<PAGE> 1
As filed with the Securities and Exchange Commission on or about February 27,
1997
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. 10 [X]
-------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 12 [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)
Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Securities Act of 1933; the Registrant's Rule 24f-2 Notice
for the fiscal year ended October 31, 1996 was filed on or about December 26,
1996.
It is proposed that this filing will become effective (check appropriate
box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on March 1, 1997 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
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<PAGE> 2
STRONG CONSERVATIVE EQUITY FUNDS, INC.
CROSS REFERENCE SHEET
STRONG AMERICAN UTILITIES FUND
STRONG EQUITY INCOME FUND
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; Highlights
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Strong Conservative Equity 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 Securities Principal Shareholders; Directors and
Officers of the Funds; Investment
Advisor, Subadvisor, and Distributor
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- ------------------------------------------- -----------------------------------------------
<S> <C>
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
17. Brokerage Allocation and Other Portfolio Transactions and Brokerage
Practices
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
Included in Prospectus under the 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, Subadvisor, and
19. Purchase, Redemption and Pricing of Distributor; and Determination of Net Asset
Securities Being Offered 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 Funds' Annual Report.
** Complete answer to Item is contained in Funds' Prospectus.
<PAGE> 4
STRONG CONSERVATIVE EQUITY FUNDS
<TABLE>
<S> <C>
STRONG ASSET ALLOCATION FUND STRONG FUNDS
STRONG EQUITY INCOME FUND P.O. Box 2936
STRONG AMERICAN UTILITIES FUND Milwaukee, Wisconsin 53201
STRONG TOTAL RETURN FUND Telephone: (414) 359-1400
STRONG GROWTH AND INCOME FUND Toll-Free: (800) 368-3863
Device for the
Hearing-Impaired:
(800) 999-2780
</TABLE>
The Strong Family of Funds ("Strong Funds") is a family of more than
twenty-five diversified and non-diversified mutual funds. All of the Strong
Funds are no-load funds, meaning that you may purchase, redeem, or exchange
shares without paying a sales charge. Strong Funds include growth funds,
conservative equity funds, income funds, municipal income funds, international
funds, and cash management funds. The Strong Conservative Equity Funds are
described in this Prospectus.
This Prospectus contains information you should consider before you invest.
Please read it carefully and keep it for future reference. A Statement of
Additional Information for the Funds, dated March 1, 1997, contains further
information, is incorporated by reference into this Prospectus, and has been
filed with the Securities and Exchange Commission ("SEC"). This Statement, which
may be revised from time to time, is available without charge upon request to
the above-noted address or telephone number. If you would like to electronically
access additional information about the Funds after reading the prospectus, you
may do so by accessing the SEC's World Wide Web site (at http://www.sec.gov)
that contains the Statement of Additional Information regarding the Funds and
other related materials.
============================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------
March 1, 1997
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PROSPECTUS PAGE I-1
<PAGE> 5
STRONG CONSERVATIVE EQUITY FUNDS
The Strong Asset Allocation Fund, Inc. and Strong Total Return Fund, Inc. are
separately incorporated, diversified, open-end management investment companies.
Strong American Utilities Fund is a non-diversified series, and Strong Equity
Income Fund and Strong Growth and Income Fund are diversified series, of Strong
Conservative Equity Funds, Inc., which is an open-end management investment
company.
STRONG ASSET ALLOCATION FUND (the "Asset Allocation Fund") seeks high total
return consistent with reasonable risk over the long term. The Fund allocates
its assets globally among a diversified portfolio of equity securities, bonds,
and cash.
STRONG EQUITY INCOME FUND (the "Equity Income Fund") seeks total return by
investing for both income and capital growth. The Fund invests primarily in
dividend-paying equity securities.
STRONG AMERICAN UTILITIES FUND (the "American Utilities Fund") seeks total
return by investing for both income and capital growth. The Fund invests
primarily in the equity securities of public utility companies headquartered in
the United States.
STRONG TOTAL RETURN FUND (the "Total Return Fund") seeks high total return by
investing for capital growth and income. Using a conservative approach to equity
management, the Fund emphasizes investments in large- to medium-sized growth
companies with steady or growing dividends.
STRONG GROWTH AND INCOME FUND (the "Growth and Income Fund") seeks high total
return by investing for capital growth and income. The Fund invests primarily in
companies that pay current dividends and offer potential growth of earnings.
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PROSPECTUS PAGE I-2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
EXPENSES................................ I-4
FINANCIAL HIGHLIGHTS.................... I-5
HIGHLIGHTS.............................. I-9
INVESTMENT OBJECTIVES AND POLICIES...... I-10
Comparing the Funds............ I-11
Strong Asset Allocation Fund... I-12
Strong Equity Income Fund...... I-13
Strong American Utilities
Fund......................... I-13
Strong Total Return Fund....... I-14
Strong Growth and Income
Fund......................... I-14
IMPLEMENTATION OF POLICIES AND RISKS.... I-15
ABOUT THE FUNDS......................... I-27
SHAREHOLDER MANUAL...................... II-1
APPENDIX................................ A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the Statement
of Additional Information, and if given or made, such information or
representations may not be relied upon as having been authorized by the Funds.
This Prospectus does not constitute an offer to sell securities in any state or
jurisdiction in which such offering may not lawfully be made.
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PROSPECTUS PAGE I-3
<PAGE> 7
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Funds, will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............. NONE
Sales Load Imposed on Reinvested
Dividends................................. NONE
Deferred Sales Load......................... NONE
Redemption Fees............................. NONE
Exchange Fees............................... NONE
</TABLE>
There are certain charges associated with retirement accounts and with
certain other special shareholder services offered by the Funds. Additionally,
purchases and redemptions may also be made through broker-dealers or other
financial intermediaries who may charge a commission or other transaction fee
for their services. (See "Shareholder Manual - How to Buy Shares" and "- How to
Sell Shares.")
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
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<TABLE>
<CAPTION>
Total
Management Other 12b-1 Operating
Fund Fees Expenses Fees Expenses
<S> <C> <C> <C> <C> <C>
Asset Allocation .80% .33% NONE 1.13%
Equity Income .80 .52 NONE 1.32
American Utilities .75 .40 NONE 1.15
Total Return .80 .29 NONE 1.09
Growth and Income .80 1.12 NONE 1.92
</TABLE>
From time to time, the Funds' investment advisor, Strong Capital Management,
Inc. (the "Advisor"), may voluntarily waive its management fee and/or absorb
certain expenses for a Fund. The expenses specified in the table above for the
Funds are based on actual expenses incurred for the fiscal year ended October
31, 1996. For additional information concerning fees and expenses, see "About
the Funds - Management."
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PROSPECTUS PAGE I-4
<PAGE> 8
EXAMPLE. You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period (in years)
Fund 1 3 5 10
<S> <C> <C> <C> <C>
Asset Allocation $12 $36 $ 62 $137
Equity Income 13 42 72 159
American Utilities 12 37 63 140
Total Return 11 35 60 133
Growth and Income 19 60 104 224
</TABLE>
- ----------------------------------------------------------------------------
The Example is based on each Fund's "Total Operating Expenses," as described
above. PLEASE REMEMBER THAT THE EXAMPLE SHOULD NOT BE CONSIDERED AS
REPRESENTATIVE OF PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE HIGHER
OR LOWER THAN THOSE SHOWN. The assumption in the Example of a 5% annual return
is required by regulations of the SEC applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of a Fund's shares.
FINANCIAL HIGHLIGHTS
The following annual Financial Highlights for each of the Funds has been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
Their report for the fiscal year ended October 31, 1996 is included in the
Funds' Annual Report that is contained in the Funds' Statement of Additional
Information. The Financial Highlights for the Funds should be read in
conjunction with the Financial Statements and related notes included in the
Funds' Annual Report. Additional information about each Fund's performance is
contained in the Funds' Annual Report, which may be obtained without charge by
calling or writing Strong Funds. The following presents information relating to
a share of common stock of each of the Funds, outstanding for the entire period
ended as indicated.
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PROSPECTUS PAGE I-5
<PAGE> 9
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
STRONG ASSET ALLOCATION FUND
10-31-96 10-31-95(1) 12-31-94 12-31-93 12-31-92 12-31-91 12-31-90
-------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.31 $ 17.91 $ 19.06 $ 18.49 $ 19.68 $ 17.50 $ 18.41
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.78 0.66 0.70 0.82 0.87 0.94 1.12
Net Realized and Unrealized Gains
(Losses) on Investments 1.05 2.32 (0.99) 1.81 (0.25) 2.41 (0.65)
-------- -------- -------- -------- -------- -------- --------
Total from Investment Operations 1.83 2.98 (0.29) 2.63 0.62 3.35 0.47
LESS DISTRIBUTIONS
From Net Investment Income (0.84) (0.58) (0.70) (0.82) (0.87) (0.97) (1.38)
From Net Realized Gains (1.18) -- -- (1.24) (0.94) (0.20) --
In Excess of Net Realized Gains -- -- (0.16) -- -- -- --
Return of Capital -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions (2.02) (0.58) (0.86) (2.06) (1.81) (1.17) (1.38)
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 20.12 $ 20.31 $ 17.91 $ 19.06 $ 18.49 $ 19.68 $ 17.50
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN +9.5% +16.8% -1.5% +14.5% +3.2% +19.6% +2.8%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $263,170 $260,722 $248,647 $254,439 $208,368 $214,951 $203,562
Ratio of Expenses to Average
Net Assets 1.1% 1.2%* 1.2% 1.2% 1.2% 1.3% 1.3%
Ratio of Net Investment Income
to Average Net Assets 3.9% 4.1%* 3.8% 4.2% 4.4% 5.1% 6.1%
Portfolio Turnover Rate 446.7% 326.8% 359.7% 348.3% 320.4% 418.4% 319.6%
Average Commission Rate Paid(2) $ 0.0469
<CAPTION>
------------------------------
STRONG ASSET ALLOCATION FUND
12-31-89 12-31-88 12-31-87
-------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.57 $ 17.60 $ 22.18
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 1.22 1.39 0.85
Net Realized and Unrealized Gains
(Losses) on Investments 0.73 0.19 (0.70)
-------- -------- --------
Total from Investment Operations 1.95 1.58 0.15
LESS DISTRIBUTIONS
From Net Investment Income (0.97) (1.38) (1.78)
From Net Realized Gains (0.14) -- (2.95)
In Excess of Net Realized Gains -- -- --
Return of Capital -- (0.23) --
-------- -------- --------
Total Distributions (1.11) (1.61) (4.73)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 18.41 $ 17.57 $ 17.60
======== ======== ========
TOTAL RETURN +11.2% +9.2% -0.3%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $240,549 $256,089 $272,899
Ratio of Expenses to Average
Net Assets 1.3% 1.2% 1.1%
Ratio of Net Investment Income
to Average Net Assets 6.6% 7.5% 4.2%
Portfolio Turnover Rate 206.5% 426.2% 336.5%
Average Commission Rate Paid(2)
</TABLE>
* Calculated on an annualized basis.
(1) Total return and portfolio turnover rate are not annualized.
(2) Disclosure required, effective for reporting periods beginning after
September 1, 1995.
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PROSPECTUS PAGE I-6
<PAGE> 10
[CAPTION]
<TABLE>
<CAPTION>
STRONG
STRONG GROWTH
EQUITY AND
INCOME INCOME
STRONG AMERICAN UTILITIES FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
10-31-96 10-31-95(1) 12-31-94 12-31-93(2) 10-31-96(2) 10-31-96(2)
-------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.73 $ 9.46 $ 10.19 $ 10.00 $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.40 0.27 0.46 0.18 0.12 0.04
Net Realized and Unrealized Gains (Losses)
on
Investments 0.90 2.25 (0.73) 0.27 2.02 2.38
-------- ------- -------- ------- -------- --------
Total from Investment Operations 1.30 2.52 (0.27) 0.45 2.14 2.42
LESS DISTRIBUTIONS
From Net Investment Income (0.39) (0.25) (0.46) (0.18) (0.11) (0.04)
From Net Realized Gains -- -- -- (0.05) -- --
In Excess of Net Realized Gains -- -- -- (0.03) -- --
-------- ------- -------- ------- -------- --------
Total Distributions (0.39) (0.25) (0.46) (0.26) (0.11) (0.04)
-------- ------- -------- ------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 12.64 $ 11.73 $ 9.46 $ 10.19 $ 12.03 $ 12.38
======== ======= ======== ======= ======== ========
TOTAL RETURN +11.2% +26.9% -2.6% +4.5% +21.5% +24.2%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $122,486 $91,696 $ 37,944 $32,457 $ 28,723 $ 17,990
Ratio of Expenses to Average Net Assets 1.2% 1.2%* 0.5% 0.0%* 1.3%* 1.9%*
Ratio of Expenses to Average
Net Assets, Without Waivers and Absorptions 1.2% 1.2%* 1.6% 1.4%* 1.3%* 1.9%*
Ratio of Net Investment Income
to Average Net Assets 3.2% 3.4%* 4.8% 5.6%* 1.6%* 0.6%*
Portfolio Turnover Rate 84.0% 56.4% 105.4% 89.3% 158.3% 174.1%
Average Commission Rate Paid(3) $ 0.0599 $ 0.0633 $ 0.0667
</TABLE>
*
Calculated on an annualized basis.
(1)
Total return and portfolio turnover rate are not annualized.
(2)
Inception dates for the American Utilities, Equity Income, and Growth and Income
Funds are July 1, 1993, December 29, 1995, and December 29, 1995, respectively.
Total return and portfolio turnover rate are not annualized.
(3)
Disclosure required, effective for reporting periods beginning after September
1, 1995.
---------------------
PROSPECTUS PAGE I-7
<PAGE> 11
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRONG TOTAL RETURN FUND
10-31-96 10-31-95(1) 12-31-94 12-31-93 12-31-92 12-31-91 12-31-90
-------- ----------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 28.02 $ 23.62 $ 24.30 $ 20.17 $ 20.24 $ 15.34 $ 17.72
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.24 0.26 0.25 0.33 0.18 0.22 0.95
Net Realized and Unrealized Gains
(Losses) on Investments 4.65 4.41 (0.59) 4.18 (0.08) 4.90 (2.19)
-------- -------- -------- -------- -------- -------- ----------
Total from Investment Operations 4.89 4.67 (0.34) 4.51 0.10 5.12 (1.24)
LESS DISTRIBUTIONS
From Net Investment Income (0.24) (0.26) (0.26) (0.33) (0.17) (0.22) (1.14)
In Excess of Net Investment Income (0.06) (0.01) (0.08) -- -- -- --
From Net Realized Gains (1.25) -- -- -- -- -- --
In Excess of Net Realized Gains -- -- -- (0.05) -- -- --
Return of Capital -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ----------
Total Distributions (1.55) (0.27) (0.34) (0.38) (0.17) (0.22) (1.14)
-------- -------- -------- -------- -------- -------- ----------
NET ASSET VALUE, END OF PERIOD $ 31.36 $ 28.02 $ 23.62 $ 24.30 $ 20.17 $ 20.24 $ 15.34
======== ======== ======== ======== ======== ======== ==========
TOTAL RETURN +18.0% +19.8% -1.4% +22.5% +0.6% +33.6% -7.1%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $760,220 $670,958 $606,814 $630,349 $587,873 $691,327 $ 646,579
Ratio of Expenses to Average
Net Assets 1.1% 1.1%* 1.2% 1.2% 1.3% 1.4% 1.4%
Ratio of Net Investment Income
to Average Net Assets 0.8% 1.2%* 1.1% 1.4% 0.9% 1.3% 5.4%
Portfolio Turnover Rate 502.4% 298.8% 290.4% 271.3% 371.8% 426.4% 312.3%
Average Commission Rate Paid(2) $ 0.0584
<CAPTION>
STRONG TOTAL RETURN FUND
12-31-89 12-31-88 12-31-87
---------- ---------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.96 $ 18.37 $ 21.61
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.55 1.95 0.97
Net Realized and Unrealized Gains
(Losses) on Investments (0.97) 0.85 0.61
---------- ---------- --------
Total from Investment Operations 0.58 2.80 1.58
LESS DISTRIBUTIONS
From Net Investment Income (1.31) (1.96) (1.65)
In Excess of Net Investment Income -- -- --
From Net Realized Gains (0.51) -- (3.17)
In Excess of Net Realized Gains -- -- --
Return of Capital -- (0.25) --
---------- ---------- --------
Total Distributions (1.82) (2.21) (4.82)
---------- ---------- --------
NET ASSET VALUE, END OF PERIOD $ 17.72 $ 18.96 $ 18.37
========== ========== ========
TOTAL RETURN +2.6% +15.6% +6.0%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(In Thousands) $1,065,278 $1,006,192 $802,442
Ratio of Expenses to Average
Net Assets 1.2% 1.2% 1.1%
Ratio of Net Investment Income
to Average Net Assets 7.7% 10.1% 5.2%
Portfolio Turnover Rate 305.3% 281.1% 224.4%
Average Commission Rate Paid(2)
</TABLE>
* Calculated on an annualized basis.
(1) Total return and portfolio turnover rate are not annualized.
(2) Disclosure required, effective for reporting periods beginning after
September 1, 1995.
---------------------
PROSPECTUS PAGE I-8
<PAGE> 12
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has distinct investment objectives and policies. Each Fund seeks
total return consistent with its investment objective and policies. The
investment objective of each Fund is set forth under "Investment Objectives and
Policies."
IMPLEMENTATION OF POLICIES AND RISKS
Subject to certain limitations, each Fund may invest in foreign securities
and engage in foreign currency and derivative transactions, including options,
futures, and options on futures transactions. Each Fund may invest in repurchase
agreements, when-issued securities, and illiquid securities. The Asset
Allocation Fund may engage in substantial short-term trading, which may result
in high portfolio turnover rates. These investment practices and techniques
involve risks that are different in some respects from those associated with
similar funds that do not use them. The American Utilities Fund is a "non-
diversified" investment company, which means that it may invest a larger
proportion of its assets in the securities of a single issuer than diversified
funds. The Funds may invest in non-investment-grade debt obligations (commonly
called "junk bonds") within specified limits. (See "Implementation of Policies
and Risks.")
MANAGEMENT
The Advisor, Strong Capital Management, Inc., serves as investment advisor to
the Funds. The Advisor provides investment management services for mutual funds
and other investment portfolios representing assets of over $24 billion. W.H.
Reaves & Co., Inc. (the "Subadvisor") is the subadvisor for the American
Utilities Fund. (See "About the Funds - Management.")
PURCHASE AND REDEMPTION OF SHARES
You may purchase or redeem shares of a Fund at net asset value. There are no
redemption or 12b-1 charges. The net asset values change daily with the value of
each Fund's portfolio. You can locate the net asset value for a Fund in
newspaper listings of mutual fund prices under the "Strong Funds" heading or at
our site on the World Wide Web at http://www.strong-funds.com. (See "Shareholder
Manual - How to Buy Shares" and "- How to Sell Shares.")
---------------------
PROSPECTUS PAGE I-9
<PAGE> 13
SHAREHOLDER SERVICES
Strong shareholder benefits include: telephone purchase, exchange, and
redemption privileges; professional representatives available 24 hours a day;
automatic investment, automatic dividend reinvestment, payroll direct deposit,
automatic exchange, and systematic withdrawal plans; and a no-minimum investment
program. (See "Shareholder Manual - Shareholder Services.")
DIVIDENDS AND OTHER DISTRIBUTIONS
The policy of each Fund is to pay dividends from net investment income
quarterly and to distribute substantially all net realized capital gains
annually. (See "About the Funds - Distributions and Taxes.")
INVESTMENT OBJECTIVES AND POLICIES
The descriptions that follow are designed to help you choose the Fund that
best fits your investment objective. You may want to pursue more than one
objective by investing in more than one of the Funds or by investing in one of
the other Strong Funds, which are described in separate prospectuses. Each
Fund's investment objective is discussed below in connection with the Fund's
investment policies. Because of the risks inherent in all investments, there can
be no assurance that the Funds will meet their objectives.
The Funds are each required or permitted to invest a substantial portion of
their assets in equity securities. Each Fund's net asset value will fluctuate
based upon changes in the value of the securities in its portfolio. Although
they are considered conservative equity funds - meaning, each Fund's net asset
value is likely to be less volatile than that of a Fund invested solely for
growth of capital - each Fund's net asset value is likely to fluctuate more than
that of a fund invested solely for income. The Funds, therefore, are not
appropriate for investors' short-term financial needs.
----------------------
PROSPECTUS PAGE I-10
<PAGE> 14
COMPARING THE FUNDS
The following summary is intended to distinguish the Funds and help you
determine their suitability for your investments.
<TABLE>
<CAPTION>
Equity Bond
Fund Range Range Diversified Focus
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation 30-70% 20-70% Yes Allocated Across
Asset Classes
- ----------------------------------------------------------------------
Equity Income 65-100% 0-35% Yes Dividend-Paying
Stocks
- ----------------------------------------------------------------------
American Utilities 65-100% 0-35% No Utility and
Energy Stocks
- ----------------------------------------------------------------------
Total Return 60-100% 0-40% Yes Large- and Mid-
Cap, Dividend-
Paying Growth
Stocks
- ----------------------------------------------------------------------
Growth and Income 65-100% 0-35% Yes Dividend-Paying
and Growth Stocks
- ----------------------------------------------------------------------
</TABLE>
Each Fund has adopted certain fundamental investment restrictions that are
set forth in the Funds' Statement of Additional Information ("SAI"). Those
restrictions, a Fund's investment objective, and any other investment policies
identified as "fundamental" cannot be changed without shareholder approval. To
further guide investment activities, each Fund has also instituted a number of
non-fundamental operating policies, which are described throughout this
Prospectus and in the SAI. Although operating policies may be changed by a
Fund's Board of Directors without shareholder approval, a Fund will promptly
notify shareholders of any material change in operating policies.
Except as limited below, each Fund may invest in a diversified portfolio of
securities without regard to objective investment criteria, such as company
size, exchange listing, earnings history, or other factors. When selecting
securities, the Advisor will, except as otherwise limited below, be limited only
by its best judgment as to what will help achieve each Fund's investment
objective.
When the Advisor determines 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.
----------------------
PROSPECTUS PAGE I-11
<PAGE> 15
STRONG ASSET ALLOCATION FUND
The Asset Allocation Fund seeks high total return consistent with reasonable
risk over the long term. The Fund allocates its assets globally among a
diversified portfolio of equity securities, bonds, and cash.
Under normal market conditions, the Fund's net assets will be allocated
according to a benchmark of 60% equities, 35% bonds, and 5% cash. The Advisor
intends to actively manage the Fund's assets, maintaining a balance over time
between investment opportunities and their associated potential risks. In
response to changing market and economic conditions, the Advisor may reallocate
the Fund's net assets among these asset categories. Those allocations normally
will be within the ranges indicated below. However, in pursuit of total return,
the Advisor may under-allocate or over-allocate the Fund's net assets in a
particular category.
ASSET-ALLOCATION CATEGORIES
<TABLE>
<CAPTION>
Percentage of Fund Net Assets
------------------------------
Category of Investment Benchmark Range
<S> <C> <C>
- ---------------------------------------------------------------------
Equities 60% 30-70%
Bonds 35% 20-70%
Cash 5% 0-50%
- ---------------------------------------------------------------------
</TABLE>
Equity securities in which the Fund may invest include common stocks,
preferred stocks, and securities that are convertible into common stocks, such
as warrants and convertible bonds. Bonds purchased by the Fund will be primarily
investment-grade debt obligations, although the Fund may invest up to 35% of its
net assets in non-investment-grade debt obligations. (See "Implementation of
Policies and Risks - Debt Obligations.") The cash portion of the Fund may
include, but is not limited to, debt securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, commercial paper, banker's
acceptances, certificates of deposit, and time deposits. The Fund may invest in
obligations of domestic and foreign banks and their subsidiaries and branches.
The Fund also has the flexibility to take advantage of investment
opportunities around the world by investing in foreign securities. The Fund may
invest up to 25% of its net assets in foreign securities, including both direct
investments and investments made through depositary receipts. Foreign
investments involve risks not normally found when investing in securities of
U.S. issuers. (See "Implementation of Policies and Risks - Foreign Securities
and Currencies.")
Within the asset-allocation categories described above, the Advisor will
allocate the Fund's investments among countries (including developing
countries), geographic regions, and currencies in response to changing market
and
----------------------
PROSPECTUS PAGE I-12
<PAGE> 16
economic trends. In making geographical allocations of investments, the Advisor
will consider such factors as the historical and prospective relationships among
currencies and governmental policies that influence currency-exchange rates,
current and anticipated interest rates, inflation levels, and business
conditions within various countries, as well as other macroeconomic, social, and
political factors.
STRONG EQUITY INCOME FUND
The Equity Income Fund seeks total return by investing for both income and
capital growth.
The Fund invests primarily in dividend-paying equity securities. Under normal
market conditions, the Fund will invest at least 65% of its total assets in
dividend-paying equity securities, including common stocks, preferred stocks,
and securities that are convertible into common stocks, such as warrants and
convertible bonds. The Fund may invest up to 35% of its total assets in
non-dividend paying equity securities and intermediate- to long-term corporate
or U.S. government bonds. Although the bonds in which it invests will be
primarily investment grade, the Fund may invest up to 10% of its net assets in
non-investment-grade bonds. The Fund may invest up to 5% of its net assets in
foreign securities, including both direct investment and investments made
through depositary receipts. (See "Implementation of Policies and Risks -
Foreign Securities and Currencies" for the special risks associated with foreign
investments.)
STRONG AMERICAN UTILITIES FUND
The American Utilities Fund seeks total return by investing for both income
and capital growth.
The Fund normally will invest at least 65% of its total assets in the equity
securities of public utility companies headquartered in the United States.
Equity securities in which the Fund may invest include common stocks, preferred
stocks, and securities that are convertible into common stocks, such as warrants
and convertible bonds. Public utility companies include those engaged in the
manufacture, production, generation, transmission, sale and/or distribution of
water, gas, and electric energy, as well as those engaged in the communications
industry, including providers of telephone, telegraph, satellite, cable
television, microwave, and other communication facilities for the public,
excluding public broadcasting companies. (See "Implementation of Policies and
Risks - Public Utility Companies.")
The balance of the Fund, up to 35% of its total assets, may be invested in
any type of security, including debt obligations and equity securities of
companies in other industries. The Fund intends to use this allowance primarily
to invest in the equity securities of energy companies, which may compose up to
25% of the Fund's total assets. (See "Implementation of Policies and Risks -
Energy Companies.") Although the debt obligations in which it invests will be
primarily investment grade, the Fund may invest up to 5% of its net assets in
----------------------
PROSPECTUS PAGE I-13
<PAGE> 17
non-investment-grade debt securities. (See "Implementation of Policies and Risks
- - Debt Obligations.")
The Fund may invest up to 25% of its net assets in foreign securities,
including both direct investments and investments made through depositary
receipts. (See "Implementation of Policies and Risks - Foreign Securities and
Currencies" for the special risks associated with foreign investments.)
Under normal market conditions, the Fund expects to be fully invested in the
equity securities of companies in the public utility and energy industries.
STRONG TOTAL RETURN FUND
The Total Return Fund seeks high total return by investing for capital growth
and income. Using a conservative approach to equity management, the Fund
emphasizes investments in large- to medium-sized growth companies with steady or
growing dividends. (See "Implementation of Policies and Risks - Debt
Obligations.")
Under normal market conditions, the Fund will invest at least 60% of its net
assets in equity securities, including common stocks, preferred stocks, and
securities that are convertible into common stocks, such as warrants and
convertible bonds. The Fund expects to invest at least 80% of its net assets in
equity securities. At times, however, it may invest up to 40% of its net assets
in intermediate- to long-term corporate or U.S. government bonds. Although the
bonds in which it invests will be primarily investment grade, the Fund may
invest up to 5% of its net assets in non-investment-grade bonds. The Fund may
invest up to 25% of its net assets in foreign securities, including both direct
investments and investments made through depositary receipts. (See
"Implementation of Policies and Risks - Foreign Securities and Currencies" for
the special risks associated with foreign investments.)
STRONG GROWTH AND INCOME FUND
The Growth and Income Fund seeks high total return by investing for capital
growth and income.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in equity securities, with a focus on those that pay current
dividends and offer potential growth of earnings. At times, however, the Fund
may invest in equity securities that are not currently paying dividends, but
offer prospects for either capital growth or future income. Equity securities
include common stocks, preferred stocks, and securities that are convertible
into common stocks, such as warrants and convertible bonds. The Fund may invest
up to 35% of its total assets in intermediate- to long-term corporate or U.S.
government bonds. Although the bonds in which it invests will be primarily
investment grade, the Fund may invest up to 5% of its net assets in
non-investment-grade bonds. The Fund may invest up to 25% of net assets in
foreign securities, including both direct investments and investments made
through depositary receipts. (See "Implementation of Policies and Risks -
Foreign Securities and Currencies" for the special risks associated with foreign
investments.)
----------------------
PROSPECTUS PAGE I-14
<PAGE> 18
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to
certain restrictions described below), the Funds may invest in some or all of
the following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below. Each
Fund may also engage in reverse repurchase agreements and mortgage dollar roll
transactions. A more complete discussion of certain of these securities and
investment techniques and the associated risks is contained in the Funds' SAI.
DEBT OBLIGATIONS
IN GENERAL. The market value of all debt obligations is affected by changes
in the prevailing interest rates. The market value of such instruments generally
reacts inversely to interest rate changes. If the prevailing interest rates
decline, the market value of debt obligations generally increases. If the
prevailing interest rates increase, the market value of debt obligations
generally decreases. In general, the longer the maturity of a debt obligation,
the greater its sensitivity to changes in interest rates.
TYPES OF OBLIGATIONS. Debt obligations include (i) corporate debt securities,
including bonds, debentures, and notes; (ii) bank obligations, such as
certificates of deposit, banker's acceptances, and time deposits of domestic and
foreign banks and their subsidiaries and branches, and domestic savings and loan
associations (in amounts in excess of the insurance coverage (currently $100,000
per account) provided by the Federal Deposit Insurance Corporation); (iii)
commercial paper (including variable-amount master demand notes); (iv)
repurchase agreements; (v) loan interests; (vi) foreign debt obligations issued
by foreign issuers traded either in foreign markets or in domestic markets
through depositary receipts; (vii) convertible securities - debt obligations of
corporations convertible into or exchangeable for equity securities or debt
obligations that carry with them the right to acquire equity securities, as
evidenced by warrants attached to such securities, or acquired as part of units
of the securities; (viii) preferred stocks - securities that represent an
ownership interest in a corporation and that give the owner a prior claim over
common stock on the company's earnings or assets; (ix) U.S. government
securities; (x) mortgage-backed securities, collateralized mortgage obligations,
and similar securities; and (xi) municipal obligations.
CREDIT QUALITY. The values of debt obligations may also be affected by
changes in the credit rating or financial condition of their issuers. Generally,
the lower the quality rating of an obligation, the higher the degree of risk as
to the payment of interest and return of principal. To compensate investors for
taking on such increased risk, those issuers deemed to be less creditworthy
----------------------
PROSPECTUS PAGE I-15
<PAGE> 19
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 quantitive factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings,
compiled by a number of nationally recognized statistical rating organizations,
which include Standard & Poor's Ratings Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors Service, Inc. ("Fitch"), Duff &
Phelps, Inc., Thomson Bankwatch, and IBCA (the "NRSROs"). "Appendix A - Ratings
of Debt Obligations" presents a summary of the ratings of three such
organizations: S&P, Moody's and Fitch. Please refer to the Appendix in the
Funds' SAI for a more detailed description of the ratings of the NRSROs.
INVESTMENT-GRADE DEBT OBLIGATIONS. Debt obligations rated in the highest-
through the medium-quality categories are commonly referred to as
"investment-grade" debt obligations and include the following:
- - U.S. government securities (as defined below);
- - bonds or bank obligations rated in one of the four highest rating categories
(e.g., BBB or higher by Standard & Poor's Ratings Group or "S&P");
- - short-term notes rated in one of the two highest rating categories (e.g., SP-2
or higher by S&P);
- - short-term bank obligations rated in one of the three highest rating
categories (e.g., A-3 or higher by S&P), with respect to obligations maturing
in one year or less;
- - commercial paper rated in one of the three highest rating categories (e.g.,
A-3 or higher by S&P);
- - unrated debt obligations determined by the Advisor to be of comparable
quality; and
- - repurchase agreements involving investment-grade debt obligations.
Investment-grade debt obligations are generally believed to have relatively
low degrees of credit risk. All ratings are determined at the time of
investment. Any subsequent rating downgrade of a debt obligation will be
monitored by the Advisor to consider what action, if any, a Fund should take
consistent with its investment objective. For purposes of determining whether a
security is investment grade, the Adviser may use the highest rating assigned to
that security by any NRSRO.
HIGH-YIELD (HIGH-RISK) SECURITIES. High-yield (high-risk) securities, also
referred to as "junk bonds," are those securities that are rated lower than
investment grade and unrated securities of comparable quality. Although these
securities generally offer higher yields than investment-grade securities with
similar maturities, lower-quality securities involve greater risks, including
the possibility of default or bankruptcy. In general, they are regarded to be
predominantly speculative with respect to the issuer's capacity to pay interest
----------------------
PROSPECTUS PAGE I-16
<PAGE> 20
and repay principal. Other potential risks associated with investing in high-
yield securities include:
- - substantial market-price volatility resulting from changes in interest rates,
changes in or uncertainty about economic conditions, and changes in the actual
or perceived ability of the issuer to meet its obligations;
- - greater sensitivity of highly-leveraged issuers to adverse economic changes
and individual-issuer developments;
- - subordination to the prior claims of other creditors;
- - additional Congressional attempts to restrict the use or limit the tax and
other advantages of these securities; and
- - adverse publicity and changing investor perceptions about these securities.
As with any other asset in a Fund's portfolio, any reduction in the value of
such securities as a result of the factors listed above would be reflected in
the net asset value of the Fund. In addition, a Fund that invests in
lower-quality securities may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal and
interest on its holdings. As a result of the associated risks, successful
investments in high-yield (high-risk) securities will be more dependent on the
Advisor's credit analysis than generally would be the case with investments in
investment-grade securities.
It is uncertain how the high-yield market will perform during a prolonged
period of rising interest rates. A prolonged economic downturn or a prolonged
period of rising interest rates could adversely affect the market for these
securities, increase their volatility, and reduce their value and liquidity. In
addition, lower-quality securities tend to be less liquid than higher-quality
debt securities because the market for them is not as broad or active. If market
quotations are not available, these securities will be valued in accordance with
procedures established by a Fund's Board of Directors. Judgment may, therefore,
play a greater role in valuing these securities. The lack of a liquid secondary
market may have an adverse effect on market price and a Fund's ability to sell
particular securities.
See the Appendix for information concerning the credit quality of the Asset
Allocation Fund's investments in debt obligations for the fiscal period ended
October 31, 1996.
GOVERNMENT SECURITIES
U.S. government securities are issued or guaranteed by the U.S. government or
its agencies or instrumentalities. Securities issued by the government include
U.S. Treasury obligations, such as Treasury bills, notes, and bonds.
----------------------
PROSPECTUS PAGE I-17
<PAGE> 21
Securities issued by government agencies or instrumentalities include, for
example, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, and the Government
National Mortgage Association, including GNMA pass-through certificates, whose
securities are supported by the full faith and credit of the United States;
- - the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association, the Interamerican Development Bank,
and International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
Each Fund may invest in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon and step-coupon securities are sold at a deep discount to
their face value. Pay-in-kind securities pay interest through the issuance of
additional securities. Because such securities do not pay current cash income,
the price of these securities can be volatile when interest rates fluctuate.
While these securities do not pay current cash income, federal income tax law
requires the holders of zero-coupon, step-coupon, and pay-in-kind securities to
include in income each year the portion of the original issue discount (or
deemed discount) and other non-cash income on such securities accrued during
that year. In order to qualify as a "regulated investment company" under the
Internal Revenue Code and avoid a certain excise tax, a Fund may be required to
distribute a portion of such discount and income and may be required to dispose
of other portfolio securities, which may occur in periods of adverse market
prices, in order to generate cash to meet these distribution requirements.
----------------------
PROSPECTUS PAGE I-18
<PAGE> 22
PUBLIC UTILITY COMPANIES (AMERICAN UTILITIES FUND)
Under normal market conditions, at least 65% of the American Utilities Fund's
total assets will be invested in the equity securities of public utility
companies headquartered in the United States. Accordingly, the Fund's
performance will depend in part on conditions in the public utility industry.
Stocks of public utility companies have traditionally been attractive to
conservative stock market investors because they have generally paid consistent
and above-average dividends. The Fund's investments in public utility securities
may or may not pay consistent and above-average dividends. Moreover, the
securities of public utility companies can still be affected by the risks of the
stock market, as well as factors specific to public utility companies.
Government regulation of public utility companies can limit their ability to
expand their businesses or to pass cost increases onto customers. Additionally,
companies providing power or energy-related services may also be affected by the
following factors: increases in fuel and other operating costs; high costs of
borrowing to finance capital construction during inflationary periods;
operational restrictions, increased costs, and delays associated with compliance
with environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks associated with constructing and operating nuclear
power plants; the effects of energy conservation; and the effects of regulatory
changes. Some public utility companies are facing increased competition, which
may reduce their profits. All of these factors are subject to rapid change,
which may affect utility companies independently from the stock market as a
whole. Equity securities issued by public utility companies tend to be more
affected by changes in interest rates than are the equity securities of other
issuers and, therefore, may react to such changes somewhat like debt
instruments. (See "Debt Obligations" above.)
In accordance with its investment objective and fundamental investment
restrictions, the Fund will normally concentrate its investments in the public
utility industry. This means that more than 25% of the value of the Fund's total
assets will normally be invested in the public utility industry. The Fund does
not have set policies to concentrate within any particular segment of the public
utilities industry; however, the Subadvisor generally emphasizes investments in
established electric utility, telephone, natural gas, and energy stocks with
sound financial structures.
Due to the Fund's concentration of investments in the public utility
industry, an investment in the Fund may be subject to greater fluctuations in
value than a Fund that does not concentrate its investments in a similar manner.
For example, as discussed above, certain economic factors or specific events may
exert a disproportionate impact upon the prices of equity securities of
companies within the public utilities industry relative to their impact on the
prices of securities of companies engaged in other industries. Additionally,
changes in the market price of the equity securities of a particular company
that occupies
----------------------
PROSPECTUS PAGE I-19
<PAGE> 23
a dominant position in an industry may tend to influence the market prices of
other companies within the same industry. As a result of the foregoing factors,
the net asset value of the Fund may be more susceptible to change than those of
investment companies that diversify their investments over many different
industries.
ENERGY COMPANIES (AMERICAN UTILITIES FUND)
Under normal market conditions, the American Utilities Fund anticipates it
may invest a substantial portion, but not more than 25% of its total assets, in
the equity securities of energy companies. Energy companies are generally
defined as companies in the conventional areas of oil, gas, electricity, and
coal, as well as those involved in alternative sources of energy, such as
nuclear, geothermal, shale, and solar power. The business activities of energy
companies may include production, generation, refining, transmission,
transportation, marketing, control, or measurement of energy or energy fuels;
providing component parts or services to companies engaged in these energy
activities; energy research or experimentation; and environmental activities
related to the solution of energy problems, such as energy conservation and
pollution control. For purposes of this 25% investment limitation, energy
companies shall exclude companies that are also public utility companies.
To the extent the Fund makes significant investments in energy companies, the
Fund's performance will depend in part on conditions in the energy industry. The
securities of companies in the energy industry are subject to changes in value
and dividend yield that depend to a large extent on the price and supply of
energy fuels. Swift price and supply fluctuations of energy fuels may be caused
by events relating to international politics, energy conservation, the success
of exploration projects, currency exchange rate fluctuations, and tax and other
regulatory policies of various governments.
WHEN-ISSUED SECURITIES
Each Fund may invest in securities purchased on a when-issued or delayed-
delivery basis. Although the payment and interest terms of these securities are
established at the time the purchaser enters into the commitment, these
securities may be delivered and paid for at a future date, generally within 45
days. Purchasing when-issued securities allows a Fund to lock in a fixed price
or yield on a security it intends to purchase. However, when a Fund purchases a
when-issued security, it immediately assumes the risk of ownership, including
the risk of price fluctuation.
The greater a Fund's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although a
----------------------
PROSPECTUS PAGE I-20
<PAGE> 24
Fund may be able to sell these securities prior to the delivery date, it will
purchase when-issued securities for the purpose of actually acquiring the
securities, unless, after entering into the commitment, a sale appears desirable
for investment reasons. When required by SEC guidelines, a Fund will set aside
permissible liquid assets in a segregated account to secure its outstanding
commitments for when-issued securities.
FOREIGN SECURITIES AND CURRENCIES
Each Fund may invest in foreign securities either directly or through the use
of depositary receipts. (See "Investment Objectives and Policies.") Depositary
receipts are generally issued by banks or trust companies and evidence ownership
of underlying foreign securities. Foreign investments may include other
investment companies which may involve frequent or layered fees and also are
subject to limitations under the Investment Company Act of 1940 (the "1940
Act"). Foreign investments involve special risks, including:
- - expropriation, confiscatory taxation, and withholding taxes on dividends and
interest;
- - less extensive regulation of foreign brokers, securities markets, and issuers;
- - less publicly available information and different accounting standards;
- - costs incurred in conversions between currencies, possible delays in
settlement in foreign securities markets, limitations on the use or transfer
of assets (including suspension of the ability to transfer currency from a
given country), and difficulty of enforcing obligations in other countries;
and
- - diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy
in various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance-of-payments positions. Many foreign securities may
be less liquid and their prices more volatile than comparable U.S. securities.
Although the Funds generally invest only in securities that are regularly traded
on recognized exchanges or in over-the-counter markets, from time to time
foreign securities may be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign investing, such as custody
charges and brokerage costs, may be higher than those attributable to domestic
investing.
The Asset Allocation Fund may invest in the foreign securities of issuers in
developing countries. The risks of foreign investments are generally intensified
for investments in developing countries. Risks of investing in such markets
include:
- - less social, political, and economic stability;
- - smaller securities markets and the lower trading volume, which may result in a
lack of liquidity and greater price volatility;
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PROSPECTUS PAGE I-21
<PAGE> 25
- - certain national policies that may restrict the Fund's investment
opportunities, including restrictions on investments in issuers or industries
deemed sensitive to national interests, or expropriation or confiscation of
assets or property, which could result in the Fund's loss of its entire
investment in that market; and
- - less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes,
and other costs relating to investments in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
The Asset Allocation Fund may also invest in debt obligations issued or
guaranteed by foreign governments or their agencies, instrumentalities or
political subdivisions, or by supranational issuers (collectively, sovereign
debt). Investment in sovereign debt involves special risks. Certain foreign
countries, particularly developing countries, have experienced, and may continue
to experience, high rates of inflation, high interest rates, exchange-rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties, and extreme poverty and unemployment. The issuer of the debt or
the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due in accordance with
the terms of such debt, and the Fund may have limited legal recourse in the
event of default.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Funds could be affected by changes in foreign
currency exchange rates to some extent. The value of a Fund's assets denominated
in foreign currencies will increase or decrease in response to fluctuations in
the value of those foreign currencies relative to the U.S. dollar. Currency
exchange rates can be volatile at times in response to supply and demand in the
currency exchange markets, international balances of payments, governmental
intervention, speculation, and other political and economic conditions.
The Funds may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options, and futures transactions
for hedging or any other lawful purpose. (See "Derivative Instruments.")
DERIVATIVE INSTRUMENTS
A Fund may use derivative instruments for any lawful purpose consistent with
the Fund's investment objective such as hedging or managing risk. Derivative
instruments are commonly defined to include securities or contracts
----------------------
PROSPECTUS PAGE I-22
<PAGE> 26
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.
Derivative instruments may include (i) options; (ii) futures; (iii) options
on futures; (iv) short sales against the box, in which a Fund sells a security
it owns for delivery at a future date; (v) swaps, in which two parties agree to
exchange a series of cash flows in the future, such as interest-rate payments;
(vi) interest-rate caps, under which, in return for a premium, one party agrees
to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; (vii) interest-rate floors, under which, in return for
a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; (viii) forward currency
contracts and foreign currency exchange-related securities; and (ix) structured
instruments which combine the foregoing in different ways.
Derivatives may be exchange-traded or traded in OTC transactions between
private parties. OTC transactions are subject to additional risks, such as the
credit risk of the counterparty to the instrument and are less liquid than
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PROSPECTUS PAGE I-23
<PAGE> 27
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. Derivative instruments may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
instrument in relation to the underlying asset may be magnified. When required
by SEC guidelines, a Fund will set aside permissible liquid assets in a
segregated account to secure its obligations under the derivative.
The successful use of derivatives by a Fund is dependent upon a variety of
factors, particularly the Advisor's ability to correctly anticipate trends in
the underlying asset. In a hedging transaction, if the Advisor incorrectly
anticipates trends in the underlying asset, a Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between a Fund's derivative transactions and the instruments being hedged. To
the extent that the Fund is engaging in derivative transactions for risk
management, the Fund's successful use of such transactions is more dependent
upon the Advisor's ability to correctly anticipate such trends, since losses in
these transactions may not be offset in gains in the Fund's portfolio or in
lower purchase prices for assets it intends to acquire. The Advisor's prediction
of trends in underlying assets may prove to be inaccurate, which could result in
substantial losses to a Fund.
In addition to the derivative instruments and strategies described above, the
Advisor expects to discover additional derivative instruments and other trading
techniques. The Advisor may utilize these new derivative instruments and
techniques to the extent that they are consistent with a Fund's investment
objective and permitted by the Fund's investment limitations, operating
policies, and applicable regulatory authorities.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators and investors in mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers, and special purpose
entities (collectively, "private lenders"). Mortgage-backed securities issued by
private lenders may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any governmental guarantee of the underlying mortgage assets but
with some form of non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first-lien mortgage
loans or interests therein; rather, they include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
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PROSPECTUS PAGE I-24
<PAGE> 28
loans, leases of various types of property, and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal and
interest on asset-backed securities may be supported by non-governmental credit
enhancements similar to those utilized in connection with mortgage-backed
securities.
The yield characteristics of mortgage- and asset-backed securities differ
from those of traditional debt securities. Among the principal differences are
that interest and principal payments are made more frequently on mortgage-and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if a Fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government-sponsored mortgage-backed securities.
The Funds may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such market
value may be extremely volatile. With respect to certain stripped securities,
such as interest-only ("IO") and principal-only ("PO") classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
SMALL AND MEDIUM COMPANIES
The Asset Allocation, Growth and Income, and Total Return Funds may invest in
the securities of small and medium companies. While small and medium companies
generally have potential for rapid growth, investments in small and medium
companies often involve greater risks than investments in larger, more
established companies because small and medium companies may lack the management
experience, financial resources, product diversification, and competitive
strengths of larger companies. In addition, in many instances the securities of
small and medium companies are traded only over-the-counter or on a regional
securities exchange, and the frequency and volume of their trading is
substantially less than is typical of larger companies. Therefore, the
securities of small and medium companies may be subject to
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PROSPECTUS PAGE I-25
<PAGE> 29
greater and more abrupt price fluctuations. When making large sales, the Fund
may have to sell portfolio holdings at discounts from quoted prices or may have
to make a series of small sales over an extended period of time due to the
trading volume of small and medium company securities. Investors should be aware
that, based on the foregoing factors, an investment in the Fund may be subject
to greater price fluctuations than an investment in a fund that invests
primarily in larger, more established companies. The Advisor's research efforts
may also play a greater role in selecting securities for the Fund than in a fund
that invests in larger, more established companies.
DIVERSIFICATION
The American Utilities Fund is non-diversified. Because the Fund may invest a
larger portion of its assets in the securities of a single issuer than
diversified funds, an investment in the Fund may be subject to greater
fluctuations in value than an investment in a diversified fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are those securities that are not readily marketable,
including restricted securities and repurchase obligations maturing in more than
seven days. Certain restricted securities that may be resold to institutional
investors under Rule 144A under the Securities Act of 1933 and Section 4(2)
commercial paper may be determined to be liquid under guidelines adopted by each
Fund's Board of Directors.
CASH MANAGEMENT
Each Fund may invest directly in cash and short-term fixed-income securities,
including, for this purpose, shares of one or more money market funds managed by
the Advisor (collectively, the "Strong Money Funds"). The Strong Money Funds
seek current income, a stable share price of $1.00, and daily liquidity. All
money market instruments can change in value when interest rates or an issuer's
creditworthiness change dramatically. The Strong Money Funds cannot guarantee
that they will always be able to maintain a stable net asset value of $1.00 per
share.
PORTFOLIO TURNOVER
Historical portfolio turnover rates for the Asset Allocation, American
Utilities, and Total Return Funds are listed under "Financial Highlights." The
annual portfolio turnover rate indicates changes in a Fund's portfolio. The
turnover rate may vary from year to year, as well as within a year. It may also
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PROSPECTUS PAGE I-26
<PAGE> 30
be affected by sales of portfolio securities necessary to meet cash requirements
for redemption of shares. High portfolio turnover in any year will result in the
payment by a Fund of above-average amounts of transaction costs and could result
in the payment by shareholders of above-average amounts of taxes on realized
investment gains. Under normal market circumstances, it is anticipated that the
rate of portfolio turnover of the Equity Income and Growth and Income Funds
generally will not exceed 200%. The Asset Allocation and Total Return Funds each
have a wide investment scope and an active management investment policy, which
may result in higher portfolio turnover. The Asset Allocation Fund may engage in
substantial short-term trading, which involves significant risk and may be
deemed speculative. Such trading will result in a higher portfolio turnover rate
and correspondingly higher brokerage costs.
ABOUT THE FUNDS
MANAGEMENT
The Board of Directors of each Fund is responsible for managing its business
and affairs. Each of the Funds has entered into an investment advisory agreement
(collectively the "Advisory Agreements") with Strong Capital Management, Inc.
(the "Advisor"). Except for the management fee arrangements, the Advisory
Agreements are substantially identical. Under the terms of these agreements, the
Advisor manages each Fund's investments and business affairs subject to the
supervision of each Fund's Board of Directors.
ADVISOR. The Advisor began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and profit-sharing
plans, as well as mutual funds, several of which are funding vehicles for
variable insurance products. As of February 1, 1997, the Advisor had over $24
billion under management. The Advisor's principal mailing address is P.O. Box
2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong, the Chairman of the
Board of each Fund, is the controlling shareholder of the Advisor.
As compensation for its services, each Fund pays the Advisor a monthly
management fee based on a percentage of each Fund's average daily net asset
value. The annual rates are as follows: Asset Allocation and Total Return Funds,
.85% of the Fund's average daily net assets up to $35,000,000 and .80% of each
Fund's average daily net assets in excess of $35,000,000; Equity Income and
Growth and Income Funds, .80%; and American Utilities Fund, .75%. Such fees are
in excess of fees paid by many other funds. From time to time, the Advisor may
voluntarily waive all or a portion of its management fee and/or absorb certain
Fund expenses without further notification of the commencement or termination of
such waiver or absorption. Any such waiver
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PROSPECTUS PAGE I-27
<PAGE> 31
or absorption will temporarily lower a Fund's overall expense ratio and increase
a Fund's overall return to investors.
The Advisor and the Subadvisor permit portfolio managers and other persons
who may have access to information about the purchase or sale of securities in a
Fund's portfolio ("access persons") to purchase and sell securities for their
own accounts, subject to the Advisor's or Subadvisor's policy governing personal
investing. These policies require access persons to conduct their personal
investment activities in a manner that the Advisor or Subadvisor believes is not
detrimental to a Fund or to the Advisor or Subadvisor's other advisory clients.
Among other things, these policies require access persons to obtain preclearance
before executing personal trades and generally prohibits access persons from
keeping profits derived from the purchase or sale of the same security within 60
calendar days. See the SAI for more information.
SUBADVISOR AMERICAN UTILITIES FUND. Under a subadvisory agreement between the
Advisor and W.H. Reaves & Co., Inc. (the "Subadvisory Agreement"), the
Subadvisor, pursuant to the oversight and supervision of the American Utilities
Fund's Board of Directors and the Advisor, provides a continuous investment
program for the American Utilities Fund. Under the Subadvisory Agreement, the
Subadvisor is responsible for determining the securities to be purchased and
sold by the Fund and for executing those transactions. However, the Advisor is
responsible for managing the cash-equivalent investment maintained by the Fund
in the ordinary course of its business, which is expected to equal approximately
5% - 7% of the Fund's total assets. As compensation for its services, the
Advisor (not the Fund) pays the Subadvisor a monthly fee at an annual rate of
.50% on the first $200 million of the Fund's average daily net assets plus 40%
of the Advisor's net management fee (after any waivers thereof) on that portion
of the Fund's average daily net assets in excess of $200 million except that the
foregoing percentage will be 50% on those average daily net assets between $1.0
billion and $1.5 billion. The Subadvisor bears all of its own expenses in
providing subadvisory services to the Fund.
The Subadvisor began conducting business in 1961. Since then, its principal
business has been providing continuous investment supervision to institutional
investors such as corporations, corporate pension funds, employee savings plans,
foundations, and endowments. The Subadvisor is a Delaware corporation. Mr.
William H. Reaves is the controlling shareholder of the Subadvisor. As of
February 1, 1997, the Subadvisor had over $1 billion under management. Its
address is 10 Exchange Place, Jersey City, New Jersey 07302.
The Subadvisor may also act as a broker for the American Utilities Fund. In
order for the Subadvisor to effect any portfolio transactions for the Fund on an
exchange, the commissions, fees, or other remuneration received by the
Subadvisor must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with transactions
involving similar securities being purchased or sold on any exchange during a
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PROSPECTUS PAGE I-28
<PAGE> 32
comparable period of time. This standard would allow the Subadvisor to receive
no more than the remuneration that would be expected to be received by an
unaffiliated broker in a commensurate arm's-length transaction.
HISTORICAL PERFORMANCE DATA OF THE SUBADVISOR
The following table sets forth the composite performance data of the
Subadvisor relating to the historical performance of actual, fee-paying,
discretionary equity accounts and the designated equity portion (including
designated cash reserves) of balanced accounts with assets over $1 million (the
"Equity Accounts") managed by the Subadvisor, since the dates indicated, that
have investment objectives, policies, strategies, and risks substantially
similar to those of the American Utilities Fund. The data is provided to
illustrate the past performance of the Subadvisor in managing substantially
similar accounts as measured against the Standard & Poor's 500 Stock Index ("S&P
500"), and does not represent the performance of the American Utilities Fund.
PERFORMANCE IS HISTORICAL AND DOES NOT REPRESENT THE FUTURE PERFORMANCE OF THE
AMERICAN UTILITIES FUND OR OF THE SUBADVISOR.
The Subadvisor's composite performance data shown below was calculated in
accordance with the recommended standards of the Association for Investment
Management and Research (commonly referred to as AIMR)* retroactively applied
for all time periods. All returns presented were calculated on a total return
basis and include all dividends and interest, accrued income, and realized and
unrealized gains and losses. All returns reflect the deduction of investment
management fees, brokerage commissions, and execution costs paid by the Equity
Accounts, without provision for federal or state income taxes. Custodial fees,
if any, were not included in the calculation. Securities transactions are
accounted for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns. The composite's returns are
calculated on a time-weighted basis.
The Equity Accounts that are included in the Subadvisor's composite are not
subject to the same type of expenses to which the American Utilities Fund is
subject nor to the diversification requirements, specific tax restrictions, and
investment limitations imposed on the American Utilities Fund by the Investment
Company Act of 1940 or Subchapter M of the Internal Revenue Code. Consequently,
the performance results for the Subadvisor's composite could have been adversely
affected if the Equity Accounts included in the composite had been regulated
under the federal security and tax laws.
The investment results of the Subadvisor's composite presented below have
been audited for all periods presented up to June 30, 1994. The Subadvisor has
- ---------------
* AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and (ii)
ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.
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PROSPECTUS PAGE I-29
<PAGE> 33
its composite performance audited every three years. The investment results
presented are not intended to predict or suggest the future returns of the
Utility Fund. Investors should be aware that the use of a methodology different
than that used below to calculate performance could result in different
performance data.
<TABLE>
<CAPTION>
Subadvisor's
Equity
Time Period Composite S&P 500(1)
<S> <C> <C>
Average Annual Returns
1 Year 10.2% 23.0%
3 Year 12.8% 19.7%
5 Year 13.3% 15.2%
10 Year 12.5% 15.2%
15 Year 17.0% 16.7%
1/1/78 -- 12/31/96(2) 17.1% 15.8%
Cumulative Returns
1/1/78 -- 12/31/96(2) 1922.9% 1515.3%
</TABLE>
(1) The S&P 500 Stock Index is an unmanaged index generally representative of
the U.S. stock market. The index does not reflect investment management
fees, brokerage commissions, and other expenses associated with investing in
equity securities.
(2) The Subadvisor's Equity Composite began on January 1, 1978.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Strong Conservative Equity Funds.
STRONG ASSET ALLOCATION FUND
BRADLEY C. TANK. Mr. Tank leads the Fund's investment team and allocates the
Fund's assets among equities, bonds, and cash. In addition, Mr. Tank co-manages
the Fund's bond component. Before joining the Advisor in June 1990, he spent
eight years at Salomon Brothers, Inc., where he was a fixed-income specialist
and, for the last six years, a vice president. Mr. Tank received his B.A. in
1980 from the University of Wisconsin-Eau Claire and his M.B.A. in 1982 from the
University of Wisconsin-Madison, where he also completed the Applied Securities
Analysis Program. Mr. Tank currently chairs the Advisor's Fixed Income
Investment Committee.
Equity Component
ANTHONY L.T. CRAGG. Mr. Cragg co-manages the Fund. Mr. Cragg joined the
Advisor in April 1993 to develop the Advisor's international investment
activities. During the prior seven years, he helped establish Dillon, Read
International Asset Management, where he was in charge of Japanese, Asian, and
Australian investments. A graduate of Christ Church, Oxford University, Mr.
Cragg began his investment career as an international investment manager in 1980
at Gartmore, Ltd., where his tenure included assignments in London, Hong Kong,
and Tokyo. He has co-managed the Fund since December 1994.
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PROSPECTUS PAGE I-30
<PAGE> 34
RONALD C. OGNAR. Mr. Ognar co-manages the Fund. Mr. Ognar, a Chartered
Financial Analyst with more than 25 years of investment experience, joined the
Advisor in April 1993 after two years as a principal and portfolio manager with
RCM Capital Management. For approximately three years prior to that, he was a
portfolio manager at Kemper Financial Services in Chicago. Mr. Ognar began his
investment career in 1968 at LaSalle National Bank in Chicago after serving two
years in the U.S. Army. He received his bachelor's degree in accounting from the
University of Illinois in 1968. Mr. Ognar has co-managed the Fund since December
1994.
RICHARD S. STRONG. Mr. Strong co-manages the Fund. Mr. Strong founded the
Advisor in 1974. He began his investment career at Employers Insurance of Wausau
in 1966, after receiving his master's degree in finance from the University of
Wisconsin-Madison that January. He received his undergraduate degree in 1963
from Baldwin-Wallace College. Mr. Strong has co-managed the Fund since December
1994. In addition to his role as a portfolio manager, he is currently the
Chairman of the Board, Director, Chief Investment Officer, and a member of the
Advisor's Executive Committee.
RICHARD T. WEISS. Mr. Weiss co-manages the Fund. Mr. Weiss joined the Advisor
in 1991 from Chicago-based Stein Roe & Farnham, where he began his career as a
research analyst in 1975. He was named a portfolio manager in 1981. Mr. Weiss
attended Harvard Graduate School of Business Administration, where he was
awarded his M.B.A. in 1975, and the University of Southern California, where he
received his bachelor's degree in business administration in 1973. Mr. Weiss has
co-managed the Fund since December 1994. In addition, Mr. Weiss is a member of
the Advisor's Executive Committee.
ANDREW C. STEPHENS. Mr. Stephens co-manages the Fund. Since he joined the
Advisor in January 1987, he has served in a variety of positions, including
Director of Trading Operations and equity research analyst. Before joining the
investment area, he served as Director of Information Systems. Mr. Stephens, a
1986 graduate of the University of Wisconsin-Madison, co-managed the Fund from
January 1993 until December 1994, and resumed co-managing the Fund in March
1996.
Bond and Cash Components
JEFFREY A. KOCH. Mr. Koch co-manages the Fund. Mr. Koch joined the Advisor as
a portfolio manager and securities analyst in June 1989. For a brief period
prior to that, he was a market-maker clerk at Fossett Corporation, a clearing
firm. Mr. Koch earned his M.B.A. in Finance at Washington University in St.
Louis, Missouri in 1989. His undergraduate degree, awarded in 1987, is from the
University of Minnesota-Morris. Mr. Koch is also a Chartered Financial Analyst.
Mr. Koch has co-managed the Fund since December 1994.
SHIRISH T. MALEKAR. Mr. Malekar co-manages the Fund. Mr. Malekar joined the
Advisor in January 1994. He was an international bond portfolio manager at
Pacific Investment Management Company in California for the previous three
years. Prior to that, he was a bond trader at Harris Bank in
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PROSPECTUS PAGE I-31
<PAGE> 35
Chicago for one year and a bond trader at PaineWebber Incorporated in New York
and Tokyo for more than two years. He has an M.S. in Management from the
Massachusetts Institute of Technology, an M.S. in Petroleum Engineering from the
University of Pittsburgh, and a B.S. in Chemical Engineering from the University
of Bombay, India. Mr. Malekar has co-managed the Fund since December 1994.
JAY N. MUELLER. Mr. Mueller co-manages the Fund. Mr. Mueller joined the
Advisor in September 1991 as a securities analyst and portfolio manager. For
four years prior to that, he was a securities analyst and portfolio manager with
R. Meeder & Associates of Dublin, Ohio. Mr. Mueller received his bachelor's
degree in economics in 1982 from the University of Chicago. Mr. Mueller is also
a Chartered Financial Analyst. Mr. Mueller has co-managed the Fund since 1993.
STRONG AMERICAN UTILITIES FUND
WILLIAM H. REAVES. Mr. Reaves, the Fund's senior co-manager, has been the
President and Chief Investment Officer, Portfolio Manager, and Utilities Analyst
of the Subadvisor since 1961. He has worked as a utilities analyst since 1946.
WILLIAM A. FERER. Mr. Ferer, a co-manager of the Fund, has been a Vice
President, Portfolio Manager, and Energy Analyst of the Subadvisor since 1987.
He has worked as a securities analyst since 1971.
RONALD J. SORENSON. Mr. Sorenson, a co-manager of the Fund, has been a Vice
President and Portfolio Manager of the Subadvisor since 1991. For three years
prior to that, he was a partner and portfolio manager of PVF Inc. For a two-year
period prior to that, Mr. Sorenson was the Chairman of the Board and Chairman of
the Investment Committee of The American Life Insurance Company of New York. Mr.
Sorenson has acted as President of RWS Energy Services, Chief Financial Officer
of Emerging Market Services A.G., Controller of Triad Holding Corporation S.A.,
and a C.P.A. for Arthur Young & Co.
MARK D. LUFTIG. Mr. Luftig, a co-manager of the Fund, has been a Vice
President and Utilities Analyst of the Subadvisor since January 1995. Prior to
joining the Subadvisor, he was the Executive Vice President and Director of
Equity Research at Kemper Securities, Inc., where he worked since 1992. For
approximately three years prior to that, Mr. Luftig served as the Vice President
of the National Economic Research Association, Inc. From 1975 until 1989, he
worked at Salomon Brothers, Inc. as the Director of Research.
STRONG TOTAL RETURN FUND
RONALD C. OGNAR. Information concerning Mr. Ognar is set forth above under
"Strong Asset Allocation Fund."
IAN J. ROGERS. In October 1994, Mr. Rogers joined Mr. Ognar as co-portfolio
manager of the Fund. Mr. Rogers has worked with Mr. Ognar as an equity analyst
since joining the Advisor in August 1993. Prior to joining the Advisor, Mr.
Rogers worked for seven years as an equity analyst with Kemper
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PROSPECTUS PAGE I-32
<PAGE> 36
Financial Services in Chicago. For approximately two years prior to that, he was
an equity analyst for Allstate Insurance. Mr. Rogers began his investment career
in 1983 as an equity analyst for Comerica Bank in Detroit. He received his
M.B.A. from Central Michigan University in 1983 and his bachelor's degree in
Business Administration from Ferris State College in 1966.
STRONG EQUITY INCOME FUND
STRONG GROWTH AND INCOME FUND
MR. RIMAS M. MILAITIS. Mr. Milaitis serves as the portfolio manager for the
Funds. He joined the Advisor in December 1995. For the previous four years, Mr.
Milaitis managed several conservative-equity portfolios at Aon Advisors, Inc.
("AAI") in Chicago, Illinois. For two years prior to that, he served as an
equity trader for AAI. Prior to working at AAI, Mr. Milaitis served as a equity
portfolio assistant for three years to the Illinois State Board of Investment.
He attended DePaul University, where he was awarded his M.B.A. in 1991, and the
Illinois State University, where he received his bachelor's degree in economics
in 1984.
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin 53201, also acts as
dividend-disbursing agent and transfer agent for the Funds. The Advisor is
compensated for its services based on an annual fee per account plus certain
out-of-pocket expenses. The fees received and the services provided as transfer
agent and dividend-disbursing agent are in addition to those received and
provided under the Advisory Agreements between the Advisor and the Funds.
DISTRIBUTOR
Strong Funds Distributors, Inc., P.O. Box 2936, Milwaukee, Wisconsin 53201,
an indirect subsidiary of the Advisor, acts as distributor of the shares of the
Funds.
ORGANIZATION
SHAREHOLDER RIGHTS. The Asset Allocation and Total Return Funds are Wisconsin
corporations that are authorized to issue an indefinite number of shares of
common stock and series and classes of series of shares of common stock. The
American Utilities Fund, Equity Income, and Growth and Income Funds are series
of common stock of Strong Conservative Equity Funds, Inc., a Wisconsin
corporation that is authorized to issue an indefinite number of shares of common
stock and series and classes of series of shares of common stock. Each share of
the Funds has one vote, and all shares participate equally in dividends and
other capital gains distributions by the respective Fund and in the residual
assets of the respective Fund in the event of liquidation. Certificates will be
issued for shares held in your account only upon your written
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PROSPECTUS PAGE I-33
<PAGE> 37
request. You will, however, have full shareholder rights whether or not you
request certificates. Generally, the Funds will not hold an annual meeting of
shareholders unless required by the 1940 Act.
SHAREHOLDER PRIVILEGES. The shareholders of each Fund may benefit from the
privileges described in the "Shareholder Manual" (see Page II-1). However, each
Fund reserves the right, at any time and without prior notice, to suspend,
limit, modify, or terminate any of these privileges or their use in any manner
by any person or class.
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. Unless you choose otherwise,
all your dividends and capital gains distributions will be automatically
reinvested in additional Fund shares. Or, you may elect to have all your
dividends and capital gain distributions from a Fund automatically invested in
additional shares of another Strong Fund. Shares are purchased at the net asset
value determined on the payment date. If you request in writing that your
dividends and other distributions be paid in cash, a Fund will credit your bank
account by Electronic Funds Transfer ("EFT") or issue a check to you within five
business days of the payment date. You may change your election at any time by
calling or writing Strong Funds. Strong Funds must receive any such change 7
days (15 days for EFT) prior to a dividend or capital gain distribution payment
date in order for the change to be effective for that payment. The policy of
each Fund is to pay dividends from net investment income quarterly and to
distribute substantially all net realized capital gains and gains from foreign
currency transactions annually. Each Fund may make additional distributions if
necessary to avoid imposition of a 4% excise tax on undistributed income and
gains.
TAX STATUS OF DIVIDENDS AND OTHER DISTRIBUTIONS. You will be subject to
federal income tax at ordinary income tax rates on any dividends you receive
that are derived from investment company taxable income (consisting generally of
net investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if any). Distributions of net capital gain (the
excess of net long-term capital gain over net short-term capital loss), when
designated as such by a Fund, are taxable to you as long-term capital gains,
regardless of how long you have held your Fund shares. The Funds' distributions
are taxable in the year they are paid, whether they are taken in cash or
reinvested in additional shares, except that certain distributions declared in
the last three months of the year and paid in January are taxable as if paid on
December 31.
If a Fund's distributions exceed its investment company taxable income and
net capital gain in any year, as a result of currency-related losses or
otherwise, all or a portion of those distributions may be treated as a return of
capital to shareholders for tax purposes.
----------------------
PROSPECTUS PAGE I-34
<PAGE> 38
YEAR-END TAX REPORTING. After the end of each calendar year, you will receive
a statement (Form 1099) of the federal income tax status of all dividends and
other distributions paid (or deemed paid) during the year.
SHARES SOLD OR EXCHANGED. Your redemption of Fund shares may result in
taxable gain or loss to you, depending upon whether the redemption proceeds
payable to you are more or less than your adjusted cost basis for the redeemed
shares. Similar tax consequences generally will result from an exchange of Fund
shares for shares of another Strong Fund. If you purchase shares of a Fund
within thirty days before or after redeeming shares of the same Fund at a loss,
a portion or all of that loss will not be deductible and will increase the cost
basis of the newly purchased shares. If you redeem shares out of a non-IRA
retirement account, you will be subject to withholding for federal income tax
purposes unless you transfer the distribution directly to an "eligible
retirement plan."
BUYING A DISTRIBUTION. A distribution paid shortly after you have purchased
shares in a Fund will reduce the net asset value of the shares by the amount of
the distribution, which nevertheless will be taxable to you even though it
represents a return of a portion of your investment.
BACKUP WITHHOLDING. If you are an individual or certain other noncorporate
shareholder and do not furnish a Fund with a correct taxpayer identification
number, the Fund is required to withhold federal income tax at a rate of 31%
(backup withholding) from all dividends, capital gain distributions, and
redemption proceeds payable to you. Withholding at that rate from dividends and
capital gain distributions payable to you also is required if you otherwise are
subject to backup withholding. To avoid backup withholding, you must provide a
taxpayer identification number and state that you are not subject to backup
withholding due to the underreporting of your income. This certification is
included as part of your application. Please complete it when you open your
account.
TAX STATUS OF THE FUNDS. Each Fund intends to continue to qualify for
treatment as a regulated investment company under Subchapter M of the Internal
Revenue Code and, if so qualified, will not be liable for federal income tax on
earnings and gains distributed to its shareholders in a timely manner.
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effects on the Funds and investors therein. See
the SAI for a further discussion. There may be other federal, state, or local
tax considerations applicable to a particular investor. You are therefore urged
to consult your own tax adviser.
----------------------
PROSPECTUS PAGE I-35
<PAGE> 39
PERFORMANCE INFORMATION
Each Fund may advertise a variety of types of performance information,
including "average annual total return," "total return," "cumulative total
return," and "yield." Each of these figures is based upon historical results and
does not represent the future performance of a Fund.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund assuming
the reinvestment of all dividends and distributions. Total return figures are
not annualized and simply represent the aggregate change of a Fund's investments
over a specified period of time.
Yield is an annualized figure, which means that it is assumed that a Fund
generates the same level of net investment income over a one-year period. A
Fund's yield is a measure of the net investment income per share earned by the
Fund over a specific one-month period and is shown as a percentage of the net
asset value of the Fund's shares at the end of the period.
----------------------
PROSPECTUS PAGE I-36
<PAGE> 40
SHAREHOLDER MANUAL
<TABLE>
<S> <C>
HOW TO BUY SHARES...................... II-1
DETERMINING YOUR SHARE PRICE........... II-4
HOW TO SELL SHARES..................... II-6
SHAREHOLDER SERVICES................... II-9
REGULAR INVESTMENT PLANS............... II-10
SPECIAL SITUATIONS..................... II-12
</TABLE>
HOW TO BUY SHARES
All the Strong Funds are 100% no-load, meaning you may purchase, redeem, or
exchange shares directly at net asset value without paying a sales charge.
Because the Funds' net asset value changes daily, your purchase price will be
the next net asset value determined after Strong receives and accepts your
purchase order.
Whether you are opening a new account or adding to an existing one, Strong
provides you with several methods to buy Fund shares.
----------------------
PROSPECTUS PAGE II-1
<PAGE> 41
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO OPEN A NEW ACCOUNT
- ----------------------------------------------------------------------------
MAIL BY CHECK
- Complete and sign the application. Make your check
or money order payable to "Strong Funds."
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to Strong Funds, 900 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- Call 1-800-368-3863 for instructions on
establishing an account with an exchange by mail.
- ----------------------------------------------------------------------------
TELEPHONE BY EXCHANGE
- Call 1-800-368-3863 to establish a new account by
1-800-368-3863 exchanging funds from an existing Strong Funds
24 HOURS A DAY, account.
7 DAYS A WEEK - Sign up for telephone exchange services when you
open your account. To add the telephone exchange
option to your account, call 1-800-368-3863 for a
Telephone Exchange Form.
- Please note that your accounts must be identically
registered and that you must exchange enough into the
new account to meet the minimum initial investment.
Or use Strong DirectSM, Strong Funds' automated
telephone response system. Call 1-800-368-7550.
- ----------------------------------------------------------------------------
IN PERSON - Stop by our Investor Center in Menomonee Falls,
Wisconsin.
Call 1-800-368-3863 for hours and directions.
- The Investor Center can only accept checks or money
orders.
- ----------------------------------------------------------------------------
WIRE Call 1-800-368-3863 for instructions on opening an
account by wire.
- ----------------------------------------------------------------------------
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM."
- If you sign up for Strong's Automatic Investment
Plan when you open your account, Strong Funds will
waive the Fund's minimum initial investment (see
chart on page II-4).
- Complete the Automatic Investment Plan section on
the account application.
- Mail to the address indicated on the application.
- ----------------------------------------------------------------------------
BROKER-DEALER - You may purchase shares in the Fund through a
broker-
dealer or other institution that may charge a
transaction fee.
- Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account
from the broker-dealer.
</TABLE>
----------------------
PROSPECTUS PAGE II-2
<PAGE> 42
- ------------------------------------------------------------------------------
TO ADD TO AN EXISTING ACCOUNT
- --------------------------------------------------------------------------------
BY CHECK
- - Complete an Additional Investment Form provided at the bottom of your account
statement, or write a note indicating your fund account number and
registration. Make your check or money order payable to "Strong Funds."
- - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
using an express delivery service, send to Strong Funds, 900 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- - Call 1-800-368-3863 for instructions on exchanging by mail.
- --------------------------------------------------------------------------------
BY EXCHANGE
- - Add to an account by exchanging funds from another Strong Funds account.
- - Sign up for telephone exchange services when you open your account. To add the
telephone exchange option to your account, call 1-800-368-3863 for a Telephone
Exchange Form.
- - Please note that the accounts must be identically registered and that the
minimum exchange is $50 or the balance of your account, whichever is less.
BY TELEPHONE PURCHASE
- - Sign up for telephone purchase when you open your account to make additional
investments from $50 to $25,000 into your Strong Funds account by telephone.
To add this option to your account, call 1-800-368-3863 for a Telephone
Purchase Form.
Or use Strong DirectSM, Strong Funds' automated telephone response system. Call
1-800-368-7550.
- --------------------------------------------------------------------------------
- - Stop by our Investor Center in Menomonee Falls, Wisconsin. Call 1-800-368-3863
for hours and directions.
- - The Investor Center can only accept checks or money orders.
- --------------------------------------------------------------------------------
Call 1-800-368-3863 for instructions on adding to an account by wire.
- --------------------------------------------------------------------------------
USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS. Sign up for these services
when you open your account, or call 1-800-368-3863 for instructions on how to
add them to your existing account.
- - AUTOMATIC INVESTMENT PLAN. Make regular, systematic investments (minimum $50)
into your Strong Funds account from your bank checking or NOW account.
Complete the Automatic Investment Plan section on the account application.
- - AUTOMATIC EXCHANGE PLAN. Make regular, systematic exchanges (minimum $50) from
one Strong Funds account to another. Call 1-800-368-3863 for an application.
- - PAYROLL DIRECT DEPOSIT. Have a specified amount (minimum $50) regularly
deducted from your paycheck, social security check, military allotment, or
annuity payment invested directly into your Strong Funds account. Call
1-800-368-3863 for an application.
- - AUTOMATIC DIVIDEND REINVESTMENT. Unless you choose otherwise, all your
dividends and capital gain distributions will be automatically reinvested in
additional Fund shares. Or, you may elect to have your dividends and capital
gain distributions automatically invested in shares of another Strong Fund.
- --------------------------------------------------------------------------------
- - You may purchase additional shares in a Fund through a broker-dealer or other
institution that may charge a transaction fee.
- - Strong Funds may only accept requests to purchase additional shares into a
broker-dealer street name account from the broker-dealer.
----------------------
PROSPECTUS PAGE II-3
<PAGE> 43
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- - Please make all checks or money orders payable to "Strong Funds."
- - We cannot accept third-party checks or checks drawn on banks outside the U.S.
- - You will be charged a $20 service fee for each check, wire, or Electronic
Funds Transfer ("EFT") purchase that is returned unpaid, and you will be
responsible for any resulting losses suffered by a Fund.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - A Fund reserves the right to decline to accept your purchase order upon
receipt for any reason.
- - Minimum Investment Requirements:
- ----------------------------------------------------------------------------
To open a regular account
Total Return and Asset Allocation Funds...........................$250
American Utilities Fund.........................................$1,000
Equity Income and Growth and Income Funds.......................$2,500
To open an IRA or Defined Contribution account........................$250
To open a UGMA/UTMA account...........................................$250
To open a 401(k) or 403(b) retirement account...................No Minimum
To add to an existing account..........................................$50
The Funds offer a No-Minimum Investment Program that waives the minimum
initial investment requirements for investors who participate in the Strong
Automatic Investment Plan (described on page II-11). Unless you participate in
the Strong No-Minimum Investment Program, please ensure your purchases meet the
minimum investment requirements.
Under certain circumstances (for example, if you discontinue a No-Minimum
Investment Program before you reach a Fund's minimum initial investment), each
Fund reserves the right to close your account. Before taking such action, a Fund
will provide you with written notice and at least 60 days in which to reinstate
an investment program or otherwise reach the minimum initial investment
required.
DETERMINING YOUR SHARE PRICE
Generally, when you make any purchases, sales, or exchanges, the price of
your shares will be the net asset value ("NAV") next determined after Strong
Funds receives your request in proper form. If Strong Funds receives such
request prior to the close of the New York Stock Exchange (the "Exchange") on a
day on which the Exchange is open, your share price will be the NAV determined
that day. The NAV for each Fund is normally determined as of
----------------------
PROSPECTUS PAGE II-4
<PAGE> 44
3:00 p.m. Central Time ("CT") each day the Exchange is open. The Funds reserve
the right to change the time at which purchases, redemptions, and exchanges are
priced if the Exchange closes at a time other than 3:00 p.m. CT or if an
emergency exists. Each Fund's NAV is calculated by taking the fair value of a
Fund's total assets, subtracting all its liabilities, and dividing by the total
number of shares outstanding. Expenses are accrued daily and applied when
determining the NAV.
A Fund's portfolio securities are valued based on market quotations or at
fair value as determined by the method selected by each Fund's Board of
Directors. Equity securities traded on a national securities exchange or NASDAQ
are valued at the last sales price on the national securities exchange or NASDAQ
on which such securities are primarily traded. Securities traded on NASDAQ for
which there were no transactions on a given day or securities not listed on an
exchange or NASDAQ are valued at the average of the most recent bid and asked
prices. Other exchange traded securities (generally foreign securities) will be
valued based on market quotations. Debt securities are valued by a pricing
service that utilizes electronic data processing techniques to determine values
for normal institutional-sized trading units of debt securities without regard
to sale or bid prices when such techniques are believed to more accurately
reflect the fair market value for such securities. Otherwise, sale or bid prices
are used. Any securities or other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Board of Directors. Debt securities having remaining maturities of 60 days or
less are valued by the amortized cost method when the Board of Directors
determines that the fair value of such securities is their amortized cost. Under
this method of valuation, a security is initially valued at its acquisition
cost, and thereafter, amortization of any discount or premium is assumed each
day, regardless of the impact of the fluctuating rates on the market value of
the instrument.
Securities quoted in foreign currency are valued daily in U.S. dollars at the
foreign currency exchange rates that are prevailing at the time the daily NAV
per share is determined. Although the Funds value their foreign assets in U.S.
dollars on a daily basis, they do not intend to convert their holdings of
foreign currencies into U.S. dollars on a daily basis. Foreign currency exchange
rates are generally determined prior to the close of trading on the Exchange.
Occasionally, events affecting the value of foreign investments and such
exchange rates occur between the time at which they are determined and the close
of trading on the Exchange. Such events would not normally be reflected in a
calculation of a Fund's NAV on that day. If events that materially affect the
value of a Fund's foreign investments or the foreign currency exchange rates
occur during such period, the investments will be valued at their fair value as
determined in good faith by or under the direction of the Board of Directors.
----------------------
PROSPECTUS PAGE II-5
<PAGE> 45
HOW TO SELL SHARES
You can access the money in your account at any time by selling (redeeming)
some or all of your shares back to the Fund. Once your redemption request is
received in proper form, Strong will normally mail you the proceeds the next
business day and, in any event, no later than seven days thereafter.
To redeem shares, you may use any of the methods described in the following
chart. However, if you are selling shares in a retirement account, please call
1-800-368-3863 for instructions. Please note that there is a $10.00 fee for
closing an IRA or other retirement account or for transferring assets to another
custodian. For your protection, certain requests may require a signature
guarantee. (See "Special Situations -- Signature Guarantees.")
----------------------
PROSPECTUS PAGE II-6
<PAGE> 46
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO SELL SHARES
- -----------------------------------------------------------------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
- Write a "letter of instruction" that includes the
For your protection following information: your account number, the
certain redemption dollar amount or number of shares you wish to
requests may require a redeem, each owner's name, your street address, and
signature guarantee. the signature of each owner as it appears on the
See "Special account.
Situations - Signature - Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Guarantees." Wisconsin 53201. If you're using an express delivery
service, send to 900 Heritage Reserve, Menomonee
Falls, Wisconsin 53051.
FOR TRUST ACCOUNTS
- Same as above. Please ensure that all trustees sign
the letter of instruction.
FOR OTHER REGISTRATIONS
- Call 1-800-368-3863 for instructions.
- -----------------------------------------------------------------------------
TELEPHONE
Sign up for telephone redemption services when you
1-800-368-3863 open your account by checking the "Yes" box in the
24 HOURS A DAY, appropriate section of the account application. To
7 DAYS A WEEK add the telephone redemption option to your account,
call 1-800-368-3863 for a Telephone Redemption Form.
Once the telephone redemption option is in place, you
may sell shares by phone and arrange to receive the
proceeds in one of three ways:
TO RECEIVE A CHECK BY MAIL
- At no charge, we will mail a check to the address
to which your account is registered.
TO DEPOSIT BY EFT
- At no charge, we will transmit the proceeds by
Electronic Funds Transfer (EFT) to a pre-authorized
bank account. Usually, the funds will arrive at
your bank two banking days after we process your
redemption.
TO DEPOSIT BY WIRE
- For a $10 fee, we will transmit the proceeds by
wire to a pre-authorized bank account. Usually, the
funds will arrive at your bank the next banking day
after we process your redemption.
You may also use Strong DirectSM, Strong Funds'
automated telephone response system. Call
1-800-368-3863 for details.
- -----------------------------------------------------------------------------
AUTOMATICALLY
You can set up automatic withdrawals from your
account at regular intervals. To establish the
Systematic Withdrawal Plan, request a form by calling
1-800-368-3863.
- -----------------------------------------------------------------------------
BROKER-DEALER
You may also redeem shares through broker-dealers or
others who may charge a commission or other
transaction fee.
</TABLE>
----------------------
PROSPECTUS PAGE II-7
<PAGE> 47
WHAT YOU SHOULD KNOW ABOUT SELLING SHARES
- - If you have recently purchased shares, please be aware that your redemption
request may not be honored until the purchase check has cleared your bank,
which generally occurs within ten calendar days.
- - You will be charged a $10 service fee for a stop-payment and replacement of a
redemption or dividend check.
- - The right of redemption may be suspended during any period in which (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined by the
SEC exists, making disposal of portfolio securities or valuation of net assets
of a Fund not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must endorse
the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
REDEMPTIONS IN KIND
If the Advisor determines that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other financial assets, valued for this purpose as they are valued in
computing the NAV for a Fund's shares. Shareholders receiving securities or
other financial assets on redemption may realize a gain or loss for tax
purposes, and will incur any costs of sale, as well as the associated
inconveniences.
WHAT YOU SHOULD KNOW ABOUT TELEPHONE REDEMPTIONS
- - The Funds reserve the right to refuse a telephone redemption if they believe
it advisable to do so.
- - Once you place your telephone redemption request, it cannot be canceled or
modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Funds and their transfer
agent employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. The Funds may incur liability if they do not follow
these procedures.
- - Because of increased telephone volume, you may experience difficulty in
implementing a telephone redemption during periods of dramatic economic or
market changes.
----------------------
PROSPECTUS PAGE II-8
<PAGE> 48
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus, or e-mail us at [email protected].
STRONG DIRECTSM AUTOMATED TELEPHONE SYSTEM. Also available 24 hours a day,
the Strong DirectSM automated response system enables you to use a touch-tone
phone to hear fund quotes and returns on any Strong Fund. You may also confirm
account balances, hear records of recent transactions and dividend activity
(1-800-368-5550), and perform purchases, exchanges or redemptions among your
existing Strong accounts (1-800-368-7550). You may also perform an exchange to
open a new Strong account provided that your account has the telephone exchange
option. Please note that your accounts must be identically registered and you
must exchange enough into the new account to meet the minimum initial
investment. Your account information is protected by a personal code that you
establish.
STRONG NETDIRECTSM. Available 24 hours a day from your personal computer,
Strong netDirectSM allows you to use the Internet to access your Strong Funds
account information. You may access specific account history, view current
account balances, obtain recent dividend activity, and perform purchases,
exchanges, or redemptions among your existing Strong accounts.
To register for netDirect, please visit our website at http://www.strong-
funds.com. Your account information is protected by a personal password and
Internet encryption technology. For more information on this service, please
call 1-800-359-3379 or e-mail us at [email protected].
STATEMENTS AND REPORTS. At a minimum, each Fund will confirm all transactions
for your account on a quarterly basis. We recommend that you file each quarterly
statement - and, especially, each calendar year-end statement - with your other
important financial papers, since you may need to refer to them at a later date
for tax purposes. Should you need additional copies of previous statements, you
may order confirmation statements for the current and preceding year at no
charge. Statements for earlier years are available for $10 each. Call
1-800-368-3863 to order past statements.
Each year, you will also receive a statement confirming the tax status of any
distributions paid to you, as well as a semi-annual report and an annual report
containing audited financial statements.
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
----------------------
PROSPECTUS PAGE II-9
<PAGE> 49
More complete information regarding each Fund's investment policies and
services is contained in its SAI, which you may request by calling or writing
Strong Funds at the phone number and address on the cover of this Prospectus.
CHANGING YOUR ACCOUNT INFORMATION. So that you continue receiving your Strong
correspondence, including any dividend checks and statements, please notify us
in writing as soon as possible if your address changes. You may use the
Additional Investment Form at the bottom of your confirmation statement, or
simply write us a letter of instruction that contains the following information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to your accounts' registration - such as adding or removing a joint
owner, changing an owner's name, or changing the type of your account - must
also be submitted in writing. Please call 1-800-368-3863 for instructions. For
your protection, some requests may require a signature guarantee.
TRANSACTION SERVICES
EXCHANGE PRIVILEGE. You may exchange shares between identically registered
Strong Funds accounts, either in writing or by telephone. By establishing the
telephone exchange services, you authorize the Fund and its agents to act upon
your instruction by telephone to exchange shares from any account you specify.
For tax purposes, an exchange is considered a sale and a purchase of Fund
shares. Please obtain and read the appropriate prospectus before investing in
any of the Strong Funds. Since an excessive number of exchanges may be
detrimental to the Funds, each Fund reserves the right to discontinue the
exchange privilege of any shareholder who makes more than five exchanges in a
year or three exchanges in a calendar quarter.
REGULAR INVESTMENT PLANS
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan, all discussed below, are methods of implementing DOLLAR
COST AVERAGING. Dollar cost averaging is an investment strategy that involves
investing a fixed amount of money at regular time intervals. By always investing
the same set amount, you will be purchasing more shares when the price is low
and fewer shares when the price is high. Ultimately, by using this principle in
conjunction with fluctuations in share price, your average cost per share may be
less than your average transaction price. A program of regular investment cannot
ensure a profit or protect against a loss during declining
-----------------------
PROSPECTUS PAGE II-10
<PAGE> 50
markets. Since such a program involves continuous investment regardless of
fluctuating share values, you should consider your ability to continue the
program through periods of both low and high share-price levels.
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in a Fund from your bank checking or NOW
account. You may choose to make investments on any day of the month in amounts
of $50 or more. You can set up the Automatic Investment Plan with any financial
institution that is a member of the Automated Clearing House. Because each Fund
has the right to close an investor's account for failure to reach the minimum
initial investment, please consider your ability to continue this Plan until you
reach the minimum initial investment. To establish the Plan, complete the
Automatic Investment Plan section on the account application, or call
1-800-368-3863 for an application.
PAYROLL DIRECT DEPOSIT PLAN. Once you meet a Fund's minimum initial
investment requirement, you may purchase additional Fund shares through the
Payroll Direct Deposit Plan. Through this Plan, periodic investments (minimum
$50) are made automatically from your payroll check into your existing Fund
account. By enrolling in the Plan, you authorize your employer or its agents to
deposit a specified amount from your payroll check into the Fund's bank account.
In most cases, your Fund account will be credited the day after the amount is
received by the Fund's bank. In order to participate in the Plan, your employer
must have direct deposit capabilities through the Automated Clearing House
available to its employees. The Plan may be used for other direct deposits, such
as social security checks, military allotments, and annuity payments.
To establish Direct Deposit for your account, call 1-800-368-3863 to obtain
an Authorization for Payroll Direct Deposit to a Strong Funds Account form. Once
the Plan is established, you may alter the amount of the deposit, alter the
frequency of the deposit, or terminate your participation in the program by
notifying your employer.
AUTOMATIC EXCHANGE PLAN. The Automatic Exchange Plan allows you to make
regular, systematic exchanges (minimum $50) from one Strong Funds account into
another Strong Funds account. By setting up the Plan, you authorize the Fund and
its agents to redeem a set dollar amount or number of shares from the first
account and purchase shares of a second Strong Fund. In addition, you authorize
a Fund and its agents to accept telephone instructions to change the dollar
amount and frequency of the exchange. An exchange transaction is a sale and
purchase of shares for federal income tax purposes and may result in a capital
gain or loss. To establish the Plan, request a form by calling 1-800-368-3863.
To participate in the Automatic Exchange Plan, you must have an initial
account balance of $2,500 in the first account and at least the minimum initial
-----------------------
PROSPECTUS PAGE II-11
<PAGE> 51
investment in the second account. Exchanges may be made on any day or days of
your choice. If the amount remaining in the first account is less than the
exchange amount you requested, then the remaining amount will be exchanged. At
such time as the first account has a zero balance, your participation in the
Plan will be terminated. You may also terminate the Plan at any time by calling
or writing to the Fund. Once participation in the Plan has been terminated for
any reason, to reinstate the Plan you must do so in writing; simply investing
additional funds will not reinstate the Plan.
SYSTEMATIC WITHDRAWAL PLAN. You can set up automatic withdrawals from your
account at regular intervals. To begin distributions, you must have an initial
balance of $5,000 in your account and withdraw at least $50 per payment. To
establish the Systematic Withdrawal Plan, request a form by calling
1-800-368-3863. Depending upon the size of the account and the withdrawals
requested (and fluctuations in net asset value of the shares redeemed),
redemptions for the purpose of satisfying such withdrawals may reduce or even
exhaust the account. If the amount remaining in the account is not sufficient to
meet a Plan payment, the remaining amount will be redeemed and the Plan will be
terminated.
SPECIAL SITUATIONS
POWER OF ATTORNEY. If you are investing as attorney-in-fact for another
person, please complete the account application in the name of such person and
sign the back of the application in the following form: "[applicant's name] by
[your name], attorney-in-fact." To avoid having to file an affidavit prior to
each transaction, please complete the Power of Attorney form available from
Strong Funds at 1-800-368-3863. However, if you would like to use your own power
of attorney form, please call the same number for instructions.
CORPORATIONS AND TRUSTS. If you are investing for a corporation, please
include with your account application a certified copy of your corporate
resolution indicating which officers are authorized to act on behalf of the
corporation. As an alternative, you may complete a Certification of Authorized
Individuals, which can be obtained from the Funds. Until a valid corporate
resolution or Certification of Authorized Individuals is received by the Fund,
services such as telephone and wire redemption will not be established.
If you are investing as a trustee, please include the date of the trust. All
trustees must sign the application. If they do not, services such as telephone
and wire redemption will not be established. All trustees must sign redemption
requests unless proper documentation to the contrary is provided to the Fund.
Failure to provide these documents or signatures as required when you invest may
result in delays in processing redemption requests.
-----------------------
PROSPECTUS PAGE II-12
<PAGE> 52
FINANCIAL INTERMEDIARIES. Broker-dealers, financial institutions, and other
financial intermediaries that have entered into agreements with the Distributor
may enter purchase or redemption orders on behalf of their customers. If you
purchase or redeem shares of a Fund through a financial intermediary, certain
features of the Fund relating to such transactions may not be available or may
be modified in accordance with the terms of the intermediaries' agreement with
the Distributor. In addition, certain operational policies of a Fund, including
those related to settlement and dividend accrual, may vary from those applicable
to direct shareholders of the Fund and may vary among intermediaries. We urge
you to consult your financial intermediary for more information regarding these
matters. In addition, a Fund may pay, directly or indirectly through
arrangements with the Advisor, amounts to financial intermediaries that provide
transfer agent and/or other administrative services relating to the Fund to
their customers provided, however, that the Fund will not pay more for these
services through intermediary relationships than it would if the intermediaries'
customers were direct shareholders in the Fund. Certain financial intermediaries
may charge a commission or other transaction fee for their services. You will
not be charged for such fees if your purchase or redeem your Fund shares
directly from a Fund without the intervention of a financial intermediary.
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you and
the Funds against fraudulent transactions by unauthorized persons. In the
following instances, the Funds will require a signature guarantee for all
authorized owners of an account:
- - when you add the telephone redemption option to your existing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $25,000;
- - when you request to redeem or redeposit shares that have been issued in
certificate form;
- - if you open an account and later decide that you want certificates;
- - when you request that redemption proceeds be sent to a different name or
address than is registered on your account;
- - if you add/change your name or add/remove an owner on your account; and
- - if you add/change the beneficiary on your transfer on death account.
A signature guarantee may be obtained from any eligible guarantor
institution, as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms, and others. PLEASE NOTE THAT A
NOTARY PUBLIC STAMP OR SEAL IS NOT ACCEPTABLE.
-----------------------
PROSPECTUS PAGE II-13
<PAGE> 53
APPENDIX
RATINGS OF DEBT OBLIGATIONS
<TABLE>
<CAPTION>
Moody's Standard & Fitch
Investors Poor's Ratings Investors
Service, Inc. Group Service, Inc. Definition
- -----------------------------------------------------------------
<S> <C> <C> <C>
Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper medium grade
Baa BBB BBB Medium grade
Ba BB BB Low grade
B B B Speculative
Caa, Ca, C CCC, CC, C CCC, CC, C Submarginal
D D DDD, DD, D Probably in
default
- -----------------------------------------------------------------
</TABLE>
ASSET COMPOSITION
For the fiscal year ended October 31, 1996, the Asset Allocation Fund's
assets were invested in the credit categories shown below. Percentages are
computed on a dollar-weighted basis and are an average of twelve monthly
calculations. For purposes of determining whether a security is investment
grade, the Advisor may use the highest rating assigned to that security by any
NRSRO. A security rated differently by two or more rating securities is included
in the category representing the higher of the ratings assigned to the security.
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
Percentage of Advisor's Assessment
S&P Moody's Investments of Not Rated Securities
- -----------------------------------------------------------
<S> <C> <C> <C>
AAA Aaa 16.8% --
AA Aa 2.7 --
A A 1.9 --
BBB Baa 8.4 --
BB Ba 10.0 .1%
B B -- .2
CCC Caa .1 .1
CC Ca -- --
C C -- --
D D -- --
Not Rated .4 --
Total 40.3% .4%
- -----------------------------------------------------------
</TABLE>
----------------------
PROSPECTUS PAGE A-1
<PAGE> 54
NOTES
<PAGE> 55
NOTES
<PAGE> 56
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: (414) 359-1400
Toll-Free: (800) 368-3863
This Statement of Additional Information is not a Prospectus and
should be read in conjunction with the Prospectus of 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. (individually, a
"Fund" and collectively, the "Funds") dated March 1, 1997. Requests for copies
of the Prospectus should be made by calling one of the numbers listed above.
The financial statements appearing in the Funds' Annual Report, which
accompanies this Statement of Additional Information, are incorporated herein
by reference.
This Statement of Additional Information is dated March 1, 1997.
<PAGE> 57
STRONG CONSERVATIVE EQUITY FUNDS
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Convertible Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Debt Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Depositary Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Energy Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Foreign Investment Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
High-Yield (High-Risk) Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Lending of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Mortgage- and Asset-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Mortgage Dollar Rolls and Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Municipal Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Public Utility Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Small and Medium Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
DIRECTORS AND OFFICERS OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
INVESTMENT ADVISOR, SUBADVISOR, AND DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ADDITIONAL SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
FUND ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
PORTFOLIO MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated March 1, 1997, and if given or made, such
information or representations may not be relied upon as having been authorized
by the Funds.
This Statement of Additional Information does not constitute an offer to sell
securities.
2
<PAGE> 58
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.
3
<PAGE> 59
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. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act
and, in accordance with Rule 4.5, will use futures or options on
futures transactions solely for bona fide hedging transactions (within
the meaning of the Commodity Exchange Act), provided, however, that
the Fund may, in addition to bona fide hedging transactions, use
futures and options on futures transactions if the aggregate initial
margin and premiums required to establish such positions, less the
amount by which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed 5% of the
Fund's net assets.
7. Borrow money except (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities
when bank borrowings exceed 5% of its total assets.
8. Make any loans other than loans of portfolio securities, except
through (i) purchases of debt securities or other debt instruments, or
(ii) engaging in repurchase agreements.
Except for the fundamental investment limitations listed above and
each Fund's investment objective, the other investment policies described in
the Prospectus and this Statement of Additional Information are not fundamental
and may be changed with approval of a Fund's Board of Directors. Unless noted
otherwise, if a percentage restriction is adhered to at the time of investment,
a later increase or decrease in percentage resulting from a change in a Fund's
assets (i.e., due to cash inflows or redemptions) or in market value of the
investment or a Fund's assets will not constitute a violation of that
restriction.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds'
investment 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."
4
<PAGE> 60
BORROWING
(ALL FUNDS)
A Fund may borrow money from banks and make other investments or
engage in other transactions permissible under the 1940 Act which may be
considered a borrowing (such as mortgage dollar rolls and reverse repurchase
agreements) as discussed under "Investment Restrictions." However, a Fund may
not purchase securities when bank borrowings exceed 5% of a Fund's total
assets. Presently, the Funds only intend to borrow from banks for temporary or
emergency purposes.
The Funds have established a line-of-credit (LOC) with certain banks
by which they may borrow funds for temporary or emergency purposes. A
borrowing is presumed to be for temporary or emergency purposes if it is repaid
by a Fund within sixty days and is not extended or renewed. The Funds intend
to use the LOC to meet large or unexpected redemptions that would otherwise
force a Fund to liquidate securities under circumstances which are unfavorable
to a Fund's remaining shareholders. The Funds pay a commitment fee to the
banks for the LOC.
CONVERTIBLE SECURITIES
(ALL FUNDS)
A Fund may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks, or other securities that may be converted
into or exchanged for a specified amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
normally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently
are issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value,
if converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as
interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. Generally, the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of
the underlying common stock approaches or exceeds the conversion price, the
price of the convertible security will be increasingly influenced by its
conversion value. A convertible security generally will sell at a premium over
its conversion value by the extent to which investors place value on the right
to acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
a Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
DEBT OBLIGATIONS
(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.
5
<PAGE> 61
PRICE VOLATILITY. The market value of debt obligations is affected
primarily by changes in prevailing interest rates. The market value of a debt
obligation generally reacts inversely to interest-rate changes, meaning, when
prevailing interest rates decline, an obligation's price usually rises, and
when prevailing interest rates rise, an obligation's price usually declines.
MATURITY. In general, the longer the maturity of a debt obligation,
the higher its yield and the greater its sensitivity to changes in interest
rates. Conversely, the shorter the maturity, the lower the yield but the
greater the price stability. Commercial paper is generally considered the
shortest form of debt obligation.
CREDIT QUALITY. The values of debt obligations may also be affected
by changes in the credit rating or financial condition of their issuers.
Generally, the lower the quality rating of a security, the higher the degree of
risk as to the payment of interest and return of principal. To compensate
investors for taking on such increased risk, those issuers deemed to be less
creditworthy generally must offer their investors higher interest rates than do
issuers with better credit ratings.
In conducting its credit research and analysis, the Advisor considers
both qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings
compiled by a number of Nationally Recognized Statistical Rating Organizations
("NRSROs"). Refer to the Appendix for a discussion of securities ratings.
DEPOSITARY RECEIPTS
(ALL FUNDS)
The Funds may invest in foreign securities by purchasing depositary
receipts, including American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"), or other securities convertible into securities
of foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are denominated in U.S. dollars and are designed for
use in the U.S. securities markets, while EDRs, in bearer form, may be
denominated in other currencies and are designed for use in the European
securities markets. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. EDRs are
European receipts evidencing a similar arrangement. For purposes of a Fund's
investment policies, ADRs and EDRs are deemed to have the same classification
as the underlying securities they represent, except that ADRs and EDRs shall be
treated as indirect foreign investments. Thus, an ADR or EDR representing
ownership of common stock will be treated as common stock. ADR and EDR
depositary receipts do not eliminate all of the risks associated with directly
investing in the securities of foreign issuers.
ADR facilities may be established as either "unsponsored" or
"sponsored." While ADRs issued under these two types of facilities are in some
respects similar, there are distinctions between them relating to the rights
and obligations of ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depositary requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities.
The depositary usually charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into U.S. dollars, the
disposition of non-cash distributions, and the performance of other services.
The depositary of an unsponsored facility frequently is under no obligation to
pass through voting rights to ADR holders in respect of the deposited
securities. In addition, an unsponsored facility is generally not obligated to
distribute communications received from the issuer of the deposited securities
or to disclose material information about such issuer in the U.S. and thus
there may not be a correlation between such information and the market value of
the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary, and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
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DERIVATIVE INSTRUMENTS
(ALL FUNDS)
IN GENERAL. A Fund may use derivative instruments for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk. Derivative instruments are commonly defined to include
securities or contracts whose values depend on (or "derive" from) the value of
one or more other assets, such as securities, currencies, or commodities.
These "other assets" are commonly referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or
exhibits characteristics similar to options or forward contracts. Options and
forward contracts are considered to be the basic "building blocks" of
derivatives. For example, forward-based derivatives include forward contracts,
swap contracts, as well as exchange-traded futures. Option-based derivatives
include privately negotiated, over-the-counter (OTC) options (including caps,
floors, collars, and options on forward and swap contracts) and exchange-traded
options on futures. Diverse types of derivatives may be created by combining
options or forward contracts in different ways, and by applying these
structures to a wide range of underlying assets.
An option is a contract in which the "holder" (the buyer) pays a
certain amount (the "premium") to the "writer" (the seller) to obtain the
right, but not the obligation, to buy from the writer (in a "call") or sell to
the writer (in a "put") a specific asset at an agreed upon price at or before a
certain time. The holder pays the premium at inception and has no further
financial obligation. The holder of an option-based derivative generally will
benefit from favorable movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse movements in the value of
the underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long"
position) and a seller (holding the "short" position) for an asset with
delivery deferred until a future date. The buyer agrees to pay a fixed price
at the agreed future date and the seller agrees to deliver the asset. The
seller hopes that the market price on the delivery date is less than the agreed
upon price, while the buyer hopes for the contrary. The change in value of a
forward-based derivative generally is roughly proportional to the change in
value of the underlying asset.
HEDGING. A Fund may use derivative instruments to protect against
possible adverse changes in the market value of securities held in, or are
anticipated to be held in, the Fund's portfolio. Derivatives may also be used
by a Fund to "lock-in" the Fund's realized but unrecognized gains in the value
of its portfolio securities. Hedging strategies, if successful, can reduce the
risk of loss by wholly or partially offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments.
MANAGING RISK. A Fund may also use derivative instruments to manage
the risks of the Fund's portfolio. Risk management strategies include, but are
not limited to, facilitating the sale of portfolio securities, managing the
effective maturity or duration of debt obligations in a Fund's portfolio,
establishing a position in the derivatives markets as a substitute for buying
or selling certain securities, or creating or altering exposure to certain
asset classes, such as equity, debt, and foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way for a Fund to invest than "traditional" securities
(i.e., stocks or bonds) would.
EXCHANGE OR OTC DERIVATIVES. Derivative instruments may be
exchange-traded or traded in OTC transactions between private parties.
Exchange-traded derivatives are standardized options and futures contracts
traded in an auction on the floor of a regulated exchange. Exchange contracts
are generally very liquid. The exchange clearinghouse is the counterparty of
every contract. Thus, each holder of an exchange contract bears the credit
risk of the clearinghouse (and has the benefit of its financial strength)
rather than that of a particular counterparty. Over-the-counter transactions
are subject to additional risks, such as the credit risk of the counterparty to
the instrument and are less liquid than exchange-traded derivatives since they
often can only be closed out with the other party to the transaction.
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RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments
involves risks and special considerations as described below. Risks pertaining
to particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as
the risk of the underlying assets, namely that the value of the underlying
asset may go up or down. Adverse movements in the value of an underlying asset
can expose a Fund to losses. Derivative instruments may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
instrument in relation to the underlying asset may be magnified. The
successful use of derivative instruments depends upon a variety of factors,
particularly Strong Capital Management, Inc.'s (the "Advisor") ability to
predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy adopted
will succeed. The Advisor's decision to engage in a derivative instrument will
reflect the Advisor's judgment that the derivative transaction will provide
value to the Fund and its shareholders and is consistent with the Fund's
objectives, investment limitations, and operating policies. In making such a
judgment, the Advisor will analyze the benefits and risks of the derivative
transaction and weigh them in the context of the Fund's entire portfolio and
investment objective.
(2) CREDIT RISK. A Fund will be subject to the risk that a loss
may be sustained by the Fund as a result of the failure of a counterparty to
comply with the terms of a derivative instrument. The counterparty risk for
exchange-traded derivative instruments is generally less than for
privately-negotiated or OTC derivative instruments, since generally a clearing
agency, which is the issuer or counterparty to each exchange-traded instrument,
provides a guarantee of performance. For privately-negotiated instruments,
there is no similar clearing agency guarantee. In all transactions, a Fund
will bear the risk that the counterparty will default, and this could result in
a loss of the expected benefit of the derivative transaction and possibly other
losses to the Fund. A Fund will enter into transactions in derivative
instruments only with counterparties that the Advisor reasonably believes are
capable of performing under the contract.
(3) CORRELATION RISK. When a derivative transaction is used to
completely hedge another position, changes in the market value of the combined
position (the derivative instrument plus the position being hedged) result from
an imperfect correlation between the price movements of the two instruments.
With a perfect hedge, the value of the combined position remains unchanged for
any change in the price of the underlying asset. With an imperfect hedge, the
values of the derivative instrument and its hedge are not perfectly correlated.
Correlation risk is the risk that there might be imperfect correlation, or even
no correlation, between price movements of an instrument and price movements of
investments being hedged. For example, if the value of a derivative
instruments used in a short hedge (such as writing a call option, buying a put
option, or selling a futures contract) increased by less than the decline in
value of the hedged investments, the hedge would not be perfectly correlated.
Such a lack of correlation might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or other pressures on the
markets in which these instruments are traded. The effectiveness of hedges
using instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and price movements in the investments
being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity
risk. Liquidity risk is the risk that a derivative instrument cannot be sold,
closed out, or replaced quickly at or very close to its fundamental value.
Generally, exchange contracts are very liquid because the exchange
clearinghouse is the counterparty of every contract. OTC transactions are less
liquid than exchange-traded derivatives since they often can only be closed out
with the other party to the transaction. A Fund might be required by
applicable regulatory requirement to maintain assets as "cover," maintain
segregated accounts, and/or make margin payments when it takes positions in
derivative instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If a Fund was unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired,
matured, or was closed out. The requirements might impair a Fund's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to sell or close out a
position in an instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the counterparty to enter into a transaction closing
out the position. Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price that is favorable to a
Fund.
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(5) LEGAL RISK. Legal risk is the risk of loss caused by the
legal unenforcibility of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside in
exchange for downside protection, the party taking the risk is looking for a
positive payoff. Despite this voluntary assumption of risk, a counterparty
that has lost money in a derivative transaction may try to avoid payment by
exploiting various legal uncertainties about certain derivative products.
(6) SYSTEMIC OR "INTERCONNECTION" RISK. Interconnection risk is
the risk that a disruption in the financial markets will cause difficulties for
all market participants. In other words, a disruption in one market will spill
over into other markets, perhaps creating a chain reaction. Much of the OTC
derivatives market takes place among the OTC dealers themselves, thus creating
a large interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create losses
at other dealers and destabilize the entire market for OTC derivative
instruments.
GENERAL LIMITATIONS. The use of derivative instruments is subject to
applicable regulations of the Securities and Exchange Commission (the "SEC"),
the several options and futures exchanges upon which they may be traded, the
Commodity Futures Trading Commission ("CFTC"), and various state regulatory
authorities. In addition, a Fund's ability to use derivative instruments may
be limited by certain tax considerations. For a discussion of the federal
income tax treatment of a Fund's derivative instruments, see "Taxes -
Derivative Instruments."
Each Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets. In
accordance with Rule 4.5 of the regulations under the Commodity Exchange Act
(the "CEA"), the notice of eligibility for a Fund includes representations that
the Fund will use futures contracts and related options solely for bona fide
hedging purposes within the meaning of CFTC regulations, provided that the Fund
may hold other positions in futures contracts and related options that do not
qualify as a bona fide hedging position if the aggregate initial margin
deposits and premiums required to establish these positions, less the amount by
which any such futures contracts and related options positions are "in the
money," do not exceed 5% of the Fund's net assets. Adherence to these
guidelines does not limit a Fund's risk to 5% of the Fund's assets.
The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging a Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of a Fund's assets, as defined under the 1940 Act, the SEC
has stated that a Fund may use coverage or the segregation of a Fund's assets.
To the extent required by SEC guidelines, a Fund will not enter into any such
transactions unless it owns either: (i) an offsetting ("covered") position in
securities, options, futures, or derivative instruments; or (ii) cash or liquid
securities positions with a value sufficient at all times to cover its
potential obligations to the extent that the position is not "covered". The
Funds will also set aside cash and/or appropriate liquid assets in a segregated
custodial account if required to do so by the SEC and CFTC regulations. Assets
used as cover or held in a segregated account cannot be sold while the
derivative position is open, unless they are replaced with similar assets. As
a result, the commitment of a large portion of a Fund's assets to segregated
accounts could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
In some cases a Fund may be required to maintain or limit exposure to
a specified percentage of its assets to a particular asset class. In such
cases, when a Fund uses a derivative instrument to increase or decrease
exposure to an asset class and is required by applicable SEC guidelines to set
aside liquid assets in a segregated account to secure its obligations under the
derivative instruments, the Advisor may, where reasonable in light of the
circumstances, measure compliance with the applicable percentage by reference
to the nature of the economic exposure created through the use of the
derivative instrument and not by reference to the nature of the exposure
arising from the liquid assets set aside in the segregated account (unless
another interpretation is specified by applicable regulatory requirements).
OPTIONS. A Fund may use options for any lawful purpose consistent
with the Fund's investment objective such as hedging or managing risk. An
option is a contract in which the "holder" (the buyer) pays a certain amount
(the "premium") to the "writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price (the "strike price" or
"exercise price") at or before a certain time (the "expiration
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date"). The holder pays the premium at inception and has no further financial
obligation. The holder of an option will benefit from favorable movements in
the price of the underlying asset but is not exposed to corresponding losses
due to adverse movements in the value of the underlying asset. The writer of
an option will receive fees or premiums but is exposed to losses due to changes
in the value of the underlying asset. A Fund may buy or write (sell) put and
call options on assets, such as securities, currencies, commodities, and
indices of debt and equity securities ("underlying assets") and enter into
closing transactions with respect to such options to terminate an existing
position. Options used by the Funds may include European, American, and
Bermuda style options. If an option is exercisable only at maturity, it is a
"European" option; if it is also exercisable prior to maturity, it is an
"American" option. If it is exercisable only at certain times, it is a
"Bermuda" option.
Each Fund may purchase (buy) and write (sell) put and call options
underlying assets and enter into closing transactions with respect to such
options to terminate an existing position. The purchase of call options serves
as a long hedge, and the purchase of put options serves as a short hedge.
Writing put or call options can enable a Fund to enhance income by reason of
the premiums paid by the purchaser of such options. Writing call options
serves as a limited short hedge because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the security appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Fund will be obligated to sell the security at less than its
market value or will be obligated to purchase the security at a price greater
than that at which the security must be sold under the option. All or a
portion of any assets used as cover for OTC options written by a Fund would be
considered illiquid to the extent described under "Investment Policies and
Techniques -- Illiquid Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the Fund
will be obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, a Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit a Fund to
realize the profit or limit the loss on an option position prior to its
exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between a Fund and the other party to the transaction
("counter party") (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a Fund purchases or writes an OTC option,
it relies on the counter party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counter party to do so
would result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. Each Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the counter party, or
by a transaction in the secondary market if any such market exists. Although
each Fund will enter into OTC options only with counter parties that are
expected to be capable of entering into closing transactions with the Funds,
there is no assurance that the Funds will in fact be able to close out an OTC
option at a favorable price prior to expiration. In the event of insolvency of
the counter party, a Fund might be unable to close out an OTC option position
at any time prior to its expiration. If a Fund were unable to effect a closing
transaction for an option it had purchased, it would have to exercise the
option to realize any profit.
The Funds may engage in options transactions on indices in much the
same manner as the options on securities discussed above, except the index
options may serve as a hedge against overall fluctuations in the securities
market in general.
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The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
SPREAD TRANSACTIONS. A Fund may use spread transactions for any
lawful purpose consistent with the Fund's investment objective such as hedging
or managing risk. A Fund may purchase covered spread options from securities
dealers. Such covered spread options are not presently exchange-listed or
exchange-traded. The purchase of a spread option gives a Fund the right to
put, or sell, a security that it owns at a fixed dollar spread or fixed yield
spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to a Fund in purchasing covered spread
options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used to
protect a Fund against adverse changes in prevailing credit quality spreads,
i.e., the yield spread between high quality and lower quality securities. Such
protection is only provided during the life of the spread option.
FUTURES CONTRACTS. A Fund may use futures contracts for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk. A Fund may enter into futures contracts, including interest
rate, index, and currency futures. Each Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve
as a long hedge, and the sale of futures or the purchase of put options thereon
can serve as a short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options in securities. The Funds' hedging may include
purchases of futures as an offset against the effect of expected increases in
currency exchange rates and securities prices and sales of futures as an offset
against the effect of expected declines in currency exchange rates and
securities prices. The Funds may also write put options on futures contracts
while at the same time purchasing call options on the same futures contracts in
order to create synthetically a long futures contract position. Such options
would have the same strike prices and expiration dates. The Funds will engage
in this strategy only when the Advisor believes it is more advantageous to the
Funds than is purchasing the futures contract.
To the extent required by regulatory authorities, the Funds only enter
into futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce a Fund's exposure to market, currency, or interest rate fluctuations, a
Fund may be able to hedge its exposure more effectively and perhaps at a lower
cost through using futures contracts.
An interest rate futures contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (e.g., debt security) or currency for a specified price at
a designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index futures
contract was originally written. Transaction costs are incurred when a futures
contract is bought or sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as the case may be, of the
instrument, the currency or by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out prior to delivery by
entering into an offsetting transaction in a matching futures contract.
Although the value of an index might be a function of the value of certain
specified securities, no physical delivery of those securities is made. If the
offsetting purchase price is less than the original sale price, a Fund realizes
a gain; if it is more, a Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, a Fund realizes a gain; if
it is less, a Fund realizes a loss. The transaction costs must also be
included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to
enter into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, a Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash
and/or other appropriate liquid assets, in an amount generally equal to 10% or
less of the contract value. Margin must also be deposited when writing a call
or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to a Fund at
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the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as "marking to market." Variation margin does not involve borrowing, but
rather represents a daily settlement of a Fund's obligations to or from a
futures broker. When a Fund purchases an option on a future, the premium paid
plus transaction costs is all that is at risk. In contrast, when a Fund
purchases or sells a futures contract or writes a call or put option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If a Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous. Purchasers and sellers of futures positions and
options on futures can enter into offsetting closing transactions by selling or
purchasing, respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be closed only on an
exchange or board of trade that provides a secondary market. The Funds intend
to enter into futures transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or options on futures
contracts positions whose prices are moving unfavorably to avoid being subject
to further calls. These liquidations could increase price volatility of the
instruments and distort the normal price relationship between the futures or
options and the investments being hedged. Also, because initial margin deposit
requirements in the futures markets are less onerous than margin requirements
in the securities markets, there might be increased participation by
speculators in the future markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
FOREIGN CURRENCIES. The Funds may purchase and sell foreign currency
on a spot basis, and may use currency-related derivatives instruments such as
options on foreign currencies, futures on foreign currencies, options on
futures on foreign currencies and forward currency contracts (i.e., an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into). The Funds
may use these instruments for hedging or any other lawful purpose consistent
with their respective investment objectives, including transaction hedging,
anticipatory hedging, cross hedging, proxy hedging, and position hedging. The
Funds' use of currency-related derivative instruments will be directly related
to a Fund's current or anticipated portfolio securities, and the Funds may
engage in transactions in currency-related derivative instruments as a means to
protect against some or all of the effects of adverse changes in foreign
currency exchange rates on their portfolio investments. In general, if the
currency in which a portfolio investment is denominated appreciates against the
U.S. dollar, the dollar value of the security will increase. Conversely, a
decline in the exchange rate of the currency would adversely affect the value
of the portfolio investment expressed in U.S. dollars.
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
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purchased or sold and the date on which payment is made or received. A Fund
also might use currency-related derivative instruments when the Advisor
believes that one currency may experience a substantial movement against
another currency, including the U.S. dollar, and it may use currency-related
derivative instruments to sell or buy the amount of the former foreign
currency, approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Alternatively, where
appropriate, a Fund may use currency-related derivative instruments to hedge
all or part of its foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currency or currencies act as an
effective proxy for other currencies. The use of this basket hedging technique
may be more efficient and economical than using separate currency-related
derivative instruments for each currency exposure held by the Fund.
Furthermore, currency-related derivative instruments may be used for short
hedges - for example, a Fund may sell a forward currency contract to lock in
the U.S. dollar equivalent of the proceeds from the anticipated sale of a
security denominated in a foreign currency.
In addition, a Fund may use a currency-related derivative instrument
to shift exposure to foreign currency fluctuations from one foreign country to
another foreign country where the Advisor believes that the foreign currency
exposure purchased will appreciate relative to the U.S. dollar and thus better
protect the Fund against the expected decline in the foreign currency exposure
sold. For example, if a Fund owns securities denominated in a foreign currency
and the Advisor believes that currency will decline, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in a second foreign currency that the Advisor believes
would better protect the Fund against the decline in the first security than
would a U.S. dollar exposure. Hedging transactions that use two foreign
currencies are sometimes referred to as "cross hedges." The effective use of
currency-related derivative instruments by a Fund in a cross hedge is dependent
upon a correlation between price movements of the two currency instruments and
the underlying security involved, and the use of two currencies magnifies the
risk that movements in the price of one instrument may not correlate or may
correlate unfavorably with the foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the currency
instruments used or investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
A Fund also might seek to hedge against changes in the value of a
particular currency when no hedging instruments on that currency are available
or such hedging instruments are more expensive than certain other hedging
instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using currency-related derivative
instruments on another foreign currency or a basket of currencies, the values
of which the Advisor believes will have a high degree of positive correlation
to the value of the currency being hedged. The risk that movements in the
price of the hedging instrument will not correlate perfectly with movements in
the price of the currency being hedged is magnified when this strategy is used.
The use of currency-related derivative instruments by a Fund involves
a number of risks. The value of currency-related derivative instruments
depends on the value of the underlying currency relative to the U.S. dollar.
Because foreign currency transactions occurring in the interbank market might
involve substantially larger amounts than those involved in the use of such
derivative instruments, a Fund could be disadvantaged by having to deal in the
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than
for round lots (generally consisting of transactions of greater than $1
million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments
might be required to take place within the country issuing the underlying
currency. Thus, a Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
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When a Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for
exchange-traded instruments is generally less than for privately-negotiated or
OTC currency instruments, since generally a clearing agency, which is the
issuer or counterparty to each instrument, provides a guarantee of performance.
For privately-negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the transaction and possibly other losses to the Fund. The Funds
will enter into transactions in currency-related derivative instruments only
with counterparties that the Advisor reasonably believes are capable of
performing under the contract.
Purchasers and sellers of currency-related derivative instruments may
enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can
be no assurance that a Fund will in fact be able to close out a forward
currency contract (or any other currency-related derivative instrument) at a
time and price favorable to a Fund. In addition, in the event of insolvency of
the counterparty, a Fund might be unable to close out a forward currency
contract at any time prior to maturity. In the case of an exchange-traded
instrument, a Fund will be able to close the position out only on an exchange
which provides a market for the instruments. The ability to establish and
close out positions on an exchange is subject to the maintenance of a liquid
market, and there can be no assurance that a liquid market will exist for any
instrument at any specific time. In the case of a privately-negotiated
instrument, a Fund will be able to realize the value of the instrument only by
entering into a closing transaction with the issuer or finding a third party
buyer for the instrument. While a Fund will enter into privately-negotiated
transactions only with entities who are expected to be capable of entering into
a closing transaction, there can be no assurance that a Fund will in fact be
able to enter into such closing transactions.
The precise matching of currency-related derivative instrument amounts
and the value of the portfolio securities involved generally will not be
possible because the value of such securities, measured in the foreign
currency, will change after the currency-related derivative instrument position
has been established. Thus, a Fund might need to purchase or sell foreign
currencies in the spot (cash) market. The projection of short-term currency
market movements is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded
primarily in the OTC market. Although options on foreign currencies are traded
primarily in the OTC market, the Funds will normally purchase or sell OTC
options on foreign currency only when the Advisor reasonably believes a liquid
secondary market will exist for a particular option at any specific time.
There will be a cost to a Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. A Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to a Fund at one rate, while offering a lesser
rate of exchange should the Fund desire to resell that currency to the dealer.
When required by the SEC guidelines, the Funds will set aside
permissible liquid assets in segregated accounts or otherwise cover their
respective potential obligations under currency-related derivatives
instruments. To the extent a Fund's assets are so set aside, they cannot be
sold while the corresponding currency position is open, unless they are
replaced with similar assets. As a result, if a large portion of a Fund's
assets are so set aside, this could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
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
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currency values and upon a correlation between price movements of the currency
instrument and the underlying security. There might be imperfect correlation,
or even no correlation, between price movements of an instrument and price
movements of investments being hedged. Such a lack of correlation might occur
due to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. In addition, a Fund's use of currency-related derivative instruments
is always subject to the risk that the currency in question could be devalued
by the foreign government. In such a case, any long currency positions would
decline in value and could adversely affect any hedging position maintained by
the Fund.
The Funds' dealing in currency-related derivative instruments will
generally be limited to the transactions described above. However, the Funds
reserve the right to use currency-related derivatives instruments for different
purposes and under different circumstances. Of course, the Funds are not
required to use currency-related derivatives instruments and will not do so
unless deemed appropriate by the Advisor. It also should be realized that use
of these instruments does not eliminate, or protect against, price movements in
the Funds' securities that are attributable to other (i.e., non-currency
related) causes. Moreover, while the use of currency-related derivatives
instruments may reduce the risk of loss due to a decline in the value of a
hedged currency, at the same time the use of these instruments tends to limit
any potential gain which may result from an increase in the value of that
currency.
SWAP AGREEMENTS. The Funds may enter into interest rate, securities
index, commodity, or security and currency exchange rate swap agreements for
any lawful purpose consistent with each Fund's investment objective, such as
for the purpose of attempting to obtain or preserve a particular desired return
or spread at a lower cost to the Fund than if the Fund had invested directly in
an instrument that yielded that desired return or spread. A Fund also may
enter into swaps in order to protect against an increase in the price of, or
the currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to several years. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized
on particular predetermined investments or instruments. The gross returns to
be exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. Swap
agreements may include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap;" interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified level, or "floor;" and
interest rate collars, under which a party sells a cap and purchases a floor,
or vice versa, in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have
agreed to exchange. Under most swap agreements entered into by a Fund, the
obligations of the parties would be exchanged on a "net basis." Consequently,
a Fund's obligation (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). A Fund's obligation under a swap agreement will be accrued daily
(offset against amounts owed to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, or liquid high grade debt obligations.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on the Advisor's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Certain restrictions
imposed on the Funds by the Internal Revenue Code may limit the Funds' ability
to use swap agreements. The swaps market is largely unregulated.
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.
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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 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.
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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.
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
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<PAGE> 73
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.
LEGISLATION. Legislation may be adopted, from time to time designed
to limit the use of certain lower-quality and comparable unrated securities by
certain issuers. It is anticipated that if additional legislation is enacted
or proposed, it could have a material affect on the value of these securities
and the existence of a secondary trading market for the securities.
ILLIQUID SECURITIES
(ALL FUNDS)
The Funds may invest in illiquid securities (i.e., securities that are
not readily marketable). However, a Fund will not acquire illiquid securities
if, as a result, they would comprise more than 15% of the value of the Fund's
net assets (or such other amounts as may be permitted under the 1940 Act).
However, as a matter of internal policy, the Advisor intends to limit each
Fund's investments in illiquid securities to 10% of its net assets.
The Board of Directors of each Fund, or its delegate, has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are illiquid for purposes of this limitation.
Certain securities exempt from registration or issued in transactions exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), such as securities that may be resold to institutional investors under
Rule 144A under the Securities Act and Section 4(2) commercial paper, may be
considered liquid under guidelines adopted by the Funds' Board of Directors.
The Board of Directors of each Fund has delegated to the Advisor the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. The
Board of Directors has directed the Advisor to look to such factors as (i) the
frequency of trades or quotes for a security, (ii) the number of dealers
willing to purchase or sell the security and number of potential buyers, (iii)
the willingness of dealers to undertake to make a market in the security, (iv)
the nature of the security and nature of the marketplace trades, such as the
time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer, (v) the likelihood that the security's marketability
will be maintained throughout the anticipated holding period, and (vi) any
other relevant factors. The Advisor may determine
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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. Restricted securities will be priced at
fair value as determined in good faith by the Board of Directors of the Fund.
If through the appreciation of restricted securities or the depreciation of
unrestricted securities, a Fund should be in a position where more than 15% of
the value of its net assets are invested in illiquid securities, including
restricted securities which are not readily marketable (except for 144A
Securities and 4(2) commercial paper deemed to be liquid by the Advisor), the
Fund will take such steps as is deemed advisable, if any, to protect liquidity.
Each Fund may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC
options written by the Fund. The assets used as cover for OTC options written
by the Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES
(ALL FUNDS)
Each Fund is authorized to lend up to 33 1/3% of the total value of
its portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. Although the Funds are authorized to lend, the Funds do not
presently intend to engage in lending. In determining whether to lend
securities to a particular broker-dealer or institutional investor, the Advisor
will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Funds will retain authority to terminate any loans at any time. The Funds may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Funds
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Funds will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when retaining such
rights is considered to be in a Fund's interest.
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.
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Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any mortgage- and asset-backed security is
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional debt
securities. Among the principal differences are that interest and principal
payments are made more frequently on mortgage- and asset-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if a Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing the yield to maturity. Conversely, if a Fund purchases these
securities at a discount, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Amounts available for reinvestment by
a Fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government-sponsored mortgage-backed securities.
While many mortgage- and asset-backed securities are issued with only
one class of security, many are issued in more than one class, each with
different payment terms. Multiple class mortgage- and asset-backed securities
are issued for two main reasons. First, multiple classes may be used as a
method of providing credit support. This is accomplished typically through
creation of one or more classes whose right to payments on the security is made
subordinate to the right to such payments of the remaining class or classes.
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates, or other characteristics differing both from those of
each other and from those of the underlying assets. Examples include so-called
"strips" (mortgage- and asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-mortgage-
or asset-backed securities, such as floating interest rates (i.e., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
The Funds may invest in stripped mortgage- or asset-backed securities,
which receive differing proportions of the interest and principal payments from
the underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such
market value may be extremely volatile. With respect to certain stripped
securities, such as interest only and principal only classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
Mortgage- and asset-backed securities backed by assets, other than as
described above, or in which the payment streams on the underlying assets are
allocated in a manner different than those described above may be issued in the
future. A Fund may invest in such securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of a Fund.
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MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
(ALL FUNDS)
The Funds may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, a
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing. (See "Borrowing".) When required by guidelines of the
SEC, a Fund will set aside permissible liquid assets in a segregated account to
secure its obligations to repurchase the security.
Each Fund may also enter into mortgage dollar rolls, in which the Fund
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. At the time the Fund would
enter into a mortgage dollar roll, it would set aside permissible liquid assets
in a segregated account to secure its obligation for the forward commitment to
buy mortgage-backed securities. Mortgage dollar roll transactions may be
considered a borrowing by the Funds. (See "Borrowing".)
The mortgage dollar rolls and reverse repurchase agreements entered
into by the Funds may be used as arbitrage transactions in which a Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar roll or reverse repurchase agreements. Since a Fund
will receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities or repurchase agreements will be high quality
and will mature on or before the settlement date of the mortgage dollar roll or
reverse repurchase agreement, the Advisor believes that such arbitrage
transactions do not present the risks to the Funds that are associated with
other types of leverage.
MUNICIPAL OBLIGATIONS
(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, 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.
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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 public utility securities may or may not
pay consistent and above-average dividends. Moreover, the securities of
public utility companies can still be affected by the risks of the stock market
as well as factors specific to public utility companies. Government regulation
of public utility companies can limit their ability to expand their businesses
or to pass cost increases on to customers. Companies providing power or
energy-related services may also be affected by increases in fuel and other
operating costs; high costs of borrowing to finance capital construction during
inflationary periods; restrictions on operations and increased costs and delays
associated with compliance with environmental and nuclear safety regulations;
the difficulties involved in obtaining natural gas for resale or fuel for
generating electricity at reasonable prices; the risks in connection with the
construction and operation of nuclear power plants; the effects of energy
conservation and the effects of regulatory changes. Some public utility
companies are facing increased competition, which may reduce 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.
SHORT SALES AGAINST THE BOX
(ALL FUNDS)
Each Fund may sell securities short against the box to hedge
unrealized gains on portfolio securities. Selling securities short against the
box involves selling a security that a Fund owns or has the right to acquire,
for delivery at a specified date in the future. If a Fund sells securities
short against the box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price rises.
SMALL AND MEDIUM COMPANIES
(ALL FUNDS)
The Funds may invest a substantial portion of their assets in small
and medium companies. While small and medium companies generally have the
potential for rapid growth, investments in small and medium companies often
involve greater risks than investments in larger, more established companies
because small and medium companies may lack the management experience,
financial resources, product diversification, and competitive strengths of
larger companies. In addition, in many instances the securities of small and
medium companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, the securities of small and
medium companies may be subject to greater and more abrupt price fluctuations.
When making large sales, the Fund may have to sell portfolio holdings at
discounts from quoted prices or may have to make a series of small sales over
an extended period of time due to the trading volume of small and medium
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company securities. Investors should be aware that, based on the foregoing
factors, an investment in the Fund may be subject to greater price fluctuations
than an investment in a fund that invests primarily in larger, more established
companies. The Advisor's research efforts may also play a greater role in
selecting securities for the Fund than in a fund that invests in larger, more
established companies.
SOVEREIGN DEBT
(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.
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
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<PAGE> 79
specific class of securities of an issuer that may have less advantageous
rights than the classes available for purchase by domiciliaries of the
countries, or impose additional taxes on foreign investors. Certain issuers
may require governmental approval for the repatriation of investment income,
capital or the proceeds of sales of securities by foreign investors. In
addition, if a deterioration occurs in a country's balance of payments, the
country could impose temporary restrictions on foreign capital remittances.
The Fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments. Investing in local
markets may require the Fund to adopt special procedures, seek local government
approvals or take other actions, each of which may involve additional costs to
the Fund.
The sovereign debt in which the Fund may invest includes Brady Bonds,
which are securities issued under the framework of the Brady Plan, an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness. In restructuring its external debt
under the Brady Plan framework, a debtor nation negotiates with its existing
bank lenders as well as multilateral institutions such as the International
Monetary Fund ("IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of commercial bank debt for newly issued Brady Bonds.
Brady Bonds may also be issued in respect of new money being advanced by
existing lenders in connection with the debt restructuring. The World Bank and
the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.
There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change. Investors should
recognize that Brady Bonds have been issued only recently, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan
to date are designed to achieve debt and debt-service reduction through
specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt, which carry a below-market
stated rate of interest (generally known as par bonds), bonds issued at a
discount from the face value of such debt (generally known as discount bonds),
bonds bearing an interest rate which increases over time, and bonds issued in
exchange for the advancement of new money by existing lenders. Regardless of
the stated face amount and stated interest rate of the various types of Brady
Bonds, the Fund will purchase Brady Bonds in secondary markets, as described
below, in which the price and yield to the investor reflect market conditions
at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF,
the World Bank, and the debtor nations' reserves. In the event of a default
with respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1) the
collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments, and (4) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds have speculative
characteristics. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased
and sold in secondary markets through U.S. securities dealers and other
financial institutions and are generally maintained through European
transnational securities depositories.
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TEMPORARY DEFENSIVE POSITION
(ALL FUNDS)
When the Advisor determines that market conditions warrant a temporary
defensive position, the 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 demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded. There generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, a Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and, if not so rated, the Funds may
invest in them only if the Advisor determines that at the time of investment
the obligations are of comparable quality to the other obligations in which the
Funds may invest. The Advisor, on behalf of the Funds, will consider on an
ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in the Funds' portfolio.
Each Fund will not invest more than 15% of its net assets in variable-
and floating-rate demand obligations that are not readily marketable (a
variable- or floating-rate demand obligation that may be disposed of on not
more than seven days notice will be deemed readily marketable and will not be
subject to this limitation). (See "Illiquid Securities" and "Investment
Restrictions.") In addition, each variable- or floating-rate obligation must
meet the credit quality requirements applicable to all the Fund's investments
at the time of purchase. When determining whether such an obligation meets a
Fund's credit quality requirements, the Fund may look to the credit quality of
the financial guarantor providing a letter of credit or other credit support
arrangement.
In determining a Fund's weighted average portfolio maturity, a Fund
will consider a floating or variable rate security to have a maturity equal to
its stated maturity (or redemption date if it has been called for redemption),
except that it may consider (i) variable rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest rate,
unless subject to a demand feature, (ii) variable rate securities subject to a
demand feature to have a remaining maturity
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equal to the longer of (a) the next readjustment in the interest rate or (b)
the period remaining until the principal can be recovered through demand, and
(iii) floating rate securities subject to a demand feature to have a maturity
equal to the period remaining until the principal can be recovered through
demand. Variable and floating rate securities generally are subject to less
principal fluctuation than securities without these attributes since the
securities usually trade at amortized cost following the readjustment in the
interest rate.
WARRANTS
(ALL FUNDS)
Each Fund may acquire warrants. Warrants are securities giving the
holder the right, but not the obligation, to buy the stock of an issuer at a
given price (generally higher than the value of the stock at the time of
issuance) during a specified period or perpetually. Warrants may be acquired
separately or in connection with the acquisition of securities. Warrants
acquired by a Fund in units or attached to securities are not subject to these
restrictions. Warrants do not carry with them the right to dividends or voting
rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As
a result, warrants may be considered to have more speculative characteristics
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
WHEN-ISSUED SECURITIES
(ALL FUNDS)
Each Fund may from time to time purchase securities on a "when-issued"
basis. The price of debt obligations purchased on a when-issued basis, which
may be expressed in yield terms, generally is fixed at the time the commitment
to purchase is made, but delivery and payment for the securities take place at
a later date. Normally, the settlement date occurs within 45 days of the
purchase although in some cases settlement may take longer. During the period
between the purchase and settlement, no payment is made by a Fund to the issuer
and no interest on the debt obligations accrues to the Fund. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Fund's other assets. While when-issued securities may
be sold prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes the commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The
Funds do not believe that their net asset values will be adversely affected by
purchases of securities on a when-issued basis.
To the extent required by the SEC, the Funds will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date. When the time comes to pay for when-issued
securities, a Fund will meet its obligations from then-available cash flow,
sale of the securities held in the separate account, described above, sale of
other securities or, although it would not normally expect to do so, from the
sale of the when-issued securities themselves (which may have a market value
greater or less than the Fund's payment obligation).
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
(ALL FUNDS)
The Funds may invest in zero-coupon, step-coupon, and pay-in-kind
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon securities are sold at a deep
discount to their face value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because such securities do not pay current
cash income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, federal
income tax law requires the holders of zero-coupon, step-coupon, and
pay-in-kind securities to include in income each year the portion of the
original issue discount (or deemed discount) and other non-cash income on such
securities accruing that year. In order to continue to qualify as a "regulated
investment company" under the Internal Revenue Code and avoid a certain excise
tax, each Fund may be required to distribute a portion of such discount and
income and may be required to dispose of other portfolio securities, which may
occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
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DIRECTORS AND OFFICERS OF THE FUNDS
Directors and officers of the Funds, together with information as to
their principal business occupations during the last five years, and other
information are shown below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an asterisk (*). Each
officer and director holds the same position with the 25 registered open-end
management investment companies consisting of 38 mutual funds, which are
managed by the Advisor (the "Strong Funds"). The Strong Funds, in the
aggregate, pays each Director who is not a director, officer, or employee of
the Advisor, or any affiliated company (a "disinterested director") an annual
fee of $50,000, plus $100 per Board meeting for each Strong Fund. In addition,
each disinterested director is reimbursed by the Strong Funds for travel and
other expenses incurred in connection with attendance at such meetings. Other
officers and directors of the Strong Funds receive no compensation or expense
reimbursement from the Strong Funds.
*RICHARD S. STRONG (DOB 5/12/42), Director and Chairman of the Board of the
Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the
Advisor, which he founded in 1974. Since August 1985, Mr. Strong has been a
Security Analyst and Portfolio Manager of the Advisor. In October 1991, Mr.
Strong also became the Chairman of the Advisor. Mr. Strong is a Director of
the Advisor. Mr. Strong has been in the investment management business since
1967. Mr. Strong has served the Funds as follows:
DIRECTOR - 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).
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).
27
<PAGE> 83
*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).
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.
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<PAGE> 84
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).
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the
Funds.
Mr. Shenkenberg has been Deputy General Counsel to the Advisor since
November 1996. From December 1992 until November 1996, Mr. Shenkenberg acted
as Associate Counsel to the Advisor. From June 1987 until December 1992, Mr.
Shenkenberg was an attorney for Godfrey & Kahn, S.C., a Milwaukee law firm.
Mr. Shenkenberg has served the Funds as follows:
VICE PRESIDENT - American Utilities Fund (since April 1996); Asset
Allocation Fund (since April 1996); Total Return Fund (since April
1996); Equity Income Fund (since April 1996); and Growth and Income
Fund (since April 1996).
SECRETARY - American Utilities Fund (since October 1996); Asset
Allocation Fund (since October 1996); Total Return Fund (since October
1996); Equity Income Fund (since October 1996); and Growth and Income
Fund (since October 1996).
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Funds.
Mr. Weitzer has been an Associate Counsel of the Advisor since July
1993. Mr. Weitzer has served the Funds as follows:
VICE PRESIDENT - American Utilities Fund (since January 1996); Asset
Allocation Fund (since January 1996); Total Return Fund (since January
1996); Equity Income Fund (since January 1996); and Growth and Income
Fund (since January 1996).
Except for Messrs. Nevins, Davis, Kritzik and Vogt, the address of all
of the above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 34108. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301. Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 2830 East Third Avenue, Denver, Colorado
80206.
In addition to the positions listed above, the following individuals
also hold the following positions with Strong Holdings, Inc. ("Holdings"), a
Wisconsin corporation and subsidiary of the Advisor; Strong Funds Distributors,
Inc., the Fund's underwriter ("Distributors"), Heritage Reserve Development
Corporation ("Heritage"), and Strong Service Corporation ("SSC"), each of which
is a Wisconsin corporation and subsidiary of Holdings; Fussville Real Estate
Holdings L.L.C. ("Real Estate Holdings") and Sherwood Development L.L.C.
("Sherwood"), each of which is a Wisconsin Limited Liability Company and
subsidiary of the Advisor and Heritage; and Fussville Development L.L.C.
("Fussville Development"), a Wisconsin Limited Liability Company and subsidiary
of the Advisor and Real Estate Holdings:
RICHARD S. STRONG:
29
<PAGE> 85
CHAIRMAN AND A DIRECTOR - Holdings and Distributors (since October
1993); Heritage (since January 1994); and SSC (since November 1995).
CHAIRMAN AND A MEMBER OF THE MANAGING BOARD - Real Estate Holdings and
Fussville Development (since December 1995 and February 1994,
respectively); and Sherwood (since October 1994).
30
<PAGE> 86
JOHN DRAGISIC:
PRESIDENT AND A DIRECTOR - Holdings (since December 1995 and July
1994, respectively); Distributors (since September 1996 and July 1994,
respectively); Heritage (since May 1994 and August 1994,
respectively); and SSC (since November 1995).
VICE CHAIRMAN AND A MEMBER OF THE MANAGING BOARD - Real Estate and
Fussville Development (since December 1995 and August 1994,
respectively); and Sherwood (since October 1994).
THOMAS P. LEMKE:
VICE PRESIDENT - Holdings, Heritage, Real Estate Holdings, and
Fussville Development (since December 1995); Distributors (since
October 1996); Sherwood (since October 1994); and SSC (since November
1995).
STEPHEN J. SHENKENBERG:
VICE PRESIDENT AND SECRETARY - Distributors (since December 1995).
SECRETARY - Holdings, Heritage, Fussville Development, Real Estate
Holdings, and Sherwood (since December 1995); and SSC (since November
1995).
As of January 31, 1997, the officers and directors of the Funds in the
aggregate beneficially owned less than 1% of each Fund's then outstanding
shares.
PRINCIPAL SHAREHOLDERS
As of January 31, 1997, no persons owned of record or are known by the
Funds to own of record more than 5% of a Fund's then outstanding shares.
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.
Shenkenberg is Vice President, Assistant Secretary, and Deputy General Counsel
of the Advisor, and Mr. Weitzer is Associate Counsel of the Advisor. A brief
description of each Fund's investment advisory agreement ("Advisory Agreement")
is set forth in the Prospectus under "About the Funds - Management."
The Advisory Agreements for the 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,
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<PAGE> 87
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, Growth and
Income, and Equity Income Funds pay to the Advisor a monthly management fee at
the annual rate of .75%, .80%, and .80%, respectively, of each Fund's average
daily net asset value, and the Asset Allocation and Total Return Funds pay to
the Advisor a monthly management fee at the annual rate of .85% of the first
$35,000,000 of the Fund's average daily net asset value and at the annual rate
of .80% of the Fund's average daily net asset value in excess of $35,000,000.
(See "Shareholder Manual - Determining Your Share Price" in the Prospectus.)
From time to time, the Advisor may voluntarily waive all or a portion of its
management fee for a Fund. The organizational expenses of the American
Utilities Fund, which were $35,100, were advanced by the Advisor and will be
reimbursed by the Fund over a period of not more than 60 months from the Fund's
date of inception. The organizational expenses of the Equity Income and Growth
and Income Funds, which were $30,003 and $29,335, respectively, were advanced
by the Advisor and will be reimbursed by each Fund over a period not more than
60 months from each Fund's date of inception.
The following table sets forth certain information concerning
management fees for each Fund for the fiscal year ended October 31, 1996, the
ten-month fiscal year ended October 31, 1995, and for the fiscal years ended
December 31, 1994; and December 31, 1993:
<TABLE>
<CAPTION>
Management Fee
Incurred Management Fee Management Fee
by Fund Waiver Paid by Fund
---------- ------- ------------
<S> <C> <C> <C>
Asset Allocation Fund
$1,843,753 $ 0 $1,843,753
1993
$2,077,850 $ 0 $2,077,850
1994
$1,679,120 $ 0 $1,679,120
1995*
$2,137,987 $ 0 $2,137,987
1996
American Utilities Fund
$ 71,977 $ 71,977 $ 0
1993(1)
$ 262,428 $208,638 $ 53,790
1994
$ 382,467 $ 0 $ 382,467
1995*
$ 946,683 $ 0 $ 946,683
1996
Total Return Fund
$4,614,268 $ 0 $4,614,268
1993
$4,973,614 $ 0 $4,973,614
1994
$4,220,838 $ 0 $4,220,838
1995*
$5,761,030 $ 0 $5,761,030
1996
Equity Income Fund
$ 109,474 $ 0 $ 109,474
1996
Growth and Income Fund
$ 40,776 $ 0 $ 40,776
1996
</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 two percent (2%) of the average net asset value of the Fund
for such year, as determined by valuations made as of the close of each
business day of the year. Reimbursement of
32
<PAGE> 88
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 (the "Order") against the Advisor, Mr. Strong,
and another employee of the Advisor in connection with conduct that occurred
between 1987 and early 1990. In re Strong/Corneliuson Capital Management, Inc.,
et al. Admin. Proc. File No. 3-8411. The proceeding was settled by consent
without admitting or denying the allegations in the Order. The Order found that
the Advisor and Mr. Strong aided and abetted violations of Section 17(a) of the
1940 Act by effecting trades between mutual funds, and between mutual funds and
Harbour Investments Ltd. ("Harbour"), without complying with the exemptive
provisions of SEC Rule 17a-7 or otherwise obtaining an exemption. It further
found that the Advisor violated, and Mr. Strong aided and abetted violations
of, the disclosure provisions of the 1940 Act and the Investment Advisers Act
of 1940 by misrepresenting the Advisor's policy on personal trading and by
failing to disclose trading by Harbour, an entity in which principals of the
Advisor owned between 18 and 25 percent of the voting stock. As part of the
settlement, the respondents agreed to a censure and a cease and desist order
and the Advisor agreed to various undertakings, including adoption of certain
procedures and a limitation for six months on accepting certain types of new
advisory clients.
On June 6, 1996, the Department of Labor (the "DOL") filed an action
against the Advisor for equitable relief alleging violations of the Employee
Retirement Income Security Act of 1974 ("ERISA") in connection with cross
trades that occurred between 1987 and late 1989 involving certain pension
accounts managed by the Advisor. Contemporaneous with this filing, the
Advisor, without admitting or denying the DOL's allegations, agreed to the
entry of a consent judgment resolving all matters relating to the allegations.
Reich v. Strong Capital Management, Inc., (U.S.D.C. E.D. WI) (the "Consent
Judgment"). Under the terms of the Consent Judgment, the Advisor agreed to
reimburse the affected accounts a total of $5.9 million. The settlement did
not have any material impact on the Advisor's financial position or operations.
As indicated above, the Subadvisor to the American Utilities Fund is
W.H. Reaves & Co., Inc. (the "Subadvisor"). The American Utilities Fund's
subadvisory agreement, dated June 25, 1993 (the "Subadvisory Agreement"), was
last approved by shareholders at the annual meeting of shareholders held on
April 13, 1995. Under the terms of the Subadvisory Agreement, the Subadvisor
furnishes investment advisory and portfolio management services to the Fund
with respect to its investments. The Subadvisor is responsible for decisions
to buy and sell the Fund's investments and all other transactions related to
investment therein and the negotiation of brokerage commissions, if any, except
that the Advisor is responsible for managing the cash equivalent investments
maintained by the Fund in the ordinary course of its business and which, on
average, are expected to equal approximately five to seven percent of the
Fund's total assets. Purchases and sales of securities on a securities
exchange are effected through brokers who charge a negotiated commission for
their services. However, because the Subadvisor is a member of the New York
Stock Exchange, it is anticipated that the Subadvisor will directly effect
purchases and sales of securities on the Exchange and be paid a commission for
such services commensurate with the commissions charged by unaffiliated brokers
in arm's-length transactions. (See "Portfolio Transactions and Brokerage.")
During the term of the Subadvisory Agreement, the Subadvisor will bear all
expenses incurred by it in connection with its services under such agreement.
The Subadvisory Agreement requires the Advisor, not the American
Utilities Fund, to pay the Subadvisor a fee, computed and paid monthly, at an
annual rate of 0.50% on the first $200 million of the Fund's average daily net
assets plus 40% of the Advisor's net management fee (after any waivers thereof)
on that portion of the Fund's average daily net assets in excess of $200
million, except that the foregoing percentage will be 50% on average daily net
assets between $1.0 billion and $1.5 billion. For the fiscal year ended
December 31, 1994, the ten-month fiscal year ended October 31, 1995, and for
the fiscal year ended October 31, 1996, the Subadvisor received $172,423,
$237,408, and $650,387, 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.
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<PAGE> 89
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 the Fund's shares, the Fund is responsible for
all its other expenses, including, without limitation, interest charges, taxes,
brokerage commissions and similar expenses; organizational expenses; expenses
of issue, sale, repurchase or redemption of shares; expenses of registering or
qualifying shares for sale with the states and the SEC; expenses for printing
and distributing Prospectuses and quarterly financial statements to existing
shareholders; charges of custodians, transfer 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 Funds and the Advisor have adopted a Code of Ethics (the "Code")
which governs the personal trading activities of all "Access Persons" of the
Advisor. Access Persons include every director and officer of the Advisor and
the investment companies managed by the Advisor, including the Funds, as well
as certain employees of the Advisor who have access to information relating to
the purchase or sale of securities by the Advisor on behalf of accounts managed
by it. The Code is based upon the principal that such Access Persons have a
fiduciary duty to place the interests of the Funds and the Advisor's other
clients ahead of their own.
The Code requires Access Persons (other than Access Persons who are
independent directors of the investment companies managed by the Advisor,
including the Funds) to, among other things, preclear their securities
transactions (with limited exceptions, such as transactions in shares of mutual
funds, direct obligations of the U.S. government, and certain options on
broad-based securities market indexes) and to execute such transactions through
the Advisor's trading department. The Code, which applies to all Access
Persons (other than Access Persons who are independent directors of the
investment companies managed by the Advisor, including the Funds), includes a
ban on acquiring any securities in an initial public offering, other than a new
offering of a registered open-end investment company, and a prohibition from
profiting on short-term trading in securities. In addition, no Access Person
may purchase or sell any security which is contemporaneously being purchased or
sold, or to the knowledge of the Access Person, is being considered for
purchase or sale, by the Advisor on behalf of any mutual fund or other account
managed by it. Finally, the Code provides for trading "black out" periods of
seven calendar days during which time Access Persons who are portfolio managers
may not trade in securities which have been purchased or sold by any mutual
fund or other account managed by the portfolio manager.
In addition, the Subadvisor to the American Utilities Fund has also
adopted a Code of Ethics (the "Reaves Code") which is identical to the Code
discussed above in all but two respects. First, instead of a flat prohibition
against profiting on short-term trading in securities, the Reaves Code gives a
Reaves' compliance official the authority to require forfeiture of such profits
if such person believes that the profits were gained at the expense of an
advisory client. Second, the Reaves Code modifies the seven day trading "black
out" period as contained in the Code to prohibit only like transactions by a
portfolio manager (e.g., a purchase by both the American Utilities Fund and a
portfolio manager of the Fund) within seven calendar days of the establishment
of an initial position or liquidation of a position of the same securities by
the Fund or other account of the Subadvisor managed by that portfolio manager.
The Advisor and the Subadvisor provide investment advisory services
for multiple clients and may give advice and take action, with respect to any
client, that may differ from the advice given, or the timing or nature of
action taken, with respect to any one account. However, the Advisor and the
Subadvisor will allocate over a period of time, to the extent practical,
investment opportunities to each account on a fair and equitable basis relative
to other similarly-situated client accounts. The Advisor and the Subadvisor,
its principals and associates (to the extent not prohibited by the Code or,
with respect to the Subadvisor, the Reaves Code), and other clients of the
Advisor and the Subadvisor may have, acquire, increase, decrease, or dispose of
securities or interests therein at or about the same time that the Advisor and
the Subadvisor is purchasing or selling securities or interests therein for an
account that are or may be deemed to be inconsistent with the actions taken by
such persons.
From time to time the Advisor votes the shares owned by the Funds
according to its Statement of General Proxy Voting Policy ("Proxy Voting
Policy"). The general principal of the Proxy Voting Policy is to vote any
beneficial interest in an equity security prudently and solely in the best
long-term economic interest of the Fund and its beneficiaries considering all
relevant factors and without undue influence from individuals or groups who may
have an economic interest in the outcome of a proxy vote. Shareholders may
obtain a copy of the Proxy Voting Policy upon request from the Advisor.
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<PAGE> 90
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 a 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.
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, the
ten-month fiscal year ended October 31, 1995, and the fiscal year ended October
31, 1996,
35
<PAGE> 91
the American Utilities Fund paid approximately $68,000, $136,000, $176,000, and
$357,280, 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 fiscal
year ended October 31, 1996, the ten-month fiscal year ended October 31, 1995,
and for the fiscal years ended December 31, 1994 and December 31, 1993.
<TABLE>
<CAPTION>
American Utilities Fund(1) Brokerage Commissions
-------------------------- ---------------------
<S> <C>
1993 $ 71,000
1994 $ 136,000
1995* $ 176,000
1996 $ 357,280
Asset Allocation Fund
---------------------
1993 $ 630,000
1994 $ 626,000
1995* $ 942,000
1996 $1,679,795
Total Return Fund
-----------------
1993 $4,309,000
1994 $4,403,000
1995* $3,863,000
1996 $6,418,764
Equity Income Fund
------------------
1996 $ 88,859
Growth and Income Fund
----------------------
1996 $ 43,466
</TABLE>
_____________________________
(1) Commenced operations on July 1, 1993.
* For the ten-month fiscal year ended October 31, 1995.
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<PAGE> 92
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
37
<PAGE> 93
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.
For the fiscal period ended October 31, 1996, the Total Return Fund's
portfolio turnover rate was 502.4%. This portfolio turnover rate was higher
than anticipated primarily because the Fund repositioned its portfolio in light
of its investment objective, policies, and the then prevalent market
environment.
As of October 31, 1996, 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, 1996
----------------------------------------- ----------------------------------------------------
<S> <C>
-----
Salomon, Inc. $9,000,000
Merrill Lynch, Pierce, Fenner & Smith $ 567,000
</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.
38
<PAGE> 94
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 fiscal year ended October 31, 1996, the ten-month
fiscal year ended October 31, 1995, and for the fiscal years ended December 31,
1994 and December 31, 1993:
Transfer Agency and Dividend Disbursement Services Charges Incurred
<TABLE>
<CAPTION>
Per Printing and Amounts Net Amount
Account Out-of-Pocket Mailing Absorbed By Paid By
Fund Charges Expenses Services Advisor Fund
-------- ------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Asset Allocation Fund
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
1996 $ 539,817 $ 56,770 $ 10,861 $ 0 $ 607,448
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
1996 $ 327,694 $ 28,507 $ 4,880 $ 0 $ 361,081
Total Return Fund
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
1996 $ 1,336,369 $140,595 $ 29,532 $ 0 $ 1,706,496
Equity Income Fund
1996 $ 20,372 $ 3,944 $ 300 $ 0 $ 24,616
Growth and Income Fund
1996 $ 17,100 $ 4,375 $ 398 $ 0 $ 21,873
- ----------------------------------------------------------------------
</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, transfer agent type activities, 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.
39
<PAGE> 95
TAXES
GENERAL
As indicated under "About the Funds - Distributions and Taxes" in the
Prospectus, each Fund intends to continue to qualify annually for treatment as
a regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended, (the "Code"). This qualification does not involve government
supervision of the Funds' management practices or policies.
In order to qualify for treatment as a RIC under the Code, each Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions) ("Distribution 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
40
<PAGE> 96
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 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
41
<PAGE> 97
realized on the disposition of securities held for less than three months.
Because of the 30% Limitation, any such gains would reduce a Fund's ability to
sell other securities, or certain options, futures, or forward currency
contracts, held for less that three months that it might wish to sell in the
ordinary course of its portfolio management.
The foregoing federal tax discussion as well as the tax discussion
contained within the Prospectus under "About the Funds - Distributions and
Taxes" is intended to provide you with an overview of the impact of federal
income tax provisions on each Fund or its shareholders. These tax provisions
are subject to change by legislative or administrative action at the federal,
state, or local level, and any changes may be applied retroactively. Any such
action that limits or restricts each Fund's current ability to pass-through
earnings without taxation at the Fund level, or otherwise materially changes a
Fund's tax treatment, could adversely affect the value of a shareholder's
investment in a Fund. Because each Fund's taxes are a complex matter, you
should consult your tax adviser for more detailed information concerning the
taxation of a Fund and the federal, state, and local tax consequences to
shareholders of an investment in a Fund.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "Shareholder Manual -
Determining Your Share Price," the net asset value of each Fund will be
determined as of the close of trading on each day the New York Stock Exchange
(the "NYSE") is open for trading. The NYSE is open for trading Monday through
Friday except New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the
NYSE will not be open for trading on the preceding Friday, and when such
holiday falls on a Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or the yearly accounting period.
Debt obligations are valued by a pricing service that utilizes
electronic data processing techniques to determine values for normal
institutional-sized trading units of debt obligations without regard to sale or
bid prices when such values are believed to more accurately reflect the fair
market value for such securities. Otherwise, sale or bid prices are used. Any
securities or other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board of
Directors of each Fund. Debt obligations having remaining maturities of 60 days
or less 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
The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds may not be liable for losses
due to unauthorized or fraudulent instructions. Such procedures include but are
not limited to requiring a form of personal identification prior to acting on
instructions received by telephone, providing written confirmations of such
transactions to the address of record, and tape recording telephone
instructions.
REDEMPTION-IN-KIND
The Funds have elected to be governed by Rule 18f-1 under the 1940
Act, which obligates each Fund to redeem shares in cash, with respect to any
one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of
the assets of the Fund. If the Advisor determines that existing conditions
make cash payments undesirable, redemption payments may be made in whole or in
part in securities or other financial assets, valued for this purpose as they
are valued in computing the NAV for the Fund's shares (a "redemption-in-kind").
Shareholders receiving securities or other financial assets in a
redemption-in-kind may realize a gain or loss for tax purposes, and will incur
any costs of sale, as well as the associated inconveniences. If you expect to
make a redemption in excess of the lesser of $250,000 or 1% of the Fund's
assets during any 90-day period and would like to avoid any possibility of
being paid with securities in-kind, you may do so by providing Strong Funds
with an unconditional instruction to redeem at least 15 calendar days prior to
the date on which the redemption transaction is to occur,
42
<PAGE> 98
specifying the dollar amount or number of shares to be redeemed and the date of
the transaction (please call 1-800-368-3863). This will provide the Fund with
sufficient time to raise the cash in an orderly manner to pay the redemption
and thereby minimize the effect of the redemption on the interests of the
Fund's remaining shareholders. Redemption checks in excess of the lesser of
$250,000 or 1% of the Fund's assets during any 90-day period may not be honored
by the Fund if the Advisor determines that existing conditions make cash
payments undesirable.
RETIREMENT PLANS
Individual Retirement Account (IRA): Everyone under age 70 1/2 with earned
income may contribute to a tax-deferred IRA. The Strong Funds offer a prototype
plan for you to establish your own IRA. You are allowed to contribute up to the
lesser of $2,000 or 100% of your earned income each year to your IRA (or up to
$4,000 between your IRA and your non-working spouses' IRA). Under certain
circumstances, your contribution will be deductible.
Direct Rollover IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or Code section
403(b) plan distribution directly into an IRA. The distribution must be
eligible for rollover. The amount of your Direct Rollover IRA contribution
will not be included in your taxable income for the year.
Simplified Employee Pension Plan (SEP-IRA): A SEP-IRA plan allows an employer
to make deductible contributions to separate IRA accounts established for each
eligible employee.
Salary Reduction Simplified Employee Pension Plan (SAR SEP-IRA): A SAR SEP-IRA
plan is a type of SEP-IRA plan in which an employer may allow employees to
defer part of their salaries and contribute to an IRA account. These deferrals
help lower the employees' taxable income. Please note that you may no longer
open new SAR SEP-IRA plans (since December 31, 1996). However, employers with
SAR SEP-IRA plans that were established prior to January 31, 1997 may still
open accounts for new employees.
Simplified Incentive Match Plan for Employees (SIMPLE-IRA): A SIMPLE-IRA plan
is a retirement savings plan that allows employees to contribute a percentage
of their compensation, up to $6,000, on a pre-tax basis, to a SIMPLE-IRA
account. The employer is required to make annual contributions to eligible
employees' accounts. All contributions grow tax-deferred.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans,
money purchase pension plans, and paired plans (a combination of a
profit-sharing plan and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
403(b)(7) Plan: A tax-sheltered custodial account designed to qualify under
section 403(b)(7) of the Code is available for use by employees of certain
educational, non-profit, hospital, and charitable organizations.
43
<PAGE> 99
FUND ORGANIZATION
Each Corporation was organized on the following dates and currently
has the following authorized shares of capital stock:
<TABLE>
<CAPTION>
Incorporation Date Series Authorized Par
Corporation Date Created Shares Value ($)
<S> <C> <C> <C> <C>
Strong Asset Allocation Fund, Inc.(1) 09/03/81 Indefinite .01
Strong Conservative Equity Funds, 12/28/90 Indefinite .00001
Inc.(2)
- Strong American Utilities Fund 12/28/90 Indefinite .00001
- Strong Equity Income Fund 10/27/95 Indefinite .00001
- Strong Growth and Income Fund 10/27/95 Indefinite .00001
Strong Total Return Fund, Inc. 9/03/81 Indefinite .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.
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.
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
44
<PAGE> 100
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:
6
YIELD = 2[( a-b + 1) - 1]
---
cd
Where a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to
receive dividends.
d = the maximum offering price per share on the last
day of the period.
For the 30-day period ended October 31, 1996, the American Utilities
Fund's yield was 3.24%. 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.
45
<PAGE> 101
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.
The figures below show performance information for the various
periods ended October 31, 1996. No adjustment has been made for taxes, if any,
payable on dividends. Securities prices fluctuated during these periods.
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $ 66,091 560.91% 13.58%
Ten Years $10,000 $ 22,114 121.14% 8.26%
Five Years $10,000 $ 15,745 57.45% 9.50%
One Year $10,000 $ 10,946 9.46% 9.46%
</TABLE>
_______________________
(1) Commenced operations on December 30, 1981.
AMERICAN UTILITIES FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $14,356 43.56% 11.46%
One Year $10,000 $11,117 11.17% 11.17%
</TABLE>
_______________________
(1) Commenced operations on July 1, 1993.
TOTAL RETURN FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $ 83,480 734.80% 15.38%
Ten Years $10,000 $ 26,567 165.67% 10.26%
Five Years $10,000 $ 18,536 85.36% 13.14%
One Year $10,000 $ 11,803 18.03% 18.03%
</TABLE>
46
<PAGE> 102
_______________________
(1) Commenced operations on December 30, 1981.
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $12,151 21.51% 21.51%
</TABLE>
_______________________
(1) Commenced operations on December 29, 1995.
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial
$10,000 Ending Value Percentage Percentage
Investment October 31, 1996 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $12,419 24.19% 24.19%
</TABLE>
_______________________
(1) Commenced operations on December 29, 1995.
The American Utilities, Asset Allocation, Equity Income, Growth and
Income, and Total Return Funds' total return for the three months ending
January 31, 1997 were 7.16%, 7.45%, 10.19%, 10.59%, and 8.79%, 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 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
47
<PAGE> 103
include the effect of any sales charges imposed by other funds. A Fund will be
compared to Lipper's appropriate fund category, that is, by fund objective and
portfolio holdings. A Fund's performance may also be compared to the average
performance of its Lipper category.
(5) MORNINGSTAR, INC.
A Fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc., which rates funds on the basis of historical
risk and total return. Morningstar's ratings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for 3, 5, and 10
year periods. Ratings are not absolute and do not represent future results.
(6) INDEPENDENT SOURCES
Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning a Fund, including reprints of, or
selections from, editorials or articles about the Fund, especially those with
similar objectives. Sources for Fund performance and articles about a Fund may
include publications such as Money, Forbes, Kiplinger's, Smart Money, Financial
World, Business Week, U.S. News and World Report, The Wall Street Journal,
Barron's and a variety of investment newsletters.
(7) INDICES
The Funds may compare their performance to a wide variety of indices
including the following:
(a) The Consumer Price Index
(b) Dow Jones Average of 30 Industrials
(c) Dow Jones Utility Average
(d) Standard & Poor's 500 Stock Index
(e) Standard & Poor's Utility Index
(f) NASDAQ Over-the-Counter Composite Index
(g) Russell 1000 Stock Index
(h) Russell 1000 Growth Index
(i) Russell 2000 Small Stock Index
(j) Russell 2500 Stock Index
(k) Russell 3000 Stock Index
(l) Russell Midcap Index
(m) Russell Midcap Growth Index
(n) Salomon Brothers 3-Month Treasury Bill Index
(o) Salomon Brothers Broad Investment-Grade Bond Index
(p) Lehman Brothers Aggregate Bond Index
(q) Lehman Brothers Intermediate Government/Corporate
Bond Index
(r) A 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
48
<PAGE> 104
bonds. Interest rates for bonds may be fixed at the time of issuance, and
payment of principal and interest may be guaranteed by the issuer and, in the
case of U.S. Treasury obligations, backed by the full faith and credit of the
U.S. Treasury.
(9) STRONG FAMILY OF FUNDS
The Strong Family of Funds offers a comprehensive range of
conservative to aggressive investment options. All of the members of the Strong
Family and their investment objectives are listed below. The Funds are listed
in ascending order of risk and return, as determined by the Funds' Advisor.
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVE
<S> <C>
Strong Money Market Fund Current income, a stable share price, and daily liquidity.
Strong Heritage Money Fund Current income, a stable share price, and daily liquidity.
Strong Municipal Money Market Federally tax-exempt current income, a stable share-price, and daily
Fund liquidity.
Strong Municipal Advantage Fund Federally tax-exempt current income with a very low degree of share-
price fluctuation.
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
Strong Short-Term Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a low degree of share-price fluctuation.
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low
degree of share-price fluctuation.
Strong Short-Term Global Bond Total return by investing for a high level of income with a low degree
Fund of share-price fluctuation.
Strong Government Securities Total return by investing for a high level of current income with a
Fund moderate degree of share-price fluctuation.
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
Strong Corporate Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
Strong High-Yield Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income.
Strong High-Yield Bond Fund Total return by investing for a high level of current income and capital
growth.
Strong International Bond Fund High total return by investing for both income and capital appreciation.
Strong Asset Allocation Fund High total return consistent with reasonable risk over the long term.
Strong Equity Income Fund Total return by investing for both income and capital growth.
Strong American Utilities Fund Total return by investing for both income and capital growth.
Strong Total Return Fund High total return by investing for capital growth and income.
Strong Growth and Income Fund High total return by investing for capital growth and income.
Strong Schafer Value Fund Long-term capital appreciation principally through investment in common
stocks and other equity securities. Current income is a secondary
objective.
Strong Value Fund Capital growth.
Strong Opportunity Fund Capital growth.
Strong Growth Fund Capital growth.
Strong Common Stock Fund* Capital growth.
Strong Mid Cap Fund Capital growth.
Strong Small Cap Fund Capital growth.
Strong Discovery Fund Capital growth.
Strong International Stock Fund Capital growth.
Strong Asia Pacific Fund Capital growth.
</TABLE>
* The Fund is closed to new investors, except the Fund may continue to offer
its shares through certain 401(k) plans and similar company-sponsored
retirement plans.
49
<PAGE> 105
The Advisor also serves as Advisor or Subadvisor to several management
investment companies, some of which fund variable annuity separate accounts of
certain insurance companies.
Each Fund may from time to time be compared to the other funds in the
Strong Family of Funds based on a risk/reward spectrum. In general, the amount
of risk associated with any investment product is commensurate with that
product's potential level of reward. The Strong Funds risk/reward continuum or
any Fund's position on the continuum may be described or diagrammed in
marketing materials. The Strong Funds risk/reward continuum positions the risk
and reward potential of each Strong Fund relative to the other Strong Funds,
but is not intended to position any Strong Fund relative to other mutual funds
or investment products. Marketing materials may also discuss the relationship
between risk and reward as it relates to an individual investor's portfolio.
Financial goals vary from person to person. You may choose one or
more of the Strong Funds to help you reach your financial goals. To help you
better understand the Strong 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 Total Return Fund
Heritage Money Fund Municipal Advantage Fund Fund Opportunity Fund
Municipal Money Market Municipal Bond Fund Growth Fund
Fund 2 TO 4 YEARS Corporate Bond Fund Common Stock Fund*
------------
Short-Term Bond Fund International Bond Fund Discovery Fund
Short-Term Municipal Bond High-Yield Municipal Bond International Stock
Fund Fund Fund
Short-Term Global Bond Asset Allocation Fund Asia Pacific Fund
Fund American Utilities Fund Value Fund
High-Yield Bond Fund Small Cap Fund
Equity Income Fund Growth and Income Fund
Mid Cap Fund
Schafer Value Fund
</TABLE>
* This Fund is closed to new investors, except the Fund may continue to offer
its shares through certain 401(k) plans and similar company-sponsored
retirement plans.
ADDITIONAL FUND INFORMATION
(1) 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.
50
<PAGE> 106
(2) MEASURES OF VOLATILITY AND RELATIVE PERFORMANCE
Occasionally statistics may be used to specify Fund volatility or
risk. The general premise is that greater volatility connotes greater risk
undertaken in achieving performance. Measures of volatility or risk are
generally used to compare a Fund's net asset value or performance relative to a
market index. One measure of volatility is beta. Beta is the volatility of a
fund relative to the total market as represented by the Standard & Poor's 500
Stock Index. A beta of more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates volatility less than the market.
Another measure of volatility or risk is standard deviation. Standard deviation
is a statistical tool that measures the degree to which a fund's performance
has varied from its average performance during a particular time period.
Standard deviation is calculated using the following formula:
2
Standard deviation = the square root of (Sigma) (x - x )
i m
------------------
n-1
where (Sigma) = "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.
51
<PAGE> 107
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> 108
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
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<PAGE> 110
also play a part in the investment strategy. Some examples would be the aging
population, telecommunications, and the rapid development of foreign economies
where U.S. companies have strong revenue growth. The Advisor seeks to manage
risk by adhering to price disciplines, diversifying holdings across sectors,
and, when appropriate, building cash reserves.
As was true with respect to its management of the Asset Allocation
Fund, the Advisor believes that active management is the best way to achieve
the Total Return Fund's objectives. This policy is based on a fundamental
belief that economic and financial conditions create favorable and unfavorable
investment periods (or seasons) and that these different seasons require
different investment approaches. Through its understanding and willingness to
change with these investment cycles, the Advisor seeks to achieve the Fund's
objectives throughout the seasons of investment.
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, Equity
Income, Growth and Income 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) Reports of Independent Accountants.
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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.
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.
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Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATings
Fitch investment grade bond and preferred stock ratings provide a
guide to investors in determining the credit risk associated with a particular
security. The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt or preferred issue in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds and preferred stock carrying the same rating are of similar but
not necessarily identical credit quality since the rating categories do not
fully reflect small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds and preferred stock considered to be investment grade
and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and/or dividends
and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because
bonds and preferred stock rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of the issuers is
generally rated 'F-1+'.
A Bonds and preferred stock considered to be investment grade
and of high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than debt or preferred
securities with higher ratings.
BBB Bonds and preferred stock considered to be investment grade
and of satisfactory credit quality. The obligor's ability to
pay interest or dividends and repay principal is considered to
be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact
on these securities and, therefore, impair timely payment.
The likelihood that the ratings of these bonds or preferred
will fall below investment grade is higher than for securities
with higher ratings.
Fitch speculative grade bond or preferred stock ratings provide a
guide to investors in determining the credit risk associated with a particular
security. The ratings ('BB' to 'C') represent Fitch's assessment of the
likelihood of timely payment
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of principal and interest or dividends in accordance with the terms of
obligation for issues not in default. For defaulted bonds or preferred stock,
the rating ('DDD' to 'D') is an assessment of the ultimate recovery value
through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer or possible recovery value in
bankruptcy, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's future financial strength.
Bonds or preferred stock that have the same rating are of similar but
not necessarily identical credit quality since the rating categories cannot
fully reflect the differences in the degrees of credit risk.
BB Bonds or preferred stock are considered speculative. The
obligor's ability to pay interest or dividends and repay
principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its
debt service requirements.
B Bonds or preferred stock are considered highly speculative.
While bonds in this class are currently meeting debt service
requirements or paying dividends, the probability of continued
timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the
issue.
CCC Bonds or preferred stock have certain identifiable
characteristics that, if not remedied, may lead to default.
The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds or preferred stock are minimally protected. Default in
payment of interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal or suspension of preferred stock dividends is
imminent.
DDD, DD,
and D Bonds are in default on interest and/or principal payments or
preferred stock dividends are suspended. Such securities are
extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization
of the obligor. 'DDD' represents the highest potential for
recovery of these securities, and 'D' represents the lowest
potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture
restrictions is important to the analysis of a company's operating and
financial constraints. From time to time, Duff & Phelps Credit Rating Co.
places issuers or security classes on Rating Watch. The Rating Watch Status
results from a need to notify investors and the issuer that there are
conditions present leading us to re-evaluate the current rating(s). A listing
on Rating Watch, however, does not mean a rating change is inevitable. The
Rating Watch Status can either be resolved quickly or over a longer period of
time, depending on the reasons surrounding the placement on Rating Watch. The
"up" designation means a rating may be upgraded; the "down" designation means a
rating may be downgraded, and the uncertain designation means a rating may be
raised or lowered.
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The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities. Structured finance issues, including real
estate, asset-backed and mortgage-backed financings, use this same rating scale
with minor modification in the definitions. Thus, an investor can compare the
credit quality of investment alternatives across industries and structural
types. A "Cash Flow Rating" (as noted for specific ratings) addresses the
likelihood that aggregate principal and interest will equal or exceed the rated
amount under appropriate stress conditions.
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
<S> <C>
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AAA Highest credit quality. The risk factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB+ Below-average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according to
BB- industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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>
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IBCA LONG-TERM DEBT RATINGS
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk, albeit not very significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
BB - Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists,
but is susceptible over time to adverse changes in business, economic or
financial conditions.
B - Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
CCC - Obligations for which there is a current perceived possibility
of default. Timely repayment of principal and interest is dependent on
favorable business, economic or financial conditions.
CC - Obligations which are highly speculative or which have a high
risk of default.
C - Obligations which are currently in default.
NOTES: "+" or "-" may be appended to a rating below AAA to denote
relative status within major rating categories. Ratings of BB and below are
assigned where it is considered that speculative characteristics are present.
THOMSON BANKWATCH LONG-TERM DEBT RATINGS
Long-Term Debt Ratings assigned by Thomson BankWatch also weigh
heavily government ownership and support. The quality of both the company's
management and franchise are of even greater importance in the Long-Term Debt
Rating decisions. Long-Term Debt Ratings look out over a cycle and are not
adjusted frequently for what we believe are short-term performance aberrations.
Long-Term Debt Ratings can be restricted to local currency debt -
ratings will be identified by the designation LC. In addition, Long-Term Debt
Ratings may include a plus (+) or minus (-) to indicate where within the
category the issue is placed. BankWatch Long-Term Debt Ratings are based on
the following scale:
Investment Grade
AAA (LC-AAA) - Indicates that the ability to repay principal and
interest on a timely basis is extremely high.
AA (LC-AA) - Indicates a very strong ability to repay principal and
interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
A (LC-A) - Indicates the ability to repay principal and interest is
strong. Issues rated A could be more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings.
A-6
<PAGE> 117
BBB (LC-BBB) - The lowest investment-grade category; indicates an
acceptable capacity to repay principal and interest. BBB issues are more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Non-Investment Grade - may be speculative in the likelihood of timely repayment
of principal and interest
BB (LC-BB) - While not investment grade, the BB rating suggests that
the likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the ability to
adequately service debt obligations.
B (LC-B) - Issues rated B show higher degree of uncertainty and
therefore greater likelihood of default than higher-rated issues. Adverse
developments could negatively affect the payment of interest and principal on a
timely basis.
CCC (LC-CCC) - Issues rated CCC clearly have a high likelihood of
default, with little capacity to address further adverse changes in financial
circumstances.
CC (LC-CC) - CC is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
D (LC-D) - Default.
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating.
A-7
<PAGE> 118
The following criteria will be used in making the assessment:
- Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
- Source of payment - the more the issue depends on the market for
its refinancing, the more likely it is to be treated as a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established industries,
(ii) high rates of return on funds employed, (iii) conservative capitalization
structure with moderate reliance on debt and ample asset protection, (iv) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and (v) well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
A-8
<PAGE> 119
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated 'F-1+'.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the
margin of safety is not as great as for issues assigned 'F-1+'
and 'F-1' ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating
criteria used by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those
differences.
From time to time, Duff & Phelps places issuers or security classes on
Rating Watch. The Rating Watch status results from a need to notify investors
and the issuer that there are conditions present leading us to re-evaluate the
current rating(s). A listing on Rating Watch, however, does not mean a rating
change is inevitable.
The Rating Watch status can either be resolved quickly or over a
longer period of time, depending on the reasons surrounding the placement on
Rating Watch. The "up" designation means a rating may be upgraded; the "down"
designation means a rating may be downgraded, and the "uncertain" designation
means a rating may be raised or lowered.
Rating Scale: Definition
High Grade
A-9
<PAGE> 120
D-1+ Highest certainty of timely payment. Short-Term
liquidity, including internal operating factors
and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing
requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt
service. Operating factors and market access may be
subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or
interest payments.
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
The TBW Short-Term Ratings apply, unless otherwise noted, to specific
debt instruments of the rated entities with a maturity of one year or less.
TBW Short-Term Ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3 The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA SHORT-TERM RATINGS
IBCA Short-Term Ratings assess the borrowing characteristics of banks
and corporations, and the capacity for timely repayment of debt obligations.
The Short-Term Ratings relate to debt which has a maturity of less than one
year.
A-10
<PAGE> 121
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit
feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or which
are currently in default.
A-11
<PAGE> 122
ANNUAL REPORT
STRONG AMERICAN UTILITIES FUND
STRONG EQUITY INCOME FUND
STRONG GROWTH AND INCOME FUND
Incorporated by Reference to the Funds' Annual Report filed on Form N-30D
(File No. 33-61358), which was filed with the Securities and Exchange
Commission on or about December 27, 1996 (Edgar Reference No.
0000901539-96-000008).
<PAGE> 123
STRONG CONSERVATIVE EQUITY FUNDS, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements - American Utilities, Equity Income, and
Growth and Income Funds (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
(b) Exhibits
(1) Articles of Incorporation dated July 31, 1996(5)
(2) Bylaws dated October 20, 1995(2)
(3) Inapplicable
(4) Specimen Stock Certificate(2)
(5) Investment Advisory Agreement(2)
(5.1) Subadvisory Agreement (American Utilities) (3)
(6) Distribution Agreement(2)
(7) Inapplicable
(8.1) Custody Agreement(4)
(8.2) Global Custody Agreement(4)
(8.2.1) Amendment to Global Custody Agreement dated
August 26, 1996
(9) Shareholder Servicing Agent Agreement(2)
(10) Inapplicable
(11) Consent of Auditor
(12) Inapplicable
(13) Inapplicable
(14.1.1) Prototype Defined Contribution Retirement Plan - No. 2(3)
(14.2) Individual Retirement Custodial Account(3)
(14.3) Section 403(b)(7) Retirement Plan(3)
(14.4) Simplified Employee Pension Plan(4)
(15) Inapplicable
(16) Computation of Performance Figures
(17) Financial Data Schedule
(19) Power of Attorney dated December 27, 1996(5)
(20) Letter of Representation
(21.1) Code of Ethics for Access Persons dated
October 18, 1996(5)
(21.2) Code of Ethics for Non-Access Persons dated
October 18, 1996(5)
- ---------------
(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.
C-1
<PAGE> 124
(3) Incorporated herein by reference to Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A of Registrant filed on or
about February 26, 1996.
(4) Incorporated herein by reference to Post-Effective Amendment No. 8 to
the Registration Statement on Form N-1A of the Registrant filed on or
about June 26, 1996.
(5) Incorporated herein by reference to Post-Effective Amendment No. 9 to
the Registration Statement on Form N-1A of the Registrant filed on or
about December 30, 1996.
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
Number of Record Holders
Title of Class as of January 31, 1997
----------------------------------- ------------------------
Common Stock, $.00001 par value
Strong American Utilities Fund 8,682
Strong Equity Income Fund 2,934
Strong Growth and Income Fund 5,232
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
C-2
<PAGE> 125
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" in the Statement of Additional
Information is hereby incorporated by reference pursuant to Rule 411 under the
Securities Act of 1933.
Item 29. Principal Underwriters
(a) Strong Funds Distributors, Inc., principal underwriter for Registrant,
also serves as principal underwriter for Strong Advantage Fund, Inc.; Strong
Asia Pacific Fund, Inc.; Strong Asset Allocation Fund, Inc.; Strong Common
Stock Fund, Inc.; Strong Corporate Bond Fund, Inc.; Strong Discovery Fund,
Inc.; Strong Equity Funds, Inc.; Strong Government Securities Fund, Inc.;
Strong Heritage Reserve Series, Inc.; Strong High-Yield Municipal Bond Fund,
Inc.; Strong Income Funds, Inc.; Strong Institutional Funds, Inc.; Strong
International Bond Fund, Inc.; Strong International Stock Fund, Inc.; Strong
Money Market Fund, Inc.; Strong Municipal Bond Fund, Inc.; Strong Municipal
Funds, Inc.; Strong Opportunity Fund, Inc.; Strong Schafer Value Fund, Inc.;
Strong Short-Term Bond Fund, Inc.; Strong Short-Term Global Bond Fund, Inc.;
Strong Short-Term Municipal Bond Fund, Inc.; Strong Special Fund II, Inc.;
Strong Total Return Fund, Inc.; and Strong Variable Insurance Funds, Inc.
(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" in the Statement of Additional
Information is hereby incorporated by reference pursuant to Rule 411 under the
Securities Act of 1933.
(c) None
Item 30. Location of Accounts and Records
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Vice President,
Thomas P. Lemke, at Registrant's corporate offices, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
Item 31. Management Services
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings
(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 the latest
annual report to shareholders.
C-3
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 10 to
the Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment No. 10 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Village of Menomonee Falls, and State of Wisconsin on
the 26th day of February, 1997.
STRONG 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. 10 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- -----
<S> <C> <C>
President (Principal Executive
Officer and acting Principal
Financial and Accounting Officer) and
/s/ John Dragisic a Director February 26, 1997
- -----------------------
John Dragisic
/s/ Richard S. Strong Chairman of the Board and a Director February 26, 1997
- -----------------------
Richard S. Strong
Director February 26, 1997
- -----------------------
Marvin E. Nevins*
Director February 26, 1997
- -----------------------
Willie D. Davis*
Director February 26, 1997
- -----------------------
William F. Vogt*
Director February 26, 1997
- -----------------------
Stanley Kritzik*
</TABLE>
* John S. Weitzer signs this document pursuant to powers of attorney filed
this Post-Effective Amendment No. 9 to with the Registration Statement on
Form N-1A.
By: /s/ John S. Weitzer
------------------------
John S. Weitzer, Vice President
<PAGE> 127
EXHIBIT INDEX
EDGAR
Exhibit No. Exhibit Exhibit No.
(8.2.1) Amendment to Custody Agreement EX-99.B8.2.1
(11) Consent of Auditor EX-99.B11
(16) Computation of Performance Figures EX-99.B16
(17) Financial Data Schedule EX-27.1 American Utilities
EX-27.2 Growth and Income
EX-27.3 Equity Income
(20) Letter of Representation EX-99.B20
<PAGE> 1
AMENDMENT TO THE SUBCUSTODIAN AGREEMENT
AMENDMENT entered into as of this 26th day of August, 1996 to the
Subcustodian Agreement among FIRSTAR TRUST COMPANY (the "Custodian") and the
STRONG FUNDS (the "Funds") listed in Appendix B and BROWN BROTHERS HARRIMAN &
CO. (the "Subcustodian") dated as of December 22, 1993 (the "Agreement").
In consideration of the Subcustodian's offering subcustodial services to
the Custodian and the Funds in Russia, the Custodian the Funds and the
Subcustodian agree that the Agreement is hereby amended as follows:
1. Section 2. 1, Safekeeping, is amended by the addition of the
following phrase at the end of said Section:
"provided, however, that the Subcustodian's responsibility for safekeeping
equity securities of Russian issuers ("Russian Equities") hereunder shall be
limited to the safekeeping of relevant share extracts from the share
registration books maintained by the entities providing share registration
services to issuers of Russian Equities (each a "Registrar") indicating an
investor's ownership of such securities (each a "Share Extract")."
2. Section 2.3, Registration, is amended by the addition of the
following at the end of said Section:
"However, with respect to Russian Equities, the Subcustodian shall
instruct a Sub-Subcustodian to ensure that registration thereof shall be
reflected on the books of the issuer's Registrar, subject to the following
conditions, but shall in no event be liable for losses or costs incurred as a
result of delays or failures in the registration process, including without
limitation the inability to obtain or enforce relevant Share Extracts, unless
such delays or failures are due to the Subcustodian's or Sub-Subcustodian's
negligence, fraud, or willful default. Such registration may be in the name of
a nominee of a Sub-Subcustodian. In the event registration is in the name of a
Fund, such Fund hereby acknowledges that only the Subcustodian or
Sub-Subcustodian may give instructions to the Registrar to transfer or engage
in other transactions involving the Russian Equities so registered.
<PAGE> 2
A Sub-Subcustodian may from time to time enter into contracts with
Registrars with respect to the registration of Russian Equities ("Registrar
Contracts"). The Subcustodian shall provide the Funds with a list of the
Russian Equities with respect to which the Sub-Subcustodian has entered into a
Registrar Contract, and will promptly provide the Funds with updates to that
list whenever the Sub-Subcustodian enters into any new Registrar Contracts.
Such Registrar Contracts will include (i) regular share confirmations by the
Sub-Subcustodian, (ii) reregistrations within set timeframes, (iii) use of a
Sub-Subcustodian's nominee name, (iv) direct access by auditors of the
Sub-Subcustodian or its clients to share registers, and (v) specification of
the Registrar's responsibilities and liabilities. It is hereby acknowledged
and agreed that the Subcustodian does not represent or warrant that such
Registrar Contracts are enforceable.
If a Fund instructs the Subcustodian to settle a purchase of a Russian
Equity, the Subcustodian will instruct a Sub-Subcustodian to use reasonable
efforts to reregister the Russian Equity and obtain a Share Extract in a timely
manner.
After completion of reregistration of a Russian Equity in respect of which
a Sub-Subcustodian has entered into a Registrar Contract, the Subcustodian
shall instruct the Sub-Subcustodian to monitor such registrar using reasonable
efforts and to promptly notify the Subcustodian upon the Sub-Subcustodian's
obtaining knowledge of the occurrence of any of the following events
("Registrar Events"): (i) a Registrar has eliminated a shareholder from the
register or has altered registration records; (ii) a Registrar has refused to
register securities in the name of a particular purchaser and the purchaser or
seller has alleged that the registrar's refusal to so register was unlawful;
(iii) a Registrar holds for its own account shares of an issuer for which it
serves as registrar; (iv) if a Registrar Contract is in effect with a
Registrar, and the Registrar notifies the Sub-Subcustodian that it will no
longer be able materially to comply with the terms of the Registrar Contract;
or the Subcustodian has actual knowledge that a registrar has engaged in
conduct that indicates it will not materially comply with the provisions. or
(v) if the Registrar has materially breached such Contract. The Subcustodian
shall promptly infonn the Fund of the occurrence of a Registrar Event provided
the Subcustodian has actual notice of the Registrar Event.
It shall be the sole responsibility of the Custodian and each Fund to
promptly contact the Subcustodian prior to executing any transaction in a
Russian Equity to determine whether a Registrar Contract exists in respect of
an issuer not included on the list provided to the Fund.
If a Fund instructs the Subcustodian by Proper Instruction to settle a
purchase of a Russian Equity in respect of which the Sub-Subcustodian has not
entered into a Registrar Contract, then the Subcustodian shall instruct the
Sub-Subcustodian to endeavor to settle such transaction in accordance with the
Proper Instruction and with the provisions of Section 2.4 of this Agreement,
notwithstanding the absence of any such Registrar Contract and subject to the
requirement that the Subcustodian provide and promptly update the Registrar
Contract list with the respect to Russian Equities and without the Subcustodian
being required to notify the Fund that no such Registrar Contract is then in
effect, and it being understood that neither the Subcustodian nor the
Sub-Subcustodian shall be required to follow the procedure set forth in the
second preceding paragraph."
3. Section 2.4, Purchases, is amended by the addition of the
following at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of purchases of securities in
Russia. Unless otherwise instructed by Proper Instructions acceptable to the
Subcustodian, the Subcustodian shall
2
<PAGE> 3
only authorize a Sub-Subcustodian to make payment for purchases of Russian
Equities upon receipt of the relevant Share Extract in respect of the Fund's
purchases. With respect to securities other than Russian Equities, settlement
of purchases shall be made in accordance with securities processing or
settlement practices which the Subcustodian in its discretion determines to be
a market practice. Subject to the exercise of reasonable care, the
Subcustodian shall only be responsible for securities purchased upon actual
receipt of such securities at the premises of its Sub-Subcustodian, provided
that the Subcustodian's responsibility for securities represented by Share
Extracts shall be limited to the safekeeping of the relevant Share Extract upon
actual receipt of such Share Extract at the premises of the Sub-Subcustodian."
4. Section 2.5, Exchanges, is amended by inserting after the word
"exchange" in the second line thereof, the following phrase:
", in accordance with the registration procedures described in Section
2.3, of this Agreement,"
5. Section 2.6 Sales of Securities, is amended by the addition of the
following at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of sales of securities in
Russia. Unless otherwise expressly instructed by Proper Instructions
acceptable to the Subcustodian, settlement of sales of securities shall be made
in accordance with securities processing or settlement practices which the
Subcustodian in its discretion determines to be a market practice. Each Fund
hereby expressly acknowledges that such market practice might require delivery
of securities prior to receipt of payment and that the Fund bears the risk of
payment in instances where delivery of securities is made prior to receipt of
payment therefor in accordance with Proper Instructions received by the
Subcustodian or pursuant to the Subcustodian's determination in its discretion
that such delivery is in accordance with market practice. Subject to the
exercise of reasonable care, the Subcustodian shall not be responsible for any
securities delivered from the premises of the Sub-Subcustodian from the time
they leave such premises."
6. Section 2.8, Exercise of Rights; Tender Offers, is replaced in its
entirety with the following:
3
<PAGE> 4
Section 2.8, Exercise of Rights Tender Offers -- Upon timely receipt of
Proper Instructions, to use reasonable efforts to take any action required by
the terms of a rights offer, tender offer, put, call, merger, consolidation,
reorganization or other corporate action affecting securities held on behalf of
a Fund. The Subcustodian shall use reasonable efforts to act on such Proper
Instructions but will not be held liable for any losses or costs incurred as a
result of such actions or as a result of the Subcustodian's inability for
reasons beyond its control to take the actions requested by such Proper
Instructions, provided however, that the Subcustodian or Sub-Subcustodian was
not negligent in performing its duties under this section. The Subcustodian
shall promptly inform the Fund whenever it is unable to take any actions
requested by Proper Instructions."
7. Section 2.9 Stock Dividends, Rights, Etc., is modified by the
addition of the following paragraph at the end of said Section:
"With respect to Russian Equities, to request a Sub-Subcustodian to obtain
a Share Extract with respect to all Russian Equities issued by reason of a
stock dividend, bonus issue or other distibution resulting from a corporate
action not requiring instructions from the shareholder of the security,
provided that the Subcustodian shall not be responsible for its inability to
obtain any such Share Extract or for the failure of a Registrar or any agent
thereof to record the Fund's ownership on the issuer's records, unless such
inability is due to the negligence, fraud, or willful default of the
Subcustodian or Sub-Subcustodian or Agent selected by the Subcustodian or
Sub-Subcustodian"
8. Section 3 Powers and Duties of the Subcustodian with Resi)ect to the
Appointment of Secondary, Sub-Subcustodians, is modified by the insertion of
the following at the end of the first paragraph of Section 3:
"With respect to Russia, each Fund hereby expressly acknowledges that a
Sub- Subcustodian for Russian securities may utilize the services of
Rosvneshtorgbank (also called Vneshtorgbank RF) ("VTB") which, as of the date
of this amendment, meets the requirements of Rule 17f-5 under the Investment
Company Act of 1940. The Custodian and each Fund acknowledge that the rights
of the Sub-Subcustodian against the VTB may consist only of a contractual
claim. Neither the Subcustodian nor the Sub-Subeustodian shall be responsible
or liable to the Custodian or a Fund or its shareholders for the acts or
omissions of the VTB unless any loss results from the negligence, fraud or
willful default of the Subcustodian or Sub-Subcustodian.. In the event of a
loss of securities or cash held on behalf of a Fund through the VTB, the
Subcustodian shall not be responsible to the Custodian, a Fund or its
shareholders unless and to the extent it in fact recovers from the
Sub-Subcustodian."
4
<PAGE> 5
9. Section 6.2 Liability of the Subcustodian with Respect to Use of
Securities Systems and Foreign Depositories, is amended by the insertion of the
following at the end of said Section:
"Notwithstanding anything in this Agreement to the contrary, neither the
Subcustodian nor the Sub-Subcustodian shall be responsible or liable to the
Custodian a Fund or its shareholders for the acts or omissions of a Foreign
Depository in Russia, and in addition, neither the Subcustodian nor a
Sub-Subcustodian shall be responsible or liable to the Custodian, a Fund or its
shareholders for the failure of the Subcustodian or Sub-Subcustodian to assert
rights effectively against any such Foreign Depository unless due to the
negligence, fraud, or willful default of the Subcustodian or Sub-Subcustodian."
10. The first paragraph of Section 6.4, Standard of Care; Liability;
Inderrmification, is replaced in its entirety with the following:
"The Subcustodian shall be held only to the exercise of reasonable care in
carrying out the provisions of this Agreement, provided that the Subcustodian
shall not thereby be required to take any action which is in contravention of
any applicable law, rule or regulation or any order or judgment of any court of
competent jurisdiction. With respect to securities issued by Russian issuers
or settlement in Russia of securities transactions, reasonable care shall mean
reasonable practices under the circumstances as measured by prevailing
custodial practices wnong international financial institutions in Russia, and
negligence as used herein shall mean the failure to exercise reasonable care as
defined in this sentence. The Subcustodian shall in no event be liable for
consequential or indirect losses or from loss of goodwill.
"Notwithstanding the foregoing, the Subcustodian shall have no liability
in respect of any loss, damage or expense suffered by the Custodian a Fund or
any shareholder of a Fund insofar as such loss, damage or expense arises from
investment risk inherent in investing in capital markets or in holding assets
in a particular country or jurisdiction, including without limitation, (i)
political, legal, economic, settlement and custody infrastructure, and currency
and exchange rate risks; (ii) investment and repatriation restrictions; (iii) a
Fund's inability to protect and enforce any local legal rights including rights
of title and beneficial ownership; (iv) corruption and crime in the local
market; (v) unreliable information which emanates from the local market; (vi)
volatility of banking and financial systems and infrastructure; (vii)
bankruptcy and insolvency risks of any and all local banking agents,
counterparties to cash and securities transactions or registrars or transfer
agents; and (vii) risk of issuer insolvency or default.
"It is understood that no Registrar, whether or not any such Registrar has
entered into a contract or other arrangement with a Sub-Subcustodian or Foreign
Depository, is or shall be considered or deemed to be a Foreign Depository or
an agent of the Subcustodian or any Sub-Subcustodian, aud accordingly neither
the Subcustodian nor the Sub-Subcustodian shall be responsible for or liable
to the Custodian, a Fund or to the shareholders of a Fund for the acts or
omissions of any such Registrar unless such acts or
5
<PAGE> 6
omissions result from the negligence, fraud or willful default of the
Subcustodian or Sub-Subcustodian. It is also agreed that each Fund shall
be responsible for preparation and filing of tax returns, reports and other
documents on any activities it undertakes in Russia which are to be filed
with any relevant governmental or other authority and for the payment of
any taxes, levies, duties or similar liability the Fund incurs in respect
of property held or sold in Russia or of payments or distributions received
in respect thereof in Russia. Accordingly, the Custodian and each Fund
hereby agree to indemnify and hold harmless the Subcustodian from any loss,
cost or expense resulting from the imposition or assessment of any such
tax, duty, levy or liability or any expenses related thereto."
11. A new Section 15., Risk Disclosure Acknowledgment, is added at the
end of the present Section 14:
"Each Fund hereby acknowledges that it has received, has read and has
understood the Subcustodian's Risk Disclosure Statement, a copy of which is
attached hereto and is incorporated herein by reference. Each Fund further
acknowledges that the Risk Disclosure Statement is not comprehensive, and
warrants and represents to the Subcustodian that it has undertaken its own
review of the risks associated with investment in Russia and has concluded that
such investment is appropriate for the Fund and in no way conflicts with the
Fund's constitutive documents, investment objective, duties to its shareholders
or with any regulatory requirements applicable to the Fund."
12. A new Section 16., Registrar System Reports, is added at the end of the new
section 15:
"Credit Suisse (Moscow) Ltd., a Sub-Subcustodian will prepare for
distribution to the Board of Directors a quarterly report identifying any
concerns Credit Suisse (Moscow) Ltd. has regarding the Russian share
registration system that should be brought to the Board of Directors'
attention. This report will include detailed information regarding the steps
Credit Suisse (Moscow) Ltd. has taken during the reporting period to ensure
that the Fund's interests continue to be appropriately recorded. This duty to
report will commence upon Board of Director approval of investment in Russia.
The first quarterly report will be submitted to the Board of Directors after
the first full quarter of the Fund's investment in Russia. Each report will
contain only new information from the date of the last quarterly report."
Except as amended above, all the provisions of the Agreement as heretofore in
effect shall remain in full force and effect.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
FIRSTAR TRUST COMPANY BROWN BROTHERS HARRIMAN &
CO.
/s/ Joe D. Redwine /s/ Stokley P. Towles
- --------------------------- --------------------------
Name: Joe D. Redwine Name: Stokley P. Towles
Title: First Vice President Title: Partner
STRONG FUNDS LISTED IN APPENDIX B
/s/ John S. Weitzer
- ---------------------------
Name: John S. Weitzer
Title: Vice President
7
<PAGE> 8
APPENDIX B
(REVISED AS OF DECEMBER 30,1996)
Strong Total Return Fund, Inc.
Strong Discovery Fund, Inc.
Strong Opportunity Fund, Inc.
Strong Advantage Fund, Inc.
Strong Short-Term Bond Fund, Inc.
Strong Corporate Bond Fund, Inc.
Strong Asset Allocation Fund, Inc.
Strong Common Stock Fund, Inc.
Strong Special Fund II, Inc.
Strong Money Market Fund, Inc.
Strong Variable Insurance Funds, Inc.
Strong Advantage Fund II
Strong Variable Insurance Funds, Inc.
Strong Asset Allocation Fund II
Strong Variable Insurance Funds, Inc.
Strong Discovery Fund II
Strong Variable InsuranceFunds, Inc.
Strong Growth Fund II
Strong Equity Funds, Inc.
Strong Growth Fund
Strong Equity Funds, Inc.
Strong Small Cap Fund
Strong Equity Funds, Inc.
Strong Mid Cap Fund
Strong Conservative Equity Funds, Inc.
Strong American Utilities Fund
Strong Conservative Equity Funds, Inc.
Strong Equity Income Fund
Strong Conservative Equity Funds, Inc.
Strong Growth and Income Fund
Strong Income Funds, Inc.
Strong High-Yield Bond Fund
Strong Institutional Funds, Inc.
Strong Institutional Bond Fund
FIRSTAR TRUST COMPANY BROWN BROTHERS HARRIMAN & CO
By: /s/ Per Pro: /s/
----------------------- ---------------------
Title: Vice President
FUNDS LISTED ABOVE
By: /s/
----------------
Title: Vice President
8
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Strong Conservative Equity Funds, Inc.
We consent to the incorporation by reference in Post-Effective Amendment No. 10
to the Registration Statement of Strong Conservative Equity Funds, Inc. on Form
N-1A of our reports dated December 4, 1996 on our audits of the financial
statements and financial highlights of Strong American Utilities Fund, Strong
Growth and Income Fund, and Strong Equity Income Fund, three series of Strong
Conservative Equity Funds, Inc., which reports are included in the Annual Report
to Shareholders for the periods ended October 31, 1996, which are also
incorporated by reference in the Registration Statement. We also consent to
the reference to our Firm under the caption "Independent Accountants" in the
Statement of Additional Information.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
February 26, 1997
<PAGE> 1
Strong American Utilities Fund
a series of Strong Conservative Equity Funds, Inc.
EXHIBIT 16
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. CURRENT ANNUALIZED YIELD: 30 days ended October 31, 1996
A. Formula
a-b 6
YIELD = 2[(----------+1) -1]
cd
Where: a = dividends and interest earned during
the period.
b = expenses accrued for the period
(net of reimbursements).
c = the average daily number of shares
outstanding during the period.
d = the maximum offering price per share
on the last day of the period.
B. Calculation
438,535.88-114,954.79 6
YIELD = 2[(---------------------+1) -1]
9,549,126.877x 12.64
YIELD = 3.24%
II. AVERAGE ANNUAL TOTAL RETURN
A. Formula
n n _____
P = (1+T) = ERV or T=\ /ERV/P-1
P = a hypothetical initial payment of $10,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $10,000
payment made at the beginning of the stated periods
at the end of the stated periods.
B. Calculation
n _____
T = \ /ERV/P-1
1. One-year period 10-31-95 through 10-31-96
1 _____________
11.17% = \ /11,117/10,000-1
<PAGE> 2
2. Since inception 7-01-93 through 10-31-96
3.333 _____________
11.46% = \ /14,356/10,000-1
III. TOTAL RETURN
A. Formula
EV-IV
_____
IV = TR
Where: EV = Value at the end of the period, including
reinvestment of all dividends and capital gains
distributions
IV = Initial value of a hypothetical investment at
the net asset value
TR = Total Return
B. Calculation
EV-IV
_____
IV = TR
One-year period ended October 31, 1996
11,117-10,000
_____________
10,000 = 11.17%
<PAGE> 3
Strong Growth and Income Fund
EXHIBIT 16
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. TOTAL RETURN
A. Formula
EV-IV
_____
IV = TR
Where: EV = Value at the end of the period, including
reinvestment of all dividends and capital
gains distributions
IV = Initial value of a hypothetical investment at
the net asset value
TR = Total Return
B. Calculation
EV-IV
_____
IV = TR
Since Inception 12-29-95 through 10-31-96
12,419-10,000
_____________
10,000 = 24.19%
<PAGE> 4
Strong Equity Income Fund
EXHIBIT 16
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. TOTAL RETURN
A. Formula
EV-IV
_____
IV = TR
Where: EV = Value at the end of the period, including
reinvestment of all dividends and capital gains
distributions
IV = Initial value of a hypothetical investment at
the net asset value
TR = Total Return
B. Calculation
EV-IV
_____
IV = TR
Since Inception 12-29-95 through 10-31-96
12,151-10,000
_____________
10,000 = 21.51%
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> STRONG AMERICAN UTILITES FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 114,256
<INVESTMENTS-AT-VALUE> 122,874
<RECEIVABLES> 800
<ASSETS-OTHER> 36
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,710
<PAYABLE-FOR-SECURITIES> 1,040
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 184
<TOTAL-LIABILITIES> 1,224
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,996
<SHARES-COMMON-STOCK> 9,691
<SHARES-COMMON-PRIOR> 7,814
<ACCUMULATED-NII-CURRENT> 375
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,497
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,618
<NET-ASSETS> 122,486
<DIVIDEND-INCOME> 4,974
<INTEREST-INCOME> 549
<OTHER-INCOME> 0
<EXPENSES-NET> (1,453)
<NET-INVESTMENT-INCOME> 4,070
<REALIZED-GAINS-CURRENT> 8,401
<APPREC-INCREASE-CURRENT> (1,982)
<NET-CHANGE-FROM-OPS> 10,489
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,904)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,627
<NUMBER-OF-SHARES-REDEEMED> (11,043)
<SHARES-REINVESTED> 293
<NET-CHANGE-IN-ASSETS> 30,790
<ACCUMULATED-NII-PRIOR> 209
<ACCUMULATED-GAINS-PRIOR> (1,903)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 947
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,453
<AVERAGE-NET-ASSETS> 126,313
<PER-SHARE-NAV-BEGIN> 11.73
<PER-SHARE-NII> 0.4
<PER-SHARE-GAIN-APPREC> 0.9
<PER-SHARE-DIVIDEND> (0.39)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.64
<EXPENSE-RATIO> 1.2
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> STRONG GROWTH & INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> DEC-29-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 17,245
<INVESTMENTS-AT-VALUE> 18,392
<RECEIVABLES> 196
<ASSETS-OTHER> 34
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,622
<PAYABLE-FOR-SECURITIES> 589
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 43
<TOTAL-LIABILITIES> 632
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,807
<SHARES-COMMON-STOCK> 1,453
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 9
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 27
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,147
<NET-ASSETS> 17,990
<DIVIDEND-INCOME> 76
<INTEREST-INCOME> 54
<OTHER-INCOME> 0
<EXPENSES-NET> (100)
<NET-INVESTMENT-INCOME> 30
<REALIZED-GAINS-CURRENT> 27
<APPREC-INCREASE-CURRENT> 1,147
<NET-CHANGE-FROM-OPS> 1,204
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (21)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,816
<NUMBER-OF-SHARES-REDEEMED> (365)
<SHARES-REINVESTED> 2
<NET-CHANGE-IN-ASSETS> 17,990
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 100
<AVERAGE-NET-ASSETS> 6,146
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 2.38
<PER-SHARE-DIVIDEND> (0.04)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.38
<EXPENSE-RATIO> 1.9
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> STRONG EQUITY INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> DEC-29-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 27,284
<INVESTMENTS-AT-VALUE> 29,649
<RECEIVABLES> 213
<ASSETS-OTHER> 28
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 29,890
<PAYABLE-FOR-SECURITIES> 1,112
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55
<TOTAL-LIABILITIES> 1,167
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,576
<SHARES-COMMON-STOCK> 2,388
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 28
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (246)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,365
<NET-ASSETS> 28,723
<DIVIDEND-INCOME> 263
<INTEREST-INCOME> 140
<OTHER-INCOME> 0
<EXPENSES-NET> (183)
<NET-INVESTMENT-INCOME> 220
<REALIZED-GAINS-CURRENT> (226)
<APPREC-INCREASE-CURRENT> 2,365
<NET-CHANGE-FROM-OPS> 2,359
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (212)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,756
<NUMBER-OF-SHARES-REDEEMED> (386)
<SHARES-REINVESTED> 18
<NET-CHANGE-IN-ASSETS> 28,723
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 110
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 183
<AVERAGE-NET-ASSETS> 16,379
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 2.02
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.03
<EXPENSE-RATIO> 1.3
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE> 1
EXHIBIT-99.B20
[GODFREY & KAHN, S.C. LETTERHEAD]
February 25, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Strong Conservative Equity Funds, Inc.
Gentlemen:
We represent Strong Conservative Equity Funds, Inc. (the "Company"),
in connection with its filing of Post-Effective Amendment No. 10 (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
