6
Please file this Prospectus Supplement with your records.
STRONG ASSET ALLOCATION FUND
STRONG EQUITY INCOME FUND
STRONG AMERICAN UTILITIES FUND
STRONG TOTAL RETURN FUND
STRONG GROWTH AND INCOME FUND
Supplement to Prospectus dated March 1, 1996
REVISION OF ASSET ALLOCATION BENCHMARKS AND RANGES
Effective July 1, 1996, the Fund will revise its asset allocation benchmarks
and ranges as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF NET ASSETS
------------------------------
BENCHMARK RANGE
-------------- --------------
CATEGORY OLD NEW OLD NEW
- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Equities 40% 60% 10-60% 30-70%
Bonds 40% 35% 20-60% 20-70%
Cash 20% 5% 0-70% 0-50%
</TABLE>
FINANCIAL HIGHLIGHTS
(For each share of the Fund outstanding throughout the period.)
The following Financial Highlights for the Funds are based upon the
unaudited period from December 29, 1995 (inception) through April 30, 1996.
<TABLE>
<CAPTION>
STRONG EQUITY STRONG GROWTH
INCOME FUND AND INCOME FUND*
---------------- ----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03 0.02
------ ------
Net Realized and Unrealized Gains on Investments 1.17 1.41
TOTAL FROM INVESTMENT OPERATIONS 1.20 1.43
LESS DISTRIBUTIONS
From Net Investment Income (0.02) (0.03)
------ ------
TOTAL DISTRIBUTIONS (0.02) (0.03)
------ ------
NET ASSET VALUE, END OF PERIOD $11.18 $11.40
====== ======
</TABLE>
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Total Return +12.0% +14.3%
Net Assets, End of Period (In Thousands) $17,312 $4,902
Ratio of Expenses to Average Net Assets 1.5%** 1.9%**
Ratio of Net Investment to Average Net Assets 1.6%** 0.9%**
Portfolio Turnover Rate 68.6% 76.5%
Average Commission Rate Paid $0.0644 $0.0654
* For the period from December 29, 1995 (inception) to April 30, 1996.
Total return and portfolio turnover are not annualized.
** Calculated on an annualized basis.
The date of this Prospectus Supplement is June 17, 1996.
<PAGE> 8
PART A
PROSPECTUS
STRONG CONSERVATIVE EQUITY FUNDS
Incorporated by Reference to the Registrant's Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A (File No. 33-61358), which was filed
with the Securities and Exchange Commission on or about February 26, 1996; as
supplemented by Registrant's 497 Filing dated March 6, 1996 (Edgar Reference
0000950137-96-000175).
<PAGE> 9
STATEMENT OF ADDITIONAL INFORMATION
STRONG ASSET ALLOCATION FUND
STRONG EQUITY INCOME FUND
STRONG AMERICAN UTILITIES FUND
STRONG TOTAL RETURN FUND
STRONG GROWTH AND INCOME 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"), Strong Equity Income Fund (the "Equity Income Fund"), and Strong Growth
and Income Fund (the "Growth and Income Fund"), all of which are series of
Strong Conservative Equity Funds, Inc. (hereinafter collectively referred to as
the "Funds") dated March 1, 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. The unaudited financial statements for the
Equity Income and Growth and Income Funds for the period from December 29, 1995
through April 30, 1996, accompany this Statement of Additional Information.
This Statement of Additional Information is dated March 1, 1996, as
supplemented on June 28, 1996.
<PAGE> 10
STRONG CONSERVATIVE EQUITY FUNDS
<TABLE>
TABLE OF CONTENTS PAGE
----
<S> <C>
INVESTMENT RESTRICTIONS ................................... 3
INVESTMENT POLICIES AND TECHNIQUES ........................ 5
Borrowing ............................................... 5
Convertible Securities .................................. 5
Debt Obligations ........................................ 6
Depositary Receipts ..................................... 6
Derivative Instruments .................................. 7
Energy Companies ........................................ 16
Foreign Investment Companies ........................... 16
Foreign Securities ...................................... 17
High-Yield (High-Risk) Securities ....................... 17
Illiquid Securities ..................................... 19
Lending of Portfolio Securities ......................... 19
Mortgage- and Asset-Backed Securities ................... 20
Mortgage Dollar Rolls and Reverse Repurchase Agreements.. 21
Municipal Obligations ................................... 21
Public Utility Companies ................................ 22
Repurchase Agreements ................................... 22
Short Sales Against the Box ............................. 23
Short-Term Cash Management .............................. 23
Small Companies ......................................... 23
Sovereign Debt .......................................... 23
Temporary Defensive Position ............................ 25
Variable- or Floating-Rate Securities ................... 25
Warrants ................................................ 26
When-Issued Securities .................................. 26
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities ..... 27
DIRECTORS AND OFFICERS OF THE FUNDS ....................... 27
PRINCIPAL SHAREHOLDERS .................................... 31
INVESTMENT ADVISOR, SUBADVISOR, AND DISTRIBUTOR .......... 32
PORTFOLIO TRANSACTIONS AND BROKERAGE ...................... 35
CUSTODIAN ................................................. 38
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT .............. 39
TAXES ..................................................... 39
DETERMINATION OF NET ASSET VALUE .......................... 42
ADDITIONAL SHAREHOLDER INFORMATION ........................ 42
FUND ORGANIZATION ......................................... 43
SHAREHOLDER MEETINGS ...................................... 44
PERFORMANCE INFORMATION ................................... 44
GENERAL INFORMATION ....................................... 51
PORTFOLIO MANAGEMENT ...................................... 53
INDEPENDENT ACCOUNTANTS ................................... 55
LEGAL COUNSEL ............................................. 55
FINANCIAL STATEMENTS ...................................... 55
APPENDIX .................................................. A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated March 1, 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.
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<PAGE> 11
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 and Equity Income Funds is to
seek total return by investing for both income and capital growth. The
investment objective of the Total Return and Growth and Income Funds 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.
4
<PAGE> 12
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.
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.
5
<PAGE> 13
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.
Unless noted otherwise, if a percentage restriction is adhered to at the
time of investment, a later increase or decrease in percentage resulting from a
change in a Fund's assets (i.e., due to cash inflows or redemptions) or in
market value of the investment or a Fund's assets will not constitute a
violation of that restriction.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds'
investment 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."
BORROWING
(ALL FUNDS)
A Fund may borrow money from banks and make other investments or engage in
other transactions permissible under the 1940 Act which may be considered a
borrowing (such as mortgage dollar rolls and reverse repurchase agreements) as
discussed under "Investment Restrictions." However, a Fund may not purchase
securities when bank borrowings exceed 5% of a Fund's total assets. Presently,
the Funds only intend to borrow from banks for temporary or emergency purposes.
The Funds have established a line-of-credit (LOC) with certain banks by
which they may borrow funds for temporary or emergency purposes. A borrowing
is presumed to be for temporary or emergency purposes if it is repaid by a Fund
within sixty days and is not extended or renewed. The Funds intend to use the
LOC to meet large or unexpected redemptions that would otherwise force a Fund
to liquidate securities under circumstances which are unfavorable to a Fund's
remaining shareholders. The Funds pay a commitment fee to the banks for the
LOC.
CONVERTIBLE SECURITIES
(ALL FUNDS)
A Fund may invest in convertible securities, which are bonds, debentures,
notes, preferred stocks, or other securities that may be converted into or
exchanged for a specified amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest normally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted, or exchanged. Convertible
securities have unique investment characteristics in that they generally (i)
have higher yields than common stocks, but lower yields than comparable
non-convertible securities, (ii) are less subject to fluctuation in value than
the underlying stock since they have fixed income characteristics, and (iii)
provide the potential for capital appreciation if the market price of the
underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion
6
<PAGE> 14
value" (the security's worth, at market value, if converted into the underlying
common stock). The investment value of a convertible security is influenced by
changes in interest rates, with investment value declining as interest rates
increase and increasing as interest rates decline. The credit standing of the
issuer and other factors also may have an effect on the convertible security's
investment value. The conversion value of a convertible security is determined
by the market price of the underlying common stock. If the conversion value is
low relative to the investment value, the price of the convertible security is
governed principally by its investment value. Generally, the conversion value
decreases as the convertible security approaches maturity. To the extent the
market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. A convertible security generally will sell
at a premium over its conversion value by the extent to which investors place
value on the right to acquire the underlying common stock while holding a fixed
income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
a Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
DEBT OBLIGATIONS
(ALL FUNDS)
Each Fund may invest a portion of its assets in debt obligations. Issuers
of debt obligations have a contractual obligation to pay interest at a
specified rate on specified dates and to repay principal on a specified
maturity date. Certain debt obligations (usually intermediate- and long-term
bonds) have provisions that allow the issuer to redeem or "call" a bond before
its maturity. Issuers are most likely to call such securities during periods
of falling interest rates and a Fund may have to replace such securities with
lower yielding securities, which could result in a lower return for the Fund.
PRICE VOLATILITY. The market value of debt obligations is affected
primarily by changes in prevailing interest rates. The market value of a debt
obligation generally reacts inversely to interest-rate changes, meaning, when
prevailing interest rates decline, an obligation's price usually rises, and
when prevailing interest rates rise, an obligation's price usually declines.
MATURITY. In general, the longer the maturity of a debt obligation, the
higher its yield and the greater its sensitivity to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. Commercial paper is generally considered the shortest form of
debt obligation.
CREDIT QUALITY. The values of debt obligations may also be affected by
changes in the credit rating or financial condition of their issuers.
Generally, the lower the quality rating of a security, the higher the degree of
risk as to the payment of interest and return of principal. To compensate
investors for taking on such increased risk, those issuers deemed to be less
creditworthy generally must offer their investors higher interest rates than do
issuers with better credit ratings.
In conducting its credit research and analysis, the Advisor considers both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings
compiled by a number of Nationally Recognized Statistical Rating Organizations
("NRSROs"). Refer to the Appendix for a discussion of securities ratings.
DEPOSITARY RECEIPTS
(ALL FUNDS)
The Funds may invest in foreign securities by purchasing depositary
receipts, including American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"), or other securities convertible into securities
of foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are denominated in U.S. dollars and are designed for
use in the U.S. securities markets, while EDRs, in bearer form, may be
denominated in other currencies and are designed for use in the European
securities markets. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. EDRs are
European receipts evidencing a similar arrangement. For purposes of a Fund's
investment policies, ADRs and EDRs are deemed to have the same classification
as the underlying securities they represent, except that ADRs and EDRs shall be
treated as indirect foreign investments. Thus, an ADR or EDR representing
ownership of common
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<PAGE> 15
stock will be treated as common stock. ADR and EDR depositary receipts do not
eliminate all of the risks associated with directly investing in the securities
of foreign issuers.
ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without participation
by (or even necessarily the acquiescence of) the issuer of the deposited
securities, although typically the depositary requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities.
The depositary usually charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into U.S. dollars, the
disposition of non-cash distributions, and the performance of other services.
The depositary of an unsponsored facility frequently is under no obligation to
pass through voting rights to ADR holders in respect of the deposited
securities. In addition, an unsponsored facility is generally not obligated to
distribute communications received from the issuer of the deposited securities
or to disclose material information about such issuer in the U.S. and thus
there may not be a correlation between such information and the market value of
the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary, and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
DERIVATIVE INSTRUMENTS
(ALL FUNDS)
IN GENERAL. A Fund may use derivative instruments for any lawful purpose
consistent with the Fund's investment objective such as hedging or managing
risk, but not for speculation. Derivative instruments are commonly defined to
include securities or contracts whose values depend on (or "derive" from) the
value of one or more other assets, such as securities, currencies, or
commodities. These "other assets" are commonly referred to as "underlying
assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Options and forward
contracts are considered to be the basic "building blocks" of derivatives. For
example, forward-based derivatives include forward contracts, swap contracts,
as well as exchange-traded futures. Option-based derivatives include privately
negotiated, over-the-counter (OTC) options (including caps, floors, collars,
and options on forward and swap contracts) and exchange-traded options on
futures. Diverse types of derivatives may be created by combining options or
forward contracts in different ways, and by applying these structures to a wide
range of underlying assets.
An option is a contract in which the "holder" (the buyer) pays a certain
amount (the "premium") to the "writer" (the seller) to obtain the right, but
not the obligation, to buy from the writer (in a "call") or sell to the writer
(in a "put") a specific asset at an agreed upon price at or before a certain
time. The holder pays the premium at inception and has no further financial
obligation. The holder of an option-based derivative generally will benefit
from favorable movements in the price of the underlying asset but is not
exposed to corresponding losses due to adverse movements in the value of the
underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long"
position) and a seller (holding the "short" position) for an asset with
delivery deferred until a future date. The buyer agrees to pay a fixed price
at the agreed future date and the seller agrees to deliver the asset. The
seller hopes that the market price on the delivery date is less than the agreed
upon price, while the buyer hopes for the contrary. The change in value of a
forward-based derivative generally is roughly proportional to the change in
value of the underlying asset.
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HEDGING. A Fund may use derivative instruments to protect against
possible adverse changes in the market value of securities held in, or are
anticipated to be held in, the Fund's portfolio. Derivatives may also be used
by a Fund to "lock-in" the Fund's realized but unrecognized gains in the value
of its portfolio securities. Hedging strategies, if successful, can reduce the
risk of loss by wholly or partially offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments.
MANAGING RISK. A Fund may also use derivative instruments to manage the
risks of the Fund's portfolio. Risk management strategies include, but are not
limited to, facilitating the sale of portfolio securities, managing the
effective maturity or duration of debt obligations in a Fund's portfolio,
establishing a position in the derivatives markets as a substitute for buying
or selling certain securities, or creating or altering exposure to certain
asset classes, such as equity, debt, and foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way for a Fund to invest than "traditional" securities
(i.e., stocks or bonds) would.
EXCHANGE OR OTC DERIVATIVES. Derivative instruments may be
exchange-traded or traded in OTC transactions between private parties.
Exchange-traded derivatives are standardized options and futures contracts
traded in an auction on the floor of a regulated exchange. Exchange contracts
are generally very liquid. The exchange clearinghouse is the counterparty of
every contract. Thus, each holder of an exchange contract bears the credit
risk of the clearinghouse (and has the benefit of its financial strength)
rather than that of a particular counterparty. Over-the-counter transactions
are subject to additional risks, such as the credit risk of the counterparty to
the instrument and are less liquid than exchange-traded derivatives since they
often can only be closed out with the other party to the transaction.
RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments
involves risks and special considerations as described below. Risks pertaining
to particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as the risk
of the underlying assets, namely that the value of the underlying asset may go
up or down. Adverse movements in the value of an underlying asset can expose a
Fund to losses. Derivative instruments may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly the
Advisor's ability to predict movements of the securities, currencies, and
commodity markets, which requires different skills than predicting changes in
the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed. The Advisor's decision to engage in
a derivative instrument will reflect the Advisor's judgment that the derivative
transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives, investment limitations, and operating
policies. In making such a judgment, the Advisor will analyze the benefits and
risks of the derivative transaction and weigh them in the context of the Fund's
entire portfolio and investment objective.
(2) CREDIT RISK. A Fund will be subject to the risk that a loss may be
sustained by the Fund as a result of the failure of a counterparty to comply
with the terms of a derivative instrument. The counterparty risk for
exchange-traded derivative instruments is generally less than for
privately-negotiated or OTC derivative instruments, since generally a clearing
agency, which is the issuer or counterparty to each exchange-traded instrument,
provides a guarantee of performance. For privately-negotiated instruments,
there is no similar clearing agency guarantee. In all transactions, a Fund
will bear the risk that the counterparty will default, and this could result in
a loss of the expected benefit of the derivative transaction and possibly other
losses to the Fund. A Fund will enter into transactions in derivative
instruments only with counterparties that the Advisor reasonably believes are
capable of performing under the contract.
(3) CORRELATION RISK. When a derivative transaction is used to completely
hedge another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments. With
a perfect hedge, the value of the combined position remains unchanged for any
change in the price of the underlying asset. With an imperfect hedge, the
values of the derivative instrument and its hedge are not perfectly correlated.
Correlation risk is the risk that there might be imperfect correlation, or
even no correlation, between price movements of an instrument and price
movements of investments being hedged. For example, if the value of a
derivative instruments used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investments, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being
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<PAGE> 17
hedged, such as speculative or other pressures on the markets in which these
instruments are traded. The effectiveness of hedges using instruments on
indices will depend, in part, on the degree of correlation between price
movements in the index and price movements in the investments being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity risk.
Liquidity risk is the risk that a derivative instrument cannot be sold, closed
out, or replaced quickly at or very close to its fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. A Fund might be required by applicable
regulatory requirement to maintain assets as "cover," maintain segregated
accounts, and/or make margin payments when it takes positions in derivative
instruments involving obligations to third parties (i.e., instruments other
than purchased options). If a Fund was unable to close out its positions in
such instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired, matured, or was
closed out. The requirements might impair a Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable
to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. A Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any derivatives position can
be sold or closed out at a time and price that is favorable to a Fund.
(5) LEGAL RISK. Legal risk is the risk of loss caused by the legal
unenforcibility of a party's obligations under the derivative. While a party
seeking price certainty agrees to surrender the potential upside in exchange
for downside protection, the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a counterparty that has
lost money in a derivative transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative products.
(6) SYSTEMIC OR "INTERCONNECTION" RISK. Interconnection risk is the risk
that a disruption in the financial markets will cause difficulties for all
market participants. In other words, a disruption in one market will spill
over into other markets, perhaps creating a chain reaction. Much of the OTC
derivatives market takes place among the OTC dealers themselves, thus creating
a large interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create losses
at other dealers and destabilize the entire market for OTC derivative
instruments.
GENERAL LIMITATIONS. The use of derivative instruments is subject to
applicable regulations of the Securities and Exchange Commission (the "SEC"),
the several options and futures exchanges upon which they may be traded, the
Commodity Futures Trading Commission ("CFTC"), and various state regulatory
authorities. In addition, a Fund's ability to use derivative instruments may
be limited by certain tax considerations. For a discussion of the federal
income tax treatment of a Fund's derivative instruments, see "Taxes -
Derivative Instruments."
Each Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets. In
accordance with Rule 4.5 of the regulations under the Commodity Exchange Act
(the "CEA"), the notice of eligibility for a Fund includes representations that
the Fund will use futures contracts and related options solely for bona fide
hedging purposes within the meaning of CFTC regulations, provided that the Fund
may hold other positions in futures contracts and related options that do not
qualify as a bona fide hedging position if the aggregate initial margin
deposits and premiums required to establish these positions, less the amount by
which any such futures contracts and related options positions are "in the
money," do not exceed 5% of the Fund's net assets. Adherence to these
guidelines does not limit a Fund's risk to 5% of the Fund's assets.
In addition, certain state regulations presently require that (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 SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging a Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of a Fund's assets, as defined under the 1940 Act, the SEC
has stated that a Fund may use coverage or the segregation of a Fund's assets.
To the extent required by SEC guidelines, a Fund will not enter into any such
transactions unless it owns either: (i) an offsetting ("covered") position in
securities, options, futures, or derivative instruments; or (ii) cash, liquid
high grade debt obligations, or securities positions that substantially
correlate to the market movements of the instrument, with a value sufficient at
all times to cover its potential obligations to the extent that the position is
not "covered". For this purpose, a high grade debt obligation shall include
any debt obligation rated A or better by an NRSRO. The Funds will also set
aside cash and/or appropriate liquid assets in a segregated custodial account
if required to do so by the SEC and CFTC regulations. Assets used as cover or
held in a segregated account cannot be sold while the derivative position is
open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of a Fund's assets to segregated accounts could
impede portfolio management or the Fund's ability to meet redemption requests
or other current obligations.
In some cases a Fund may be required to maintain or limit exposure to a
specified percentage of its assets to a particular asset class. In such cases,
when a Fund uses a derivative instrument to increase or decrease exposure to an
asset class and is required by applicable SEC guidelines to set aside liquid
assets in a segregated account to secure its obligations under the derivative
instruments, the Advisor may, where reasonable in light of the circumstances,
measure compliance with the applicable percentage by reference to the nature of
the economic exposure created through the use of the derivative instrument and
not by reference to the nature of the exposure arising from the liquid assets
set aside in the segregated account (unless another interpretation is specified
by applicable regulatory requirements).
OPTIONS. A Fund may use options for any lawful purpose consistent with
the Fund's investment objective such as hedging or managing risk but not for
speculation. An option is a contract in which the "holder" (the buyer) pays a
certain amount (the "premium") to the "writer" (the seller) to obtain the
right, but not the obligation, to buy from the writer (in a "call") or sell to
the writer (in a "put") a specific asset at an agreed upon price (the "strike
price" or "exercise price") at or before a certain time (the "expiration
date"). The holder pays the premium at inception and has no further financial
obligation. The holder of an option will benefit from favorable movements in
the price of the underlying asset but is not exposed to corresponding losses
due to adverse movements in the value of the underlying asset. The writer of
an option will receive fees or premiums but is exposed to losses due to changes
in the value of the underlying asset. A Fund may buy or write (sell) put and
call options on assets, such as securities, currencies, commodities, and
indices of debt and equity securities ("underlying assets") and enter into
closing transactions with respect to such options to terminate an existing
position. Options used by the Funds may include European, American, and
Bermuda style options. If an option is exercisable only at maturity, it is a
"European" option; if it is also exercisable prior to maturity, it is an
"American" option. If it is exercisable only at certain times, it is a
"Bermuda" option.
Each Fund may purchase (buy) and write (sell) put and call options
underlying assets and enter into closing transactions with respect to such
options to terminate an existing position. The purchase of call options serves
as a long hedge, and the purchase of put options serves as a short hedge.
Writing put or call options can enable a Fund to enhance income by reason of
the premiums paid by the purchaser of such options. Writing call options
serves as a limited short hedge because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the security appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Fund will be obligated to sell the security at less than its
market value or will be obligated to purchase the security at a price greater
than that at which the security must be sold under the option. All or a
portion of any assets used as cover for OTC options written by a Fund would be
considered illiquid to the extent described under "Investment Policies and
Techniques -- Illiquid Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the Fund
will be obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions.
A Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put
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<PAGE> 19
option; this is known as a closing purchase transaction. Conversely, a Fund
may terminate a position in a put or call option it had purchased by writing an
identical put or call option; this is known as a closing sale transaction.
Closing transactions permit a Fund to realize the profit or limit the loss on
an option position prior to its exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between a Fund and the other party to the transaction
("counter party") (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a Fund purchases or writes an OTC option,
it relies on the counter party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counter party to do so
would result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counter party, or by a
transaction in the secondary market if any such market exists. Although each
Fund will enter into OTC options only with counter parties that are expected to
be capable of entering into closing transactions with the Funds, there is no
assurance that the Funds will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the counter
party, a Fund might be unable to close out an OTC option position at any time
prior to its expiration. If a Fund were unable to effect a closing transaction
for an option it had purchased, it would have to exercise the option to realize
any profit.
The Funds may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except the index options
may serve as a hedge against overall fluctuations in the securities market in
general.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
SPREAD TRANSACTIONS. A Fund may use spread transactions for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk, but not for speculation. A Fund may purchase covered spread
options from securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a
Fund the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the Fund
does not own, but which is used as a benchmark. The risk to a Fund in
purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect a Fund against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
FUTURES CONTRACTS. A Fund may use futures contracts for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk but not for speculation. A Fund may enter into futures
contracts, including interest rate, index, and currency futures. Each Fund may
also purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can serve as a limited long
hedge, using a strategy similar to that used for writing covered options in
securities. The Funds' hedging may include purchases of futures as an offset
against the effect of expected increases in currency exchange rates and
securities prices and sales of futures as an offset against the effect of
expected declines in currency exchange rates and securities prices. The Funds
may also write put options on futures contracts while at the same time
purchasing call options on the same futures contracts in order to create
synthetically a long futures contract position. Such options would have the
same strike prices and expiration dates. The Funds will engage in this
strategy only when the Advisor believes it is more advantageous to the Funds
than is purchasing the futures contract.
To the extent required by regulatory authorities, the Funds only enter
into futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be
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used to reduce a Fund's exposure to market, currency, or interest rate
fluctuations, a Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.
An interest rate futures contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (e.g., debt security) or currency for a specified price at
a designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index futures
contract was originally written. Transaction costs are incurred when a futures
contract is bought or sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as the case may be, of the
instrument, the currency or by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out prior to delivery by
entering into an offsetting transaction in a matching futures contract.
Although the value of an index might be a function of the value of certain
specified securities, no physical delivery of those securities is made. If the
offsetting purchase price is less than the original sale price, a Fund realizes
a gain; if it is more, a Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, a Fund realizes a gain; if
it is less, a Fund realizes a loss. The transaction costs must also be
included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to
enter into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, a Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
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.
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.
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Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities
markets involving arbitrage, "program trading" and other investment strategies
might result in temporary price distortions.
FOREIGN CURRENCIES. The Funds may purchase and sell foreign currency on a
spot basis, and may use currency-related derivatives instruments such as
options on foreign currencies, futures on foreign currencies, options on
futures on foreign currencies and forward currency contracts (i.e., an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into). The Funds
may use these instruments for hedging or any other lawful purpose consistent
with their respective investment objectives, including transaction hedging,
anticipatory hedging, cross hedging, proxy hedging, and position hedging. The
Funds' use of currency-related derivative instruments will be directly related
to a Fund's current or anticipated portfolio securities, and the Funds may
engage in transactions in currency-related derivative instruments as a means to
protect against some or all of the effects of adverse changes in foreign
currency exchange rates on their portfolio investments. In general, if the
currency in which a portfolio investment is denominated appreciates against the
U.S. dollar, the dollar value of the security will increase. Conversely, a
decline in the exchange rate of the currency would adversely affect the value
of the portfolio investment expressed in U.S. dollars.
For example, a Fund might use currency-related derivative instruments to
"lock in" a U.S. dollar price for a portfolio investment, thereby enabling the
Fund to protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date the security is purchased or sold and the
date on which payment is made or received. A Fund also might use
currency-related derivative instruments when the Advisor believes that one
currency may experience a substantial movement against another currency,
including the U.S. dollar, and it may use currency-related derivative
instruments to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, a Fund
may use currency-related derivative instruments to hedge all or part of its
foreign currency exposure through the use of a basket of currencies or a proxy
currency where such currency or currencies act as an effective proxy for other
currencies. The use of this basket hedging technique may be more efficient and
economical than using separate currency-related derivative instruments for each
currency exposure held by the Fund. Furthermore, currency-related derivative
instruments may be used for short hedges - for example, a Fund may sell a
forward currency contract to lock in the U.S. dollar equivalent of the proceeds
from the anticipated sale of a security denominated in a foreign currency.
In addition, a Fund may use a currency-related derivative instrument to
shift exposure to foreign currency fluctuations from one foreign country to
another foreign country where the Advisor believes that the foreign currency
exposure purchased will appreciate relative to the U.S. dollar and thus better
protect the Fund against the expected decline in the foreign currency exposure
sold. For example, if a Fund owns securities denominated in a foreign currency
and the Advisor believes that currency will decline, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in a second foreign currency that the Advisor believes
would better protect the Fund against the decline in the first security than
would a U.S. dollar exposure. Hedging transactions that use two foreign
currencies are sometimes referred to as "cross hedges." The effective use of
currency-related derivative instruments by a Fund in a cross hedge is dependent
upon a correlation between price movements of the two currency instruments and
the underlying security involved, and the use of two currencies magnifies the
risk that movements in the price of one instrument may not correlate or may
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
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<PAGE> 22
derivative instruments on another foreign currency or a basket of currencies,
the values of which the Advisor believes will have a high degree of positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the hedging instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The use of currency-related derivative instruments by a Fund involves a
number of risks. The value of currency-related derivative instruments depends
on the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such derivative
instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots (generally consisting of transactions of greater than $1 million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments
might be required to take place within the country issuing the underlying
currency. Thus, a Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When a Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for
exchange-traded instruments is generally less than for privately-negotiated or
OTC currency instruments, since generally a clearing agency, which is the
issuer or counterparty to each instrument, provides a guarantee of performance.
For privately-negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the transaction and possibly other losses to the Fund. The Funds
will enter into transactions in currency-related derivative instruments only
with counterparties that the Advisor reasonably believes are capable of
performing under the contract.
Purchasers and sellers of currency-related derivative instruments may
enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can
be no assurance that a Fund will in fact be able to close out a forward
currency contract (or any other currency-related derivative instrument) at a
time and price favorable to a Fund. In addition, in the event of insolvency of
the counterparty, a Fund might be unable to close out a forward currency
contract at any time prior to maturity. In the case of an exchange-traded
instrument, a Fund will be able to close the position out only on an exchange
which provides a market for the instruments. The ability to establish and
close out positions on an exchange is subject to the maintenance of a liquid
market, and there can be no assurance that a liquid market will exist for any
instrument at any specific time. In the case of a privately-negotiated
instrument, a Fund will be able to realize the value of the 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
15
<PAGE> 23
currencies in the spot (cash) market. The projection of short-term currency
market movements is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded primarily
in the OTC market. Although options on foreign currencies are traded primarily
in the OTC market, the Funds will normally purchase or sell OTC options on
foreign currency only when the Advisor reasonably believes a liquid secondary
market will exist for a particular option at any specific time.
There will be a cost to a Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. A Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to a Fund at one rate, while offering a lesser
rate of exchange should the Fund desire to resell that currency to the dealer.
When required by the SEC guidelines, the Funds will set aside permissible
liquid assets in segregated accounts or otherwise cover their respective
potential obligations under currency-related derivatives instruments. To the
extent a Fund's assets are so set aside, they cannot be sold while the
corresponding currency position is open, unless they are replaced with similar
assets. As a result, if a large portion of a Fund's assets are so set aside,
this could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
The Advisor's decision to engage in a transaction in a particular
currency-related derivative instrument will reflect the Advisor's judgment that
the transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives and policies. In making such a judgment,
the Advisor will analyze the benefits and risks of the transaction and weigh
them in the context of the Fund's entire portfolio and objectives. The
effectiveness of any transaction in a currency-related derivative instrument is
dependent on a variety of factors, including the Advisor's skill in analyzing
and predicting currency values and upon a correlation between price movements
of the currency instrument and the underlying security. There might be
imperfect correlation, or even no correlation, between price movements of an
instrument and price movements of investments being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which these instruments are traded. In addition, a Fund's use of
currency-related derivative instruments is always subject to the risk that the
currency in question could be devalued by the foreign government. In such a
case, any long currency positions would decline in value and could adversely
affect any hedging position maintained by the Fund.
The Funds' dealing in currency-related derivative instruments will
generally be limited to the transactions described above. However, the Funds
reserve the right to use currency-related derivatives instruments for different
purposes and under different circumstances. Of course, the Funds are not
required to use currency-related derivatives instruments and will not do so
unless deemed appropriate by the Advisor. It also should be realized that use
of these instruments does not eliminate, or protect against, price movements in
the Funds' securities that are attributable to other (i.e., non-currency
related) causes. Moreover, while the use of currency-related derivatives
instruments may reduce the risk of loss due to a decline in the value of a
hedged currency, at the same time the use of these instruments tends to limit
any potential gain which may result from an increase in the value of that
currency.
SWAP AGREEMENTS. The Funds may enter into interest rate, securities
index, commodity, or security and currency exchange rate swap agreements for
any lawful purpose consistent with each Fund's investment objective, such as
for the purpose of attempting to obtain or preserve a particular desired return
or spread at a lower cost to the Fund than if the Fund had 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
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<PAGE> 24
for a premium, one party agrees to make payments to the other to the extent
that interest rates exceed a specified rate, or "cap;" interest rate floors,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a specified level, or
"floor;" and interest rate collars, under which a party sells a cap and
purchases a floor, or vice versa, in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by a Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, a Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's obligation under a swap agreement will be accrued daily (offset
against amounts owed to the Fund) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, or liquid high grade debt obligations.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend, in part, on the Advisor's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Swap agreements may be considered to
be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to
be received under a swap agreement in the event of the default or bankruptcy of
a swap agreement counterparty. Certain restrictions imposed on the Funds by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is largely unregulated.
The Funds will enter swap agreements only with counterparties that the
Advisor reasonably believes are capable of performing under the swap
agreements. If there is a default by the other party to such a transaction, a
Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In addition to the
derivative instruments and strategies described above and in the Funds'
Prospectus, the Advisor expects to discover additional derivative instruments
and other hedging or risk management techniques. The Advisor may utilize these
new derivative instruments and techniques to the extent that they are
consistent with a Fund's investment objective and permitted by the Fund's
investment limitations, operating policies, and applicable regulatory
authorities.
ENERGY COMPANIES
(AMERICAN UTILITIES FUND)
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.
FOREIGN INVESTMENT COMPANIES
(ALL FUNDS)
The Funds may invest, to a limited extent, in foreign investment
companies. Some of the countries in which the Funds invest may not permit
direct investment by outside investors. Investments in such countries may
only be permitted through foreign government-approved or -authorized
investment vehicles, which may include other investment companies. In
addition, it may be less expensive and more expedient for a Fund to invest in
a foreign investment company in a country which permits direct foreign
investment. Investing through such vehicles may involve frequent or layered
fees or expenses and may also be subject to limitation under the 1940 Act.
Under the 1940 Act, a Fund may invest up to 10% of its assets in shares of
other investment companies and up to 5% of its assets in any one investment
company as long as the investment does not represent more than 3% of the
voting stock of the acquired investment company. Each Fund does not intend to
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<PAGE> 25
invest in such investment companies unless, in the judgment of the Advisor,
the potential benefits of such investments justify the payment of any
associated fees and expenses.
FOREIGN SECURITIES
(ALL FUNDS)
Investing in foreign securities involves a series of risks not present in
investing in U.S. securities. Many of the foreign securities held by the Fund
will not be registered with the Securities and Exchange Commission (the "SEC"),
nor will the foreign issuers be subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by the Funds than is available concerning
U.S. companies. Disclosure and regulatory standards in many respects are less
stringent in emerging market countries than in the U.S. and other major
markets. There also may be a lower level of monitoring and regulation of
emerging markets and the activities of investors in such markets, and
enforcement of existing regulations may be extremely limited. Foreign
companies, and in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting, auditing and financial
reporting standards, or to other regulatory requirements comparable to those
applicable to U.S. companies. The Fund's net investment income and capital
gains from its foreign investment activities may be subject to non-U.S.
withholding taxes.
The costs attributable to foreign investing that the Funds must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing.
Costs associated with the exchange of currencies also make foreign investing
more expensive than domestic investing. Investment income on certain foreign
securities in which the Funds may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities.
Tax treaties between the United States and foreign countries, however, may
reduce or eliminate the amount of foreign tax to which the Funds would be
subject.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have failed to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of a Fund are uninvested and no return is earned thereon.
The inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result either
in losses to a Fund due to subsequent declines in the value of such portfolio
security or, if the Fund has entered into a contract to sell the security,
could result in possible liability to the purchaser.
HIGH-YIELD (HIGH-RISK) SECURITIES
(ALL FUNDS)
IN GENERAL. The American Utilities, Total Return, and Growth and Income
Funds have the authority to invest up to 5% of their respective net assets in
non-investment grade debt obligations; the Equity Income Fund has the authority
to invest up to 10% of its 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 for a discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated security market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such
conditions could severely disrupt the market for and adversely affect the value
of such securities.
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<PAGE> 26
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower-quality and comparable unrated securities also tend to
be more sensitive to economic conditions than are higher-rated securities. As
a result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, a Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in a Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so
will a Fund's net asset value. If a Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would force the Fund to sell the more liquid
portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, a Fund may have
to replace the securities with a lower yielding security, which would result in
a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully reflect the true risks
of an investment. In addition, credit rating agencies may or may not make
timely changes in a rating to reflect changes in the economy or in the
condition of the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in lower-quality and comparable unrated
obligations will be more dependent on the Advisor's credit analysis than would
be the case with investments in investment-grade debt obligations. The Advisor
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Advisor continually monitors the investments in
each Fund's portfolio and carefully evaluates whether to dispose of or to
retain lower-quality and comparable unrated securities whose credit ratings or
credit quality may have changed.
LIQUIDITY AND VALUATION. A Fund may have difficulty disposing of certain
lower-quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets
in all lower-quality and comparable unrated securities, there is no established
retail secondary market for many of these securities. The Funds anticipate
that such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist,
it is generally not as liquid as the secondary market for higher-rated
securities. The lack of a liquid secondary market may have an adverse impact
on the market price of the security. As a result, a Fund's asset value and
ability to dispose of particular securities, when necessary to meet the Fund's
liquidity needs or in response to a specific economic event, may be impacted.
The lack of a liquid secondary market for certain securities may also make it
more difficult for a Fund to obtain accurate market quotations for purposes of
valuing the Fund's portfolio. Market quotations are generally available on
many lower-quality and comparable unrated issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. During periods of thin trading, the spread between bid and
asked prices is likely to increase significantly. In addition, adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
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<PAGE> 27
LEGISLATION. Legislation may be adopted, from time to time designed to
limit the use of certain lower-quality and comparable unrated securities by
certain issuers. It is anticipated that if legislation is enacted or proposed,
it could have a material affect on the value of these securities and the
existence of a secondary trading market for the securities.
ILLIQUID SECURITIES
(ALL FUNDS)
The Funds may invest in illiquid securities (i.e., securities that are not
readily marketable). However, a Fund will not acquire illiquid securities if,
as a result, they would comprise more than 15% of the value of the Fund's net
assets (or such other amounts as may be permitted under the 1940 Act).
However, as a matter of internal policy, the Advisor intends to limit each
Fund's investments in illiquid securities to 10% of its net assets.
The Board of Directors of each Fund, or its delegate, has the ultimate
authority to determine, to the extent permissible under the federal securities
laws, which securities are illiquid for purposes of this limitation. Certain
securities exempt from registration or issued in transactions exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), such as securities that may be resold to institutional investors under
Rule 144A under the Securities Act and Section 4(2) commercial paper, may be
considered liquid under guidelines adopted by the Funds' Board of Directors.
The Board of Directors of each Fund has delegated to 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. The Board of Directors has directed the Advisor to
look to such factors as (i) the frequency of trades or quotes for a security,
(ii) the number of dealers willing to purchase or sell the security and number
of potential buyers, (iii) the willingness of dealers to undertake to make a
market in the security, (iv) the nature of the security and nature of the
marketplace trades, such as the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer, (v) the likelihood
that the security's marketability will be maintained throughout the anticipated
holding period, and (vi) any other relevant factors. The Advisor may determine
4(2) commercial paper to be liquid if (i) the 4(2) commercial paper is not
traded flat or in default as to principal and interest, (ii) the 4(2)
commercial paper is rated in one of the two highest rating categories by at
least two nationally rated statistical rating organizations ("NRSRO"), or if
only one NRSRO rates the security, by that NRSRO, or is determined by the
Advisor to be of equivalent quality, and (iii) the Advisor considers the
trading market for the specific security taking into account all relevant
factors. With respect to a Fund's foreign holdings, a foreign security may be
considered liquid by the Advisor (despite its restricted nature under the
Securities Act) if the security can be freely traded in a foreign securities
market and all the facts and circumstances support a finding of liquidity.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than
prevailed when it decided to sell. If through the appreciation of restricted
securities or the depreciation of unrestricted securities, a Fund should be in
a position where more than 15% of the value of its net assets are invested in
illiquid securities, including restricted securities which are not readily
marketable (except for 144A Securities and 4(2) commercial paper deemed to be
liquid by the Advisor), the Fund will take such steps as is deemed advisable,
if any, to protect liquidity.
Each Fund may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC
options written by the Fund. The assets used as cover for OTC options written
by the Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES
(ALL FUNDS)
Each Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank
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collateral either in cash or money market instruments in an amount at least
equal to the market value of the securities loaned, plus accrued interest and
dividends, determined on a daily basis and adjusted accordingly. Although the
Funds are authorized to lend, the Funds do not presently intend to engage in
lending. In determining whether to lend securities to a particular
broker-dealer or institutional investor, the Advisor will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. The Funds will retain
authority to terminate any loans at any time. The Funds may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Funds
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Funds will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when retaining such
rights is considered to be in a Fund's interest.
MORTGAGE- AND ASSET-BACKED SECURITIES
(ALL FUNDS)
Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property,
and include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any mortgage- and asset-backed security is
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional debt
securities. Among the principal differences are that interest and principal
payments are made more frequently on mortgage-and asset-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if a Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing the yield to maturity. Conversely, if a Fund purchases these
securities at a discount, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. 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.
While many mortgage- and asset-backed securities are issued with only one
class of security, many are issued in more than one class, each with different
payment terms. Multiple class mortgage- and asset-backed securities are issued
for two main reasons. First, multiple classes may be used as a method of
providing credit support. This is accomplished typically through creation of
one or more classes whose right to payments on the security is made subordinate
to the right to such payments of the remaining class or classes. Second,
multiple classes may permit the issuance of securities with payment terms,
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interest rates, or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (mortgage - and asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-mortgage-
or asset-backed securities, such as floating interest rates (i.e., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
The Funds may invest in stripped mortgage- or asset-backed securities,
which receive differing proportions of the interest and principal payments from
the underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such
market value may be extremely volatile. With respect to certain stripped
securities, such as interest only and principal only classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
Mortgage- and asset-backed securities backed by assets, other than as
described above, or in which the payment streams on the underlying assets are
allocated in a manner different than those described above may be issued in the
future. A Fund may invest in such securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of a Fund.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
(ALL FUNDS)
The Funds may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, a
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing. (See "Borrowing".) When required by guidelines of the
SEC, a Fund will set aside permissible liquid assets in a segregated account to
secure its obligations to repurchase the security.
Each Fund may also enter into mortgage dollar rolls, in which the Fund
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. At the time the Fund would
enter into a mortgage dollar roll, it would set aside permissible liquid assets
in a segregated account to secure its obligation for the forward commitment to
buy mortgage-backed securities. Mortgage dollar roll transactions may be
considered a borrowing by the Funds. (See "Borrowing" above.)
The mortgage dollar rolls and reverse repurchase agreements entered into
by the Funds may be used as arbitrage transactions in which a Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar roll or reverse repurchase agreements. Since a Fund
will receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities or repurchase agreements will be high quality
and will mature on or before the settlement date of the mortgage dollar roll or
reverse repurchase agreement, the Advisor believes that such arbitrage
transactions do not present the risks to the Funds that are associated with
other types of leverage.
MUNICIPAL OBLIGATIONS
(ASSET ALLOCATION FUND)
General obligation bonds are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of interest and principal.
Revenue bonds are payable only from the revenues derived from a project or
facility or from the proceeds of a specified revenue source. Industrial
development bonds are generally revenue bonds secured by payments from and the
credit of private users. Municipal notes are issued to meet the short-term
funding requirements of state, regional, and local governments. Municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax and revenue anticipation notes, construction loan
notes, short-term discount notes, tax-exempt commercial paper, demand notes,
and similar instruments. Municipal obligations include obligations, the
interest on which is exempt from federal income tax,
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that may become available in the future as long as the Board of Directors of
the Fund determines that an investment in any such type of obligation is
consistent with the Fund's investment objective.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities, such as
state and municipal vehicles, telecommunications and computer equipment, and
other capital assets. The Fund may purchase these obligations directly, or it
may purchase participation interests in such obligations. Municipal leases are
generally subject to greater risks than general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet in order to issue municipal obligations. Municipal
leases may contain a covenant by the state or municipality to budget for,
appropriate, and make payments due under the obligation. Certain municipal
leases may, however, contain "non-appropriation" clauses which provide that the
issuer is not obligated to make payments on the obligation in future years
unless funds have been appropriated for this purpose each year. Accordingly,
such obligations are subject to "non-appropriation" risk. While municipal
leases are secured by the underlying capital asset, it may be difficult to
dispose of any such asset in the event of non-appropriation or other default.
PUBLIC UTILITY COMPANIES
(AMERICAN UTILITIES FUND)
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 attractive to more conservative stock market investors
because they generally have 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.
REPURCHASE AGREEMENTS
(ALL FUNDS)
Each Fund may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement, a Fund buys a security at one
price, and at the time of sale, the seller agrees to repurchase the obligation
at a mutually agreed upon time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. The Advisor will monitor, on an ongoing
basis, the value of the underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued interest. Repurchase
agreements could involve certain risks in the event of a default or insolvency
of the other party to the agreement, including possible delays or restrictions
upon a Fund's ability to dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the Advisor reviews the
creditworthiness of the banks and non-bank dealers with which the Funds enter
into repurchase agreements to evaluate those risks. A Fund may, under certain
circumstances, deem repurchase agreements collateralized by U.S. government
securities to be investments in U.S. government securities.
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SHORT SALES AGAINST THE BOX
(ALL FUNDS)
Each Fund may sell securities short against the box to hedge unrealized
gains on portfolio securities. Selling securities short against the box
involves selling a security that a Fund owns or has the right to acquire, for
delivery at a specified date in the future. If a Fund sells securities short
against the box, it may protect unrealized gains, but will lose the opportunity
to profit on such securities if the price rises.
SHORT-TERM CASH MANAGEMENT
(ALL FUNDS)
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.
SMALL COMPANIES
(ALL FUNDS)
The Fund may, from time to time, invest a 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 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.
SOVEREIGN DEBT
(ASSET ALLOCATION FUND)
Sovereign debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank loans to the same sovereign entity may not
contest payments to the holders of sovereign debt in the event of default under
commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by a variety of factors, including
among others, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. A country
whose exports are concentrated in a few commodities could be vulnerable to a
decline in the international price of such commodities. Increased
protectionism on the part of a country's trading partners, or political changes
in those countries, could also adversely affect its exports. Such events could
diminish a country's trade account surplus, if any, or the credit standing of a
particular local government or agency. Another factor bearing on the ability
of a country to repay sovereign debt is the level of the country's
international reserves. Fluctuations in the level of these reserves can affect
the amount of foreign exchange readily available for external debt payments
and, thus, could have a bearing on the capacity of the country to make payments
on its sovereign debt.
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To the extent that a country has a current account deficit (generally when
it exports of merchandise and services are less than its country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it may need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt
obligations can be adversely affected, by a change in international interest
rates since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. At times certain emerging
market countries have declared moratoria on the payment of principal and
interest on external debt.
Certain emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
Holders of sovereign debt, including the Fund, may be requested to participate
in the rescheduling of such debt and to extend further loans to sovereign
debtors, and the interests of holders of sovereign debt could be adversely
affected in the course of restructuring arrangements or by certain other
factors referred to below. Furthermore, some of the participants in the
secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants, such as the Funds.
Obligations arising from past restructuring agreements may affect the economic
performance and political and social stability of certain issuers of sovereign
debt. There is no bankruptcy proceeding by which sovereign debt on which a
sovereign has defaulted may be collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or controlled
to varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in such sovereign debt and increase the costs and
expenses of the Fund. Certain countries in which the Fund may invest require
governmental approval prior to investments by foreign persons, 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
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increases over time, and bonds issued in exchange for the advancement of new
money by existing lenders. Regardless of the stated face amount and stated
interest rate of the various types of Brady Bonds, the Fund will purchase Brady
Bonds in secondary markets, as described below, in which the price and yield to
the investor reflect market conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF,
the World Bank, and the debtor nations' reserves. In the event of a default
with respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1) the
collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments, and (4) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds have speculative
characteristics. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased
and sold in secondary markets through U.S. securities dealers and other
financial institutions and are generally maintained through European
transnational securities depositories.
TEMPORARY DEFENSIVE POSITION
(ALL FUNDS)
When the Advisor determines that market conditions warrant a temporary
defensive position, the Total Return Fund may invest up to 40% of its net
assets, and the Asset Allocation, American Utilities, Equity Income and Growth
and Income Funds may invest without limitation in cash and short-term fixed
income securities, including U.S. government securities, commercial paper,
banker's acceptances, certificates of deposit, and time deposits.
VARIABLE- OR FLOATING-RATE SECURITIES
(ALL FUNDS)
The Funds may invest in securities which offer a variable- or
floating-rate of interest. Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities generally provide for automatic
adjustment of the interest rate whenever some specified interest rate index
changes. The interest rate on variable- or floating-rate securities is
ordinarily determined by reference to or is a percentage of a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial
paper or bank certificates of deposit, an index of short-term interest rates,
or some other objective measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on 7 days notice; in
other cases, the demand feature is exercisable at any time on 30 days notice or
on similar notice at intervals of not more than one year. Some securities
which do not have variable or floating interest rates may be accompanied by
puts producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, each Fund may consider that instrument's maturity to be shorter than its
stated maturity.
Variable-rate demand notes include master demand notes which are
obligations that permit a Fund to invest fluctuating amounts, which may change
daily without penalty, pursuant to direct arrangements between a Fund, as
lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate
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demand obligation is based on a known lending rate, such as a bank's prime
rate, and is adjusted automatically each time such rate is adjusted. The
interest rate on a variable-rate demand obligation is adjusted automatically at
specified intervals. Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by banks. Because these
obligations are direct lending arrangements between the lender and borrower, it
is not contemplated that such instruments will generally be traded. There
generally is not an established secondary market for these obligations,
although they are redeemable at face value. Accordingly, where these
obligations are not secured by letters of credit or other credit support
arrangements, a Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and, if not so rated, the Funds may
invest in them only if the Advisor determines that at the time of investment
the obligations are of comparable quality to the other obligations in which the
Funds may invest. The Advisor, on behalf of the Funds, will consider on an
ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in the Funds' portfolio.
Each Fund will not invest more than 15% of its net assets in variable- and
floating-rate demand obligations that are not readily marketable (a variable-
or floating-rate demand obligation that may be disposed of on not more than
seven days notice will be deemed readily marketable and will not be subject to
this limitation). (See "Illiquid Securities" and "Investment Restrictions.")
In addition, each variable- or floating-rate obligation must meet the credit
quality requirements applicable to all the Fund's investments at the time of
purchase. When determining whether such an obligation meets a Fund's credit
quality requirements, the Fund may look to the credit quality of the financial
guarantor providing a letter of credit or other credit support arrangement.
In determining a Fund's weighted average portfolio maturity, a Fund will
consider a floating or variable rate security to have a maturity equal to its
stated maturity (or redemption date if it has been called for redemption),
except that it may consider (i) variable rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest rate,
unless subject to a demand feature, (ii) variable rate securities subject to a
demand feature to have a remaining maturity equal to the longer of (a) the next
readjustment in the interest rate or (b) the period remaining until the
principal can be recovered through demand, and (iii) floating rate securities
subject to a demand feature to have a maturity equal to the period remaining
until the principal can be recovered through demand. Variable and floating
rate securities generally are subject to less principal fluctuation than
securities without these attributes since the securities usually trade at par
following the readjustment in the interest rate.
WARRANTS
(ALL FUNDS)
Each Fund may acquire warrants. Warrants are securities giving the holder
the right, but not the obligation, to buy the stock of an issuer at a given
price (generally higher than the value of the stock at the time of issuance)
during a specified period or perpetually. Warrants may be acquired separately
or in connection with the acquisition of securities. 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 to have more speculative
characteristics than certain other types of investments. In addition, the
value of a warrant does not necessarily change with the value of the underlying
securities, and a warrant ceases to have value if it is not exercised prior to
its expiration date.
WHEN-ISSUED SECURITIES
(ALL FUNDS)
Each Fund may from time to time purchase securities on a "when-issued"
basis. The price of debt obligations purchased on a when-issued basis, which
may be expressed in yield terms, generally is fixed at the time the commitment
to purchase is made, but delivery and payment for the securities take place at
a later date. Normally, the settlement date occurs within one month of the
purchase although is some cases settlement may take longer. During the period
between the purchase and settlement, no payment is made by a Fund to the issuer
and no interest on the debt obligations accrues to the Fund. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Fund's other assets. While when-issued securities may
be sold prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a
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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.
To the extent required by the SEC, the Funds will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date. When the time comes to pay for when-issued
securities, a Fund will meet its obligations from then-available cash flow,
sale of the securities held in the separate account, described above, sale of
other securities or, although it would not normally expect to do so, from the
sale of the when-issued securities themselves (which may have a market value
greater or less than the Fund's payment obligation).
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
(ALL FUNDS)
The Funds may invest in zero-coupon, step-coupon, and pay-in-kind
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon securities are sold at a deep
discount to their face value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because such securities do not pay current
cash income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, federal
income tax law requires the holders of zero-coupon, step-coupon, and
pay-in-kind securities to include in income each year the portion of the
original issue discount (or deemed discount) and other non-cash income on such
securities accruing that year. In order to continue to qualify as a "regulated
investment company" under the Internal Revenue Code and avoid a certain excise
tax, each Fund may be required to distribute a portion of such discount and
income and may be required to dispose of other portfolio securities, which may
occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
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 26 registered open-end
management investment companies consisting of 37 mutual funds, which are
managed by the Advisor (the "Strong Funds"). The Strong Funds, in the
aggregate, pays each Director who is not a director, officer, or employee of
the Advisor, or any affiliated company (a "disinterested director") an annual
fee of $50,000, plus $100 per Board meeting for each Strong Fund. In addition,
each disinterested director is reimbursed by the Strong Funds for travel and
other expenses incurred in connection with attendance at such meetings. Other
officers and directors of the Strong Funds receive no compensation or expense
reimbursement from the Strong Funds.
*RICHARD S. STRONG (DOB 5/12/42), Director and Chairman of the Board of the
Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the
Advisor, which he founded in 1974. Since August 1985, Mr. Strong has been a
Security Analyst and Portfolio Manager of the Advisor. In October 1991, Mr.
Strong also became the Chairman of the Advisor. Mr. Strong is a director of
the Advisor. Mr. Strong has been in the investment management business since
1967. Mr. Strong has served the Funds as follows:
DIRECTOR - Asset Allocation Fund (since December 1981); Total Return Fund
(since December 1981); American Utilities Fund (since April 1993); Equity
Income Fund (since October 1995); and Growth and Income Fund (since
October 1995).
CHAIRMAN - Asset Allocation Fund (since July 1986); Total Return Fund
(since July 1986); American Utilities Fund (since April 1993); Equity
Income Fund (since October 1995); and Growth and Income Fund (since
October 1995).
28
<PAGE> 36
MARVIN E. NEVINS (DOB 7/19/18), Director of the Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of Wisconsin
Centrifugal Inc., a foundry. From July 1983 to December 1986, he was Chairman
of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins is a
former Chairman of the Wisconsin Association of Manufacturers & Commerce. He
was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin. Mr. Nevins has served
the Funds as follows:
DIRECTOR - Asset Allocation Fund (since December 1981); Total Return Fund
(since December 1981); American Utilities Fund (since April 1993); Equity
Income Fund (since October 1995); and Growth and Income Fund (since
October 1995).
WILLIE D. DAVIS (DOB 7/24/34), Director of the Funds.
Mr. Davis has been director of Alliance Bank since 1980, Sara Lee
Corporation (a food/consumer products company) since 1983, KMart Corporation (a
discount consumer products company) since 1985, YMCA Metropolitan - Los Angeles
since 1985, Dow Chemical Company since 1988, MGM Grand, Inc. (an
entertainment/hotel company) since 1990, WICOR, Inc. (a utility company) since
1990, Johnson Controls, Inc. (an industrial company) since 1992, L.A. Gear (a
footwear/sportswear company) since 1992, and Rally's Hamburger, Inc. since
1994. Mr. Davis has been a trustee of the University of Chicago since 1980,
Marquette University since 1988, and Occidental College since 1990. Since
1977, Mr. Davis has been President and Chief Executive Officer of All Pro
Broadcasting, Inc. Mr. Davis was a director of the Fireman's Fund (an
insurance company) from 1975 until 1990. Mr. Davis has served the Funds as
follows:
DIRECTOR - American Utilities Fund (since July 1994); Asset Allocation
Fund (since July 1994); Total Return Fund (since July 1994); Equity
Income Fund (since October 1995); and Growth and Income Fund (since
October 1995).
*JOHN DRAGISIC (DOB 11/26/40), President and Director of the Funds.
Mr. Dragisic has been President of the Advisor since October 1995, and a
director of the Advisor and Distributor since July 1994. Mr. Dragisic served
as Vice Chairman of the Advisor from July 1994 until October 1995. Mr.
Dragisic was the President and Chief Executive Officer of Grunau Company, Inc.
(a mechanical contracting and engineering firm), Milwaukee, Wisconsin from 1987
until July 1994. From 1981 to 1987, he was an Executive Vice President with
Grunau Company, Inc. From 1969 until 1973, Mr. Dragisic worked for the Inter
American Development Bank. Mr. Dragisic received his Ph.D. in Economics in
1971 from the University of Wisconsin-Madison, and his B.A. degree in Economics
in 1962 from Lake Forest College. Mr. Dragisic has served the Funds as
follows:
DIRECTOR - Asset Allocation Fund (July 1991 until July 1994, and since
April 1995); Total Return Fund (July 1991 until July 1994, and since
April 1995); American Utilities Fund (April 1993 until July 1994, and
since April 1995); Equity Income Fund (since October 1995); and Growth
and Income Fund (since October 1995).
VICE CHAIRMAN - American Utilities Fund (July 1994 until October 1995);
Asset Allocation Fund (July 1994 until October 1995); and Total Return
Fund (July 1994 until October 1995).
PRESIDENT - American Utilities Fund (since November 1995); Asset
Allocation Fund (since November 1995); Equity Income Fund (since November
1995); Growth and Income Fund (since November 1995); and Total Return
Fund (since November 1995).
STANLEY KRITZIK (DOB 1/9/30), Director of the Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since 1962, a
Director of Aurora Health Care since 1987, and Health Network Ventures, Inc.
since 1992. Mr. Kritzik has served the Funds as follows:
DIRECTOR - American Utilities Fund (since April 1995); Asset Allocation
Fund (since April 1995); Total Return Fund (since April 1995); Equity
Income Fund (since October 1995); and Growth and Income Fund (since
October 1995).
29
<PAGE> 37
WILLIAM F. VOGT (DOB 7/19/47), Director of the Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc. since
1990. From 1982 until 1990, he served as Executive Director of University
Physicians of the University of Colorado. Mr. Vogt is the Past President of
the Medical Group Management Association and a Fellow of the American College
of Medical Practice Executives. Mr. Vogt has served the Funds as follows:
DIRECTOR - American Utilities Fund (since April 1995); Asset Allocation
Fund (since April 1995); Total Return Fund (since April 1995); Equity
Income Fund (since October 1995); and Growth and Income Fund (since
October 1995).
LAWRENCE A. TOTSKY (DOB 5/6/59), C.P.A., Vice President of the Funds.
Mr. Totsky has been Senior Vice President of the Advisor since September
1994. Mr. Totsky served as Vice President of the Advisor from December 1992 to
September 1994. Mr. Totsky acted as the Advisor's Manager of Shareholder
Accounting and Compliance from June 1987 to June 1991 when he was named
Director of Mutual Fund Administration. Mr. Totsky has served the Funds as
follows:
VICE PRESIDENT - Asset Allocation Fund (since May 1993); Total Return
Fund (since May 1993); American Utilities Fund (since April 1993); Equity
Income Fund (since October 1995); and Growth and Income Fund (since
October 1995).
THOMAS P. LEMKE (DOB 7/30/54), Vice President of the Funds.
Mr. Lemke has been Senior Vice President, Secretary, and General Counsel
of the Advisor since September 1994. For two years prior to joining the
Advisor, Mr. Lemke acted as Resident Counsel for Funds Management at J.P.
Morgan & Co., Inc. From February 1989 until April 1992, Mr. Lemke acted as
Associate General Counsel to Sanford C. Bernstein Co., Inc. For two years
prior to that, Mr. Lemke was Of Counsel at the Washington D.C. law firm of Tew
Jorden & Schulte, a successor of Finley, Kumble Wagner. From August 1979 until
December 1986, Mr. Lemke worked at the Securities and Exchange Commission, most
notably as the Chief Counsel to the Division of Investment Management (November
1984 - December 1986), and as Special Counsel to the Office of Insurance
Products, Division of Investment Management (April 1982 - October 1984). Mr.
Lemke has served the Funds as follows:
VICE PRESIDENT - American Utilities Fund (since October 1994); Asset
Allocation Fund (since October 1994); Total Return Fund (since October
1994); Equity Income Fund (since October 1995); and Growth and Income
Fund (since October 1995).
ANN E. OGLANIAN (DOB 12/7/61), Secretary and Vice President 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 served the Funds as follows:
SECRETARY - American Utilities Fund (since May 1994); Asset Allocation
Fund (since May 1994); Total Return Fund (since May 1994); Equity Income
Fund (since October 1995); and Growth and Income Fund (since October
1995).
VICE PRESIDENT - American Utilities Fund (since January 1996); Asset
Allocation Fund (since January 1996); Equity Income Fund (since January
1996); Growth and Income Fund (since January 1996); and Total Return Fund
(since January 1996).
30
<PAGE> 38
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President of the Funds.
Mr. Shenkenberg has been an Associate Counsel to the Advisor since
December 1992. From June 1987 until December 1992, Mr. Shenkenberg was an
attorney for Godfrey & Kahn, S.C., a Milwaukee law firm. Mr. Shenkenberg has
served the Funds as follows:
VICE PRESIDENT - American Utilities Fund (since April 1996); Asset
Allocation Fund (since April 1996); Equity Income Fund (since April
1996); Growth and Income Fund (since April 1996); and Total Return Fund
(since April 1996).
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Funds.
Mr. Weitzer has been an Associate Counsel of the Advisor since July 1993.
Mr. Weitzer has served the Funds as follows:
VICE PRESIDENT - American Utilities Fund (since January 1996); Asset
Allocation Fund (since January 1996); Equity Income Fund (since January
1996); Growth and Income Fund (since January 1996); and Total Return Fund
(since January 1996).
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 served the Funds as follows:
TREASURER - American Utilities Fund (since April 1995); Asset Allocation
Fund (since April 1995); Total Return Fund (since April 1995); Equity
Income Fund (since October 1995); and Growth and Income Fund (since
October 1995).
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.
In addition to the positions listed above, Mr. Strong has been Chairman
and a director of Strong Holdings, Inc., a Wisconsin corporation and subsidiary
of the Advisor ("Holdings") since October 1993; Chairman and a director of the
Funds' underwriter, Strong Funds Distributors, Inc., a Wisconsin Corporation
and subsidiary of Holdings ("Distributor") since October 1993; Chairman and a
director of Heritage Reserve Development Corporation, a Wisconsin corporation
and subsidiary of Holdings ("Heritage") since January 1994; Chairman and a
director of Strong Service Corporation, a Wisconsin corporation and subsidiary
of Holdings ("SSC") since November 1995; Chairman and a member of the Managing
Board of Fussville Real Estate Holdings L.L.C., a Wisconsin Limited Liability
Company and subsidiary of the Advisor ("Real Estate Holdings") since February
1994; Chairman and a member of the Managing Board of Fussville Development
L.L.C., a Wisconsin Limited Liability Company and subsidiary of the Advisor and
Real Estate Holdings ("Fussville Development") since February 1994; and
Chairman and a member of the Managing Board of Sherwood Development L.L.C., a
Wisconsin Limited Liability Company and subsidiary of the Advisor ("Sherwood")
since December 1995 and April 1995, respectively. In addition to the positions
listed above, Mr. Dragisic has been a director of Distributors since July 1994;
President and a director of Holdings since December 1995 and July 1994,
respectively; President and a director of SSC since November 1995; Vice
Chairman and a director of Heritage since August 1994; Vice Chairman and a
member of the Managing Board of Fussville Development since December 1995 and
August 1994, respectively; Vice Chairman and a member of the Managing Board of
Real Estate Holdings since December 1995 and August 1994, respectively; and
Vice Chairman and a member of the Managing Board of Sherwood since December
1995 and April 1995, respectively. In addition to the positions listed above,
Mr. Lemke has been President of Distributors since December 1995; Vice
President of Holdings since December 1995; Vice President of SSC since November
31
<PAGE> 39
1995; Vice President of Heritage since December 1995; Vice President of
Fussville Development since December 1995; Vice President of Real Estate
Holdings since December 1995; and Vice President of Sherwood since December
1995. In addition to the positions listed above, Mr. Shenkenberg has been Vice
President and Secretary of Distributors since December 1995; Secretary of SSC
since November 1995; and Secretary of Holdings, Heritage, Fussville
Development, Real Estate Holdings, and Sherwood since December 1995. In
addition to the positions listed above, Mr. Neville has been Vice President of
Distributors since December 1995; Vice President of Holdings since December
1995; Vice President of SSC since November 1995; Vice President of Heritage
since December 1995; Vice President of Fussville Development since December
1995; Vice President of Real Estate Holdings since December 1995; and Vice
President of Sherwood since December 1995.
As of February 5, 1996, the officers and directors of the Asset
Allocation, American Utilities, and Total Return Funds in the aggregate
beneficially owned less than 1% of each Fund's then outstanding shares. As of
February 5, 1996, the officers and directors of the Equity Income Fund
beneficially owned 50,000 shares of common stock of the Fund which was 48.16%
of the Fund's then outstanding shares. As of February 5, 1996, the officers
and directors of the Growth and Income Fund beneficially owned 50,000 shares of
common stock of the Fund which was 33.76% of the Fund's then outstanding
shares.
PRINCIPAL SHAREHOLDERS
As of January 31, 1996, 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.
For Exclusive Benefit of Customers
101 Montgomery Street Asset Allocation/726,444 5.42 %
San Francisco, CA 94104 American Utilities/4,567,701 39.00 %
Strong Capital Management, Inc.
100 Heritage Reserve Equity Income/50,000 78.57 %
Menomonee Falls, WI 53051 Growth and Income/50,000 52.54 %
National Financial Services Corporation
For Exclusive Benefit of Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908 American Utilities/873,510 7.46 %
Patricia T. Vanden Beemt
P.O. Box 37
Monkton, MD 21111-0037 Growth and Income/6,924 7.28 %
Robert B. East
2224 B Tufton Ridge Road
Reiseterstown, MD 21136 Growth and Income/4,907 5.16 %
</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.
32
<PAGE> 40
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, Mr.
Shenkenberg is Vice President, Assistant Secretary, and Associate Counsel of
the Advisor, and Ms. Oglanian and Mr. Weitzer are 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. The Advisory
Agreements for the Equity Income and Growth and Income Funds, dated December
28, 1995, were last approved by its shareholders on December 28, 1995, and will
remain in effect for a period of two years. Each Advisory Agreement is
required to be approved annually by either the Board of Directors of the Fund
or by vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act). In either case, each annual renewal must 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.
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 $27,839, 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 for the ten-month fiscal year ended October 31, 1995, and
for the fiscal years ended December 31, 1994; December 31, 1993; and December
31, 1992:
<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
1995* $1,679,120 $0 $1,679,120
</TABLE>
33
<PAGE> 41
<TABLE>
<S> <C> <C> <C>
American Utilities Fund
1993(1) $ 71,977 $ 71,977 $ 0
1994 $ 262,428 $208,638 $ 53,790
1995* $ 382,467 $ 0 $ 382,467
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
1995* $4,220,838 $ 0 $4,220,838
</TABLE>
- ---------------
(1) Commenced operations on July 1, 1993.
* For the ten-month fiscal year ended October 31, 1995.
Each Advisory Agreement requires the Advisor to reimburse a Fund in the
event that the expenses and charges payable by the Fund in any fiscal year,
including the management fee but excluding taxes, interest, brokerage
commissions, and similar fees and to the extent permitted extraordinary
expenses, exceed that percentage of the average net asset value of the Fund for
such year, as determined by valuations made as of the close of each business
day of the year, which is the most restrictive percentage expense limitation
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, then 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 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.
On June 6, 1996, the Department of Labor (the "DOL") filed an action
against the Advisor for equitable relief alleging violations of the Employee
Retirement Security Act of 1974 ("ERISA") in connection with cross trades that
occurred between 1987 and late 1989 involving certain pension accounts managed
by the Advisor. Contemporaneous with this filing, the Advisor, without
admitting or denying the DOL's allegations, agreed to the entry of a consent
judgment resolving all matters relating to the allegations. Reich v. Strong
Capital Management, Inc., (U.S.D.C. E.D. WI)(the "Consent Judgment"). Under
the terms of the Consent Judgment, the Advisor agreed to reimburse the affected
accounts a total of $5.9 million. The settlement did not have any material
impact on the Advisor's financial position or operations.
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
34
<PAGE> 42
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. For the fiscal year ended December 31,
1994, and the ten-month fiscal year ended October 31, 1995, the Subadvisor
received $172,423 and $237,408, respectively, in subadvisory fees from the
Advisor pursuant to the Subadvisory Agreement.
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
35
<PAGE> 43
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 and a Distribution
Agreement dated December 28, 1995 for the Equity Income and the Growth and
Income 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 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.
The Advisor has adopted procedures that provide generally for the Advisor
to seek to bunch orders for the purchase or sale of the same security for the
Fund, other mutual funds managed by the Advisor, and other Advisory clients
(collectively, the "client accounts"). The Advisor will bunch orders when it
deems it to be appropriate and in the best interests of the client accounts.
When a bunched order is filled in its entirety, each participating client
account will participate at the average share price for the bunched order on
the same business day, and transaction costs shall be shared pro rata based on
each client's participation in the bunched order. When a bunched order is only
partially filled, the securities purchased will be allocated on a pro rata
basis to each client account participating in the bunched order based upon the
initial amount requested for the account, subject to certain exceptions, and
each participating account will participate at the average share price for the
bunched order on the same business day.
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<PAGE> 44
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 the fiscal year
ended December 31, 1993 and 1994, and the ten-month fiscal year ended October
31, 1995, the American Utilities Fund paid approximately $68,000, $136,000, and
$176,000, respectively, to the Subadvisor in brokerage commissions. The
payments made to the Subadvisor during the ten-month fiscal year ended October
31, 1995, represent 100% 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 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 following table sets forth certain
information concerning brokerage commissions paid by each Fund for the
ten-month fiscal year ended October 31, 1995, and for the fiscal years ended
December 31, 1994; December 31, 1993; and December 31, 1992.
<TABLE>
<CAPTION>
American Utilities Fund(1) Brokerage Commissions
<S> <C>
1993 $ 71,000
1994 $ 136,000
1995* $ 176,000
Asset Allocation Fund
1992 $ 520,000
1993 $ 630,000
1994 $ 626,000
1995* $ 942,000
Total Return Fund
1992 $4,467,000
1993 $4,309,000
1994 $4,403,000
1995* $3,863,000
</TABLE>
- ---------------
(1) Commenced operations on July 1, 1993.
* For the ten-month fiscal year ended October 31, 1995.
37
<PAGE> 45
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 new issues of securities for a
Fund in a fixed price offering. In these situations, the seller may be a member
of the selling group that will, in addition to selling the securities to the
Funds and other advisory clients, provide the Advisor with research. The
National Association of Securities Dealers has adopted rules expressly
permitting these types of arrangements under certain circumstances. Generally,
the seller will provide research "credits" in these situations at a rate that
is higher than that which is available for typical secondary market
transactions. These arrangements may not fall within the safe harbor of Section
28(e).
Each year, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Funds and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e) the
Advisor allocates brokerage to those firms, provided that their brokerage and
research services were satisfactory to the Advisor and their execution
capabilities were compatible with the Advisor's policy of seeking best
execution at the best security price available, as discussed above. In no case
will the Advisor make binding commitments as to the level of brokerage
commissions it will allocate to a broker, nor will it commit to pay cash if any
informal targets are not met. The Advisor anticipates it will continue to
enter into such brokerage arrangements.
The Advisor may direct the purchase of securities on behalf of the Funds
and other advisory clients in secondary market transactions, in public
offerings directly from an underwriter, or in privately negotiated transactions
with an issuer. When the Advisor believes the circumstances so warrant,
securities purchased in public offerings may be resold shortly after
acquisition in the immediate aftermarket for the security in order to take
advantage of price appreciation from the public offering price or for other
reasons. Short-term trading of securities acquired in public offerings, or
otherwise, may result in higher portfolio turnover and associated brokerage
expenses.
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
38
<PAGE> 46
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.
As of October 31, 1995, the Asset Allocation Fund had acquired securities
of its regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act)
or their parents in the following amounts:
<TABLE>
<CAPTION>
Regular Broker or Dealer or Parent Issuer Value of Securities Owned as of October 31, 1995
- ----------------------------------------- ------------------------------------------------
<S> <C>
Lehman Brothers, Inc. $4,183,000
</TABLE>
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.
39
<PAGE> 47
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 for transfer agency and dividend disbursing and printing and
mailing services for the ten-month fiscal year ended October 31, 1995, and for
the fiscal years ended December 31, 1994; December 31, 1993; and December 31,
1992:
<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
1995* 461,676 69,276 9,691 0 540,643
American Utilities Fund
1993(1) $0 $ 0 $ 0 $0 $ 0
1994 56,756 451 798 0 58,005
1995* 161,976 19,487 2,247 0 183,710
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
1995* 1,235,853 167,928 24,187 0 1,427,968
</TABLE>
- ---------------------------------------------------------------------
(1) The American Utilities Fund commenced operations on July 1, 1993.
* For the ten-month fiscal year ended October 31, 1995.
From time to time, the Funds, directly or indirectly through arrangements
with the Advisor, and/or the Advisor may pay amounts to third parties that
provide transfer agent and other administrative services relating to the Funds
to persons who beneficially own interests in the Funds, such as participants in
401(k) plans. These services may include, among other things, sub-accounting
services, 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 based on the number of beneficial owners at a rate that is greater
than the rate the Funds are currently paying the Advisor for providing these
services to Fund shareholders.
TAXES
GENERAL
As indicated under "About the Funds - Distributions and Taxes" in the
Prospectus, each Fund intends to continue to qualify annually for treatment as
a regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended, (the "Code"). This qualification does not involve government
supervision of the Funds' management practices or policies.
40
<PAGE> 48
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. From
time to time the Advisor may find it necessary to make certain types of
investments for the purpose of ensuring that the Fund continues to qualify for
treatment as a RIC under the Code.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
FOREIGN TRANSACTIONS
Interest and dividends received by a Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
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
shareholders to satisfy the Distribution Requirement and avoid imposition of
the
41
<PAGE> 49
Excise Tax -- even if those earnings and gain were not received by the Fund.
In most instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures and entering into 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.
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,
42
<PAGE> 50
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 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.
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.
43
<PAGE> 51
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.
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, Equity Income, and
Growth and Income Funds are 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.
44
<PAGE> 52
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.(1) 09/03/81 300,000,000 .01
Strong Conservative Equity Funds,
Inc.(2) 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, Inc. 9/03/81 300,000,000 .01
</TABLE>
(1) Prior to December 21, 1994, the Fund's name was Strong Investment Fund,
Inc.
(2) Prior to April 17, 1995, the Fund's name was Strong American Utilities
Fund, Inc.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered investment
companies, such as the Corporations, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the 1940 Act. Each Corporation has adopted the appropriate provisions in
their Bylaws and may, at their discretion, not hold an annual meeting in any
year in which the election of directors is not required to be acted on by
shareholders under the 1940 Act.
Each Corporation's Bylaws allow for a director to be removed by its
shareholders with or without cause, only at a meeting called for the purpose
of removing the director. Upon the written request of the holders of shares
entitled to not less than ten percent (10%) of all the votes entitled to be
cast at such meeting, the Secretary of the Corporation shall promptly call a
special meeting of shareholders for the purpose of voting upon the question of
removal of any director. The Secretary of the Corporation shall inform such
shareholders of the reasonable estimated costs of preparing and mailing the
notice of the meeting, and upon payment to the Corporation of such costs, the
Corporation shall give not less than ten nor more than sixty days notice of the
special meeting.
PERFORMANCE INFORMATION
As described in the "About the Funds - Performance Information" section of
the Funds' Prospectus, each Fund's historical performance or return may be
shown in the form of "average annual total return," "total return," and
"cumulative total return." In addition, each 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.
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:
YIELD = 2[( a-b + 1)6 - 1]
---
cd
<TABLE>
<S> <C>
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.
</TABLE>
45
<PAGE> 53
For the 30-day period ended October 31, 1995, the American Utilities
Fund's yield was 3.27%. 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.
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.
46
<PAGE> 54
The figures below show performance information for the various periods
ended October 31, 1995. No adjustment has been made for taxes, if any, payable
on dividends. Securities prices fluctuated during these periods.
<TABLE>
<CAPTION>
ASSET ALLOCATION FUND
- ---------------------
Total Average Annual
Return Total Return
---------- --------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1995 Increase Increase
---------- ---------------- ---------- --------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $60,379.44 503.79 % 13.88 %
Ten Years 10,000 25,880.52 158.81 9.98
Five Years 10,000 16,639.40 66.39 10.72
One Year 10,000 11,620.59 16.21 16.21
</TABLE>
------------------------
(1) Commenced operations on December 30, 1981.
<TABLE>
<CAPTION>
AMERICAN UTILITIES FUND
--------------------------------
Total Average Annual
Return Total Return
---------- --------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1995 Increase Increase
------------ ---------------- ---------- --------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $12,913.41 29.13 % 11.56 %
One Year 10,000 12,271.81 22.72 22.72
</TABLE>
-----------------------
(1) Commenced operations on July 1, 1993.
<TABLE>
<CAPTION>
TOTAL RETURN FUND
------------------
Total Average Annual
Return Total Return
---------- --------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1994 Increase Increase
---------- ---------------- ---------- --------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $70,725.08 607.25 % 15.19 %
Ten Years 10,000 30,322.52 203.23 11.73
Five Years 10,000 19,918.96 99.19 14.78
One Year 10,000 11,748.36 17.48 17.48
</TABLE>
------------------------
(1) Commenced operations on December 30, 1981.
The American Utilities, Asset Allocation, and Total Return Funds' total
return for the three months ending January 31, 1996 were 10.00%, 4.28%, and
7.49%, respectively.
COMPARISONS
(1) U.S. TREASURY BILLS, NOTES, OR BONDS
Investors may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes, or bonds, which are issued by the U.S. Government.
Treasury obligations are issued in selected denominations. Rates of Treasury
obligations are fixed at the time of issuance and payment of principal and
interest is backed by the full faith and credit of the Treasury. The
47
<PAGE> 55
market value of such instruments will generally fluctuate inversely with
interest rates prior to maturity and will equal par value at maturity.
Generally, the values of obligations with shorter maturities will fluctuate
less than those with longer maturities.
(2) CERTIFICATES OF DEPOSIT
Investors may want to compare a Fund's performance to that of certificates
of deposit offered by banks and other depositary institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of the deposits prior to maturity normally will
be subject to a penalty. Rates offered by banks and other depositary
institutions are subject to change at any time specified by the issuing
institution.
(3) MONEY MARKET FUNDS
Investors may also want to compare performance of a Fund to that of money
market funds. Money market fund yields will fluctuate and shares are not
insured, but share values usually remain stable.
(4) LIPPER ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT RANKING
ORGANIZATIONS
From time to time, in marketing and other fund literature, a Fund's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value,
with all income and capital 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
48
<PAGE> 56
(q) Lehman Brothers Intermediate Government/Corporate Bond Index
(r) A blended 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 blended 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.
(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.
49
<PAGE> 57
(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.
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVE
<S> <C>
Strong Money Market Fund Current income, a stable share price, and daily liquidity.
- ---------------------------------------------------------------------------------------------------------
Strong Heritage Money Fund Current income, a stable share price, and daily liquidity.
- ---------------------------------------------------------------------------------------------------------
Strong Municipal Money Market Federally tax-exempt current income, a stable share-price, and daily
Fund liquidity.
- ---------------------------------------------------------------------------------------------------------
Federally tax-exempt current income with a very low degree of
Strong Municipal Advantage Fund share-price fluctuation.
- ---------------------------------------------------------------------------------------------------------
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
- ---------------------------------------------------------------------------------------------------------
Strong Short-Term Municipal Total return by investing for a high level of federally tax-exempt
Bond Fund current income with a low degree of share-price fluctuation.
- ---------------------------------------------------------------------------------------------------------
Total return by investing for a high level of current income with a low
Strong Short-Term Bond Fund 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.
- ---------------------------------------------------------------------------------------------------------
Total return by investing for a high level of federally tax-exempt
Strong Municipal Bond Fund current income with a moderate degree of share-price fluctuation.
- ---------------------------------------------------------------------------------------------------------
Total return by investing for a high level of current income with a
Strong Corporate Bond Fund moderate degree of share-price fluctuation.
- ---------------------------------------------------------------------------------------------------------
Strong High-Yield Municipal Total return by investing for a high level of federally tax-exempt
Bond Fund current income.
- ---------------------------------------------------------------------------------------------------------
Total return by investing for a high level of current income and
Strong High-Yield Bond Fund capital growth.
- ---------------------------------------------------------------------------------------------------------
Strong International Bond Fund High total return by investing for both income and capital appreciation.
- ---------------------------------------------------------------------------------------------------------
Strong Asset Allocation Fund High total return consistent with reasonable risk over the long term.
- ---------------------------------------------------------------------------------------------------------
Strong Equity Income Fund Total return by investing for both income and capital growth.
- ---------------------------------------------------------------------------------------------------------
Strong American Utilities Fund Total return by investing for both income and capital growth.
- ---------------------------------------------------------------------------------------------------------
Strong Total Return Fund High total return by investing for capital growth and income.
- ---------------------------------------------------------------------------------------------------------
Strong Growth and Income Fund High total return by investing for capital growth and income.
- ---------------------------------------------------------------------------------------------------------
Long-term capital appreciation principally through investment in common
stocks and other equity securities. Current income is a secondary
Strong Schafer Value Fund objective.
- ---------------------------------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------------------------------
* The Fund is currently closed to new investors.
</TABLE>
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
50
<PAGE> 58
potential of each Strong Fund relative to the other Strong Funds, but is not
intended to position any Strong Fund relative to other mutual funds or
investment products. Marketing materials may also discuss the relationship
between risk and reward as it relates to an individual investor's portfolio.
Financial goals vary from person to person. You may choose one or more of
the Strong Funds to help you reach your financial goals. To help you better
understand the Strong Conservative Equity Funds and determine which Fund or
combination of Funds best meets your personal investment objectives, they are
described in the same Prospectus.
(10) TYING TIME FRAMES TO YOUR GOALS
There are many issues to consider as you make your investment decisions,
including analyzing your risk tolerance, investing experience, and asset
allocations. You should start to organize your investments by learning to link
your many financial goals to specific time frames. Then you can begin to
identify the appropriate types of investments to help meet your goals. As a
general rule of thumb, the longer your time horizon, the more price fluctuation
you will be able to tolerate in pursuit of higher returns. For that reason,
many people with longer-term goals select stocks or long-term bonds, and many
people with nearer-term goals match those up with for instance, short-term
bonds. The Advisor developed the following suggested holding periods to help
our investors set realistic expectations for both the risk and reward potential
of our funds. (See table below.) Of course, time is just one element to
consider when making your investment decision.
STRONG FUNDS SUGGESTED MINIMUM HOLDING PERIODS
<TABLE>
<CAPTION>
UNDER 1 YEAR 1 TO 2 YEARS 4 TO 7 YEARS 5 OR MORE YEARS
- -------------------- --------------------------- -------------------------- ------------------------
<S> <C> <C> <C>
Money Market Fund Advantage Fund Government Securities Fund Total Return Fund
Heritage Money Fund Municipal Advantage Fund Municipal Bond Fund Opportunity Fund
Municipal Money Corporate Bond Fund Growth Fund
Market Fund 2 TO 4 YEARS International Bond Fund Common Stock Fund*
------------------------ High-Yield Municipal Bond Discovery Fund
Short-Term Bond Fund Fund International Stock Fund
Short-Term Municipal Bond Asset Allocation Fund Asia Pacific Fund
Fund American Utilities Fund Value Fund
Short-Term Global Bond Fund High-Yield Bond Fund Small Cap Fund
Equity Income Fund Growth and Income Fund
Schafer Value 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.
(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.
51
<PAGE> 59
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.
The increasing complexity of the capital markets requires specialized
skills and processes for each asset class and style. Therefore, the Advisor
believes that active management should produce greater returns than a passively
managed index. The Advisor has brought together a group of top-flight
investment professionals with diverse product expertise, and each concentrates
on their investment specialty. The Advisor believes that people are the firm's
most important asset. For this reason, continuity of professionals is critical
to the firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their impact
on the Funds may be used in advertisements and sales materials. Such factors
that may impact the Funds include, but are not limited to, changes in interest
rates, political developments, the competitive environment, consumer behavior,
industry trends, technological advances, macroeconomic trends, and the supply
and demand of various financial instruments. In addition, marketing materials
may cite the portfolio management's views or interpretations of such factors.
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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.
Markets:
The retirement plan services provided by the Advisor focus on four
distinct markets, based on the belief that a retirement plan should fit the
customer's needs, not the other way around.
1. Small company plans. Small company plans are designed for companies with
1-50 plan participants. The objective is to incorporate the features and
benefits typically reserved for large companies, such as sophisticated
recordkeeping systems, outstanding service, and investment expertise, into
a small company plan without administrative hassles or undue expense.
Small company plan sponsors receive a comprehensive plan administration
manual as well as toll-free telephone support.
2. Large company plans. Large company plans are designed for companies with
between 51 and 1,000 plan participants. Each large company plan is
assigned a team of professionals consisting of an account manager, who is
typically an attorney, CPA, or holds a graduate degree in business, a
conversion specialist (if applicable), an accounting manager, a
legal/technical manager, and an education/communications educator.
3. Women-owned businesses.
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<PAGE> 61
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.
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.
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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 cash. 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 cash, 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 at least four to seven
years. 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.
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 - to
medium - sized growth companies and dividend paying stocks. The Fund's charter
also enables it to invest in small companies. 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.
From time to time, the Advisor focuses 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
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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.
EQUITY INCOME AND GROWTH AND INCOME FUNDS
The Advisor utilizes a research-driven, growth-oriented approach that
focuses on companies with stable and predictable revenue and earnings growth,
as well as those with a steady or growing dividend stream. These are typically
medium- to large-sized companies with dominant, market-leading positions in
their respective industries. The Growth and Income Fund may also invest a
portion of its assets in smaller company or value stocks for added growth
potential.
The Advisor's investment process involves both bottom-up analysis and the
consideration of macroeconomic factors that may influence company-specific
performance. Fundamental research is augmented by meetings with company
management. The Advisor diversifies its holdings among sectors and industries
with positive dynamics that are likely to serve as a solid base for future
growth in revenues and earnings.
The Advisor intends to emphasize investments in companies that display
superior financial performance as defined by: above-average revenue and
earnings growth, moderate levels of financial leverage, above-average return on
equity, positive cash flow, and a management team that is focused on enhancing
shareholder value. Investments are typically not based on short-term
speculative events; instead, they are based on long-term industry
characteristics and company-specific dynamics.
The Advisor also evaluates a company's price in comparison to its own
historical levels, to its industry peer group, and to the overall market.
Stocks are sold when, in the Advisor's opinion, they approach full valuation
based upon historical, absolute, or relative levels, or when the prospects for
growth decline or company fundamentals deteriorate.
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.
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.
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The unaudited financial statements for the Equity Income and Growth and
Income Funds for the period December 29, 1995 through April 30, 1996 that are
attached hereto contain the following financial information for the Funds:
(a) Schedule of Investments in Securities.
(b) Statement of Operations.
(c) Statement of Assets and Liabilities.
(d) Statement of Changes in Net Assets.
(e) Notes to Financial Statements.
(f) Financial Highlights.
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APPENDIX
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or based on
other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default capacity and willingness of
the obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of,
the obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
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B Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grade period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
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Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected
by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated 'AAA'. Because bonds rated in the 'AAA' and 'AA' categories
are not significantly vulnerable to foreseeable future
developments, short-term debt of the issuers is generally rated
'F-1+'.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have
adverse impact on these bonds and, therefore, impair timely payment.
The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
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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.
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 that, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD,
and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or
reorganization of the obligor. 'DDD' represents the highest
potential for recovery of these bonds, and 'D' represents the lowest
potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important
to the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
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<TABLE>
<CAPTION>
RATING SCALE DEFINITION
- ---------------------------------------------------------------------------------------------------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
- ---------------------------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
- ---------------------------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
- ---------------------------------------------------------------------------------------------------
BBB+ Below-average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
- ---------------------------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according to
BB- industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
- ---------------------------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will not be met
B when due. Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a higher
or lower rating grade.
- ---------------------------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable uncertainty exists as to
timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
- ---------------------------------------------------------------------------------------------------
DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend arrearages.
- ---------------------------------------------------------------------------------------------------
</TABLE>
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
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Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating.
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.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
A-6
<PAGE> 71
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment will
often be evidenced by many of the following characteristics: (i) leading
market positions in well-established industries, (ii) high rates of return on
funds employed, (iii) conservative capitalization structure with moderate
reliance on debt and ample asset protection, (iv) broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and (v)
well established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
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.
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.
A-7
<PAGE> 72
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
used by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
Rating Scale: Definition
- ------------- ----------
High Grade
----------
D-1+ Highest certainty of timely payment. Short-Term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
A-8
<PAGE> 73
Default
D-5 Issuer failed to meet scheduled principal and/or interest payments.
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
The TBW Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. TBW
Short-Term Ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".
TBW-3 The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA SHORT-TERM RATINGS
IBCA Short-Term Ratings assess the borrowing characteristics of banks and
corporations, and the capacity for timely repayment of debt obligations. The
Short-Term Ratings relate to debt which has a maturity of less than one year.
A1+ Obligations supported by the highest capacity for timely repayment and
possess a particularly strong credit feature.
A1 Obligations supported by the highest capacity for timely repayment.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely repayment.
B Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
C Obligations for which there is a high risk of default or which are
currently in default.
A-9
<PAGE> 74
STRONG CONSERVATIVE EQUITY FUNDS, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Strong American Utilities Fund (all included or
incorporated by reference in Parts A & B) (audited).
Schedules of Investments in Securities
Statements of Operations
Statements of Assets and Liabilities
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
(2) Strong Equity Income Fund and Strong Growth and
Income Fund (all included or incorporated by
reference in Parts A & B) (unaudited).
Schedule of Investments in Securities
Statement of Operations
Statement of Assets and Liabilities
Statement of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
(b) Exhibits
(1) Amended and Restated Articles of Incorporation
(1.1) Amendment to Articles of Incorporation
(2) Bylaws
(3) Inapplicable
(4) Specimen Stock Certificate
(5) Investment Advisory Agreement
(5.1) Subadvisory Agreement (American Utilities)
(6) Distribution Agreement
(7) Inapplicable
(8.1) Custody Agreement
(8.2) Global Custody Agreement
(9) Shareholder Servicing Agent Agreement
(10) Inapplicable
(11) Consent of Auditor
(12) Inapplicable
(13) Inapplicable
(14.1) Prototype Defined Contribution Retirement Plan - No. 1
(14.1.1) Prototype Defined Contribution Retirement Plan - No. 2
(14.2) Individual Retirement Custodial Account
(14.3) Section 403(b)(7) Retirement Plan
(14.4) Simplified Employee Pension Plan
(15) Inapplicable
(16) Computation of Performance Figures
(17) Power of Attorney
C-1
<PAGE> 75
(18) Letter of Representation
(27) Financial Data Schedule (American Utilities)
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant neither controls any person nor is under common control with
any other person.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of May 31, 1996
----------------------------------- ------------------------
<S> <C>
Common Stock, $.00001 par value
Strong American Utilities Fund 8,651
Strong Equity Income Fund 1,397
Strong Growth and Income Fund 780
</TABLE>
Item 27. Indemnification
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Group, First State
Insurance Company, Chubb Group, and Gulf Insurance Companies in the aggregate
amount of $40,000,000, subject to certain deductions. Pursuant to the
authority of the Wisconsin Business Corporation Law, Article VII of
Registrant's Bylaws provides as follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01 Mandatory Indemnification. The Corporation shall
indemnify, to the full extent permitted by the WBCL, as in effect from
time to time, the persons described in Sections 180.0850 through 180.0859
(or any successor provisions) of the WBCL or other provisions of the law
of the State of Wisconsin relating to indemnification of directors and
officers, as in effect from time to time. The indemnification afforded
such persons by this section shall not be exclusive of other rights to
which they may be entitled as a matter of law.
SECTION 7.02. Permissive Supplementary Benefits. The Corporation
may, but shall not be required to, supplement the right of indemnification
under Section 7.01 by (a) the purchase of insurance on behalf of any one
or more of such persons, whether or not the Corporation would be obligated
to indemnify such person under Section 7.01; (b) individual or group
indemnification agreements with any one or more of such persons; and (c)
advances for related expenses of such a person.
SECTION 7.03. Amendment. This Article VII may be amended or
repealed only by a vote of the shareholders and not by a vote of the Board
of Directors.
SECTION 7.04. Investment Company Act. In no event shall the
Corporation indemnify any person hereunder in contravention of any
provision of the Investment Company Act.
Item 28. Business and Other Connections of Investment Advisor
The information contained under "About the Funds - Management" in the
Prospectus and under "Directors and Officers of the Funds" and "Investment
Advisor, Subadvisor, and Distributor" with respect to Strong American Utilities
Fund and "Investment Advisor and Distributor" with respect to Strong Equity
Income and Strong Growth and Income Funds, in the Statement of Additional
Information is hereby incorporated by reference pursuant to Rule 411 under the
Securities Act of 1933.
C-2
<PAGE> 76
Item 29. Principal Underwriters
(a) Strong Funds Distributors, Inc., principal underwriter for Registrant,
also serves as principal underwriter for Strong Advantage Fund, Inc.; Strong
Asia Pacific Fund, Inc.; Strong Asset Allocation Fund, Inc.; Strong Common
Stock Fund, Inc.; Strong Corporate Bond Fund, Inc.; Strong Discovery Fund,
Inc.; Strong Equity Funds, Inc.; Strong Government Securities Fund, Inc.;
Strong Heritage Reserve Series, Inc.; Strong High-Yield Municipal Bond Fund,
Inc.; Strong Income Funds, Inc.; Strong Institutional Funds, Inc.; Strong
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.; Strong Short-Term Municipal Bond Fund, Inc.; Strong Special Fund
II, Inc.; Strong Total Return Fund, Inc.; and Strong Variable Insurance Funds,
Inc.
(b) The information contained under "About the Funds - Management" in the
Prospectus and under "Directors and Officers of the Funds" and "Investment
Advisor, Subadvisor, and Distributor" with respect to Strong American Utilities
Fund and "Investment Advisor and Distributor" with respect to Strong Equity
Income and Strong Growth and Income Funds, in the Statement of Additional
Information is hereby incorporated by reference pursuant to Rule 411 under the
Securities Act of 1933.
(c) None
Item 30. Location of Accounts and Records
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Treasurer, Ronald A.
Neville, at Registrant's corporate offices, 100 Heritage Reserve, Menomonee
Falls, Wisconsin 53051.
Item 31. Management Services
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings
(a) Inapplicable.
(b) Inapplicable.
(c) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered, upon request and without charge, a copy of Strong
American Utilities Fund's latest annual report to shareholders.
C-3
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that this
Post-Effective Amendment No. 8 meets all the requirements for effectiveness
pursuant to paragraph (b) of Rule 485 under the Securities Act of 1933, as
amended, and that it has duly caused this Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Village of Menomonee Falls, and
State of Wisconsin on the 25th day of June, 1996.
STRONG CONSERVATIVE EQUITY FUNDS, INC.
(Registrant)
BY: /s/ John Dragisic
------------------------
John Dragisic, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------- ------------------------------------------ -------------
<S> <C> <C>
President (Principal Executive Officer)
/s/ John Dragisic and a Director June 25, 1996
- -----------------
John Dragisic
/s/ Ronald A. Neville Treasurer (Principal Financial and June 25, 1996
- -------------------- Accounting Officer)
Ronald A. Neville
/s/ Richard S. Strong Chairman of the Board and a Director June 25, 1996
- ---------------------
Richard S. Strong
- -------------------- Director June 25, 1996
Marvin E. Nevins*
- -------------------- Director June 25, 1996
Willie D. Davis*
- ------------------- Director June 25, 1996
William F. Vogt*
- ------------------- Director June 25, 1996
Stanley Kritzik*
</TABLE>
* Ann E. Oglanian signs this document pursuant to powers of attorney filed with
Post-Effective Amendment No. 4 to the Registration Statement of Registrant
filed with the SEC on or about April 24, 1995.
By: /s/ Ann E. Oglanian
-------------------
Ann E. Oglanian
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EDGAR
Exhibit No. Exhibit Exhibit No.
- ----------- ------------------------------------------------------ ------------------
<S> <C> <C>
(1) Amended and Restated Articles of Incorporation EX-99.B1(1)
(1.1) Amendment to Articles of Incorporation EX-99.B1.1(2)
(2) Bylaws EX-99.B2(2)
(3) Inapplicable
(4) Specimen Stock Certificate EX-99.B4(2)
(5) Investment Advisory Agreement EX-99.B5(2)
(5.1) Subadvisory Agreement (American Utilities) EX-99.B5.1(3)
(6) Distribution Agreement EX-99.B6(2)
(7) Inapplicable
(8.1) Custody Agreement EX-99.B8.1
(8.2) Global Custody Agreement EX-99.B8.2
(9) Shareholder Servicing Agent Agreement EX-99.B9(2)
(10) Inapplicable
(11) Consent of Auditor EX-99.B11
(12) Inapplicable
(13) Inapplicable
(14.1) Prototype Defined Contribution Retirement Plan - No. 1 EX-99.B14.1(3)
(14.1.1) Prototype Defined Contribution Retirement Plan - No. 2 EX-99.B14.1.1(3)
(14.2) Individual Retirement Custodial Account EX-99.B14.2(3)
(14.3) Section 403(b)(7) Retirement Plan EX-99.B14.3(3)
(14.4) Simplified Employee Pension Plan EX-99.B14.4
(15) Inapplicable
(16) Computation of Performance Figures EX-99.B16(3)
(17) Power of Attorney(1)
(18) Letter of Representation EX-99.B18
</TABLE>
<PAGE> 79
(27) Financial Data Schedule (American Utilities) EX-27.1
American Utilities
- ---------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A of Registrant filed on or
about April 24, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 6 to
the Registration Statement on Form N-1A of Registrant filed on or
about December 13, 1995.
(3) Incorporated herein by reference to the Post-Effective Amendment No.
7 to the Registration Statement on Form N-1A of Registrant filed on or
about February 26, 1996.
<PAGE> 1
EXHIBIT 99.B8.1
CUSTODIAN AGREEMENT
THIS AGREEMENT is made and entered into on this ___ day of ____, ____,
between STRONG <<FUND>>, INC., a Wisconsin corporation (the "Corporation"), on
behalf of the Funds (as defined below) of the Corporation, and FIRSTAR TRUST
COMPANY, a Wisconsin corporation (the "Custodian").
WITNESSETH:
WHEREAS, the Corporation is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940 (the "Investment Company Act");
WHEREAS, the Corporation is authorized to create separate series, each
with its own separate investment portfolio, and the beneficial interest in each
such series will be represented by a separate series of shares (each series
indicated on Schedule A is hereinafter individually referred to as a "Fund" and
collectively as the "Funds"); and
WHEREAS, the Corporation desires to retain the Custodian to hold and
administer the securities and cash of each Fund listed in Schedule A hereto,
and any additional Funds the Corporation and the Custodian may agree upon and
include in Schedule A as such Schedule may be amended from time to time,
pursuant to the terms of this Agreement.
NOW, THEREFORE, the Corporation and the Custodian do mutually agree and
promise as follows:
1. Definitions
The word "securities" as used herein includes stocks, shares, bonds,
debentures, notes, mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights to receive,
purchase or subscribe for the same, or evidencing or representing any other
rights or interests therein, or in any property or assets.
The words "officers' certificate" shall mean a request or direction or
certification in writing signed in the name of the Corporation by any two of
the President, a Vice President, the Secretary and the Treasurer of the
Corporation, or any other persons duly authorized to sign by the Board of
Directors.
The word "Board" shall mean the Board of Directors the Corporation.
2. Names, Titles and Signatures of the Corporation's Officers
An officer of the Corporation will certify to the Custodian the names
and signatures of those persons authorized to sign the officers' certificates
described in Section 1, hereof, and the names of the members of the Board of
Directors, together with any changes which may occur from time to time.
<PAGE> 2
3. Receipt and Disbursement of Money
A. The Custodian shall open and maintain a separate account or
accounts in the name of each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement. The Custodian shall
hold in such account or accounts, subject to the provisions hereof, all cash
received by it from or for the account of a Fund. The Custodian shall make
payments of cash to, or for the account of, a Fund from such cash only:
(a) for the purchase of securities for the portfolio of a
Fund upon the delivery of such securities to the Custodian, registered
in the name of the Fund or of the nominee of the Custodian referred to
in Section 7 or in proper form for transfer;
(b) for the purchase or redemption of shares of common
stock of a Fund upon delivery thereof to Custodian, or upon proper
instructions from the Fund;
(c) for the payment of interest, dividends, taxes,
investment adviser's fees or operating expenses (including, without
limitation thereto, fees for legal, accounting, auditing and custodian
services and expenses for printing and postage);
(d) for payments in connection with the conversion,
exchange or surrender of securities owned or subscribed to by a Fund
held by or to be delivered to Custodian; or
(e) for other proper corporate purposes certified by
resolution of the Board of Directors of the Corporation, on behalf of a
Fund.
Before making any such payment, the Custodian shall receive
(and may rely upon) an officers' certificate requesting such payment
and stating that it is for a purpose permitted under the terms of
items (a), (b), (c) or (d) of this Subsection A, and also, in respect
of item (e), upon receipt of an officers' certificate specifying the
amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom such payment is to
be made, provided, however, that an officers' certificate need not
precede the disbursement of cash for the purpose of purchasing a money
market instrument, or any other security with same or next-day
settlement, if the President, a Vice President, the Secretary or the
Treasurer of the Corporation, on behalf of a particular Fund, issues
appropriate oral or facsimile instructions to the Custodian and an
appropriate officers' certificate is received by the Custodian within
two business days thereafter.
Regardless of the foregoing, if the Corporation's investment
advisor (the "Advisor") is a member of the Institutional Delivery
("ID") system and desires to affirm trades on behalf of a Fund with
the Depository Trust Company ("DTC") for those transactions affirmed
through the ID system; or (ii) has established an automated interface
to transmit trade authorization detail to the Custodian, then no
officers' certificate is required; provided that the appropriate
ID/DTC letter agreement or automated trade authorization agreement has
been executed by both the Advisor and the Custodian.
2
<PAGE> 3
B. The Custodian is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money received by the
Custodian for each Fund's account.
C. The Custodian shall, upon receipt of proper instructions, make
federal funds available to the Funds as of specified times agreed upon from
time to time by the Corporation, on behalf of the Funds, and the Custodian in
the amount of checks received in payment for shares of the Funds which are
deposited into the respective Fund's account.
4. Segregated Accounts
Upon receipt of proper instructions, the Custodian shall establish and
maintain a segregated account or accounts for and on behalf of each Fund, into
which account or accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to paragraph 14
hereof, (i) in accordance with the provisions of any agreement among the
Corporation, on behalf of a Fund or Funds, the Custodian and a broker-dealer
registered under the Exchange Act and a member of the National Association of
Securities Dealers, Inc. (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of the
Options Clearing Corporation and of any registered national securities exchange
(or the Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding escrow or
other arrangements in connection with transactions for a Fund, (ii) for the
purpose of segregating cash or securities in connection with options purchased,
sold or written for a Fund or commodity futures contracts or options thereon
purchased or sold for a Fund, (iii) for the purpose of compliance by the
Corporation or a Fund with the procedures required by any release or
interpretations of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment companies, and (iv)
as mutually agreed upon from time to time between the Corporation, on behalf of
a Fund or Funds, and the Custodian.
5. Transfer, Exchange, Redelivery, etc. of Securities
The Custodian shall have sole power to release or deliver any
securities of the Funds held by it pursuant to this Agreement. The Custodian
agrees to transfer, exchange or deliver securities held by it hereunder only:
(a) for sales of such securities for the account of a Fund upon
receipt by Custodian of payment therefore;
(b) when such securities are called, redeemed or retired or
otherwise become payable;
(c) for examination by any broker selling any such securities in
accordance with "street delivery" custom;
(d) in exchange for, or upon conversion into, other securities
alone or other securities and cash whether pursuant to any plan of merger,
consolidation, reorganization, recapitalization or readjustment, or otherwise;
3
<PAGE> 4
(e) upon conversion of such securities pursuant to their terms
into other securities;
(f) upon exercise of subscription, purchase or other similar
rights represented by such securities;
(g) for the purpose of exchanging interim receipts or temporary
securities for definitive securities;
(h) for the purpose of redeeming in kind shares of common stock of
a Fund upon delivery thereof to the Custodian; or
(i) for other proper corporate purposes.
As to any deliveries made by the Custodian pursuant to items (a), (b),
(d), (e), (f), and (g), securities or cash receivable in exchange therefore
shall be deliverable to the Custodian.
Before making any such transfer, exchange or delivery, the Custodian
shall receive (and may rely upon) an officers' certificate requesting such
transfer, exchange or delivery, and stating that it is for a purpose permitted
under the terms of items (a), (b), (c), (d), (e), (f), (g) or (h) of this
Section 5 and also, in respect of item (i), upon receipt of an officers'
certificate specifying the securities to be delivered, setting forth the
purpose for which such delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to whom delivery of
such securities shall be made, provided, however, that an officers' certificate
need not precede any such transfer, exchange or delivery of a money market
instrument, or any other security with same or next-day settlement, if the
President, a Vice President, the Secretary or the Treasurer of the Corporation,
on behalf of a particular Fund, issues appropriate oral or facsimile
instructions to the Custodian and an appropriate officers' certificate is
received by the Custodian within two business days thereafter.
Regardless of the foregoing, if the Advisor is a member of the ID
system and desires to affirm trades on behalf of a Fund with the DTC for those
transactions affirmed through the ID system; or (ii) has established an
automated interface to transmit trade authorization detail to the Custodian,
then no officers' certificate is required; provided that the appropriate ID/DTC
letter agreement or automated trade authorization agreement has been executed
by both the Advisor and the Custodian.
6. Custodian's Acts Without Instructions
Unless and until the Custodian receives an officers' certificate to
the contrary, the Custodian shall: (a) present for payment all coupons and
other income items held by it for the account of each Fund which call for
payment upon presentation, and hold the cash received by it upon such payment
for the account of the respective Fund; (b) collect interest and cash dividends
received, with notice to each Fund, for the account of the respective Fund; (c)
hold for the account of each Fund hereunder all stock dividends, rights and
similar securities issued with respect to any securities held by it hereunder;
and (d) execute, as agent on behalf of each Fund, all necessary ownership
certificates required by the Internal
4
<PAGE> 5
Revenue Code or the Income Tax Regulations of the United States Treasury
Department or under the laws of any state now or hereafter in effect, inserting
the Fund's name on such certificates as the owner of the securities covered
thereby, to the extent it may lawfully do so.
7. Registration of Securities
Except as otherwise directed by an officers' certificate, the
Custodian shall register all securities, except such as are in bearer form, in
the name of a registered nominee of the Custodian as defined in the Internal
Revenue Code and any Regulations of the Treasury Department issued hereunder or
in any provision of any subsequent federal tax law exempting such transaction
from liability for stock transfer taxes, and shall execute and deliver all such
certificates in connection therewith as may be required by such laws or
regulations or under the laws of any state. The Custodian shall use its best
efforts to the end that the specific securities held by it hereunder shall be
at all times identifiable in its records.
The Corporation shall from time to time furnish to the Custodian
appropriate instruments to enable the Custodian to hold or deliver in proper
form for transfer, or to register in the name of its registered nominee, any
securities which it may hold for the account of the Funds and which may from
time to time be registered in the name of a particular Fund.
8. Voting and Other Action
Neither the Custodian nor any nominee of the Custodian shall vote any
of the securities held hereunder by or for the account of any Fund, except in
accordance with the instructions contained in an officers' certificate. The
Custodian shall deliver, or cause to be executed and delivered, to the
Corporation all notices, proxies and proxy soliciting materials with relation
to such securities, such proxies to be executed by the registered holder of
such securities (if registered otherwise than in the name of a Fund), but
without indicating the manner in which such proxies are to be voted.
9. Transfer Tax and Other Disbursements
The Corporation, on behalf of the Funds, shall pay or reimburse the
Custodian from time to time for any transfer taxes payable upon transfers of
securities made hereunder, and for all other necessary and proper disbursements
and expenses made or incurred by the Custodian in the performance of this
Agreement.
The Custodian shall execute and deliver such certificates in
connection with securities delivered to it or by it under this Agreement as may
be required under the provisions of the Internal Revenue Code and any
Regulations of the Treasury Department issued thereunder, or under the laws of
any state, to exempt from taxation any exemptable transfers and/or deliveries
of any such securities.
10. Concerning Custodian
The Custodian shall be paid as compensation for its services pursuant
to this Agreement such compensation as may from time to time be agreed upon in
writing between the Corporation, on behalf of
5
<PAGE> 6
the Funds, and the Custodian. Until modified in writing, such compensation
shall be as set forth in Schedule B attached hereto.
The Custodian shall not be liable for any action taken in good faith
upon any certificate herein described or certified copy of any resolution of
the Board, and may rely on the genuineness of any such document which it may in
good faith believe to have been validly executed.
The Corporation, on behalf of the Funds, agrees to indemnify and hold
harmless the Custodian and its nominee from all taxes, charges, expenses,
assessments, claims and liabilities (including counsel fees) incurred or
assessed against it or by its nominee in connection with the performance of
this Agreement, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct. The
Custodian is authorized to charge the applicable account of a Fund for such
items. In the event of any advance of cash by the Custodian which results in
any overdraft of a Fund, which is a money market fund subject to Rule 2a-7
under the Investment Company Act, the Custodian is granted a security interest
in such Fund's assets limited to the extent of the overdraft.
11. Subcustodians
The Custodian is hereby authorized to engage another bank or trust
company as a Subcustodian for all or any part of the Corporation's assets, so
long as any such bank or trust company meets the requirements of the Investment
Company Act, as amended and the rules and regulations thereunder and provided
further that, if the Custodian utilizes the services of a Subcustodian, the
Custodian shall remain fully liable and responsible for any losses caused to
any of the Funds by the Subcustodian as fully as if the Custodian was directly
responsible for any such losses under the terms of the Custodian Agreement.
Notwithstanding anything contained herein, if the Corporation requires
the Custodian to engage specific Subcustodians for the safekeeping and/or
clearing of assets, the Corporation agrees to indemnify and hold harmless the
Custodian from all claims, expenses and liabilities incurred or assessed
against it in connection with the use of such Subcustodian in regard to the
Corporation's assets, except as may arise from its own negligent action,
negligent failure to act or willful misconduct.
12. Reports by Custodian
The Custodian shall furnish the Corporation periodically as agreed upon
with a statement summarizing all transactions and entries for the account of
each Fund. The Custodian shall furnish to the Corporation, at the end of every
month, a list of the securities held by each Fund, showing the aggregate cost
of each issue. The books and records of the Custodian pertaining to its
actions under this Agreement shall be open to inspection and audit at
reasonable times by officers of, and of auditors employed by, the Corporation.
13. Termination or Assignment
This Agreement may be terminated by the Corporation, on behalf of the
Funds, or by the Custodian, on ninety (90) days notice, given in writing and
sent by registered mail to the Custodian at P. O. Box 2054, Milwaukee,
Wisconsin 53201, or to the Corporation at 100 Heritage Reserve, Menomonee Falls,
Wisconsin 53051, as the case may be. Upon any termination of this Agreement,
pending appointment of a successor to the Custodian or a vote of the
shareholders of the Corporation to dissolve or
6
<PAGE> 7
to function without a custodian of its cash, securities and other property,
the Custodian shall not deliver cash, securities or other property of
the Corporation to the Corporation, but may deliver them to a bank or trust
company of its own selection, that meets the requirements of the Investment
Company Act as a Custodian for the Corporation to be held under terms similar
to those of this Agreement, provided, however, that the Custodian shall not be
required to make any such delivery or payment until full payment shall have
been made by the Corporation of all liabilities constituting a charge on or
against the properties then held by the Custodian or on or against the
Custodian, and until full payment shall have been made to the Custodian of all
its fees, compensation, costs and expenses, subject to the provisions of
Section 10 of this Agreement.
This Agreement may not be assigned by the Custodian without the consent
of the Corporation, authorized or approved by a resolution of its Board of
Directors.
14. Deposits of Securities in Securities Depositories
No provision of this Agreement shall be deemed to prevent the use by
the Custodian of a central securities clearing agency or securities depository,
provided, however, that the Custodian and the central securities clearing
agency or securities depository meet all applicable federal and state laws and
regulations, including the requirements of the Investment Company Act, and the
Board of Directors of the Corporation approves by resolution the use of such
central securities clearing agency or securities depository.
15. Records
To the extent that the Custodian in any capacity prepares or maintains
any records required to be maintained and preserved by the Corporation pursuant
to the provisions of the Investment Company Act, the Custodian agrees to make
any such records available to the Corporation upon request and to preserve such
records for the periods prescribed in Rule 31a-2 under the Investment Company
Act.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first written above.
Attest: Firstar Trust Company
____________________________________ ___________________________________
By: By:
Its: Its:
Attest: Strong <<Name>>, Inc.
____________________________________ ___________________________________
By: Ann E. Oglanian By: Lawrence A. Totsky
Its: Secretary Its: Vice President
7
<PAGE> 8
SCHEDULE A
The Fund(s) of the Corporation currently subject to this Agreement are as
follows:
Fund(s) Date of Addition
------- to this Agreement
-----------------
<<SERIES>> <<AGT DATE>>
Attest: Firstar Trust Company
______________________ ______________________________
By: By:
Its: Its:
Attest: Strong <<NAME>>, Inc.
_______________________ ______________________________
By: Ann E. Oglanian By: Lawrence A. Totsky
Its: Secretary Its: Vice President
<PAGE> 9
ADDENDUM TO SCHEDULE B
FIRSTAR TRUST COMPANY
MUTUAL FUND SERVICES
MUTUAL FUND CUSTODIAL AGENT SERVICE
ANNUAL FEE SCHEDULE FOR THE
STRONG MUTUAL FUNDS
EFFECTIVE APRIL 1, 1996 THROUGH MARCH 31, 1997
Annual fee on all Strong Mutual Funds
$500,000.00 BASE FEE ON TOTAL FUND FAMILY
Investment transactions (purchase, sale, exchange, tender,
redemption, maturity, receipt, delivery)
$ 7.00 per Depository Trust Company or Federal Reserve System
trade, automated and non-automated
$25.00 per definitive security (physical)
$ 8.50 per commercial paper trade
$50.00 per Euroclear
$ 6.00 per principal reduction on pass-through certificates
$35.00 per option/futures contract
$10.00 per variation margin transaction
$10.00 per Fed wire deposit or withdrawal
STRONG CAPITAL MANAGEMENT FIRSTAR TRUST COMPANY
By: /s/ Ronald A. Neville By: /s/ Joe D. Redwine
Its: Senior VP and CFO Its: First Vice President
Date: April 15, 1996 Date: April 4, 1996
<PAGE> 1
EXHIBIT 99.B8.2
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
FIRSTAR TRUST COMPANY
AND
THE STRONG FUNDS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Employment of Subcustodian 1
2. Powers and Duties of the Subcustodian
with respect to Property of the Funds
held by the Subcustodian 2
2.1 Safekeeping 2
2.2 Manner of Holding Securities 2
2.3 Registration 2
2.4 Purchases 3
2.5 Exchanges 4
2.6 Sales of Securities 5
2.7 Depositary Receipts 6
2.8 Exercise of Rights; Tender Offers 7
2.9 Stock Dividends, Rights, Etc. 7
2.10 Options 7
2.11 Borrowings 8
2.12 Demand Deposit Bank Accounts 9
2.13 Interest Bearing Call or Time Deposits 10
2.14 Futures Contracts 12
2.15 Foreign Exchange Transactions 13
2.16 Stock Loans 14
2.17 Collections 14
2.18 Dividends, Distributions and Redemptions 16
2.19 Proxies, Notices, Etc. 16
2.20 Nondiscretionary Details 17
2.21 Bills 17
2.22 Deposit of Fund Assets in Securities Systems 18
2.23 Other Transfers 20
2.24 Investment Limitations 21
2.25 Subcustodian Advances 21
2.26 Restricted Securities 22
2.27 Proper Instructions 24
2.28 Segregated Account 26
2.29 Opinion of Fund's Independent Certified
Public Accountants 27
2.30 Reports by Independent Certified Public Accountants 27
2.31 Proceeds from Shares Sold 27
3. Powers and Duties of the Subcustodian with
Respect to the Appointment of Secondary Subcustodians 28
4. Assistance by the Subcustodian as to Certain Matters 33
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
5. Powers and Duties of the Subcustodian with
Respect to its Role as Recordkeeping Agent 34
5.1 Records 34
5.2 Accounts 34
5.3 Access to Records 34
6. Standard of Care and Related Matters 35
6.1 Liability of the Subcustodian with
Respect to Proper Instructions;
Evidence of Authority; Etc. 35
6.2 Liability of the Subcustodian with
Respect to Use of Securities Systems
and Foreign Depositories 36
6.3 Liability of the Subcustodian with
respect to Secondary Subcustodians 37
6.4 Standard of Care; Liability;
Indemnification 38
6.5 Mitigation by Subcustodian 40
6.6 Expenses of the Custodian and the Funds 40
6.7 Liability for Past Records 41
6.8 Reimbursement of Disbursements, Etc. 41
6.9 Notice of Litigation; Right to Prosecute, Etc. 41
6.10 Security for Obligations to Subcustodian 42
6.11 Appointment of Agents 45
6.12 Powers of Attorney 45
7. Compensation of the Subcustodian 46
8. Termination; Successor Custodian/Subcustodian;
Additional Funds 46
9. Amendment; Waiver 48
10. Governing Law 48
11. Notices 48
12. Binding Effect 49
13. Severability 49
14. Counterparts 49
</TABLE>
<PAGE> 4
CUSTODIAN AGREEMENT
AGREEMENT made this 22nd day of December, 1993, between FIRSTAR TRUST
COMPANY (the "Custodian") and each of the Funds listed in Appendix B attached
hereto as said Exhibit may from time to time be revised (collectively, the
"Funds" individually, a "Fund") and Brown Brothers Harriman & Co, (the
"Subcustodian");
WITNESSETH: That in consideration of the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
1. Employment of Subcustodian: The Custodian and the Funds hereby
employ and appoint the Subcustodian as a subcustodian for the term and subject
to the provisions of this Agreement. The Subcustodian shall not be under any
duty or obligation to require a Fund to deliver to it any securities, funds or
other property owned by the Fund and shall have no responsibility or liability
for or on account of securities, funds or other property not so delivered. Each
Fund will deposit with the Subcustodian copies of its Declaration of Trust or
Certificate of Incorporation and By-Laws (or comparable documents) and all
amendments thereto, and copies of such votes and other proceedings of the
shareholders or Trustees or Directors of the Fund as may be necessary for or
convenient to the Subcustodian in the performance of its duties. The
Subcustodian shall maintain separate accounts and records for each of the Funds.
- 1 -
<PAGE> 5
2. Powers and Duties of the Subcustodian with respect to Property
of the Funds held by the Subcustodian: Except for securities, funds and other
property held by any Secondary Subcustodian appointed pursuant to the
provisions of Section 3 hereof or held by any Foreign Depository (as said term
is defined in Section 3) utilized by a Secondary Subcustodian, the Subcustodian
shall have and perform the following powers and duties with respect to
securities, funds and other property of the Funds:
2.1 Safekeeping - To keep safely the securities, funds and other
property of each Fund that have been delivered to the Subcustodian and, on
behalf of the Custodian and each Fund, from time to time to receive delivery of
securities and other property for safekeeping.
2.2 Manner of Holding Securities - To hold securities of each Fund
(1) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form, or (2) in book-entry
form by a Securities System (as said term is defined in Section 2.22) or a
Foreign Depository,
2.3 Registration - To hold registered securities of each Fund, with
or without any indication of fiduciary capacity, provided that securities are
held in an account of the Subcustodian containing only property of such Fund or
only property held as fiduciary or custodian for customers; provided that the
records of the Subcustodian shall indicate at all times the Funds or other
customers for which such securities and other
- 2 -
<PAGE> 6
property are held in such account and the respective interests therein.
2.4 Purchases - Upon receipt of proper instructions, as defined in
Section 2.27, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of a Fund, payment being made only
upon receipt of the securities (1) by the Subcustodian, or (2) by a clearing
corporation of a national securities exchange of which the Subcustodian is a
member, or (3) by a Securities System or a Foreign Depository. However, (i) in
the case of repurchase agreements entered into by a Fund, the Subcustodian (as
well as an Agent) may release funds to a Securities System, a Foreign
Depository or a Secondary Subcustodian prior to the receipt of advice from the
Securities System, Foreign Depository or Secondary Subcustodian that the
securities underlying such repurchase agreement have been transferred by
book-entry into the Account (as defined in Section 2.22) of the Subcustodian
(or such Agent) maintained with such Securities System or to the Foreign
Depository or Secondary Subcustodian, so long as such payment instructions to
the Securities System, Foreign Depository or Secondary Subcustodian include a
requirement that delivery is only against payment for securities, (ii) in the
case of foreign exchange contracts, options, time deposits, call account
deposits, currency deposits, and other deposits, contracts or options pursuant
to Sections 2.10, 2.72, 2.13, 2.14 and 2.15, the Subcustodian may make payment
therefor without receiving an
- 3 -
<PAGE> 7
instrument evidencing said deposits, contracts or options so long as such
payment instructions detail specific deposits, contracts or options to be
acquired, and (iii) in the case of securities as to which payment for the
securities and receipt of the instrument evidencing the securities ordinarily
take place in different locations or through separate parties, the Subcustodian
may make payment for such securities prior to delivery thereof only if such
payment is in accordance with the terms of the instrument representing the
security or the generally accepted practice of Institutional Clients (as
hereinafter defined) in the country or countries in which the settlement occurs
or the terms of the instrument representing the security, but in all events
subject to the standard of care set forth in Section 6 hereof. "Institutional
Clients" shall mean major commercial banks, corporations, insurance companies,
or substantially similar institutions, which, as a substantial part of their
business operations, purchase or sell securities and make use of custodial
services.
2.5 Exchanges - Upon receipt of proper instructions, to exchange
securities held by it for the account of a Fund for other securities in
connection with any reorganization, recapitalization, split-up of shares,
change of par value, conversion or other event relating to the securities or
the issuer of such securities and to deposit any such securities in accordance
with the terms of any reorganization or protective plan. Without proper
instructions, the Subcustodian may
- 4 -
<PAGE> 8
surrender securities in temporary form for definitive securities, may surrender
securities for transfer into an account as permitted in Section 2.3, and may
surrender securities for a different number of certificates or instruments
representing the same number of shares or same principal amount of
indebtedness, provided the securities to be issued are to be delivered to the
Subcustodian.
2.6 Sales of Securities - Upon receipt of proper instructions, to
make delivery of securities which have been sold for the account of a Fund, but
only against payment therefor (1) in cash, by a certified check, bank cashier's
check, bank credit, or bank wire transfer, or (2) by credit to the account of
the Subcustodian with a clearing corporation of a national securities exchange
of which the Subcustodian is a member, or (3) by credit to the account of the
Subcustodian or an Agent of the Subcustodian with a Securities System or a
Foreign Depository. Notwithstanding the foregoing: (i) in the case of delivery
of physical certificates or instruments representing securities, the
Subcustodian may make delivery to the broker buying the securities, against
receipt therefor, for examination in accordance with "street delivery" custom,
provided that the payment therefor is to be made to the Subcustodian (which
payment may be made by a broker's check) or that such securities are to be
returned to the Subcustodian, and (ii) in the case of securities referred to in
clause (iii) of Section 2.4, the Subcustodian may make settlement, including
with respect to the
- 5 -
<PAGE> 9
form of payment, in accordance with the terms of the instrument representing
the security or the generally accepted trade practice of Institutional Clients
in the country or countries in which the settlement occurs, but in all events
subject to the standard of care set forth in Section 6 hereof, provided that
the Subcustodian shall have taken all reasonable steps to ensure prompt
collection of the payment for, or return of, such securities by the broker or
its clearing agent and provided further that the Subcustodian shall not be
responsible for the selection of a broker or clearing agent that fails or is
unable to perform.
2.7 Depositary Receipts - Upon receipt of proper instructions, to
instruct a Secondary Subcustodian or an Agent to surrender securities to the
depositary used by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter collectively referred to as "ADRs") for such
securities against a written receipt therefor adequately describing such
securities and written evidence satisfactory to the Secondary Subcustodians or
Agent that the depositary has acknowledged receipt of instructions to issue
with respect to such securities ADRs in the name of the Subcustodian, or a
nominee of the Subcustodian, for delivery to the Subcustodian in Boston,
Massachusetts, or at such other place as the Subcustodian may from time to time
designate.
Upon receipt of proper instructions, to surrender ADRs to the issuer
thereof against a written receipt therefor adequately
- 6 -
<PAGE> 10
describing the ADRs surrendered and written evidence satisfactory to the
Subcustodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depositary to deliver the securities underlying such
ADRs to a Secondary Subcustodian or an Agent.
2.8 Exercise of Rights; Tender Offers - Upon timely receipt of
proper instructions, to promptly deliver to the issuer or trustee thereof, or
to the agent of either, warrants, puts, calls, rights or similar securities for
the purpose of being exercised or sold, provided that the new securities and
cash, if any, acquired by such action are to be delivered to the Subcustodian,
and, upon receipt of proper instructions, to promptly deposit securities upon
invitations for tenders of securities, provided that the consideration is to be
paid or delivered or the tendered securities are to be returned to the
Subcustodian.
2.9 Stock Dividends, Rights, Etc. - To receive and collect all
stock dividends, rights and other items of like nature; and to deal
with the same pursuant to proper instructions relative thereto.
2.10 Options - Upon receipt of proper instructions or upon
receipt of instructions given pursuant to any agreement relating to an option
or as otherwise provided in any such agreement to (i) receive and retain, to
the extent provided to the Subcustodian, confirmations or other documents
evidencing the purchase, sale or writing of an option of any type on or in
- 7 -
<PAGE> 11
respect of a security, securities index or similar form of property by a Fund;
(ii) deposit and maintain in a segregated account, either physically or by
book-entry in a Securities System or Foreign Depository or with a broker,
dealer or other entity, securities, funds or other property in connection with
options transactions entered into by a Fund; (iii) transfer securities, funds
or other property to a Securities System, Foreign Depository, broker, dealer or
other entity, as margin (including variation margin) or other security for a
Fund's obligations in respect of any option; and (iv) pay, release and/or
transfer such securities, funds or other property in accordance with a notice
or other communication evidencing the expiration, termination or exercise of or
default under any such option furnished by The Options Clearing Corporation, by
the securities or options exchange on which such option is traded or by such
broker, dealer or other entity as may be responsible for handling such options
transaction or have authority to give such notice or communication. The
Subcustodian shall not be responsible for the sufficiency of property held in
any segregated account established in compliance with applicable margin
maintenance requirements or the performance of the other terms of any agreement
relating to an option. Notwithstanding the foregoing, options on futures
contracts and options to purchase and sell foreign currencies shall be governed
by Sections 2.14 and 2.15.
2.11 Borrowings - Upon receipt of proper instructions, to
- 8 -
<PAGE> 12
deliver securities of a Fund to lenders or their agents as collateral for
borrowings effected by the Fund, provided that such borrowed money is payable
by the lender to or upon the Subcustodian's order as Subcustodian for the Fund.
2.12 Demand Deposit Bank Accounts - To open and operate an account or
accounts in the name of each Fund, subject only to draft or order by the
Custodian or a Fund, and to hold in such account or accounts as a deposit
accepted on the Subcustodian's books cash, including foreign currency, received
for the account of such Fund other than cash held as deposits with Banking
Institutions in accordance with the following paragraph. The responsibilities
of the Subcustodian for cash, including foreign currency, of a Fund accepted on
the Subcustodian's books as a deposit shall be that of a U. S. bank for a
similar deposit.
If and when authorized by proper instructions, the Subcustodian may open
and operate an additional account(s) in such other banks or trust companies as
may be designated by the Custodian or a Fund in such instructions (any such
bank or trust company so designated by the Custodian and a Fund being referred
to hereafter as a "Banking Institution"), and may deposit cash, including
foreign currency, of such Fund in such account or accounts, provided that such
account(s) (hereinafter collectively referred to as "demand deposit bank
accounts") shall be in the name of the Subcustodian or a nominee of the
Subcustodian for the account of such Fund or for the account of the
Subcustodian's customers generally and shall be subject only to the
- 9 -
<PAGE> 13
Subcustodian's draft or order; provided that any such demand deposit bank
account shall contain only property held by the Subcustodian as a fiduciary or
custodian for the Fund and/or other customers and that the records of the
Subcustodian shall indicate at all times such Fund and/or other customers for
which such funds are held in such account and the respective interests therein.
Such demand deposit accounts may be opened with Banking Institutions in the
United States and in other countries and may be denominated in either U. S.
Dollars or other currencies as the Custodian or a Fund may determine. The
records for each such account will be maintained by the Subcustodian but the
deposits in any such account shall not constitute a deposit liability of the
Subcustodian. All such deposits, including with Secondary Subcustodians, shall
be deemed to be portfolio securities of a Fund and accordingly the
responsibility of the Subcustodian therefor shall be the same as and no greater
than the Subcustodian's responsibility in respect of other portfolio securities
of the Fund. The authorization by Custodian or a Fund to appoint a Secondary
Subcustodian as such shall also constitute a proper instruction to open a
demand deposit bank account subject to the provisions of this paragraph with
such Secondary Subcustodian.
2.13 Interest Bearing Call or Time Deposits - To place interest
bearing fixed term and call deposits with such banks and in such amounts as the
Custodian or a Fund may authorize pursuant to proper instructions. Such
deposits may be placed with the
- 10 -
<PAGE> 14
Subcustodian or with Secondary Subcustodians or other Banking Institutions as
the Custodian or a Fund may determine, in the name of the Subcustodian or a
nominee of the Subcustodian for the account of the Fund or the account of the
Subcustodian's customers generally and subject only to the Subcustodian's draft
or order; provided that any such deposit shall be held in an account containing
only property held by the Subcustodian as a fiduciary or custodian for the Fund
and/or other customers and that the records of the Subcustodian shall indicate
at all times such Fund and/or other customers for which such funds are held in
such account and the respective interests therein. Deposits may be denominated
in U. S. Dollars or other currencies and need not be evidenced by the issuance
or delivery of a certificate to the Subcustodian, provided that the
Subcustodian shall include in its records with respect to the assets of a Fund
appropriate notation as to the amount and currency of each such deposit, the
accepting Banking Institution and other appropriate details, and shall retain
such forms of advice or receipt evidencing the deposit, if any, as may be
forwarded to the Subcustodian by the Banking Institution. Funds, other than
those accepted on the Subcustodian's books as a deposit, but including those
placed with Secondary Subcustodians, shall be deemed portfolio securities of a
Fund and the responsibilities of the Subcustodian therefor shall be the same as
those for demand deposit bank accounts placed with other banks, as described in
the second paragraph of Section 2.12 of this Agreement. The responsibility
- 11 -
<PAGE> 15
of the Subcustodian for funds accepted on the Subcustodian's books as a deposit
shall be that of a U. S. bank for a similar deposit.
2.14 Futures Contracts - Upon receipt of proper instructions or upon
receipt of instructions given pursuant to any agreement relating to a futures
contract or an option thereon or as otherwise provided in any such agreement,
to (i) receive and retain, to the extent provided to the Subcustodian,
confirmations or other documents evidencing the purchase or sale of a futures
contract or an option on a futures contract by a Fund; (ii) deposit and
maintain in a segregated account, either physically or by book-entry in a
Securities System or Foreign Depository, for the benefit of any futures
commission merchant, or pay to such futures commission merchant, securities,
cash or other property designated by the Custodian or a Fund as initial,
maintenance or variation "margin" deposits intended to secure the Fund's
performance of its obligations under any futures contract purchased or sold or
any option on a futures contract written, purchased or sold by the Fund, in
accordance with the provisions of any agreement relating thereto or the rules
of the Commodity Futures Trading Commission and/or any contract market or any
similar organization on which such contract or option is traded; and (iii) pay,
release and/or transfer securities, cash or other property into or out of such
margin accounts only in accordance with any such agreement or rules. The
Subcustodian shall not be responsible for the sufficiency of property held in
any
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<PAGE> 16
segregated account established in compliance with applicable margin maintenance
requirements or the performance of the other terms of any agreement relating to
a futures contract or an option thereon.
2.15 Foreign Exchange Transactions - Pursuant to proper instructions,
to settle foreign exchange contracts or options to purchase and sell foreign
currencies for spot and future delivery on behalf and for the account of a Fund
with such currency brokers or Banking Institutions, including Secondary
Subcustodians, as the Custodian or the Fund may direct pursuant to proper
instructions. The Subcustodian shall be responsible for the transmission of
cash and instructions to and from the currency broker or Banking Institution
with which the contract or option is made, the safekeeping of all certificates
and other documents and agreements evidencing or relating to such foreign
exchange transactions as the Subcustodian may receive and the maintenance of
proper records as set forth in Section 5.1. In connection with such
transactions, the Subcustodian is authorized to make free outgoing payments of
cash in the form of U. S. Dollars or foreign currency without receiving
confirmation of a foreign exchange contract or option or confirmation that the
countervalue currency completing the foreign exchange contract has been
delivered or received or that the option has been delivered or received. Each
Fund accepts full responsibility for its use of third-party foreign exchange
dealers and for execution of said foreign exchange contracts and options and
understands
- 13 -
<PAGE> 17
that the Fund shall be responsible for any and all costs and interest charges
which may be incurred by the Fund or the Subcustodian as a result of the
failure or delay of third parties to deliver foreign exchange.
Alternatively, such transactions may be undertaken by the Subcustodian
as principal, if instructed by a Fund.
Foreign exchange contracts and options, other than those executed with
the Subcustodian as principal, but including those executed with Secondary
Subcustodians, shall be deemed to be portfolio securities of a Fund and the
responsibility of the Subcustodian therefor shall be the same as and no greater
than the Subcustodian's responsibility in respect of other portfolio securities
of the Fund. The responsibility of the Subcustodian with respect to foreign
exchange contracts and options executed with the Subcustodian as principal
shall be that of a U. S. bank with respect to a similar contract or option.
2.16 Stock Loans - Upon receipt of proper instructions, to deliver
securities of a Fund, in connection with loans of securities by the Fund, to
the borrower thereof prior to receipt of the collateral, if any, for such
borrowing, provided that for stock loans secured by cash collateral the
Subcustodian's instructions to any Securities System holding such securities
require that the Securities System may deliver the securities to the borrower
thereof only upon receipt of the collateral for such borrowing.
2.17 Collections - (i) To collect and receive all income,
- 14 -
<PAGE> 18
payments of principal and other payments with respect to the securities held
hereunder, and in connection therewith to deliver the certificates or other
instruments representing the securities to the issuer thereof or its agent when
securities are called, redeemed, retired or otherwise become payable; provided,
that the payment is to be made in such form and manner and at such time, which
may be after delivery by the Subcustodian of the instrument representing the
security, as is in accordance with the terms of the instrument representing the
security, or such proper instructions as the Subcustodian may receive, or
governmental regulations, the rules of Securities Systems, Foreign Depositories
or other U.S. or foreign securities depositories and clearing agencies or, with
respect to securities referred to in clause (iii) of Section 2.4, in accordance
with the terms of the instrument representing the security or the generally
accepted practice of Institutional Clients in the country or countries in which
the settlement occurs, but in all events subject to the standard of care set
forth in Section 6 hereof, provided that the Subcustodian shall have taken all
reasonable steps to ensure prompt collection of the payment for, or return of,
such securities by the broker or its clearing agent and provided further that
the Subcustodian shall not be responsible for the selection of a broker or
clearing agent that fails or is unable to perform; (ii) to execute ownership
and other certificates and affidavits for all federal and state tax purposes in
connection with receipt of income, principal or other payments with respect
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<PAGE> 19
to securities of a Fund or in connection with transfer of securities; and (iii)
pursuant to proper instructions to take such other actions with respect to
collection or receipt of funds or transfer of securities which involve an
investment decision.
2.18 Dividends, Distributions and Redemptions - Upon receipt of
proper instructions from the Custodian or a Fund, or upon receipt of
instructions from the Fund's shareholder servicing agent or agent with
comparable duties (the "Shareholder Servicing Agent") (given by such person or
persons and in such manner on behalf of the Shareholder Servicing Agent as the
Custodian or the Fund shall have authorized), the Subcustodian shall release
securities, funds or other property to the Shareholder Servicing Agent or other
wise apply securities, funds or other property, insofar as available, for the
payment of dividends or other distributions to Fund shareholders. Upon receipt
of proper instructions from the Custodian or the Fund, or upon receipt of
instructions from the Shareholder Servicing Agent (given by such person or
persons and in such manner on behalf of the Shareholder Servicing Agent as the
Custodian or the Fund shall have authorized), the Subcustodian shall release
securities, funds or other property, insofar as available, to the Shareholder
Servicing Agent or as such Agent shall otherwise instruct for payment to Fund
shareholders who have delivered to such Agent a request for repurchase or
redemption of their shares of the Fund.
2.19 Proxies, Notices, Etc. - Promptly to deliver or mail
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<PAGE> 20
to the Custodian or a Fund all forms of proxies and all notices of meetings and
any other notices or announcements affecting or relating to securities owned by
the Fund that are received by the Subcustodian, and upon receipt of proper
instructions, to promptly execute and deliver or cause its nominee to promptly
execute and deliver such proxies or other authorizations as may be required.
Neither the Subcustodian nor its nominee shall vote upon any of such securities
or execute any proxy to vote thereon or give any consent or take any other
action with respect thereto (except as otherwise herein provided) unless
ordered to do so by proper instructions.
2.20 Nondiscretionary Details - Without the necessity of express
authorization from the Custodian or a Fund, (1) to attend to all
nondiscretionary details in connection with the sale, exchange, substitution,
purchase, transfer or other dealings with securities, funds or other property
of the Fund held by the Subcustodian except as otherwise directed from time to
time by the Custodian or the Directors or Trustees of the Fund, and (2) to
make payments to itself or others for minor expenses of handling securities or
other similar items relating to the Subcustodian's duties under this Agreement,
provided that all such payments shall be accounted for to a Fund.
2.21 Bills - Upon receipt of proper instructions, to pay or cause to
be paid, insofar as funds are available for the purpose, bills, statements and
other obligations of a Fund (including but not limited to interest charges,
taxes, management
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<PAGE> 21
fees, compensation to Fund officers and employees, and other operating expenses
of a Fund).
2.22 Deposit of Fund Property in Securities Systems - The
Subcustodian may deposit and/or maintain securities owned by a Fund in (i) The
Depository Trust Company, (ii) the Participants Trust Company, (iii) any
book-entry system as provided in Subpart O of Treasury Circular No. 300, 31 CFR
306, Subpart B of 31 CFR Part 350, or the book-entry regulations of federal
agencies substantially in the form of Subpart O, or (iv) any other domestic
clearing agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934 which acts as a securities
depository and whose use the Custodian or the Fund has previously approved in
writing (each of the foregoing being referred to in this Agreement as a
"Securities System"). Utilization of a Securities System shall be in
accordance with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
1) The Subcustodian may deposit and/or maintain Fund securities, either
directly or through one or more Agents appointed by the Subcustodian (provided
that any such agent shall be qualified to act as a custodian of a Fund pursuant
to the Investment Company Act of 1940 and the rules and regulations
thereunder), in a Securities System provided that such securities are
represented in an account ("Account") of the Subcustodian or such Agent in the
Securities System which shall not include any
- 18 -
<PAGE> 22
assets of the Subcustodian or Agent other than property held as a fiduciary,
custodian, or otherwise for customers;
2) The records of the Subcustodian with respect to securities of a Fund
which are maintained in a Securities System shall identify by book-entry those
securities belonging to the Fund;
3) The Subcustodian shall pay for securities purchased for the account
of a Fund upon (i) receipt of advice from the Securities System that such
securities have been transferred to the Account, and (ii) the making of an
entry on the records of the Subcustodian to reflect such payment and transfer
for the account of the Fund. The Subcustodian shall transfer securities sold
for the account of a Fund upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Subcustodian to reflect such
transfer and payment for the account of the Fund. Copies of all advices from
the Securities System of transfers of securities for the account of a Fund
shall identify the Fund, be maintained for a Fund by the Subcustodian or an
Agent as referred to above, and be provided to the Custodian or the Fund at its
request. The Subcustodian shall furnish the Custodian or a Fund confirmation
of each transfer to or from the account of the Fund in the form of a written
advice or notice and shall furnish to the Custodian or the Fund copies of daily
transaction sheets reflecting each day's transactions in the Securities System
for the account of the Custodian or the Fund on the next business day;
- 19 -
<PAGE> 23
4) The Subcustodian shall provide the Custodian or a Fund with any
report obtained by the Subcustodian or any Agent as referred to above on the
Securities System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the Securities System; and
the Subcustodian and such Agents shall send to the Custodian or the Fund such
reports on their own systems of internal accounting control as the Custodian or
the Fund may reasonably request from time to time; and
5) At the written request of the Custodian or the Fund, the Subcustodian
will terminate the use of any such Securities System on behalf of the Fund as
promptly as practicable.
2.23 Other Transfers - Upon receipt of proper instructions, to deliver
securities, funds and other property of a Fund to a Secondary Subcustodian or
another custodian for the Fund as necessary to effect transactions authorized
by proper instructions and upon receipt of proper instructions, to deliver
securities, funds and other property of a Fund to a Secondary Subcustodian or
another custodian of the Fund; and, upon receipt of proper instructions, to
make such other disposition of securities, funds or other property of a Fund in
a manner other than or for purposes other than as enumerated elsewhere in this
Agreement, provided that the instructions relating to such disposition shall
state the amount of securities to be delivered and the name of the person or
persons to whom delivery is to be made.
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<PAGE> 24
2.24 Investment Limitations - In performing its duties generally, and
more particularly in connection with the purchase, sale and exchange of
securities made by or for a Fund, the Subcustodian may assume unless and until
notified in writing to the contrary that proper instructions received by it are
not in conflict with or in any way contrary to any provisions of the Fund's
Declaration of Trust or Certificate of Incorporation or By-Laws (or comparable
documents) or votes or proceedings of the shareholders or Trustees or Directors
of the Fund. The Subcustodian shall in no event be liable to the Custodian or
any Fund and shall be indemnified by the Custodian and the Fund for any
violation which occurs in the course of carrying out instructions given by the
Custodian or the Fund of any investment limitations to which the Fund is
subject or other limitations with respect to the Fund's powers to make
expenditures, encumber securities, borrow or take similar actions affecting the
Fund.
2.25 Subcustodian Advances - In the event that the Subcustodian is
directed by proper instructions to make any payment or transfer of funds on
behalf of a Fund for which there would be, at the close of business on the date
of such payment or transfer, insufficient funds held by the Subcustodian on
behalf of the Fund, the Subcustodian may, in its discretion without further
proper instructions, provide an advance ("Advance") to the Fund in an amount
sufficient to allow the completion of the transaction by reason of which such
payment or transfer of funds is to be made. In addition, in the event the
Subcustodian is
- 21 -
<PAGE> 25
directed by proper instructions to make any payment or transfer of funds on
behalf of a Fund as to which it is subsequently determined that the Fund has
overdrawn its cash account with the Subcustodian as of the close of business on
the date of such payment or transfer, said overdraft shall constitute an
Advance. Any Advance shall be payable by the Fund or the Custodian on demand by
Subcustodian, unless otherwise agreed by the Custodian or the Fund and the
Subcustodian, and shall accrue interest from the date of the Advance to the
date of payment by the Fund or the Custodian at a rate agreed upon in writing
from time to time by the Subcustodian and the Custodian or the Fund. It is
understood that any transaction in respect of which the Subcustodian shall have
made an Advance, including but not limited to a foreign exchange contract or
transaction in respect of which the Subcustodian is not acting as a principal,
is for the account of and at the risk of a Fund, and not, by reason of such
Advance, deemed to be a transaction undertaken by the Subcustodian for its own
account and risk. The Subcustodian and each Fund acknowledge that the purpose
of Advances is to finance temporarily the purchase or sale of securities for
prompt delivery in accordance with the settlement terms of such transactions or
to meet emergency expenses not reasonably foreseeable by the Fund. The
Subcustodian shall promptly notify a Fund of any Advance. Such notification
shall be sent by facsimile transmission or in such other manner as such Fund
and the Subcustodian may agree.
2.26 Restricted Securities - In the case of a "restricted
- 22 -
<PAGE> 26
security", the Custodian or the Fund shall have the responsibility to provide
to or obtain for the Subcustodian, the issuer of the security or other
appropriate third party any necessary documentation, including without
limitation, legal opinions or consents, and to take any necessary actions
required in connection with the registration of restricted securities in the
manner provided in Section 2.3 upon acquisition thereof by the Fund or required
in connection with any sale or other disposition thereof by the Fund. Upon
acquisition and until so registered, the Subcustodian shall use its best
efforts to service such restricted securities (including, without limitation,
the receipt and collection of cash and stock dividends, rights and other items
of like nature); to exercise in a timely manner any right in respect of any
restricted security; and to take any action in a timely manner in respect of
any other type of corporate action relating to a restricted security. The
Subcustodian shall not have responsibility for the inability of a Fund to sell
or otherwise transfer in a timely manner any restricted security in the absence
of any such documentation or action to be provided, obtained or taken by the
Custodian or the Fund or for the Subcustodian's inability to take in a timely
manner any of the actions referred to in the preceeding sentence provided that
such inability of the Custodian or the Fund to sell or otherwise transfer
restricted securities pursuant to this Section 2.26 or the Subcustodian's
inability to take the aforesaid actions is not caused by the negligence,
misfeasance or
- 23 -
<PAGE> 27
misconduct of the Subcustodian or its nominees. At such time as the
Subcustodian shall receive any restricted security, regardless of when it shall
be registered as aforesaid, the Custodian or the Fund shall also deliver to the
Subcustodian a term sheet summarizing those rights, restrictions or other
matters of which the Subcustodian should have knowledge, such as exercise
periods, expiration dates and payment dates, in order to assist the
Subcustodian in servicing such securities. As used herein, the term
"restricted security" shall mean a security which is subject to restrictions on
transfer, whether by reason of contractual restrictions or federal, state or
foreign securities or similar laws, or a security which has special rights or
contractual features which do not apply to publicly-traded shares of, or
comparable interests representing, such security.
2.27 Proper Instructions - Proper instructions shall mean a tested
telex or a swift message from the Custodian or a Fund or a written request,
direction, instruction or certification signed or initialled on behalf of the
Custodian or the Fund by two or more persons as the Custodian or the Board of
Trustees or Directors of the Fund shall have from time to time authorized,
provided, however, that no such instructions directing the delivery of
securities or the payment of funds to an authorized signatory of the Custodian
or the Fund shall be signed by such person. Those persons authorized to give
proper instructions may be identified by the Custodian or the Fund's Board of
Trustees or
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<PAGE> 28
Directors by name, title or position and will include at least one officer
empowered by the Custodian or the Board to name other individuals who are
authorized to give proper instructions on behalf of the Custodian or the Fund.
Telephonic or other oral instructions or instructions given by facsimile
transmission may be given by any one of the above persons and will be
considered proper instructions if the Subcustodian reasonably believes them to
have been given by a person authorized to give such instructions with respect
to the transaction involved. Oral instructions will be confirmed by tested
telex or in writing in the manner set forth above but the lack of such
confirmation shall in no way affect any action taken by the Subcustodian in
reasonable reliance upon such oral instructions. The Custodian and each Fund
authorizes the Subcustodian to tape record any and all telephonic or other oral
instructions given to the Subcustodian by or on behalf of the Custodian or the
Fund (including any of their respective officers, Directors, Trustees,
employees or agents or any investment manager or adviser of the Fund or person
or entity with similar reponsibilities which is authorized to give proper
instructions on behalf of the Custodian or the Fund to the Subcustodian).
Proper instructions may relate to specific transactions or to types or classes
of transactions, and may be in the form of standing instructions.
Proper instructions may include communications effected directly between
electromechanical or electronic devices or systems, in addition to tested
telex, provided that the Custodian
- 25 -
<PAGE> 29
or the Fund and the Subcustodian agree to the use of such device or system.
2.28 Segregated Account - The Subcustodian shall upon receipt of
proper instructions establish and maintain on its books a segregated account or
accounts for and on behalf of each Fund, into which account or accounts may be
transferred cash and/or securities of the Fund, including securities maintained
by the Subcustodian pursuant to Section 2.22 hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Subcustodian and/or Custodian
and a broker-dealer registered under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc. (or any futures
commission merchant registered under the Commodity Exchange Act) relating to
compliance with the rules of the Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Fund, (ii) for purposes of segregating cash or securities
in connection with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund, (iii) for
the purposes of compliance by the Fund with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment
- 26 -
<PAGE> 30
companies, or (iv) as mutually agreed from time to time between the Custodian
or the Fund and the Subcustodian.
2.29 Opinion of Fund's Independent Certified Public Accountants - The
Subcustodian shall take all reasonable action as a Fund may request to obtain
from year to year favorable opinions from the Fund's independent certified
public accountants with respect to the Subcustodian's activities hereunder in
connection with the preparation of the Fund's Securities and Exchange
Commission registration statement and all amendments thereto and the Fund's
Form N-SAR or other periodic reports to the Securities and Exchange Commission
and with respect to any other requirements of the Securities and Exchange
Commission.
2.30 Reports by Independent Certified Public Accountants - At the
request of a Fund, the Subcustodian shall deliver to the Fund a written report
prepared by the Subcustodian's independent certified public accountants with
respect to the services provided by the Subcustodian under this Agreement,
including, without limitation, the Subcustodian's accounting system, internal
accounting control and procedures for safeguarding cash, securities and other
property, including cash, securities and other property deposited and/or
maintained in a Securities System or with a Secondary Subcustodian. Such
report shall be sufficient scope and in sufficient detail as may reasonably be
required by a Fund and as may reasonably be obtained by the Subcustodian.
2.31 Proceeds from Shares Sold - The Subcustodian shall
- 27 -
<PAGE> 31
receive funds representing cash payments received for Fund shares issued or
sold from time to time by a Fund, and shall promptly credit such funds to the
account of the applicable Fund. The Subcustodian shall promptly notify such
Fund of the Subcustodian's receipt of cash in payment for shares issued by the
Fund by facsimile transmission or in such other manner as the Fund and
Subcustodian may agree in writing. Upon receipt of proper instructions, the
Subcustodian shall: (a) deliver all federal funds received by the Subcustodian
in payment for Fund shares in payment for such investments and at the time
agreed upon by the Subcustodian and the relevant Fund; and (b) make federal
funds available to such Fund as of specified times agreed upon from time to
time by the Fund and the Subcustodian, in the amount of checks received in
payment for Fund shares that are deposited in the account of the Fund.
3. Powers and Duties of the Subcustodian with Respect to the
Appointment of Secondary Subcustodians: With regard to the selection of a
Secondary Subcustodian or Foreign Depository pursuant to this Section 3, the
Subcustodian may, at any time and from time to time; appoint, subject to
approval of the relevant Fund or Funds: (i) any bank, trust company or other
entity meeting the requirements of an "eligible foreign custodian" under
Section 17(f) of the Investment Company Act of 1940 and the rules and
regulations thereunder or by order of the Securities and Exchange Commission
exempted therefrom, or (ii) any bank as defined in Section 2(a)(5) of the
Investment Company Act of 1940
- 28 -
<PAGE> 32
meeting the requirements of a custodian under Section 17(f) of the Investment
Company Act of 1940 and the rules and regulations thereunder. The Custodian
and each Fund hereby authorize and instruct the Subcustodian to hold
securities, funds and other property of the Fund which are maintained outside
the United States at subcustodians appointed pursuant to the provisions of this
Section 3 (a "Secondary Subcustodian"). The Custodian and each Fund shall
approve in writing (1) the appointment of each Secondary Subcustodian and the
subcustodian agreement to be entered into between such Secondary Subcustodian
and the Subcustodian, and (2) if the Secondary Subcustodians is organized under
the laws of a country other than the United States, the country or countries in
which the Secondary Subcustodians is authorized to hold securities, funds and
other property of the Fund. The Custodian and each Fund hereby further
authorize and instruct the Subcustodian and any Secondary Subcustodian to
utilize such securities depositories located outside the United States which
are approved in writing by the Custodian and the Fund to hold securities, funds
and other property of the Fund (a "Foreign Depository"). Upon such approval by
the Custodian and the Fund, the Subcustodian is authorized on behalf of the
Custodian and the Fund to notify each Secondary Subcustodian of its appointment
as such.
Those Secondary Subcustodians, and the countries where and the Foreign
Depositories through which they or the Subcustodian may hold securities, funds
and other property of a Fund which the
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<PAGE> 33
Custodian and each Fund has approved to date are set forth on Appendix A
hereto. The Custodian shall monitor the performance and financial condition of
the Subcustodians, Secondary Subcustodians and Foreign Depositories to the
extent practicable and shall promptly report to each Fund any material adverse
facts of which it becomes aware. Upon request of a Fund, the Custodian shall
deliver to the Fund a certificate stating: (i) the identity of each
Subcustodian or Secondary Subcustodian then acting on behalf of the Custodian,
as identified in Appendix A and as such Appendix may be amended from time to
time; (ii) the countries in which and the securities depositories and clearing
agents through which each such Subcustodian or Secondary Subcustodian is then
holding securities, funds and other property of the Fund; and (iii) such other
information as may be requested by the Fund and as the Custodian shall be
reasonably able to obtain to evidence compliance with Rule 17f-5 under the
Investment Company Act of 1940. Upon approval by a Fund in accordance with
this Section 3, Appendix A shall be amended from time to time as Secondary
Subcustodians, and/or countries and/or Foreign Depositories are changed, added
or deleted. The Custodian or the Fund shall be responsible for informing the
Subcustodian sufficiently in advance of a proposed investment which is to be
held in a country not listed on Appendix A, in order that there shall be
sufficient time for the Custodian and the Fund to give the approval required by
the preceding paragraph and for the Subcustodian to put the appropriate
arrangements in
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<PAGE> 34
place with such Secondary Subcustodian, including negotiation of a subcustodian
agreement and submission of such subcustodian agreement to the Custodian and
the Fund for approval.
If a Fund shall have invested in a security to be held in a country
before the foregoing procedures have been completed, such security shall be
held by such agent as the Subcustodian may appoint. In any event, the
Subcustodian shall be liable to the Custodian and the Fund for the actions of
such agent if and only to the extent the Subcustodian shall have recovered from
such agent for any damages caused the Custodian and/or the Fund by such agent.
At the request of the Custodian or a Fund, the Subcustodian agrees to remove
any securities held on behalf of the Fund by such agent, if practical, to an
approved Secondary Subcustodian. Under such circumstances the Subcustodian
will collect income and respond to corporate actions on a best efforts basis.
With respect to securities and funds held by a Secondary Subcustodian,
either directly or indirectly (including by a Foreign Depository or foreign
clearing agency) or by a Foreign Depository or foreign clearing agency utilized
by the Subcustodian, notwithstanding any provision of this Agreement to the
contrary, payment for securities purchased and delivery of securities sold may
be made prior to receipt of the securities or payment, respectively, and
securities or payment may be received in a form, in accordance with
governmental regulations, rules of Foreign Depositories and foreign clearing
agencies, or generally accepted trade practice in the applicable local market.
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<PAGE> 35
In the event that any Secondary Subcustodian appointed pursuant to the
provisions of this Section 3 fails to perform any of its obligations under the
terms and conditions of the applicable subcustodian agreement, the Subcustodian
shall use its best efforts to cause such Secondary Subcustodian to perform such
obligations. In the event that the Subcustodian is unable to cause such
Secondary Subcustodian to perform fully its obligations thereunder, the
Subcustodian shall forthwith upon the Custodian or a Fund's request terminate
such Secondary Subcustodian as a Secondary Subcustodian for such Fund in
accordance with the termination provisions under the applicable subcustodian
agreement and, if necessary or desirable, appoint another subcustodian in
accordance with the provisions of this Section 3. At the election of the
Custodian or a Fund, it shall have the right to enforce, to the extent
permitted by the subcustodian agreement and applicable law, the Subcustodian's
rights against any such Secondary Subcustodian for loss, damage or expense
caused the Custodian or the Fund by such Secondary Subcustodian. The
Subcustodian agrees to cooperate with the Fund and or the Custodian, as the
case may be, and take all actions reasonably requested by the Fund or the
Custodian, at the Fund's expense, in connection with the enforcement of any
rights of the Subcustodian by the Fund or the Custodian.
The Subcustodian will not amend any subcustodian agreement or agree to
change or permit any changes thereunder in respect of a Fund except upon the
prior written approval of the Custodian and the Fund.
- 32 -
<PAGE> 36
The Subcustodian may, at any time in its discretion upon notification to
the Custodian and a Fund, terminate any Secondary Subcustodian of the Fund in
accordance with the termination provisions under the applicable secondary
subcustodian agreement, and at the written request of the Custodian or a Fund,
the Subcustodian will terminate any Secondary Subcustodian in respect of the
Fund in accordance with the termination provisions under the applicable
secondary subcustodian agreement.
If necessary or desirable, the Subcustodian may appoint another
subcustodian in respect of a Fund to replace a Secondary Subcustodian
terminated pursuant to the foregoing provisions of this Section 3, such
appointment to be made upon approval of the successor subcustodian by the
Custodian and the Fund's Board of Directors or Trustees in accordance with the
provisions of this Section 3.
In the event the Subcustodian receives a claim from a Secondary
Subcustodian under the indemnification provisions of any subcustodian agreement
in respect of a Fund, the Subcustodian shall promptly give written notice to
the Custodian and the Fund of such claim. No more than thirty days after
written notice to the Custodian and the Fund of the Subcustodian's intention to
make such payment, the Custodian or the Fund will reimburse the Subcustodian
the amount of such payment except in respect of any negligence or misconduct of
the Subcustodian.
4. Assistance by the Subcustodian as to Certain Matters: The
Subcustodian may assist generally in the preparation of
- 33 -
<PAGE> 37
reports to Fund shareholders and others, audits of accounts, and other
ministerial matters of like nature.
5. Powers and Duties of the Subcustodian with Respect to its Role
as Recordkeeping Agent: The Subcustodian shall have and perform the following
powers and duties with respect to recordkeeping:
5.1 Records - To create, maintain and retain such records relating
to its activities and obligations under this Agreement as are required under
the Investment Company Act of 1940 and the rules and regulations thereunder
(including Section 31 thereof and Rules 31a-1 and 31a-2 thereunder) and under
applicable Federal and State tax laws. All such records will be the property
of the relevant Fund and in the event of termination of this Agreement shall be
delivered to the Fund or successor custodian.
5.2 Accounts - To keep books of account and render statements,
including interim monthly and complete quarterly financial statements, or
copies thereof, from time to time as reasonably requested by proper
instructions.
5.3 Access to Records - The books and records maintained by the
Subcustodian pursuant to Sections 5.1 and 5.2 shall at all times during the
Subcustodian's regular business hours be open to inspection and audit by
officers of, attorneys for and auditors employed by the Custodian or a Fund and
by employees and agents of the Securities and Exchange Commission, provided
that all such individuals shall observe all security requirements of the
- 34 -
<PAGE> 38
Subcustodian applicable to its own employees having access to similar records
within the Subcustodian and such regulations as may be reasonably imposed by
the Subcustodian.
6. Standard of Care and Related Matters:
6.1 Liability of the Subcustodian with Respect to Proper
Instructions; Evidence of Authority, Etc. The Subcustodian shall not be liable
for any action taken or omitted in reliance upon proper instructions reasonably
believed by it to be genuine or upon any other written notice, request,
direction, instruction, certificate or other instrument believed by it to be
genuine and signed by the proper party or parties.
The Secretary or Assistant Secretary of the Custodian and of each Fund
shall certify to the Subcustodian the names, signatures and scope of authority
of all persons authorized to give proper instructions or any other such notice,
request, direction, instruction, certificate or instrument on behalf of the
Custodian or the Fund, respectively, the names and signatures of the officers
of the Custodian or the Fund, respectively, the name and address of the
Shareholder Servicing Agent, and any resolutions, votes, instructions or
directions of the Custodian or the Fund's respective Board of Directors or
Trustees or shareholders. Such certificate may be accepted and relied upon by
the Subcustodian as conclusive evidence of the facts set forth therein and may
be considered in full force and effect until receipt of a similar certificate
to the contrary.
So long as and to the extent that it is in the exercise of
- 35 -
<PAGE> 39
reasonable care, the Subcustodian shall not be responsible for the title,
validity or genuineness of any property or evidence of title thereto received
by it or delivered by it pursuant to this Agreement.
The Subcustodian shall be entitled, at the expense of a Fund, to receive
and act upon advice of (i) counsel regularly retained by the Subcustodian in
respect of custodian matters, (ii) counsel for the Custodian or the Fund, or
(iii) such other counsel as the Custodian or the Fund and the Subcustodian may
agree upon, with respect to all matters, and the Subcustodian shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
6.2 Liability of the Subcustodian with Respect to Use of Securities
Systems and Foreign Depositories - With respect to the portfolio securities,
funds and other property of a Fund held by a Securities System or by a Foreign
Depository utilized by the Subcustodian or any Secondary Subcustodian, the
Subcustodian shall be liable to the Custodian or a Fund only for any loss,
damage or expense to the Custodian or the Fund resulting from use of the
Securities System or Foreign Depository if caused by any negligence,
misfeasance or misconduct of the Subcustodian or any of its Agents (as said
term is defined in Section 6.6) or of any of its or its Agents' employees or
from any failure of the Subcustodian or any such Agent to enforce effectively
such rights as it may have against the Securities System or Foreign Depository.
At the election of the Custodian or a Fund, it shall
- 36 -
<PAGE> 40
be entitled to be subrogated to the rights of the Subcustodian with respect to
any claim against the Securities System, Foreign Depository or any other person
which the Subcustodian may have as a consequence of any such loss, damage or
expense to the Custodian or the Fund if and to the extent that the Custodian or
the Fund has not been made whole for any such loss, damage or expense. The
Subcustodian agrees to cooperate with the Fund or the Custodian, as the case
may be, and take all actions reasonably requested by the Fund or the Custodian,
at the Fund's expense, in connection with the enforcement of any rights of the
Subcustodian by the Fund or the Custodian.
6.3 Liability of the Subcustodian with respect to Secondary
Subcustodians - The Subcustodian shall be liable to a Fund for the actions or
omissions of any Secondary Subcustodian to the same extent as if such actions
or omissions were performed by the Subcustodian itself in the country in which
the Secondary Subcustodian is operating under the terms of the secondary
subcustodian agreement; provided, however, that if there has been a final
adjudication of any term or provision thereof or of the governing law of such
agreement by a court of competent jurisdication, then such determination shall
govern the determination of the Subcustodian's liability under this Section
6.3. In the event of any loss, damage or expense suffered or incurred by a
Fund caused by or resulting from the actions or omissions of any Secondary
Subcustodian for which the Subcustodian would be liable pursuant to this
Section 6.3, the
- 37 -
<PAGE> 41
Subcustodian shall promptly reimburse the Fund in the amount of any such loss,
damage or expense.
The Subcustodian shall also be liable to a Fund for the Subcustodian's
own negligence in transmitting any instructions received by it from a Fund and
for the Subcustodian's own negligence in connection with the delivery of any
securities, funds or other property held by it to any Secondary Subcustodian.
6.4 Standard of Care; Liability; Indemnification - The Subcustodian
shall be held to the exercise of reasonable care and diligence in carrying out
the provisions of this Agreement, and shall be liable to the Custodian and the
relevant Fund for all loss, damage and expense suffered or incurred by the
Custodian or the Fund resulting from the failure of the Subcustodian to
exercise such reasonable care and diligence; provided that the Subcustodian
shall not thereby be required to take any action which is in contravention of
any applicable law, rule or regulation or any order or judgment of any court of
competent jurisdiction.
The Custodian and each Fund agree to indemnify and hold harmless the
Subcustodian and its nominees from all claims and liabilities (including
counsel fees) incurred or assessed against it or its nominees in connection
with the performance of this Agreement, except such as may arise from the
Subcustodian or its nominee's breach of the relevant standard of conduct set
forth in this Agreement. Notwithstanding the above, no Fund shall be liable to
indemnify the Subcustodian for any claims and liabilities other than those
arising from services provided to that particular Fund. Without limiting the
- 38 -
<PAGE> 42
foregoing indemnification obligation of the Custodian and each Fund, the
Custodian and each relevant Fund agree to indemnify the Subcustodian and any
nominee in whose name portfolio securities or other property of the Fund is
registered against any liability the Subcustodian or such nominee may incur by
reason of taxes assessed to the Subcustodian or such nominee or other costs,
liability or expense incurred by the Subcustodian or such nominee resulting
directly or indirectly from the fact that portfolio securities or other
property of the Fund is registered in the name of the Subcustodian or such
nominee.
In no event shall the Subcustodian incur liability under this Agreement
if the Subcustodian or any Secondary Subcustodian, Securities System, Foreign
Depository, Banking Institution or any agent or entity utilized by any of them
(each individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Ageement provides
shall be performed or omitted to be performed, by reason of (i) any Sovereign
Risk or (ii) any provision of any present or future law or regulation or order
of the United States of America or any state thereof, or of any foreign country
or political subdivision thereof, or of any securities depository or clearing
agency which operates a central system for handling of securities or equivalent
book-entries in a country or which operates a transnational system for the
central handling of securities or equivalent book-entries, or (iii) any
provision of any order or judgment of any court of competent jurisdiction. A
"Sovereign Risk" shall mean nationalization, expropriation, devaluation,
revaluation,
- 39 -
<PAGE> 43
confiscation, seizure, cancellation, destruction or similar action by any
governmental authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of currency
restrictions, exchange controls, taxes, levies or other charges affecting a
Fund's property; or acts of war, terrorism, insurrection or revolution; or any
other act or event beyond the Subcustodian's control.
6.5 Mitigation by Subcustodian - Upon the occurence of any event
that causes or may cause loss, damage or expense to the Custodian or a Fund,
(i) the Subcustodian or a Secondary Subcustodian shall and (ii) the
Subcustodian or a Secondary Subcustodian shall cause any applicable
Subcustodian or Secondary Subcustodian to use all commercially reasonable
efforts and take all reasonable steps under the circumstances to mitigate the
effects of such event and to avoid continuing harm to the Custodian or the
Fund.
6.6 Expenses of the Custodian and the Funds - In addition to the
liability of the Subcustodian or a Secondary Subcustodian under this Section 6,
the Subcustodian or a Secondary Subcustodian shall be liable to the Custodian
or the relevant Fund for all reasonable costs and expenses incurred by the
Custodian or the Fund in connection with any claim by the Custodian or the Fund
against the Subcustodian or a Secondary Subcustodian arising from the
obligations of the Subcustodian or Secondary Subcustodian hereunder including,
without limitation,
- 40 -
<PAGE> 44
all reasonable attorneys' fees and expenses incurred by the Custodian or the
Fund in asserting any such claim, and all expenses incurred by the Fund in
connection with any investigations, lawsuits or proceedings relating to such
claims; provided, that the Custodian or relevant Fund has recovered from the
Subcustodian or a Secondary Subcustodian for such claim.
6.7 Liability for Past Records - The Subcustodian shall have no
liability in respect of any loss, damage or expense suffered by a Fund, insofar
as such loss, damage or expense arises from the performance of the
Subcustodian's duties hereunder by reason of the Subcustodian's reasonable
reliance upon records that were maintained for the Fund by entities other than
the Subcustodian prior to the Subcustodian's employment hereunder.
6.8 Reimbursement of Disbursements, Etc. - The Subcustodian shall be
entitled to receive reimbursement from the Custodian or the relevant Fund on
demand, in the manner provided in Section 7, for its cash disbursements,
expenses and charges (including the fees and expenses of any Secondary
Subcustodian or any Agent) in connection with this Agreement, but excluding
salaries and usual overhead expenses.
6.9 Notice of Litigation; Right to Prosecute, Etc. - Neither the
Custodian nor the Fund shall be liable for indemnification under Section 6 of
this Agreement unless a Person shall have promptly notified the Custodian or
the relevant Fund in writing of the commencement of any litigation or
proceeding
- 41 -
<PAGE> 45
brought against such Person in respect of which indemnity may be sought under
Section 6. With respect to claims in such litigation or proceedings for which
indemnity by the Custodian or a Fund may be sought and subject to applicable
law and the ruling of any court of competent jurisdiction, the Custodian and
the Fund shall be entitled to participate in any such litigation or proceeding
and, after written notice from the Custodian or the Fund to any Person, the
Custodian or the relevant Fund may assume the defense of such litigation or
proceeding with counsel of its choice at its own expense in respect of that
portion of the litigation for which the Custodian or the Fund may be subject to
an indemnification obligation; provided, however, a Person shall be entitled to
participate in (but not control), at its own expense, the defense of any such
litigation or proceeding if the Custodian or the Fund has not acknowledged in
writing its obligation to indemnify the Person with respect to such litigation
or proceeding. If the Custodian or the Fund is not permitted to participate in
or control such litigation or proceeding under applicable law or by a ruling of
a court of competent jurisdiction, such Person shall reasonably prosecute such
litigation or proceeding.
6.10 Security for Obligations to Subcustodian - If the Subcustodian
or any nominee thereof shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Agreement (collectively a "Liability"), except such as may arise from its
- 42 -
<PAGE> 46
or such nominee's breach of the relevant standard of conduct set forth in this
Agreement, or if the Subcustodian shall make any Advance to a Fund, then in
such event property equal in value to not more than 125% of such Advance and
accrued interest on the Advance or the anticipated amount of such Liability,
held at any time for the account of the Fund by the Subcustodian or a Secondary
Subcustodian may be held as security for such Liability or for such Advance and
accrued interest on the Advance. The Subcustodian shall designate the security
or securities constituting security for an Advance or Liability (the
"Designated Securities") by notice in writing to the Fund (which may be sent by
telefax or telex). In the event the value of the Designated Securities shall
decline to less than 110% of the amount of such Advance and accrued interest on
the Advance or the anticipated amount of such Liability, then the Subcustodian
may designate in the same manner an additional security for such obligation but
the aggregate value of the Designated Securities and Additional Securities
shall not be in excess of 125% of the amount of such Advance and the accrued
interest on the Advance or the anticipated amount of such Liability. At the
request of the Fund, the Subcustodian shall agree to substitution of a security
or securities which have a value equal to the value of the Designated or
Additional Securities which the Fund desires be released from their status as
security, and such release from status as security shall be effective upon the
Subcustodian and the Fund agreeing in writing as to the identity of the
- 43 -
<PAGE> 47
substituted security or securities, which shall thereupon become Designated
Securities.
Notwithstanding the above, the Subcustodian shall, at the request of a
Fund, immediately release from their status as security any or all of the
Designated Securities or Additional Securities upon the Subcustodian's receipt
from such Fund cash or cash equivalents in an amount equal to 100% of the value
of the Designated Securities or Additional Securities that the Fund desires to
be released from their status as security pursuant to this Section. The Fund
shall reimburse or indemnify the Subcustodian and shall pay any Advances upon
demand; provided, however, that the Subcustodian first notified the Custodian
or the Fund of such demand for repayment, reimbursement or indemnification.
If, upon notification, the Custodian or the Fund shall fail to pay such Advance
or interest when due or shall fail to reimburse or indemnify the Subcustodian
promptly in respect of a Liability, the Subcustodian shall be entitled to
dispose of the Designated Securities and Additional Securities to the extent
necessary to obtain repayment, reimbursement or indemnification. Interest,
dividends and other distributions paid or received on the Designated Securities
and Additional Securities, other than payments of principal or payments upon
retirement, redemption or repurchase, shall remain the property of the Fund,
and shall not be subject to this Section 6.10. To the extent that the
disposition of a Fund's property, designated as security for such Advance or
Liability, results in an amount
- 44 -
<PAGE> 48
less than necessary to obtain repayment, reimbursement or indemnification, the
Fund shall continue to be liable to the Subcustodian for the difference between
the proceeds of the disposition of the Fund's property, designated as security
for such Advance or Liability, and the amount of the repayment, reimbursement
or indemnification due to the Subcustodian.
6.11 Appointment of Agents - The Subcustodian may at any time or
times in its discretion appoint (and may at any time remove) any other bank or
trust company as its agent (an "Agent") to carry out such of the provisions of
this Agreement as the Subcustodian may from time to time direct, provided,
however, that the appointment of such Agent (other than an Agent appointed
pursuant to the third paragraph of Section 3) shall not relieve the
Subcustodian of any of its responsibilities under this Agreement.
In the event of any loss, damage, or expense suffered or incurred by the
Custodian or a Fund caused by or resulting from the actions or omissions of any
Agent for which the Subcustodian would otherwise be liable, the Subcustodian
shall promptly reimburse the Custodian or the Fund, as the case may be, in the
amount of any such loss, damage or expense.
6.12 Powers of Attorney - Upon request, the Custodian or a Fund shall
deliver to the Subcustodian such proxies, powers of attorney or other
instruments as may be reasonable and necessary or desirable in connection with
the performance by the Subcustodian or any Secondary Subcustodian of their
respective
- 45 -
<PAGE> 49
obligations under this Agreement or any applicable subcustodian agreement.
7. Compensation of the Subcustodian: The Custodian or such Fund
shall pay the Subcustodian a custody fee based on such fee schedule as may from
time to time be agreed upon in writing by the Subcustodian, the Custodian and
each Fund. Such fee, together with all amounts for which the Subcustodian is
to be reimbursed in accordance with Section 6.4, shall be billed to the
Custodian or the Fund and be paid in cash to the Subcustodian.
8. Termination; Successor Custodian/Subcustodian; Additional Funds:
This Agreement shall continue in full force and effect until terminated as to
one or more of the Funds by the Custodian, the Subcustodian or such Fund or
Funds by an instrument in writing delivered or mailed, postage prepaid, to the
other parties, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing. In the event of termination, the
Subcustodian shall be entitled to receive prior to delivery of the securities,
funds and other property held by it all accrued fees and unreimbursed expenses
the payment of which is contemplated by Sections 6.4 and 7, and all Advances
and Liabilities, upon receipt by the Custodian or the relevant Fund or Funds of
a statement setting forth such fees, expenses, Advances and Liabilities.
In the event of the appointment of a successor custodian, the
Subcustodian shall take all reasonable steps to execute an agreement with the
successor custodian and a Fund or Funds on
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<PAGE> 50
substantially the same terms as contained in this Agreement. The Subcustodian
agrees to cooperate with the Custodian, the successor custodian, and such Fund
or Funds in execution of documents and performance of other actions necessary
or desirable in order to substitute the successor custodian for the Custodian.
In the event of the appointment of a successor subcustodian, it is
agreed that the securities, funds and other property owned by a Fund or Funds
as to which this Agreement has been terminated and held by the Subcustodian or
any Secondary Subcustodian shall be delivered to the successor subcustodian,
unless the Subcustodian is otherwise instructed by the Custodian or the Fund or
Funds. The Subcustodian agrees to cooperate with the Custodian, the successor
custodian, and such Fund or Funds in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
subcustodian for the Subcustodian under this Agreement.
An additional Fund or Funds may become a party to this Agreement after
the date hereof by an instrument in writing to such effect signed by such Fund
or Funds, the Custodian and the Subcustodian. If this Agreement is terminated
as to one or more of the Funds (but less than all of the Funds) of if an
additional Fund or Funds shall become a party to this Agreement, there shall be
delivered to the Subcustodian by the Custodian an amended Appendix B deleting
or adding such Fund or Funds, as the case may be. The termination of this
Agreement as to less than all of the Funds shall not affect the obligations of
the Custodian, the
- 47 -
<PAGE> 51
Subcustodian and the remaining Funds hereunder as set forth in Appendix B, as
revised from time to time.
9. Amendment; Waiver: This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof. No provision of this Agreement may be waived, amended or
terminated except by a statement in writing signed by the party or parties
against which enforcement of the waiver, amendment or termination is sought.
In connection with the operation of this Agreement, the Subcustodian,
the Custodian and one or more of the Funds may agree in writing from time to
time on such provisions interpretative of or in addition to the provisions of
this Agreement as may in their joint opinion be consistent with the general
tenor of this Agreement. No interpretative or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of this
Agreement.
The section headings in this Agreement are for the convenience of the
parties and in no way alter, amend, limit or restrict the contractual
obligations of the parties set forth in this Agreement.
10. Governing Law: This Agreement is executed and delivered in The
Commonwealth of Massachusetts and shall be governed by and construed according
to the laws of said Commonwealth.
11. Notices: Notices and other writings delivered or mailed
postage prepaid to a Fund addressed to the Fund at 100
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<PAGE> 52
Heritage Reserve, Menomonee Falls, Wisconsin 53051 Attention: Helge Krist Lee,
or to such other address as the Fund may have designated to the Subcustodian
and the Custodian in writing, or to the Custodian at 615 East Michigan Street,
P. 0. Box 701, Milwaukee, Wisconsin 53201, Attention: J. Redwine, or to such
other address as the Custodian may have designated to the Funds and the
Subcustodian in writing or to the Subcustodian at 40 Water Street, Boston,
Massachusetts 02109, Attention: Manager, Securities Department, or to such
other address as the Subcustodian may have designated to the Custodian and the
Funds in writing, shall be deemed to have been properly delivered or given
hereunder to the respective addressee.
12. Binding Effect: This Agreement shall be binding on and shall
inure to the benefit of the Funds, the Custodian and the Subcustodian and their
respective successors and assigns, provided that no party hereto may assign
this Agreement or any of its rights or obligations hereunder without the prior
written consent of the other parties (except that assignment by a Fund shall
not require the consent of any other Funds).
13. Severability: If any provision of this Agreement shall be held
or made unenforceable by a court decision, statute, rule, regulation or
otherwise, the remaining provisions of this Agreement shall not be affected
thereby.
14. Counterparts: This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more
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<PAGE> 53
counterparts have been signed and delivered by each of the parties.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
FIRSTAR TRUST COMPANY BROWN BROTHERS HARRIMAN & CO.
By _____________________ per pro ______________________
Title ____________________
FUNDS LISTED IN APPENDIX B
By ______________________
Title _____________________
- 50 -
<PAGE> 54
GLOBAL CUSTODY TRI-PARTY AGREEMENT
WITH FIRSTAR TRUST COMPANY
AND THE INDIVIDUAL STRONG FUNDS LISTED IN
APPENDIX B ATTACHED HERETO
DATE ______________________________
SPECIAL TERMS AND CONDITIONS RIDER
1. Multiple Accounts
Pursuant to Sections 1 and 8 of the Agreement, Brown Brothers Harriman & Co.
and Firstar Trust Company have established the Accounts set forth on Appendix B
to be separately accounted for under the terms of this Agreement. Appendix B
shall be updated from time to time by the Custodian to reflect any changes in
the Funds a party to the Agreement.
- 51 -
<PAGE> 55
STRONG CAPITAL MANAGEMENT, INC.
DOMESTIC MUTUAL FUND
REVISED GLOBAL CUSTODY FEE SCHEDULE
APRIL 1996
Payable quarterly on the value of assets:
Foreign (excluding Euroclear)
.0015 per year on first $50 million
.0012 per year on next $50 million
.0010 per year on all over $100 million
Euroclear
.0012 per year on first $50 million
.0010 per year on next $50 million
.0008 per year on all over $100 million
Argentina
.0030 on all assets
Transaction charge: $75
Bangladesh
.0045 on all assets
Transaction charge: $175
Botswana
.0050 on all assets
Transaction charge: $200
Brazil
.0015 on all assets
Transaction charge: $50
Chile
.0035 on all assets
Transaction charge: $85
China
.0035 on all assets
Transaction charge: $75
<PAGE> 56
STRONG CAPITAL MANAGEMENT, INC.
DOMESTIC MUTUAL FUND
GLOBAL CUSTODY FEE SCHEDULE
APRIL 1996
PAGE 2
Colombia
.0045 on all assets
Transaction charge: $100
Czech Republic
.0030 on all assets
Transaction charge: $65
Ecuador
.0050 on all assets
Transaction charge: $150
Egypt
.0050 on all assets
Transaction charge: $150
Ghana:
.0050 on all assets
Transaction charge: $150
Greece
.0050 on all assets
Transaction charge: $100 on-site
$400 off-site
Hungary
.0055 on all assets
Transaction charge: $200
Israel
.0025 on all assets
Transaction charge: $75
India
.0040 on all assets
Transaction charge: $150
<PAGE> 57
STRONG CAPITAL MANAGEMENT, INC.
DOMESTIC MUTUAL FUND
GLOBAL CUSTODY FEE SCHEDULE
APRIL 1996
PAGE 3
Indonesia
.0015 on all assets
Transaction charge: $55
Jordan
.0045 on all assets
Transaction charge: $175
Kenya
.0050 on all assets
Transaction charge: $150
Korea .0022 on all assets
Transaction charge: $50
Morocco
.0040 on all assets
Transaction charge: $150
Pakistan
.0035 on all assets
Transaction charge: $125
Peru
.0050 on all assets
Transaction charge: $110
Philippines
.0025 on all assets
Transaction charge: $65
Poland .0060 on all assets
Transaction charge: $125
<PAGE> 58
STRONG CAPITAL MANAGEMENT, INC.
DOMESTIC MUTUAL FUND
Global Custody Fee Schedule
April 1996
Page 4
Portugal
.0030 on all assets
Transaction charge: $150
Slovakia
.0035 on all assets
Transaction charge: $100
South Africa
.0012 on all assets
Transaction charge: $ 50
Sri Lanka
.0020 on all assets
Transaction charge: $ 85
Swaziland
.0050 on all assets
Transaction charge: $200
Taiwan
.0025 on all assets
Transaction charge: $ 75
Turkey
.0035 on all assets
Transaction charge: $125
Uruguay
.0055 on all assets
Transaction charge: $125
Venezuela
.0045 on all assets
Transaction charge: $125
<PAGE> 59
STRONG CAPITAL MANAGEMENT, INC.
DOMESTIC MUTUAL FUND
GLOBAL CUSTODY FEE SCHEDULE
APRIL 1996
PAGE 5
Zambia
.0050 on all assets
Transaction charge: $150
Zimbabwe
.0050 on all assets
Transaction charge: $150
Minimum: $45,000 (all domestic portfolios combined)
Transaction Charge: $35
Emerging markets will be negotiated at the time of investment
OUT-OF-POCKET EXPENSES
Out-of-pocket expenses including, but not limited to telex, legal,
telephone, postage and direct expenses including but not limited to customized
systems programming, registration and certificate fees would be
additional. Brokerage, stamp duty and Euroclear deposit and withdrawal charges
are for the account of the Fund.
This schedule includes all custody fees and transaction charges of
subcustodians. Emerging Markets may require the use of a local administrative
agent. Administrative fees will be for the account of the Fund. Charges
associated with income collection, governmental stamp or other taxes will also
be for the account of the Fund.
<PAGE> 1
EXHIBIT 99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Strong Conservative Equity Funds, Inc.
We consent to the incorporation by reference in Post-Effective Amendment No. 8
to the Registration Statement of Strong Conservative Equity Funds, Inc. on
Form N-1A of our reports dated December 8, 1995 on our audits of the financial
statements and financial highlights of Strong American Utilities Fund (formerly
known as Strong American Utilities Fund, Inc.), a series of Strong Conservative
Equity Funds, Inc., Strong Asset Allocation Fund, Inc. and Strong Total Return
Fund, Inc., which reports are included in the Annual Report to Shareholders for
the period from January 1, 1995 to October 31, 1995 which is also incorporated
by reference in the Registration Statement. We also consent to the reference
to our Firm under the caption" Independent Accountants" in the Statement of
Additional Information.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
June 25, 1996
<PAGE> 1
BASIC PLAN DOCUMENT
UNIVERSAL SIMPLIFIED EMPLOYEE PENSION PLAN
EXHIBIT 14.4
[STRONG FUNDS LOGO]
STRONG FUNDS
1 ESTABLISHMENT AND PURPOSE OF PLAN
1.01 PURPOSE The purpose of this Plan is to provide, in accordance with
its provisions, a Simplified Employee Pension Plan providing benefits
upon retirement for the individuals who are eligible to participate
hereunder.
1.02 INTENT TO QUALIFY It is the intent of the Employer that this Plan shall
be for the exclusive benefit of its Employees and shall qualify for
approval under Section 408(k) of the Internal Revenue Code, as
amended from time to time (for corresponding provisions of any
subsequent Federal law at that time in effect). In case of any
ambiguity, it shall be interpreted to accomplish such result. It is
further intended, that it comply with the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA) as amended from time to
time.
1.03 WHO MAY ADOPT An employer who has ever maintained a defined benefit
plan which is now terminated may not participate in this prototype
Simplified Employee Pension Plan. If, subsequent to adopting this
Plan, any defined benefit plan of the Employer terminates, the
employer will no longer participate in this prototype plan and will
be considered to have an individually designed plan.
1.04 USE WITH IRA This prototype Simplified Employee Pension Plan must be
used with an Internal Revenue Service model IRA (Form 5305 or Form
5305-A) or an Internal Revenue Service approved master or prototype
IRA.
1.05 FOR MORE INFORMATION To obtain more information concerning the rules
governing this Plan, contact the Prototype Sponsor listed in Section
5 of the Adoption Agreement.
<PAGE> 2
2 DEFINITIONS
2.01 ADOPTION AGREEMENT Means the document executed by the Employer
through which it adopts the Plan and thereby agrees to be bound by
all terms and conditions of the Plan.
2.02 CODE Means the Internal Revenue Code of 1986 as amended.
2.03 COMPENSATION Compensation for the purposes of the $300 limit of
Section 408(k)(2)(C) of the Code shall be defined as Section 414(q)(7)
Compensation.
For all other purposes, Compensation shall mean all of a Participant's
wages as defined in Section 3401(a) of the Code for the purposes of
income tax withholding at the source (that is, W-2 wages) but
determined without regard to any rules that limit the remuneration
included in wages based on the nature or location of the employment or
the services performed (such as the exception for agricultural labor
in Section 3401(a)(2) of the Code).
For any Self-Employed Individual covered under the Plan, Compensation
will mean Earned Income.
Compensation shall include only that Compensation which is actually
paid to the Participant during the Plan Year.
Compensation shall include any amount which is contributed by the
Employer pursuant to a salary reduction agreement and which is not
includible in the gross income of the Employee under Sections
125,402(a)(8), 402(h) or 403(b) of the Code.
The annual Compensation of each Participant taken into account under
the Plan for any year shall not exceed $200,000. This limitation
shall be adjusted by the Secretary at the same time and in the same
manner as under Section 415(d) of the Code, except the dollar
increase in effect on January 1 of any calendar year is effective for
years beginning in such calendar year and the first adjustment to the
$200,000 limitation is effected on January 1, 1990. If a Plan
determines Compensation on a period of time that contains fewer than
12 calendar months, then the annual Compensation limit is an amount
equal to the annual Compensation limit for the calendar year in which
the compensation period begins multiplied by the ratio obtained by
dividing the number of full months in the period by 12.
In determining the Compensation of a Participant the rules of Section
414(q)(6) of the Code shall apply, except in applying such rules, the
term "family" shall include only the spouse of the Participant and
any lineal descendants of the Participant who have not attained age
19 before the close of the year. If, as a result of the application
of such rules the adjusted $200,000 limitation is exceeded, then
(except for purposes of determining the portion of Compensation up to
the integration level if this Plan provides for permitted disparity),
the limitation shall be prorated among the affected individuals in
proportion to each such individual's Compensation as determined under
this section prior to the application of this limitation.
In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the contrary,
for Plan Years beginning on or after January 1, 1994, the annual
Compensation of each Employee taken into account under the Plan shall
not exceed the OBRA '93 annual Compensation limit. The OBRA '93
annual Compensation limit is $150,000, as adjusted by the
Commissioner for increases in the cost of living in accordance with
Section 401(a)(17)(B) of the Internal Revenue Code. The
cost-of-living adjustment in effect for a calendar year applies to any
period, not exceeding 12 months, over which Compensation is determined
(determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93
annual Compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination
period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference
in this Plan to the limitation under Section 401(a)(17) of the Code
shall mean the OBRA '93 annual Compensation limit set forth in this
provision.
<PAGE> 3
2.04 EARNED INCOME Means the net earnings from self-employment in
the trade or business with respect to which the Plan is
established, for which personal services of the individual
are a material income-producing factor. Net earnings will be
determined without regard to items not included in gross
income and the deductions allocable to such items. Net
earnings are reduced by contributions by the Employer to
a qualified plan or to a Simplified Employee Pension Plan
to the extent deductible under Section 404 of the Code.
Net earnings shall be determined with regard to the
deduction allowed to the Employer by Section 164(f)
of the Code for taxable years beginning after
December 31, 1989.
2.05 EFFECTIVE DATE Means the date the Plan becomes
effective as indicated in the Adoption Agreement.
2.06 EMPLOYEE Means any person who is a natural person
employed by the Employer as a common law employee
and if the Employer is a sole proprietorship or
partnership, any Self-Employed Individual who performs
services with respect to the trade or business of the
Employer. Further, any employee of any other employer
required to be aggregated under Section 414(b), (c), (m),
or (o) of the Code and any leased employee required to be
treated as an employee of the Employer under Section 414(n)
of the Code shall also be considered an Employee.
2.07 EMPLOYER Means any corporation, partnership or sole
proprietorship named in the Adoption Agreement and any
successor who by merger, consolidation, purchase or
otherwise assumes the obligations of the Plan. A partnership
is considered to be the Employer of each of the partners and
a sole proprietorship is considered to be the Employer of
the sole proprietor.
2.08 EMPLOYER CONTRIBUTION Means the amount contributed
by the Employer to this Plan.
2.09 IRA Means the designated Individual Retirement
Account or Individual Retirement Annuity, which satisfies
the requirements of Section 408 of the Code, and which is
maintained by a Participant with the Prototype Sponsor
(unless the Prototype Sponsor allows Participants to
maintain their IRAs with other organizations).
2.10 PARTICIPANT Means any Employee who has met the
participation requirements of Section 3.01 and who is or
may become eligible to receive an Employer Contribution.
2.11 PLAN Means this plan document plus the corresponding
Adoption Agreement as completed and signed by the Employer.
2.12 PLAN YEAR Means the calendar year or the 12 consecutive month
period which coincides with the Employer's taxable year.
2.13 PRIOR PLAN Means a plan which was amended or replaced by
adoption of this plan document, as indicated in the Adoption
Agreement.
2.14 PROTOTYPE SPONSOR Means the entity specified in the
Adoption Agreement which sponsors this prototype Plan.
2.15 SELF-EMPLOYED INDIVIDUAL Means an individual who
has Earned Income for a Plan Year from the trade or business
for which the Plan is established; also, an individual who
would have had Earned Income but for the fact that the trade
or business had no net profits for the Plan Year.
2.16 SERVICE Means the performance of duties by an Employee for
the Employer, for any period of time, however
short, for which the Employee is paid or entitled to payment.
When the Employer maintains the Plan of a predecessor
employer, an Employee's Service will include his or her
service for such predecessor employer.
2.17 TAXABLE WAGE BASE Means the maximum amount of earnings which
may be considered wages for a year under Section 312(a)(1) of
the Code in effect as of the beginning of the Plan Year.
<PAGE> 4
3. ELIGIBILITY AND PARTICIPATION
3.01 ELIGIBILITY REQUIREMENTS Except for those Employees excluded
pursuant to Section 3.02, each Employee of the Employer who fulfills the
eligibility requirements specified in the Adoption Agreement shall, as
a condition for further employment, become a participant. Each
Participant must establish an IRA with the Prototype Sponsor to which
Employer Contributions under this Plan will be made.
3.03 ADMITTANCE AS A PARTICIPANT
A. Prior Plan If this Plan is an amendment or continuation of a Prior
Plan, each Employee of the Employer who immediately before the
Effective Date was a participant in said Prior Plan shall be a
Participant in this Plan as of said date.
B. Notification of Eligibility The Employer shall notify each
Employee who becomes a Participant of his or her status as a
Participant in the Plan and of his or her duty to establish an IRA
with the Prototype Sponsor to which Employer Contributions may be
made.
C. Establishment of an IRA If a Participant fails to establish an
IRA for whatever reason, the Employer may execute any necessary
documents to establish an IRA on behalf of the Participant.
3.02 EXCLUSION OF CERTAIN EMPLOYEES If the Employer has so indicated in the
Adoption Agreement, the following Employees shall not be eligible to
become a participant in the Plan: (a) Those Employees included in a unit
of Employees covered by the terms of a collective bargaining agreement,
provided retirement benefits were the subject of good faith bargaining;
and (b) those Employees who are nonresident aliens, who have received no
earned income from the Employer which constitutes earned income from
sources within the United States.
3.04 DETERMINATIONS UNDER THIS SECTION The Employer shall determine the
eligibility of each Employee to be a Participant. This determination
shall be conclusive and binding upon all persons except as otherwise
provided herein or by law.
3.05 LIMITATION RESPECTING EMPLOYMENT Neither the fact of the establishment
of the Plan nor the fact that a common-law employee has become a
Participant shall give to that common-law employee any right to
continued employment; nor shall either fact limit the right of the
Employer to discharge or to deal otherwise with a common-law employee
without regard to the effect such treatment may have upon the Employee's
rights under the Plan.
<PAGE> 5
4. CONTRIBUTIONS AND ALLOCATIONS
4.01 EMPLOYER CONTRIBUTIONS
A. Allocation Formula Employer Contributions shall be allocated in
accordance with the allocation formula selected in the Adoption
Agreement. Each Employee who has satisfied the eligibility
requirements pursuant to Section 3.01 (thereby becoming a
Participant) will share in such allocation.
If the Employer has selected the pro rata allocation formula in
the Adoption Agreement, then Employer Contributions for each
Plan Year shall be allocated to the IRA of each Participant in the
same proportion as such Participant's Compensation (not in excess
of $200,000, indexed for cost of living increases in accordance
with Section 408(k)(8) of the Code) for the Plan Year bears to the
total Compensation of all Participants for such year.
Employer Contributions made for a Plan Year on behalf of any
Participant shall not exceed the lesser of 15% of Compensation or
the limitation in effect under Code Section 415(c)(1)(A)(indexed
for cost of living increases in accordance with Code Section
415(d)).
B. Integrated Allocation Formula If the Employer has selected the
integrated allocation formula in the Adoption Agreement, then
Employer Contributions for the Plan Year will be allocated to
Participants' IRA as follows:
Step 1 Employer Contributions will be allocated to each
Participant's IRA in the ratio that each Participant's
total Compensation bears to all Participants' total
Compensation, but not in excess of 3% of each
Participant's Compensation.
Step 2 Any Employer Contributions remaining after the allocation
in Step 1 will be allocated to each Participant's IRA
in the ratio that each Participant's Compensation for the
Plan Year in excess of the integration level bears to the
Compensation of all Participants' in excess of the
integration level, but not in excess of 3%.
Step 3 Any Employer Contributions remaining after the allocation
in Step 2 will be allocated to each Participant's IRA
in the ratio that the sum of each Participant's total
Compensation and Compensation in excess of the integration
level bears to the sum of all Participants' total
Compensation and Compensation in excess of the integration
level, but not in excess of the maximum disparity rate
described in the following table.
Step 4 Any Employer Contributions remaining after the allocation
in Step 3 will be allocated to each Participant's IRA
in the ratio that each Participant's total Compensation
for the Plan Year bears to all Participants' total
Compensation for that Plan Year.
The integration level shall be equal to the Taxable Wage
Base or such lesser amount elected by the Employer in the
Adoption Agreement.
<TABLE>
<CAPTION>
Integration Level Maximum Disparity Rate
- --------------------------------------------------------------------------------
<S> <C>
Taxable Wage Base (TWB) 2.7%
More than $0 but not more than X* 2.7%
More than X* of TWB but not more than 80% of TWB 1.3%
More than 80% of TWB but not more than TWB 2.4%
</TABLE>
*X means the greater of $10,000 or 20% of TWB.
C. Timing of Employer Contribution Employer Contributions, if any,
made on behalf of Participants for a Plan Year shall be
allocated and deposited to the IRA of each Participant no later
than the due date for filing the Employer's tax return (including
extensions).
4.02 DEDUCTIBILITY OF CONTRIBUTIONS Contributions to the Plan are
deductible by the Employer for the taxable year with or within
which the Plan Year of the Plan ends. Contributions made for a
particular taxable year and contributed by the due date of the
Employer's income tax return, including extensions, are deemed made in
that taxable year.
4.03 VESTING, WITHDRAWAL RIGHTS TO CONTRIBUTIONS All Employer Contributions
made under the Plan on behalf of Employees shall be fully
vested and nonforfeitable at all times. Each Employee shall have an
unrestricted right to withdraw at any time all or a portion of the
Employer Contributions made on his or her behalf. However,
withdrawals taken are subject to the same taxation and penalty
provisions of the Code which are applicable to IRA distributions.
4.04 SIMPLIFIED EMPLOYER REPORTS The Employer shall furnish reports,
relating to contributions made under the Plan, in the time and
manner and containing the information prescribed by the Secretary of
the Treasury, to Participants. Such reports shall be furnished at
least annually and shall disclose the amount of the contribution made
under the Plan to the Participant's IRA.
<PAGE> 6
5 AMENDMENT OR TERMINATION OF PLAN
5.01 AMENDMENT BY EMPLOYER The Employer reserves the right to amend
the elections made or not made on the Adoption Agreement by
executing a new Adoption Agreement and delivering a copy of the
same to the Prototype Sponsor. The Employer shall not have the
right to amend any nonelective provision of the Adoption Agreement
nor the right to amend provisions of this plan document. If the
Employer adopts an amendment to the Adoption Agreement or plan
document in violation of the preceding sentence, the Plan will be
deemed to be an individually designed plan and may no longer
participate in this prototype Plan.
5.02 AMENDMENT BY PROTOTYPE SPONSOR By adopting this Plan, the
Employer delegates to the Prototype Sponsor the power to amend or
replace the Adoption Agreement of the Plan to conform them to the
provisions of any law, regulations or administrative rulings
pertaining to Simplified Employee Pensions and to make such other
changes to the Plan, which, in the judgement of the Prototype
Sponsor, are necessary or appropriate. The Employer shall be
deemed to have consented to all such amendments, provided however,
that no changes may be made without the consent of the Employer if
the effect would be to substantially change the costs or benefits
under the Plan. The Prototype Sponsor shall not have the
obligation to exercise or not to exercise the power delegated to
it nor shall the Prototype Sponsor incur liability of any nature
for any act done or failed to be done by the Prototype Sponsor in
good faith in the exercise or nonexercise of the power delegated
hereunder. The Prototype Sponsor shall notify the Employer should
it discontinue sponsorship of the Plan.
5.03 LIMITATIONS ON POWER TO AMEND No amendment by either the Employer
or the Prototype Sponsor shall reduce or otherwise adversely
affect any benefits of a Participant or Beneficiary acquired
prior to such amendment unless it is required to maintain
compliance with any law, regulation or administrative ruling
pertaining to Simplified Employee Pensions.
5.04 TERMINATION While the Employer expects to continue the Plan
indefinitely, the Employer shall not be under any obligation or
liability to continue contributions or to maintain the Plan for
any given length of time. The Employer may terminate this Plan at
any time by appropriate action of its managing body. This Plan
shall terminate on the occurrence of any of the following events:
A. Delivery to the Prototype Sponsor of a notice of termination
executed by the Employer specifying the effective date of the
Plan's termination.
B. Adjudication of the Employer as bankrupt or the liquidation or
dissolution of the Employer.
5.05 NOTICE OF AMENDMENT, TERMINATION Any amendment or termination
shall be communicated by the Employer to all appropriate parties
as required by law. Amendments made by the Prototype Sponsor shall
be furnished to the Employer and communicated by the Employer to
all appropriate parties as required by law. Any filings required
by the Internal Revenue Service or any other regulatory body
relating to the amendment or termination of the Plan shall be
made by the Employer.
5.06 CONTINUANCE OF PLAN BY SUCCESSOR EMPLOYER A successor of the
Employer may continue the Plan and be substituted in the place of
the present Employer. The successor and present Employer (or if
deceased, the executor of the estate of a deceased Self-Employed
Individual who was the Employer) must execute a written instrument
authorizing such substitution and the successor must complete and
sign a new Adoption Agreement.
<PAGE> 7
6 SALARY DEFERRAL SEP PROVISIONS
In addition to Sections 1 through 5, the provisions of this
Section 6 shall apply if the Employer is an Eligible Employer and
has adopted a salary deferral Simplified Employee Pension Plan by
indicating in the Adoption Agreement that Retirement Savings
Contributions are permitted.
If the Employer has so indicated in the Adoption Agreement, the
Employer agrees to permit Retirement Savings Contributions to be
made which will be contributed by the Employer to the IRA
established by or on behalf of each Contributing Participant. This
arrangement is intended to qualify as a salary reduction
simplified employee pension ("SARSEP") under Section 480(k)(6) of
the Code and the regulations thereunder.
The SARSEP portion of this Plan shall be effective upon adoption.
No Retirement Savings Contributions may be based on Compensation
an Employee could have received before adoption of the SARSEP and
execution by the Employee of a Retirement Savings Agreement.
6.100 DEFINITIONS
6.101 COMPENSATION Means Compensation as defined in Section 2.03 of
the Plan and shall include any amount which is contributed by the
Employer as a Retirement Savings Contribution pursuant to a
Retirement Savings Agreement which is not includible in the gross
income of the Employee under Section 402(h) of the Code.
6.102 CONTRIBUTING PARTICIPANT Means a person who has met the
participation requirements and who has enrolled as a Contributing
Participant pursuant to Section 6.201 and on whose behalf the
Employer is contributing Retirement Savings Contributions.
6.103 ELIGIBLE EMPLOYER Means an Employer which: (a) has no more than
25 Employees who are eligible to participate in the Plan (or would
have been eligible to participate if this Plan had been
maintained) at any time during the preceding Plan Year; (b) has no
leased employees within the meaning of Section 414(n)(2) of the
Code; (c) is not a state or local government or political
subdivision thereof, or any agency or instrumentality thereof, or
an organization exempt from tax under Subtitle A of the Code; and
(d) does not currently maintain or has not maintained a defined
benefit plan, even if now terminated.
6.104 ENROLLMENT DATE Means the first day of any Plan Year, the first
day of the seventh month of any Plan Year and any more frequent
dates as the Employer may designate in a uniform and
nondiscriminatory manner.
6.105 EXCESS CONTRIBUTION Means the amount of each Highly Compensated
Employee's Retirement Savings Contributions that exceeds the
actual deferral percentage test limits described in Section
6.303(B) of the Plan for a Plan Year.
6.106 HIGHLY COMPENSATED EMPLOYEE Means a Participant described in
Section 414(q) of the Code who during the current or preceding
year; (a) was a 5% owner of the Employer as defined in Section
416(i)(1)(B)(i) of the Code; (b) received Compensation in excess
of $50,000, as adjusted pursuant to Section 415(d), and was in the
top-paid group (the top 20% of Employees, by Compensation); (c)
received Compensation in excess of $75,000, as adjusted pursuant
to section 415(d); or (d) was an officer and received Compensation
in excess of 50% of the dollar limit under Section 415 of the Code
for defined benefit plans.
6.107 KEY EMPLOYEE Means any Employee or former Employee or
beneficiaries of these Employees who at any time during the Plan
Year or the four preceding Plan Years is or was: (a) an officer of
the Employer (if the Employee's annual Compensation exceeds 50% of
the dollar limitation under Section 415(b)(1)(A) of the Code); (b)
an owner of one of the 10 largest interests in the Employer (if
the Employee's annual Compensation exceeds 100% of the dollar
limitation under Section 415(c)(1)(A) of the Code); (c) a 5% owner
of the Employer as defined in Section 416(i)(1)(B)(i) of the Code;
or (d) a 1% owner of Employer (if the Employee has annual
Compensation in excess of $150,000).
6.108 RETIREMENT SAVINGS AGREEMENT Means an agreement, on a form
provided by the Employer pursuant to which a Contributing
Participant may elect to have his or her Compensation reduced and
paid as a Retirement Savings Contribution to his or her IRA by the
Employer.
6.109 RETIREMENT SAVINGS CONTRIBUTIONS Means contributions made by the
Employer on behalf of the Contributing Participant pursuant to
Section 6.301. Retirement Savings Contributions shall be deemed to
be Employer Contributions for purposes of (a) the contribution
limits described in Section 4.01(A) of the Plan; (b) the vesting
and withdrawal rights described in Section 4.03 of the Plan; and
(c) determining whether this Plan is a Top-Heavy Plan.
6.110 TOP-HEAVY PLAN This Plan is a Top-Heavy Plan for any Plan Year
if, as of the last day of the previous Plan Year (or current Plan
Year if this is the first year of the Plan) the total of the
Employer Contributions made on behalf of Key Employees for all the
years this Plan has been in existence exceeds 60% of such
contributions for all Employees. If the Employer maintains (or
maintained within the prior five years) any other SEP or defined
contribution plan in which a Key Employee participates (or
participated), the contributions or account balances, whichever is
applicable, must be aggregated with the contributions made to the
Plan. The contributions (and account balances, if applicable) of
an Employee who ceases to be a Key Employee or of an individual
who has not been in the employ of the Employer for the previous
five years shall be disregarded. The identification of Key
Employees and the top-heavy calculation shall be determined in
accordance with Section 416 of the Code and the regulations
thereunder.
<PAGE> 8
6.200 CONTRIBUTING PARTICIPANT
6.201 REQUIREMENTS TO ENROLL AS A CONTRIBUTING PARTICIPANT
A. Enrollment Each Employee who becomes a Participant may enroll
as a Contributing Participant. A Participant shall be eligible
to enroll as a Contributing Participant on any Enrollment
Date.
B. Initial Enrollment Notwithstanding the time set forth in
Section 6.201(A) as of which a Participant may enroll as a
Contributing Participant, the Employer shall have the
authority to designate, in a uniform and nondiscriminatory
manner, additional Enrollment Dates during the twelve month
period beginning on the Effective Date in order that an
orderly first enrollment might be completed.
6.202 MODIFICATION OF RETIREMENT SAVINGS AGREEMENT A Contributing
Participant may modify his or her Retirement Savings Agreement to
increase or decrease (within the limits placed on Retirement
Savings Contributions in the Adoption Agreement) the amount of his
or her Compensation deferred into his or her IRA under the Plan.
Such modification may only be prospectively made effective as of
an Enrollment Date, or as of any other more frequent date(s) if
the Employer so permits in a uniform and nondiscriminatory manner.
A Contributing Participant who desires to make such a modification
shall complete, sign and file a new Retirement Savings Agreement
with the Employer at least 30 days (or such lesser period of days
as the Employer shall permit in a uniform and nondiscriminatory
manner) before the modification is to become effective.
6.203 WITHDRAWAL AS A CONTRIBUTING PARTICIPANT A Participant may
withdraw as a Contributing Participant as of the last date
preceding any Enrollment Date (or as of any other date if the
Employer so permits in a uniform and nondiscriminatory manner) by
revoking his or her authorization to the Employer to make
Retirement Savings Contributions on his or her behalf. A
Participant who desires to withdraw as a Contributing Participant
shall give written notice of withdrawal to the Employer at least
30 days (or such lesser period of days as the Employer shall
permit in a uniform and nondiscriminatory manner) before the
effective date of withdrawal. A Participant shall cease to be a
Contributing Participant upon his or her termination of
employment, or on account of termination of the Plan.
6.204 RETURN AS CONTRIBUTING PARTICIPANT AFTER WITHDRAWAL A Participant
who has withdrawn as a Contributing Participant under Section
6.203 may not again become a Contributing Participant until the
first day of the first Plan Year following the effective date of
his or her withdrawal as Contributing Participant.
6.300 RETIREMENT SAVINGS CONTRIBUTIONS
6.301 SALARY DEFERRAL ARRANGEMENT The Employer shall contribute
Retirement Savings Contributions on behalf of all Contributing
Participants for each Plan Year that the following requirements
are satisfied:
A. The Employer is an Eligible Employer; and
B. Not less than 50% of the Employees eligible to participate
elect to have Retirement Savings Contributions contributed to
the Plan on their behalf.
Subject to the limits described in Section 6.303, the amount of
Retirement Savings Contributions so contributed shall be the
amount required by the Retirement Savings Agreements of
Contributing Participants.
No Retirement Savings Contribution may be based on Compensation a
Participant received, or had a right to receive, before execution
of a Retirement Savings Agreement by the Participant.
6.302 FAILURE TO SATISFY 50% PARTICIPATION REQUIREMENT If the 50%
participation requirement described in Section 6.301(B) is not
satisfied as of the end of any Plan Year, all the Retirement
Savings Contributions made by Employees for the Plan Year shall be
considered "Disallowed Deferrals," i.e., IRA contributions that
are not SEP-IRA contributions. The Employer shall notify each
affected Employee, within 2-1/2 months after the end of the Plan
Year to which the Disallowed Deferrals relate, that the deferrals
are no longer considered SEP-IRA contributions. Such notification
shall specify the amount of the Disallowed Deferrals and the
calendar year of the Employee in which they are includible in
income and must provide an explanation of applicable penalties if
the Disallowed Deferrals are not withdrawn in a timely fashion.
The notice to each affected Employee must state specifically; (a)
the amount of the Disallowed Deferrals; (b) that the Disallowed
Deferrals are includible in the Employee's gross income for the
calendar year or years in which the amounts deferred would have
been received by the Employee in cash had he or she not made an
election to defer and that the income allocable to such Disallowed
Deferrals is includible in the year withdrawn from the IRA; and
(c) that the Employee must withdraw the Disallowed Deferrals (and
allocable income) from the SEP-IRA by April 15 following the
calendar year of notification by the Employer. Those Disallowed
Deferrals not withdrawn by April 15 following the year of
notification will be subject to the IRA contribution limitations
of Sections 219 and 408 of the Code and thus may be considered an
excess contribution to the Employee's IRA. Disallowed Deferrals
may be subject to the 6% tax on excess contributions under Section
4973 of the Code. If income allocable to a Disallowed Deferral is
not withdrawn by April 15 following the year of notification by
the Employer, the income may be subject to the 10% tax on early
distributions under Section 72(t) of the Code when withdrawn.
Disallowed Deferrals are reported in the same manner as are Excess
Contributions.
<PAGE> 9
6.303 LIMITS ON RETIREMENT SAVINGS CONTRIBUTIONS
A. Maximum Amount No Contributing Participant shall be permitted
to have Retirement Savings Contributions made under this Plan
during any calendar year in excess of $7,000 (as indexed
pursuant to Code Section 402(g)(5)). The $7,000 (indexed)
limit applies to the total elective deferrals the Contributing
Participant makes for the calendar year under this Plan and
under any cash or deferred arrangement described in Section
401(k) of the Code and any salary reduction arrangement
described in Section 403(b) of the Code. The limit may be
increased to $9,500 if the Contributing Participant makes
elective deferrals to a salary reduction arrangement under
Section 403(b) of the Code.
Under no circumstances may an Employee's Retirement Savings
Contributions in any calendar year exceed the lesser of: (1)
the limitation under Section 402(g) of the Code based on all
of the plans of the Employer; or (2) 15% of his or her
Compensation (less any amount contributed by the Employer as a
Retirement Savings Contribution). Compute the amount of this
15% limit by using the following formula:
Compensation (before subtracting Retirement Savings
Contributions) X 13.0435%.
If an Employer maintains any other SEP plan to which
non-elective SEP Employer Contributions are made for a Plan
Year, or any qualified plan to which contributions are made
for such Plan Year, then an Employee's Retirement Savings
Contribution may be limited to the extent necessary to satisfy
the maximum contribution limitation under Section 415(c)(1)(A)
of the Code.
In addition to the dollar limitation of Section 415(c)(1)(A),
which is $30,000 in 1991, Employer Contributions to this Plan,
when aggregated with contributions to all other SEP plans and
qualified plans of the Employer, generally may not exceed 15%
of Compensation (less any amount contributed by the Employer
as a Retirement Savings Contribution) for any Employee. If
these limits are exceeded on behalf of any Employee for a
particular Plan Year, that Employee's Retirement Savings
Contributions for that year must be reduced to the extent of
the excess.
B. Actual Deferred Percentage (ADP) Test Limits Retirement
Savings Contributions by a Highly Compensated Employee must
satisfy the actual deferral percentage (hereinafter "ADP")
limitation under Section 408(k)(6) of the Code. Amounts in
excess of the ADP limitation will be deemed Excess
Contributions on behalf of the affected Highly Compensated
Employee or Employees. The ADP of any Highly Compensated
Employee who is eligible to be a Contributing Participant
shall not be more than the product obtained by multiplying the
average of the ADPs of all non-Highly Compensated Employees
who are eligible to be Contributing Participants by 1.25. For
purposes of this Section 6.303, an Employee's ADP is the ratio
(expressed as a percentage) of his or her Retirement Savings
Contributions for the Plan Year to his or her Compensation for
the Plan Year. The ADP of an Employee who is eligible to be a
Contributing Participant, but who does not make Retirement
Savings Contributions during the Plan Year is zero. The
determination of the ADP for any Employee is to be made in
accordance with Section 408(k)(6) of the Code and should
satisfy such other requirements as may be provided by the
Secretary of the Treasury.
C. Special Rule for Family Members For purposes of determining
the ADP of a Highly Compensated Employee, the Retirement
Savings Contributions and Compensation of the Employee will
also include the Retirement Savings Contribution and
Compensation of any family member. This special rule applies
only if the Highly Compensated Employee is in one of the
following groups: (a) a more than 5% owner of the Employer; or
(b) one of a group of the 10 most Highly Compensated
Employees.
The Retirement Savings Contributions and Compensation of
family members used in this special rule do not count in
computing the average of the ADPs of non-Highly Compensated
Employees.
For purposes of this special rule, a family member is an
individual who is related to a Highly Compensated Employee as
a spouse, or as a lineal ascendent or descendent or the
spouses of such lineal ascendents or descendents in accordance
with Section 414(q) of the Code and the regulations
thereunder.
6.304 DISTRIBUTION OF EXCESS RETIREMENT SAVINGS CONTRIBUTIONS To the
extent that a Contributing Participant's Retirement Savings
Contributions for a calendar year exceed the limit described in
Section 6.303(A) (i.e., the $7,000 (indexed) limit), the
Contributing Participant must withdraw the excess Retirement
Savings Contributions (and any income allocable to such amount) by
April 15 following the year of the deferral.
6.305 DISTRIBUTION OF EXCESS CONTRIBUTIONS The Employer shall notify
each Employee, no later than 2-1/2 months following the close of
the Plan Year of the amount, if any, of any Excess Contribution to
that Employee's IRA for such Plan Year. If the Employer does not
so notify Employees by such date, the Employer must pay a tax
equal to 10% of the Excess Contributions for the Plan Year
pursuant to Section 4979 of the Code. If the Employer fails to
notify Employees by the end of the Plan Year following the Plan
Year of the Excess Contributions, the SEP no longer will be
considered to meet the requirements of Section 408(k)(6) of the
Code. This means that the earnings on the SEP are subject to tax
immediately, that no more Retirement Savings Contributions may be
made under the SEP, and
<PAGE> 10
that Retirement Savings Contributions of all Employees with
uncorrected Excess Contributions must be included in their income
in that year. If the SEP no longer meets the requirements of
Section 408(k)(6), then any contribution to an Employee's IRA will
be subject to the IRA contribution limitations of Section 219 and
408 of the Code and thus may be considered an excess contribution
to the Employee's IRA.
The Employer's notification to each affected Employee of the
Excess Contributions must specifically state in a manner
calculated to be understood by the average Plan Participant: (a)
the amount of the Excess Contributions attributable to that
Employee's Retirement Savings Contributions; (b) the Plan Year for
which the Excess Contributions were made; (c) that the Excess
Contributions are includible in the affected Employee's gross
income for the calendar year in which such Excess Contributions
were made; and (d) that the Employee must withdraw the Excess
Contributions (and allocable income) from the IRA by April 15
following the year of notification by the Employer. Those Excess
Contributions not withdrawn by April 15 following the year of
notification will be subject to the IRA contribution limitations
of Sections 219 and 408 of the Code for the preceding calendar
year and thus may be considered an excess contribution to the
Employee's IRA. Such excess contributions may be subject to the 6%
tax on excess contributions under Section 4973 of the Code. If
income allocable to an Excess Contribution is not withdrawn by
April 15 following the year of notification by the Employer, the
income may be subject to the 10% tax on early distributions under
Section 72(t) of the Code when withdrawn. However, if the Excess
Contributions (not including allocable income) total less than
$100, then the Excess Contributions are includible in the
Employee's gross income in the year of notification. Income
allocable to the Excess Contributions is includible in the year of
withdrawal from the IRA.
6.306 DETERMINATION OF INCOME For purposes of Sections 6.302, 6.304 and
6.305, the income allocable to Disallowed Deferrals, excess
Retirement Savings Contributions or Excess Contributions for a
year shall be determined by multiplying the income earned on the
IRA for the period which begins on the first day of such year and
ends on the date of distribution from the IRA by a fraction, the
numerator of which is the Disallowed Deferral, excess Retirement
Savings Contribution or Excess Contribution for such year and the
denominator of which is the sum of the account balance of the IRA
as of the beginning of such year and the total contributions made
to the IRA for such year.
6.307 RESTRICTION ON TRANSFERS AND WITHDRAWALS The Employer shall
notify each Contributing Participant that, until the earlier of
2-1/2 months after the end of a particular Plan Year or the date
the Employer notifies its employees that the actual deferral
percentage limitations have been calculated, any transfer or
distribution from the Contributing Participant's IRA of Retirement
Savings Contributions (or income on these contributions)
attributable to Retirement Savings Contributions made during that
Plan Year will be includible in income for purposes of Sections
72(t) and 408(d)(1) of the Code.
6.308 ALLOCATION OF RETIREMENT SAVINGS CONTRIBUTIONS Retirement Savings
Contributions made on behalf of Contributing Participants for a
Plan Year shall be allocated and deposited to the IRA of each
Contributing Participant by the Employer as soon as is
administratively feasible.
6.400 SPECIAL RULES FOR TOP-HEAVY PLANS
6.401 MINIMUM ALLOCATION The following mandatory minimum allocation
applies when this Plan is a Top-Heavy Plan:
Unless another plan of the Employer is designated in the space
below to satisfy the top-heavy requirements of Section 416 of the
Code, each year this Plan is a Top-Heavy Plan, the Employer will
make a minimum contribution to the IRA of each Participant who is
not a Key Employee, which, in combination with other non-elective
contributions, if any, is equal to the lesser of 3% of such
Participant's Compensation or a percentage of Compensation equal
to the percentage of Compensation at which elective and non-
elective contributions are made under the Plan for the Plan Year
for the Key Employee for whom such percentage is the largest.
The top-heavy minimum will be met in the following plan:
________________________________________________________________
_________________________________________________________________
_________________________________________________________________
(If applicable, name the plan other than this Plan in which the
minimum top-heavy contribution will be made).
6.402 RETIREMENT SAVINGS CONTRIBUTIONS CANNOT BE USED FOR MINIMUM
ALLOCATION For purposes of satisfying the minimum allocation
requirement of Section 416 of the Code, Retirement Savings
Contributions contributed for the benefit of Employees who are not
Key Employees may not be used to satisfy the minimum allocation
requirement.
<PAGE> 1
[GODFREY & KAHN, S.C. LETTERHEAD]
June 24, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Strong Conservative Equity Funds, Inc.
Gentlemen:
We represent Strong Conservative Equity Funds, Inc. (the "Company"), in
connection with its filing of Post-Effective Amendment No. 8 (the
"Post-Effective Amendment") to the Company's Registration Statement
(Registration Nos. 33-61358; 811-7656) on Form N-1A under the Securities Act of
1933 (the "Securities Act") and the Investment Company Act of 1940. The
Post-Effective Amendment is being filed pursuant to Rule 485(b) under the
Securities Act.
We have reviewed the Post-Effective Amendment and, in accordance with
Rule 485(b)(4) under the Securities Act, hereby represent that the
Post-Effective Amendment does not contain disclosures which would render it
ineligible to become effective pursuant to Rule 485(b).
Very truly yours,
GODFREY & KAHN, S.C.
/s/ Scott A. Moehrke
Scott A. Moehrke
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000901539
<NAME> Strong Conservative Equity Funds, Inc.
<SERIES>
<NUMBER> 1
<NAME> Strong American Utilities Fund
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-START> Nov-01-1995
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 128,541
<INVESTMENTS-AT-VALUE> 137,675
<RECEIVABLES> 798
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<TOTAL-ASSETS> 138,473
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