<PAGE> 1
STRONG GROWTH FUNDS
<TABLE>
<S> <C>
STRONG OPPORTUNITY FUND, INC. STRONG FUNDS
STRONG GROWTH FUND, INC. P.O. Box 2936
STRONG COMMON STOCK FUND, INC. Milwaukee, Wisconsin 53201
STRONG DISCOVERY FUND, INC. Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
Device for the
Hearing-Impaired:
(800) 999-2780
</TABLE>
The Strong Family of Funds ("Strong Funds") is a family of twenty-three
diversified and non-diversified, open-end management investment companies,
commonly called 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, growth and income funds, income funds,
municipal income funds, international funds, and money market funds. The "Strong
Growth 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 October 13, 1995, 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.
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THE FUNDS MAY ENGAGE IN SUBSTANTIAL SHORT-TERM TRADING, WHICH MAY
INCREASE A FUND'S EXPENSES. EACH FUND MAY INVEST A SIGNIFICANT PORTION OF
ITS ASSETS IN RESTRICTED SECURITIES. THESE INVESTMENT POLICIES INVOLVE
SUBSTANTIAL RISK AND MAY BE CONSIDERED SPECULATIVE.
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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.
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Dated October 13, 1995
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PROSPECTUS PAGE I-1
<PAGE> 2
STRONG GROWTH FUNDS
Strong Opportunity Fund, Inc., Strong Growth Fund, Inc., Strong Common Stock
Fund, Inc., and Strong Discovery Fund, Inc. (collectively the "Funds") are
separately incorporated, diversified, open-end management investment companies.
STRONG OPPORTUNITY FUND (the "Opportunity Fund") seeks capital growth. The
Fund invests at least 70% of its total assets in equity securities. It currently
emphasizes medium-sized companies that the Fund's Advisor believes are
under-researched and attractively valued.
STRONG GROWTH FUND (the "Growth Fund") seeks capital growth. The Fund invests
primarily in equity securities that the Fund's Advisor believes have
above-average growth prospects.
STRONG COMMON STOCK FUND (the "Common Stock Fund") seeks capital growth. The
Fund invests at least 80% of its total assets in equity securities. It currently
emphasizes small companies that the Fund's Advisor believes are under-researched
and attractively valued. The Common Stock Fund is currently closed to new
investors.
STRONG DISCOVERY FUND (the "Discovery Fund") seeks capital growth. The Fund's
Advisor seeks to identify emerging investment trends and attractive growth
opportunities. While the Fund normally emphasizes equity investments, it also
has the flexibility to invest in debt obligations and short-term fixed income
securities.
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PROSPECTUS PAGE I-2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
EXPENSES................................. I-4
FINANCIAL HIGHLIGHTS..................... I-5
HIGHLIGHTS............................... I-9
INVESTMENT OBJECTIVES AND POLICIES....... I-9
Comparing the Funds ... I-10
Strong Opportunity Fund......... I-10
Strong Growth Fund.............. I-11
Strong Common Stock Fund........ I-12
Strong Discovery Fund........... I-13
IMPLEMENTATION OF POLICIES AND RISKS..... I-14
ABOUT THE FUNDS.......................... I-20
SHAREHOLDER MANUAL....................... II-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 Strong
Growth Funds. This Prospectus does not constitute an offer to sell securities to
any person in any state or jurisdiction in which such offering may not lawfully
be made.
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PROSPECTUS PAGE I-3
<PAGE> 4
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Funds, will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............. NONE
Sales Load Imposed on Reinvested
Dividends................................. NONE
Deferred Sales Load......................... NONE
Redemption Fees............................. NONE
Exchange Fees............................... NONE
</TABLE>
There are certain charges associated with retirement accounts and with
certain other special shareholder services offered by the Funds. Additionally,
purchases and redemptions may also be made through broker-dealers or others who
may charge a commission or other transaction fee for their services. (See
"Shareholder Manual - How to Buy Shares" and "- How to Sell Shares.")
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
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<TABLE>
<CAPTION>
Total
Management Other 12b-1 Operating
Fund Fees Expenses Fees Expenses
<S> <C> <C> <C> <C>
Opportunity 1.00% .38%* NONE 1.38%
Growth 1.00 .61* NONE 1.61
Common Stock 1.00 .34* NONE 1.34
Discovery 1.00 .46* NONE 1.46
</TABLE>
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* For the fiscal year ended December 31, 1994, the Funds may have used brokerage
commission credits to pay certain expenses that otherwise would require cash
payments by the Funds. In all cases, such credits have been immaterial in amount
and have not resulted in any increase in the level of commissions paid by the
Funds.
From time to time, the Funds' investment advisor, Strong Capital Management,
Inc. (the "Advisor"), may voluntarily waive its management fee and/or absorb
certain expenses for any of the Funds. The expenses specified in the table above
are based on actual expenses incurred for the year ended December 31, 1994. For
additional information concerning fees and expenses, see "About the Funds -
Management."
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PROSPECTUS PAGE I-4
<PAGE> 5
EXAMPLE. You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
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<TABLE>
<CAPTION>
Period (in years)
-----------------------------
Fund 1 3 5 10
<S> <C> <C> <C> <C>
Opportunity $14 $44 $ 76 $166
Growth 16 51 88 191
Common Stock 14 42 73 161
Discovery 15 46 80 175
</TABLE>
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The Example is based on each Fund's "Total Operating Expenses" described
above. PLEASE REMEMBER THAT THE EXAMPLE SHOULD NOT BE CONSIDERED AS
REPRESENTATIVE OF PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE HIGHER
OR LOWER THAN THOSE SHOWN. The assumption in the Example of a 5% annual return
is required by regulations of the SEC applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of a Fund's shares.
FINANCIAL HIGHLIGHTS
The following annual Financial Highlights for each of the Funds has been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
Their report for the fiscal year ended December 31, 1994 is included in the
Annual Report of the Growth Funds that is contained in the Funds' Statement of
Additional Information. The Financial Highlights for the Funds should be read in
conjunction with the Financial Statements and related notes included in the
Funds' Annual Report. Additional information about each Fund's performance is
contained in the Funds' Annual Report, which may be obtained without charge by
calling or writing Strong Funds. The following presents information relating to
a share of capital stock of each of the Funds, outstanding for the entire
period.
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PROSPECTUS PAGE I-5
<PAGE> 6
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRONG OPPORTUNITY FUND
1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 28.23 $ 24.70 $ 21.24 $ 16.29 $ 19.21 $ 16.90 $ 15.87 $ 15.99 $ 10.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.13 0.06 0.06 0.21 0.63 0.84 1.35 0.27 0.05
Net Realized and
Unrealized Gains
(Losses) on
Investments 0.76 5.10 3.62 4.93 (2.77) 2.31 1.23 1.65 5.94
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL FROM INVESTMENT
OPERATIONS 0.89 5.16 3.68 5.14 (2.14) 3.15 2.58 1.92 5.99
LESS DISTRIBUTIONS
From Net Investment
Income (0.13) (0.06) (0.06) (0.19) (0.74) (0.68) (1.37) (0.24) --
From Net Realized
Gains (1.28) (1.57) (0.16) -- (0.04) (0.16) -- (1.80) --
From Capital -- -- -- -- -- -- (0.18) -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (1.41) (1.63) (0.22) (0.19) (0.78) (0.84) (1.55) (2.04) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 27.71 $ 28.23 $ 24.70 $ 21.24 $ 16.29 $ 19.21 $ 16.90 $ 15.87 $ 15.99
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return +3.2% +21.2% +17.4% +31.7% -11.3% +18.5% +16.5% +11.9% +59.9%
Net Assets, End of
Period
(In Thousands) $805,700 $443,503 $193,208 $159,667 $131,919 $205,043 $157,353 $153,573 $ 43,632
Ratio of Expenses to
Average
Net Assets 1.4% 1.4% 1.5% 1.7% 1.7% 1.6% 1.6% 1.5% 1.7%
Ratio of Net Investment
Income
to Average Net Assets 0.5% 0.2% 0.3% 1.1% 3.3% 4.3% 7.4% 1.7% 0.7%
Portfolio Turnover Rate 59.2% 109.1% 138.5% 270.5% 275.0% 305.6% 352.4% 371.2% 170.2%
</TABLE>
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PROSPECTUS PAGE I-6
<PAGE> 7
-------------------------------------------------------
<TABLE>
<CAPTION>
STRONG DISCOVERY FUND
1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.05 $ 16.01 $ 17.49 $ 12.51 $ 13.18 $ 11.44 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.16 (0.01) (0.06) -- 0.27 0.30 0.95
Net Realized and Unrealized Gains
(Losses) on Investments (1.17) 3.48 0.23 8.41 (0.63) 2.43 1.49
-------- -------- -------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS (1.01) 3.47 0.17 8.41 (0.36) 2.73 2.44
LESS DISTRIBUTIONS
From Net Investment Income (0.11) -- -- -- (0.31) (0.28) (0.97)
In Excess of Net Investment Income (0.58) (0.45) -- -- -- -- --
From Net Realized Gains (0.68) (0.98) (1.65)(1) (3.43)(2) -- (0.71) (0.03)
-------- -------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (1.37) (1.43) (1.65) (3.43) (0.31) (0.99) (1.00)
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 15.67 $ 18.05 $ 16.01 $ 17.49 $ 12.51 $ 13.18 $ 11.44
======== ======== ======== ======== ======== ======== ========
Total Return -5.7% +22.2% +1.9% +67.6% -2.7% +24.0% +24.5%
Net Assets, End of Period
(In Thousands) $388,410 $301,789 $193,276 $162,499 $ 56,260 $ 57,914 $ 13,648
Ratio of Expenses to Average
Net Assets 1.5% 1.5% 1.5% 1.6% 1.9% 1.9% 2.0%
Ratio of Net Investment Income
to Average Net Assets 0.7% (0.2%) (0.4%) 0.0% 2.1% 2.4% 11.9%
Portfolio Turnover Rate 606.1% 668.2% 1,258.6% 1,059.9% 493.9% 549.6% 441.6%
</TABLE>
(1)Includes $1.50 ordinary income distribution for tax purposes.
(2)Includes $0.83 ordinary income distribution for tax purposes.
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PROSPECTUS PAGE I-7
<PAGE> 8
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-----------------------------------
<TABLE>
<CAPTION>
STRONG COMMON STOCK FUND STRONG GROWTH FUND
1994 1993 1992 1991 1990 1994
-------- -------- -------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.94 $ 15.07 $ 12.84 $ 10.02 $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.04 0.04 0.03 (0.02) 0.07 --
Net Realized and Unrealized Gains
(Losses) on Investments (0.13) 3.74 2.59 5.42 0.03 1.72
-------- -------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS (0.09) 3.78 2.62 5.40 0.10 1.72
LESS DISTRIBUTIONS
In Excess of Net Investment Income -- -- -- -- -- (0.11)
From Net Investment Income (0.04) (0.04) (0.01) -- (0.08) --
From Net Realized Gains (1.07) (0.87) (0.38)(1) (2.58)(2) -- --
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (1.11) (0.91) (0.39) (2.58) (0.08) (0.11)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 16.74 $ 17.94 $ 15.07 $ 12.84 $ 10.02 $ 11.61
======== ======== ======== ======== ======== ============================
Total Return -0.5% +25.2% +20.8% +57.1% +1.0% +17.3%
Net Assets, End of Period
(In Thousands) $790,125 $762,086 $179,113 $ 48,549 $ 2,432 $106,009
Ratio of Expenses to Average
Net Assets 1.3% 1.4% 1.4% 2.0% 2.0% 1.6%
Ratio of Net Investment Income
to Average Net Assets 0.3% 0.2% 0.1% (0.5%) 0.9% (0.1%)
Portfolio Turnover Rate 83.0% 80.9% 291.7% 2,460.7% 291.2% 385.8%
</TABLE>
(1)Includes $0.22 ordinary income distribution for tax purposes.
(2)Ordinary income distribution for tax purposes.
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PROSPECTUS PAGE I-8
<PAGE> 9
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund seeks capital growth consistent with its investment policies as 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 illiquid
securities, engage in substantial short-term trading, and may invest a
significant portion of its assets in small companies, some of which may be
unseasoned. Each Fund may also invest in repurchase agreements and when-issued
securities. These investment practices and techniques involve risks that are
different in some respects from those associated with similar funds that do not
use them. (See "Implementation of Policies and Risks.")
MANAGEMENT
The Advisor, Strong Capital Management, Inc., serves as investment advisor to
the Funds. The Advisor provides investment management services for mutual funds
and other investment portfolios representing assets of over $15 billion. (See
"About the Funds - Management.")
PURCHASE AND REDEMPTION OF SHARES
You may purchase or redeem shares of a Fund at net asset value. There are no
redemption or 12b-1 charges. The net asset values change daily with the value of
each Fund's portfolio. You can locate the net asset value for a Fund in
newspaper listings of mutual fund prices under the "Strong Funds" heading. (See
"Shareholder Manual - How to Buy Shares" and " - How to Sell Shares.")
SHAREHOLDER SERVICES
Strong shareholder benefits include: telephone purchase, exchange, and
redemption privileges; professional representatives available 24 hours a day;
automatic investment, automatic dividend reinvestment, payroll direct deposit,
automatic exchange and systematic withdrawal plans; and a no-minimum investment
program. (See "Shareholder Manual - Shareholder Services.")
DIVIDENDS AND 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
---------------------
PROSPECTUS PAGE I-9
<PAGE> 10
the other Strong Funds, which are described in separate prospectuses. Each
Growth Fund's investment objective is discussed below in connection with the
Fund's investment policies. Because of the risks inherent in all investments,
there can be no assurance that the Funds will meet their objectives.
The Funds are each required or permitted to invest a substantial portion of
their assets in equity securities. Accordingly, each Fund's net asset value will
fluctuate based upon changes in the value of the securities in its portfolio,
and each Fund's net asset value is likely to fluctuate more than that of a fund
invested principally in fixed income securities. The Funds, therefore, are not
appropriate for investors' short-term financial needs.
COMPARING THE FUNDS
The following chart is intended to distinguish the Funds and help you
determine their suitability for your investments:
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<TABLE>
<CAPTION>
Anticipated Maximum Maximum
Equity Debt Cash Investment
Fund Exposure Exposure Position Focus
<S> <C> <C> <C> <C>
Opportunity 70-100% 30% 30% Mid-Cap
Growth 65-100% 35% 100%* Growth
Common Stock 80-100% 20% 20% Small-Cap
Discovery 0-100% 100% 100%* Emerging Growth
</TABLE>
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* Temporary emergency purposes only.
Each Fund has adopted certain fundamental investment restrictions that are
set forth in the Funds' Statement of Additional Information ("SAI"). Those
restrictions, each Fund's investment objective, and any other investment
policies identified as "fundamental" cannot be changed without shareholder
approval. To further guide investment activities, each Fund has also instituted
a number of non-fundamental operating policies, which are described throughout
this Prospectus and in the SAI. Although operating policies may be changed by a
Fund's Board of Directors without shareholder approval, a Fund will promptly
notify shareholders of any material change in operating policies.
Except as limited below, each Fund may invest in a diversified portfolio of
securities without regard to objective investment criteria, such as company
size, exchange listing, earnings history, or other factors. When selecting
securities, the Advisor will, except as otherwise limited below, be limited only
by its best judgment as to what will help achieve each Fund's investment
objective.
STRONG OPPORTUNITY FUND
The Opportunity Fund seeks capital growth. The Fund invests primarily in
equity securities and currently emphasizes investments in medium-sized companies
the Advisor believes are under-researched and attractively valued.
The Fund will invest at least 70% of its total assets in equity securities,
including common stocks, preferred stocks, and securities that are convertible
----------------------
PROSPECTUS PAGE I-10
<PAGE> 11
into common or preferred stocks, such as warrants and convertible bonds. Under
normal market conditions, the Fund expects to be fully invested in equities. The
Fund may, however, invest up to 30% of its total assets in debt obligations,
including intermediate- to long-term corporate or U.S. government debt
securities and, when the Advisor determines that market conditions warrant a
temporary defensive position, it may use that allowance to invest in cash and
short-term fixed income securities. Although the debt obligations in which it
invests will be primarily investment-grade, the Fund may invest up to 5% of its
total assets in non-investment-grade debt obligations. (See "Implementation of
Policies and Risks - Debt Obligations.") The Fund may invest up to 15% of its
total assets directly in the securities of foreign issuers. It may also invest
without limitation in foreign securities in domestic markets through depositary
receipts. However, as a matter of policy, the Advisor intends to limit total
foreign exposure, including both direct investments and depositary receipts, to
no more than 25% of the Fund's total assets. See "Implementation of Policies and
Risks - Foreign Securities and Currencies" for the special risks associated with
foreign investments.
In selecting its equity investments, the Advisor seeks to identify attractive
investment opportunities that have not become widely recognized by other stock
analysts or the financial press. Through first-hand research that often includes
on-site visits with the leaders of companies, the Advisor looks for companies
with fundamental value or growth potential that is not yet reflected in their
current market prices.
In many cases, companies in the small- and medium-capitalization markets are
underfollowed and, as a result, less efficiently priced than their larger,
better-known counterparts. The Opportunity Fund's investments are therefore
likely to consist, in part, of securities in small- and medium-sized companies.
Many of these companies may have successfully emerged from the start-up phase
and have potential for future growth. Because of their longer track records and
more seasoned management, they generally pose less investment uncertainty than
do the smallest companies. In general, however, smaller-capitalization companies
often involve greater risks than investments in established companies. (See
"Implementation of Policies and Risks - Small Companies.")
STRONG GROWTH FUND
The Growth Fund seeks capital growth. The Fund invests primarily in equity
securities that the Advisor believes have above-average growth prospects.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in equity securities, including common stocks, preferred stocks,
and securities that are convertible into common or preferred stocks, such as
warrants and convertible bonds. While the emphasis of the Fund is clearly on
equity securities, the Fund may invest a limited portion of its assets in debt
obligations when the Advisor perceives that they are more attractive than stocks
on a long-term basis. The Fund may invest up to 35% of its total assets in
----------------------
PROSPECTUS PAGE I-11
<PAGE> 12
debt obligations, including intermediate- to long-term corporate or U.S.
government debt securities. When the Advisor determines that market conditions
warrant a temporary defensive position, the Fund may invest without limitation
in cash and short-term fixed income securities. Although the debt obligations in
which it invests will be primarily investment-grade, the Fund may invest up to
5% of its total assets in non-investment-grade debt obligations. (See
"Implementation of Policies and Risks - Debt Obligations.")
The Fund may invest up to 15% of its total assets directly in the securities
of foreign issuers. It may also invest without limitation in foreign securities
in domestic markets through depositary receipts. However, as a matter of policy,
the Advisor intends to limit total foreign exposure, including both direct
investments and depositary receipts, to no more than 25% of the Fund's total
assets. See "Implementation of Policies and Risks - Foreign Securities and
Currencies" for the special risks associated with foreign investments.
The Fund will generally invest in companies whose earnings are believed to be
in a relatively strong growth trend, and, to a lesser extent, in companies in
which significant further growth is not anticipated but whose market value is
thought to be undervalued. In identifying companies with favorable growth
prospects, the Advisor ordinarily looks to certain other characteristics, such
as the following:
- - prospects for above-average sales and earnings growth;
- - high return on invested capital;
- - overall financial strength, including sound financial and accounting policies
and a strong balance sheet;
- - competitive advantages, including innovative products and service;
- - effective research, product development, and marketing; and
- - stable, capable management.
STRONG COMMON STOCK FUND
The Common Stock Fund is closed to new investors. Current shareholders of the
Fund may continue to add to existing accounts and open new accounts. (See
"Shareholder Manual - How to Buy Shares.") Although the Fund may resume sales to
new investors in the future, it has no present intention to do so.
The Common Stock Fund seeks capital growth. The Fund invests primarily in
equity securities and currently emphasizes the stocks of small companies the
Advisor believes are under-researched and attractively valued.
The Fund will invest at least 80% of its total assets in equity securities,
including common stocks (which must constitute at least 65% of its total
assets), preferred stocks, and securities that are convertible into common or
preferred stocks, such as warrants and convertible bonds. Under normal market
conditions, the Fund expects to be fully invested in equity securities. The Fund
may, however, invest up to 20% of its total assets in debt obligations,
including intermediate- to long-term corporate or U.S. government debt
securities and, when the Advisor determines that market conditions warrant a
temporary defensive position, it may use that allowance to invest in cash and
----------------------
PROSPECTUS PAGE I-12
<PAGE> 13
short-term fixed income securities. Although the debt obligations in which it
invests will be primarily investment-grade, the Fund may invest up to 5% of its
total assets in non-investment-grade debt obligations. (See "Implementation of
Policies and Risks - Debt Obligations.")
The Fund may invest up to 15% of its total assets directly in the securities
of foreign issuers. It may also invest without limitation in foreign securities
in domestic markets through depositary receipts. However, as a matter of policy,
the Advisor intends to limit total foreign exposure, including both direct
investments and depositary receipts, to no more than 25% of the Fund's total
assets. See "Implementation of Policies and Risks - Foreign Securities and
Currencies" for the special risks associated with foreign investments.
In selecting its equity investments, the Advisor seeks to identify attractive
investment opportunities that have not become widely recognized by other stock
analysts or the financial press. Through first-hand research that often includes
on-site visits with the leaders of companies, the Advisor looks for companies
with fundamental value or growth potential that is not yet reflected in their
current market prices.
In many cases, companies in the small- and medium-capitalization markets are
underfollowed and, as a result, less efficiently priced than their larger,
better-known counterparts. The Common Stock Fund's investments are therefore
likely to consist, in part, of securities in small- and medium-sized companies.
Many of these companies may have successfully emerged from the start-up phase
and have potential for future growth. Because of their longer track records and
more seasoned management, they generally pose less investment uncertainty than
do the smallest companies. In general, however, smaller-capitalization companies
often involve greater risks than investments in established companies. (See
"Implementation of Policies and Risks - Small Companies.")
STRONG DISCOVERY FUND
The Discovery Fund seeks capital growth. The Fund invests in securities that
the Advisor believes represent attractive growth opportunities.
The Fund normally emphasizes equity securities, although it has the
flexibility to invest in any type of security that the Advisor believes has the
potential for capital appreciation. The Fund may invest up to 100% of its total
assets in equity securities, including common stocks, preferred stocks, and
securities that are convertible into common or preferred stocks, such as
warrants and convertible bonds. The Fund may also invest up to 100% of its total
assets in debt obligations, including intermediate- to long-term corporate or
U.S. government debt securities. When the Advisor determines that market
conditions warrant a temporary defensive position, the Fund may invest without
limitation in cash and short-term fixed income securities. Although the debt
obligations in which it invests will be primarily investment-grade, the Fund may
invest up to 5% of its total assets in non-investment-grade debt obligations.
(See "Implementation of Policies and Risks - Debt Obligations.")
----------------------
PROSPECTUS PAGE I-13
<PAGE> 14
The Fund may invest up to 15% of its total assets directly in the securities
of foreign issuers. It may also invest without limitation in foreign securities
in domestic markets through depositary receipts. However, as a matter of policy,
the Advisor intends to limit total foreign exposure, including both direct
investments and depositary receipts, to no more than 25% of the Fund's total
assets. See "Implementation of Policies and Risks - Foreign Securities and
Currencies" for the special risks associated with foreign investments.
The Advisor seeks to uncover emerging investment trends and attractive growth
opportunities. In its search for potential investments, the Advisor attempts to
identify companies that are poised for accelerated earnings growth due to
innovative products or services, new management, or favorable economic or market
cycles. These companies may be small, unseasoned firms in the early stages of
development, or they may be mature organizations. (See "Implementation of
Policies and Risks - Small Companies.") Whatever their size, history, or
industry, the Advisor believes their potential earnings growth is not yet
reflected in their market value and that, over time, the market prices of these
securities will move higher.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to
certain restrictions described below), the Funds may invest in some or all of
the following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below.
Presently, the Funds do not intend to engage in cross-trading. Each Fund may
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 presented in the Funds' SAI.
FOREIGN SECURITIES AND CURRENCIES
Each Fund may invest in foreign securities either directly or indirectly
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 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.
----------------------
PROSPECTUS PAGE I-14
<PAGE> 15
Foreign economies may differ favorably or unfavorably from the U.S. economy
in various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities.
Although the Funds generally invest only in securities that are regularly traded
on recognized exchanges or in over-the-counter markets, from time to time
foreign securities may be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign investing, such as custody
charges and brokerage costs, are higher than those attributable to domestic
investing.
The Fund may invest in securities of issuers in developing or emerging
markets and economies. Risks of investing in developing or emerging markets
include:
- - less social, political, and economic stability;
- - smaller securities markets and lower trading volume, which may result in a
lack of liquidity and greater price volatility;
- - certain national policies that may restrict a 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 a Fund's loss of its entire investment in that
market; and
- - less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes,
and other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
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.")
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PROSPECTUS PAGE I-15
<PAGE> 16
FOREIGN INVESTMENT COMPANIES
Some of the countries in which the Funds invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. Investing through such
vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the Investment Company Act of 1940 (the "1940 Act").
DERIVATIVE INSTRUMENTS
Derivative instruments may be used by the Funds for any lawful purpose,
including hedging, risk management, or enhancing returns, but not for
speculation. Derivative instruments are securities or agreements whose value is
derived from the value of some underlying asset, for example, securities,
currencies, reference indexes, or commodities. Options, futures, and options on
futures transactions are considered derivative transactions. Derivatives
generally have investment characteristics that are based upon either forward
contracts (under which one party is obligated to buy and the other party is
obligated to sell an underlying asset at a specific price on a specified date)
or option contracts (under which the holder of the option has the right but not
the obligation to buy or sell an underlying asset at a specified price on or
before a specified date). Consequently, the change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset. In contrast, the buyer of an option-based derivative generally
will benefit from favorable movements in the price of the underlying asset but
is not exposed to corresponding losses due to adverse movements in the value of
the underlying asset. The seller of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset. Derivative transactions may include elements
of leverage and, accordingly, the fluctuation of the value of the derivative
transaction in relation to the underlying asset may be magnified. In addition to
options, futures, and options on futures transactions, derivative transactions
may include short sales against the box, in which a Fund sells a security it
owns for delivery at a future date; swaps, in which the two parties agree to
exchange a series of cash flows in the future, such as interest-rate payments;
interest-rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; and interest-rate floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
fall below a specified level, or "floor." Derivative transactions may also
include forward currency contracts and foreign currency exchange-related
securities.
Derivative instruments may be exchange-traded or traded in over-the-counter
transactions between private parties. Over-the-counter transactions are
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PROSPECTUS PAGE I-16
<PAGE> 17
subject to the credit risk of the counterparty to the instrument and are less
liquid than exchange-traded derivatives since they often can only be closed out
with the other party to the transaction. When required by SEC guidelines, a Fund
will set aside permissible liquid assets or securities positions that
substantially correlate to the market movements of the derivatives transactions
in a segregated account to secure its obligations under derivative transactions.
In order to maintain its required cover for a derivative transaction, a Fund may
need to sell portfolio securities at disadvantageous prices or times since it
may not be possible to liquidate a derivative position.
The successful use of derivative transactions by a Fund is dependent upon the
Advisor's ability to correctly anticipate trends in the underlying asset. To the
extent that a Fund is engaging in derivative transactions other than for hedging
purposes, the Fund's successful use of such transactions is more dependent upon
the Advisor's ability to correctly anticipate such trends, since 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. Hedging transactions are also subject to risks. If
the Advisor incorrectly anticipates trends in the underlying asset, a Fund may
be in a worse position than if no hedging had occurred. In addition, there may
be imperfect correlation between a Fund's derivative transactions and the
instruments being hedged.
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 pursuant to Rule 144A under the Securities Act of 1933 and Section
4(2) commercial paper may be determined liquid under guidelines adopted by each
Fund's Board of Directors.
SMALL COMPANIES
The Funds may, from time to time, invest a substantial portion of their
assets in small companies. While smaller companies generally have potential for
rapid growth, investments in smaller companies often involve greater risks than
investments in larger, more established companies because smaller companies may
lack the management experience, financial resources, product diversification,
and competitive strengths of larger companies. In addition, in many instances
the securities of smaller companies are traded only over-the-counter or on a
regional securities exchange, and the frequency and volume of their trading is
substantially less than is typical of larger companies. Therefore, the
securities of smaller companies may be subject to greater and more abrupt price
fluctuations. When making large sales, a Fund may have to sell portfolio
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PROSPECTUS PAGE I-17
<PAGE> 18
holdings at discounts from quoted prices or may have to make a series of small
sales over an extended period of time due to the trading volume of smaller
company securities. Investors should be aware that, based on the foregoing
factors, an investment in the Funds 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 Funds than in a fund that invests in larger, more
established companies.
DEBT OBLIGATIONS
IN GENERAL. Debt obligations in which the Funds may invest will primarily be
investment-grade debt obligations, although each Fund may invest up to 5% of its
assets in non-investment-grade debt obligations. The market value of all debt
obligations is affected by changes in the prevailing interest rates. The market
value of such instruments generally reacts inversely to interest rate changes.
If the prevailing interest rates decline, the market value of debt obligations
generally increases. If the prevailing interest rates increase, the market value
of debt obligations generally decreases. In general, the longer the maturity of
a debt obligation, the greater its sensitivity to changes in interest rates.
Investment-grade debt obligations include:
- - bonds or bank obligations rated in one of the four highest rating categories
of any nationally recognized statistical rating organization or "NRSRO" (e.g.,
BBB or higher by Standard & Poor's Ratings Group or "S&P"),
- - U.S. government securities (as defined below),
- - commercial paper rated in one of the three highest ratings categories of any
NRSRO (e.g., A-3 or higher by S&P);
- - short-term bank obligations that are rated in one of the three highest
categories by any NRSRO (e.g., A-3 or higher by S&P), with respect to
obligations maturing in one year or less;
- - repurchase agreements involving investment-grade debt obligations; or
- - unrated debt obligations which are determined by the Advisor to be of
comparable quality.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Advisor to consider what
action, if any, a Fund should take consistent with its investment objective.
Securities rated in the fourth highest category (e.g., BBB by S&P), although
considered investment-grade, have speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities.
Non-investment-grade debt obligations include:
- - securities rated as low as C by S&P or their equivalents;
- - commercial paper rated as low as C by S&P or its equivalents; and
- - unrated debt securities judged to be of comparable quality by the Advisor.
----------------------
PROSPECTUS PAGE I-18
<PAGE> 19
GOVERNMENT SECURITIES. U.S. government securities are issued or guaranteed by
the U.S. government or its agencies or instrumentalities. Securities issued by
the government include U.S. Treasury obligations, such as Treasury bills, notes,
and bonds. Securities issued by government agencies or instrumentalities
include, for example, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, and the Government
National Mortgage Association, including GNMA pass-through 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.
WHEN-ISSUED SECURITIES
Each Fund may invest without limitation in securities purchased on a when-
issued or delayed delivery basis. Although the payment and interest terms of
these securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date,
generally within 45 days. Purchasing when-issued securities allows a Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when a Fund purchases a when-issued security, it immediately assumes the risk of
ownership, including the risk of price fluctuation until the settlement date.
The greater a Fund's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although a Fund may be
able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable
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PROSPECTUS PAGE I-19
<PAGE> 20
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.
PORTFOLIO TURNOVER
Historical portfolio turnover rates for Funds are listed under "Financial
Highlights." The annual portfolio turnover rate indicates changes in a Fund's
portfolio. The turnover rate may vary from year to year, as well as within a
year. It may also be affected by sales of portfolio securities necessary to meet
cash requirements for redemptions of shares. High portfolio turnover in any year
will result in the payment by a Fund of above-average amounts of transaction
costs and could result in the payment by shareholders of above-average amounts
of taxes on realized investment gains. The Opportunity and Discovery Funds'
annual portfolio turnover rates may be as much as 400% or more. It is
anticipated that, under normal market conditions, the rate of portfolio turnover
of the Common Stock Fund generally will not exceed 300%. However, during periods
in which the Advisor deems it advisable to engage in substantial short-term
trading, the rate of portfolio turnover may exceed 300%. The Growth Fund will
not generally trade in securities for short-term profits, but, when the Advisor
determines that circumstances warrant, securities may be purchased and sold
without regard to the length of time held. Under normal market conditions, it is
anticipated that the rate of portfolio turnover of the Growth Fund generally
will not exceed 150%. These rates should not be considered as limiting factors.
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"). The Advisory Agreements are identical. Under the terms of these
agreements, the Advisor manages each Fund's investments and business affairs
subject to the supervision of each Fund's Board of Directors.
ADVISOR. The Advisor began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and profit-sharing
plans. The Advisor also acts as investment advisor for each of the mutual funds
within the Strong Family of Funds. As of August 31, 1995, the Advisor had over
$15 billion under management. The Advisor's principal mailing address is P.O.
Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong, the Chairman of the
Board of each Fund, is the controlling shareholder of the Advisor.
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PROSPECTUS PAGE I-20
<PAGE> 21
As compensation for its services, each Fund pays the Advisor a monthly
management fee. The annual fee for each Fund is 1.0% of a Fund's average daily
net asset value. Such fees are in excess of fees paid by many other funds. From
time to time, the Advisor may voluntarily waive all or a portion of its
management fee and/or absorb certain Fund expenses without further notification
of the commencement or termination of such waiver or absorption. Any such waiver
or absorption will temporarily lower a Fund's overall expense ratio and increase
a Fund's overall return to investors.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Strong Growth Funds.
STRONG OPPORTUNITY FUND
STRONG COMMON STOCK FUND
RICHARD T. WEISS. 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 managed the Strong Opportunity
and Common Stock Funds since 1991. In addition, Mr. Weiss is a member of the
Advisor's Executive Committee.
MARINA T. CARLSON. Before she joined the Advisor as an equity research
analyst in 1991, Ms. Carlson worked in a similar capacity at Stein Roe &
Farnham, where she began her investment career in 1986. She has worked with
portfolio manager Richard T. Weiss since 1989, and, in 1993, she was named a
co-manager of the Strong Opportunity and Common Stock Funds. A Chartered
Financial Analyst, Ms. Carlson received her M.B.A. from DePaul University in
1989 and her bachelor's degree in finance from Drake University in 1986.
STRONG GROWTH FUND
RONALD C. OGNAR. 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. In addition to his duties as portfolio manager of the Fund, which he has
managed since its inception in January 1994, he also co-manages the Strong Total
Return Fund.
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PROSPECTUS PAGE I-21
<PAGE> 22
STRONG DISCOVERY FUND
RICHARD S. STRONG. 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 managed the Strong Discovery Fund since its inception in
December 1987. In addition to his role as a portfolio manager, he is currently
the Chairman of the Board, Director, Chief Investment Officer, and a member of
the Advisor's Executive Committee.
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin 53201, also acts as
dividend-disbursing agent and transfer agent for the Funds. The Advisor is
compensated for its services based on an annual fee per account plus certain
out-of-pocket expenses. The fees received and the services provided as transfer
agent and dividend-disbursing agent are in addition to those received and
provided under the Advisory Agreements between the Advisor and the Funds.
DISTRIBUTOR
Strong Funds Distributors, Inc., P.O. Box 2936, Milwaukee, Wisconsin 53201,
an indirect subsidiary of the Advisor, acts as distributor of the shares of the
Funds.
ORGANIZATION
SHAREHOLDER RIGHTS. Each Fund is a Wisconsin corporation that is authorized
to issue shares of Common Stock and series and classes of series of shares of
Common Stock. Each share of the Funds has one vote, and all shares participate
equally in dividends and other capital gains distributions by the respective
Fund and in the residual assets of the respective Fund in the event of
liquidation. Certificates will be issued for shares held in your account only
upon your written request. You will, however, have full shareholder rights
whether or not you request certificates. Generally, the Funds will not hold an
annual meeting of shareholders unless required by the 1940 Act. Shareholders
have certain rights, including the right to call a meeting upon a vote of 10% of
a Fund's outstanding shares for the purpose of voting to remove one or more
directors or to transact any other business.
SHAREHOLDER PRIVILEGES. The shareholders of each Fund may benefit from the
privileges described in the "Shareholder Manual" (see Page II-1). However, each
Fund reserves the right, at any time and without prior notice, to suspend,
limit, modify, or terminate any of these privileges or their use in any manner
by any person or class.
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PROSPECTUS PAGE I-22
<PAGE> 23
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. You may elect to have all your
dividends and capital gain distributions from a Fund automatically reinvested in
additional shares of that Fund or in shares of another Strong Fund at the net
asset value determined on the payment date. If you request in writing that your
dividends and other distributions be paid in cash, a Fund will credit your bank
account by Electronic Funds Transfer ("EFT") or issue a check to you within five
business days of the payment date. You may change your election at any time by
calling or writing Strong Funds. Strong Funds must receive any such change 7
days (15 days for EFT) prior to a dividend or capital gain distribution payment
date in order for the change to be effective for that payment. The policy of
each Fund is to pay dividends from net investment income quarterly and to
distribute substantially all net realized capital gains and gains from foreign
currency transactions annually. Each Fund may make additional distributions if
necessary to avoid imposition of a 4% excise tax on undistributed income and
gains.
TAX STATUS OF DIVIDENDS AND OTHER DISTRIBUTIONS. You will be subject to
federal income tax at ordinary income tax rates on any dividends you receive
that are derived from investment company taxable income (consisting generally of
net investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if any). Distributions of net capital gain (the
excess of net long-term capital gain over net short-term capital loss), when
designated as such by a Fund, are taxable to you as long-term capital gains,
regardless of how long you have held your Fund shares. The Funds' distributions
are taxable in the year they are paid, whether they are taken in cash or
reinvested in additional shares, except that certain distributions declared in
the last three months of the year and paid in January are taxable as if paid on
December 31.
If a Fund's distributions exceed its investment company taxable income and
net capital gain in any year, as a result of currency-related losses or
otherwise, all or a portion of those distributions may be treated as a return of
capital to shareholders for tax purposes.
YEAR-END TAX REPORTING. After the end of each calendar year, you will receive
a statement (Form 1099) of the federal income tax status of all dividends and
other distributions paid (or deemed paid) during the year.
SHARES SOLD OR EXCHANGED. Your redemption of Fund shares may result in a
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
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PROSPECTUS PAGE I-23
<PAGE> 24
same Fund at a loss, a portion or all of that loss will not be deductible and
will increase the cost basis of the newly purchased shares. If you redeem shares
out of a retirement account, you will be subject to withholding for federal
income tax purposes unless you transfer the distribution directly to an
"eligible retirement plan."
BUYING A DISTRIBUTION. A distribution paid shortly after you have purchased
shares in a Fund will reduce the net asset value of the shares by the amount of
the distribution, which nevertheless will be taxable to you even though it
represents a return of a portion of your investment.
BACKUP WITHHOLDING. If you are an individual or certain other noncorporate
shareholder and do not furnish a Fund with a correct taxpayer identification
number, the Fund is required to withhold federal income tax at a rate of 31%
(backup withholding) from all dividends, capital gain distributions, and
redemption proceeds payable to you. Withholding at that rate from dividends and
capital gain distributions payable to you also is required if you otherwise are
subject to backup withholding. To avoid backup withholding, you must provide a
taxpayer identification number and state that you are not subject to backup
withholding due to the underreporting of your income. This certification is
included as part of your application. Please complete it when you open your
account.
TAX STATUS OF THE FUNDS. Each Fund intends to continue to qualify for
treatment as a regulated investment company under Subchapter M of the Internal
Revenue Code and, if so qualified, will not be liable for federal income tax on
earnings and gains distributed to its shareholders in a timely manner.
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effects on the Funds and investors therein. See
the SAI for a further discussion. There may be other federal, state, or local
tax considerations applicable to a particular investor. You are therefore urged
to consult your own tax adviser.
PERFORMANCE INFORMATION
Each Fund may advertise "average annual total return," "total return," and
"cumulative total return." 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 other distributions. Total return figures are not
annualized and simply represent the aggregate change of a Fund's investments
over a specified period of time.
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PROSPECTUS PAGE I-24
<PAGE> 25
SHAREHOLDER MANUAL
<TABLE>
<S> <C>
HOW TO BUY SHARES...................... II-1
DETERMINING YOUR SHARE PRICE........... II-5
HOW TO SELL SHARES..................... II-6
SHAREHOLDER SERVICES................... II-8
REGULAR INVESTMENT PLANS............... II-10
SPECIAL SITUATIONS..................... II-12
</TABLE>
HOW TO BUY SHARES
All the Strong Funds are 100% no-load, meaning you may purchase, redeem, or
exchange shares directly at net asset value without paying a sales charge.
Because the Funds' net asset values change daily, your purchase price will be
the next net asset value determined after Strong receives and accepts your
purchase order.
Whether you are opening a new account or adding to an existing one, Strong
provides you with several methods to buy Fund shares.
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PROSPECTUS PAGE II-1
<PAGE> 26
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO OPEN A NEW ACCOUNT
- ------------------------------------------------------------------------------
MAIL BY CHECK
- Complete and sign the application. Make your check
or money order payable to "Strong Funds."
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to Strong Funds, 100 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- Call 1-800-368-3863 for instructions on
establishing an account with an exchange by mail.
- ------------------------------------------------------------------------------
TELEPHONE BY EXCHANGE
- Sign up for telephone exchange services when you
1-800-368-3863 open your account.
24 HOURS A DAY, - Call 1-800-368-3863 to establish a new account by
7 DAYS A WEEK exchanging funds from an existing Strong Funds
account.
- To add the telephone exchange option to your
account, call 1-800-368-3863 for a Telephone Exchange
Form.
- Please note that your accounts must be identically
registered and that you must exchange enough into the
new account to meet the minimum initial investment.
- ------------------------------------------------------------------------------
IN PERSON - Stop by our Investor Center in Menomonee Falls,
Wisconsin.
Call 1-800-368-3863 for hours and directions.
- The Investor Center can only accept checks or money
orders.
- ------------------------------------------------------------------------------
WIRE Call 1-800-368-3863 for instructions on opening an
account by
wire.
- ------------------------------------------------------------------------------
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM."
- If you sign up for Strong's Automatic Investment
Plan when you open your account, Strong Funds will
waive the Fund's minimum initial investment (see
chart on page II-4).
- Complete the Automatic Investment Plan section on
the account application.
- Mail to the address indicated on the application.
- ------------------------------------------------------------------------------
BROKER-DEALER - You may purchase shares in a Fund through a
broker-dealer
or other institution that may charge a transaction
fee.
- Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account
from the broker-dealer.
</TABLE>
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PROSPECTUS PAGE II-2
<PAGE> 27
- ------------------------------------------------------------------------------
TO ADD TO AN EXISTING ACCOUNT
- --------------------------------------------------------------------------------
BY CHECK
- - Complete an Additional Investment Form provided at the bottom of your account
statement, or write a note indicating your fund account number and
registration. Make your check or money order payable to "Strong Funds."
- - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
using an express delivery service, send to Strong Funds, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- - Call 1-800-368-3863 for instructions on exchanging by mail.
- --------------------------------------------------------------------------------
BY EXCHANGE
- - Add to an account by exchanging funds from another Strong Funds account.
- - Sign up for telephone exchange services when you open your account. To add the
telephone exchange option to your account, call 1-800-368-3863 for a Telephone
Exchange Form.
- - Please note that the accounts must be identically registered and that the
minimum exchange is $50 or the balance of your account, whichever is less.
BY TELEPHONE PURCHASE
- - Sign up for telephone purchase when you open your account to make additional
investments from $50 to $25,000 into your Strong Funds account by telephone.
To add this option to your account, call 1-800-368-3863 for a Telephone
Purchase Form.
Or use Strong DirectSM, Strong Funds' automated telephone response system. Call
1-800-368-3863 for details.
- --------------------------------------------------------------------------------
- - Stop by our Investor Center in Menomonee Falls, Wisconsin. Call 1-800-368-3863
for hours and directions.
- - The Investor Center can only accept checks or money orders.
- --------------------------------------------------------------------------------
Call 1-800-368-3863 for instructions on adding to an account by wire.
- --------------------------------------------------------------------------------
USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS. Sign up for these services
when you open your account, or call 1-800-368-3863 for instructions on how to
add them to your existing account.
- - AUTOMATIC INVESTMENT PLAN. Make regular, systematic investments (minimum $50)
into your Strong Funds account from your bank checking or NOW account.
Complete the Automatic Investment Plan section on the account application.
- - AUTOMATIC EXCHANGE PLAN. Make regular, systematic exchanges (minimum $50) from
one Strong Funds account to another. Call 1-800-368-3863 for an application.
- - PAYROLL DIRECT DEPOSIT. Have a specified amount (minimum $50) regularly
deducted from your paycheck, social security check, military allotment, or
annuity payment invested directly into your Strong Funds account. Call
1-800-368-3863 for an application.
- - AUTOMATIC DIVIDEND REINVESTMENT. Unless you choose otherwise, all your
dividends and capital gain distributions will be automatically reinvested in
additional Fund shares. Or, you may elect to have your dividends and capital
gain distributions automatically invested in shares of another Strong Fund.
- --------------------------------------------------------------------------------
- - You may purchase additional shares in a Fund through a broker-dealer or other
institution that may charge a transaction fee.
- - Strong Funds may only accept requests to purchase additional shares into a
broker-dealer street name account from the broker-dealer.
----------------------
PROSPECTUS PAGE II-3
<PAGE> 28
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- - Please make all checks or money orders payable to "Strong Funds."
- - We cannot accept third-party checks or checks drawn on banks outside the U.S.
- - You will be charged a $20 service fee for each check, wire, or Electronic
Funds Transfer ("EFT") purchase that is returned unpaid, and you will be
responsible for any resulting losses suffered by a Fund.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - A Fund may decline to accept your purchase order upon receipt when, in the
judgment of the Advisor, it would not be in the best interests of the existing
shareholders.
- - The exchange privileges are available in all 50 states because all the Strong
Funds intend to continue to qualify their shares for sale in all 50 states.
- - Minimum Investment Requirements:
- ----------------------------------------------------------------------------
To open a regular account...........................................$1,000
To open an IRA, Defined Contribution, or 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 Plan that waives the minimum initial
investment requirements for investors who participate in the Strong Automatic
Investment Plan (described on page II-10). Unless you participate in the Strong
No-Minimum Investment Program, please ensure 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.
COMMON STOCK FUND IS CLOSED TO NEW INVESTORS
The Common Stock Fund is currently closed to new investors. Current
shareholders of the Common Stock Fund may continue to add to an account through
the reinvestment of dividends and cash distributions on any Common Stock Fund
shares owned, through the purchase of additional Common Stock Fund shares, and
through exchanges from other Strong Fund accounts, which includes accounts where
the shareholder is the owner, a joint owner, or a custodian for a minor child.
Employee benefit plans that became shareholders on or before the March 19, 1993
closing date may continue to purchase Fund
----------------------
PROSPECTUS PAGE II-4
<PAGE> 29
shares in the course of their normal operations. Additionally, directors of the
Fund and employees and directors of the Fund's Advisor and Distributor may
continue to open new Fund accounts. Shareholders of other Strong Funds are not
able to exchange into the Fund. The Fund may resume sales to new investors at
some future date, but it has no present intention to do so.
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
THROUGH A BROKER-DEALER
- - If you purchase shares through a program of services offered or administered
by a broker-dealer, financial institution, or other service provider, you
should read the program's materials, including information relating to fees,
in connection with a Fund's Prospectus. Certain features of a Fund may not be
available or may be modified in connection with the program of services
provided.
- - Certain broker-dealers, financial institutions, or other service providers
that have entered into an agreement with the Distributor may enter purchase
orders on behalf of their customers by phone, with payment to follow within
several days as specified in the agreement. The Funds may effect such purchase
orders at the net asset value next determined after receipt of the telephone
purchase order. It is the responsibility of the broker-dealer, financial
institution, or other service provider to place the order with the Funds on a
timely basis. If payment is not received within the time specified in the
agreement, the broker-dealer, financial institution, or other service provider
could be held liable for any resulting fees or losses.
DETERMINING YOUR SHARE PRICE
Generally, when you make any purchases, sales, or exchanges, the price of
your shares will be the net asset value ("NAV") next determined after Strong
Funds receives your request in proper form. If Strong Funds receives such
request prior to the close of the New York Stock Exchange (the "Exchange") on a
day on which the Exchange is open, your share price will be the NAV determined
that day. The NAV for each Fund is normally determined as of 3:00 p.m. Central
Time ("CT") each day the Exchange is open. The Funds reserve the right to change
the time at which purchases, redemptions, and exchanges are priced if the
Exchange closes at a time other than 3:00 p.m. CT or if an emergency exists.
Each Fund's NAV is calculated by taking the fair value of a Fund's total assets,
subtracting all its liabilities, and dividing by the total number of shares
outstanding. Expenses are accrued daily and applied when determining the net
asset value.
A Fund's portfolio securities are valued based on market quotations or at
fair value as determined by the method selected by each Fund's Board of
Directors. Equity securities traded on a national securities exchange or NASDAQ
are valued at the last sale price on the national securities exchange
----------------------
PROSPECTUS PAGE II-5
<PAGE> 30
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.
Securities quoted in foreign currency are valued daily in U.S. dollars at the
foreign currency exchange rates that are prevailing at the time the daily net
asset value per share is determined. Although the Funds value their foreign
assets in U.S. dollars on a daily basis, they do not intend to convert their
holdings of foreign currencies into U.S. dollars on a daily basis. Foreign
currency exchange rates are generally determined prior to the close of trading
on the Exchange. Occasionally, events affecting the value of foreign investments
and such exchange rates occur between the time at which they are determined and
the close of trading on the Exchange. Such events would not normally be
reflected in a calculation of a Fund's net asset value on that day. If events
that materially affect the value of a Fund's foreign investments or the foreign
currency exchange rates occur during such period, the investments will be valued
at their fair value as determined in good faith by or under the direction of the
Board of Directors.
HOW TO SELL SHARES
You can access the money in your account at any time by selling (redeeming)
some or all of your shares back to the Fund. Once your redemption request is
received in proper form, Strong will normally mail you the proceeds the next
business day and, in any event, no later than seven days thereafter.
To redeem shares, you may use any of the methods described in the following
chart. However, if you are selling shares in a retirement account, please call
1-800-368-3863 for instructions. Please note that there is a $10.00 fee for
closing an IRA or other retirement account or for transferring assets to another
custodian. For your protection, certain requests may require a signature
guarantee.
----------------------
PROSPECTUS PAGE II-6
<PAGE> 31
----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO SELL SHARES
- -----------------------------------------------------------------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
- Write a "letter of instruction" that includes the
following information: your account number, the
dollar amount or number of shares you wish to
redeem, each owner's name, your street address, and
the signature of each owner as it appears on the
account.
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to 100 Heritage Reserve, Menomonee
Falls, Wisconsin 53051.
FOR TRUST ACCOUNTS
- Same as above. Please ensure that all trustees sign
the letter of instruction.
FOR OTHER REGISTRATIONS
- Call 1-800-368-3863 for instructions.
- -----------------------------------------------------------------------------
TELEPHONE Sign up for telephone redemption services when you
open
1-800-368-3863 your account by checking the "Yes" box in the
24 HOURS A DAY, appropriate section of the account application. To
7 DAYS A WEEK add the telephone redemption option to your account,
call 1-800-368-3863 for a Telephone Redemption Form.
Once the telephone redemption option is in place, you
may sell shares ($500 minimum) by phone and arrange
to receive the proceeds in one of three ways:
TO RECEIVE A CHECK BY MAIL
- At no charge, we will mail a check to the address
to which your account is registered.
TO DEPOSIT BY EFT
- At no charge, we will transmit the proceeds by
Electronic Funds Transfer (EFT) to a pre-authorized
bank account. Usually, the funds will arrive at
your bank two banking days after we process your
redemption.
TO DEPOSIT BY WIRE
- For a $10 fee, we will transmit the proceeds by
wire to a pre-authorized bank account. Usually, the
funds will arrive at your bank the next banking day
after we process your redemption.
You may also use Strong DirectSM, Strong Funds'
automated telephone response system. Call
1-800-368-3863 for details.
- -----------------------------------------------------------------------------
AUTOMATICALLY You can set up automatic withdrawals from your
account at
regular intervals. To establish the Systematic
Withdrawal Plan, request a form by calling
1-800-368-3863.
- -----------------------------------------------------------------------------
BROKER-DEALER You may also redeem shares through broker-dealers or
others
who may charge a commission or other transaction fee.
</TABLE>
----------------------
PROSPECTUS PAGE II-7
<PAGE> 32
WHAT YOU SHOULD KNOW ABOUT SELLING SHARES
- - If you have recently purchased shares, please be aware that your redemption
request may not be honored until the purchase check has cleared your bank,
which generally occurs within ten calendar days.
- - The right of redemption may be suspended during any period in which (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined by the
SEC exists, making disposal of portfolio securities or valuation of net assets
of a Fund not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must endorse
the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
WHAT YOU SHOULD KNOW ABOUT TELEPHONE REDEMPTIONS
- - The Funds reserve the right to refuse a telephone redemption if they believe
it advisable to do so.
- - Once you place your telephone redemption request, it cannot be canceled or
modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Funds and their transfer
agent employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. The Funds may incur liability if they do not follow
these procedures.
- - Because of increased telephone volume, you may experience difficulty in
implementing a telephone redemption during periods of dramatic economic or
market changes.
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus.
STRONG DIRECTSM AUTOMATED TELEPHONE SYSTEM. Also available 24 hours a day,
the Strong DirectSM automated response system enables you to use a touch-tone
phone to hear fund quotes and returns on any Strong Fund. You may also confirm
account balances, hear records of recent transactions and
----------------------
PROSPECTUS PAGE II-8
<PAGE> 33
dividend activity, and perform purchases, exchanges or redemptions among
your existing Strong accounts. Your account information is protected by a
personal code that you establish. For more information on this service, call
1-800-368-3863.
STATEMENTS AND REPORTS. At a minimum, each Fund will confirm all transactions
for your account on a quarterly basis. We recommend that you file each quarterly
statement - and, especially, each calendar year-end statement - with your other
important financial papers, since you may need to refer to them at a later date
for tax purposes. Should you need additional copies of previous statements, you
may order confirmation statements for the current and preceding year at no
charge. Statements for earlier years are available for $10 each. Call
1-800-368-3863 to order past statements.
Each year, you will also receive a statement confirming the tax status of any
distributions paid to you, as well as a semiannual report and an annual report
containing audited financial statements.
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
More complete information regarding each Fund's investment policies and
services is contained in its SAI, which you may request by calling or writing
Strong Funds at the phone number and address on the cover of this Prospectus.
CHANGING YOUR ACCOUNT INFORMATION. So that you continue receiving your Strong
correspondence, including any dividend checks and statements, please notify us
in writing as soon as possible if your address changes. You may use the
Additional Investment Form at the bottom of your confirmation statement, or
simply write us a letter of instruction that contains the following information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to your accounts' registrations - such as adding or removing a joint
owner, changing an owner's name, or changing the type of your account - must
also be submitted in writing. Please call 1-800-368-3863 for instructions. For
your protection, some requests may require a signature guarantee.
----------------------
PROSPECTUS PAGE II-9
<PAGE> 34
TRANSACTION SERVICES
FREE EXCHANGE PRIVILEGE. You may exchange shares between identically
registered Strong Funds accounts, either in writing or by telephone. By
establishing the telephone exchange services, you authorize the Fund and its
agents to act upon your instruction by telephone to redeem or exchange shares
from any account you specify. Please obtain and read the appropriate prospectus
before investing in any of the Strong Funds. Since an excessive number of
exchanges may be detrimental to the Funds, each Fund reserves the right to
discontinue the exchange privilege of any shareholder who makes more than five
exchanges in a year or three exchanges in a calendar quarter.
REGULAR INVESTMENT PLANS
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan, all discussed below, are methods of implementing DOLLAR
COST AVERAGING. Dollar cost averaging is an investment strategy that involves
investing a fixed amount of money at regular time intervals. By always investing
the same set amount, you will be purchasing more shares when the price is low
and fewer shares when the price is high. Ultimately, by using this principle in
conjunction with fluctuations in share price, your average cost per share may be
less than your average transaction price. A program of regular investment cannot
ensure a profit or protect against a loss during declining markets. Since such a
program involves continuous investment regardless of fluctuating share values,
you should consider your ability to continue the program through periods of both
low and high share-price levels.
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in a Fund from your bank checking or NOW
account. You may choose to make investments on any day of the month in amounts
of $50 or more. You can set up the Automatic Investment Plan with any financial
institution that is a member of the Automated Clearing House. Because each Fund
has the right to close an investor's account for failure to reach the minimum
initial investment, please consider your ability to continue this Plan until you
reach the minimum initial investment. Such closing may occur in periods of
declining share prices. To establish the Plan, complete the Automatic Investment
Plan section on the account application, or call 1-800-368-3863 for an
application.
PAYROLL DIRECT DEPOSIT PLAN. Once you meet a Fund's minimum initial
investment requirement, you may purchase additional Fund shares through the
Payroll Direct Deposit Plan. Through this Plan, periodic investments (minimum
$50) are made automatically from your payroll check into your existing Fund
account. By enrolling in the Plan, you authorize your employer or its agents to
deposit a specified amount from your payroll check into the Fund's
-----------------------
PROSPECTUS PAGE II-10
<PAGE> 35
bank account. In most cases, your Fund account will be credited the day after
the amount is received by the Fund's bank. In order to participate in the Plan,
your employer must have direct deposit capabilities through Automated Clearing
House available to its employees. The Plan may be used for other direct
deposits, such as social security checks, military allotments, and annuity
payments.
To establish a Direct Deposit for your account, call 1-800-368-3863 to obtain
an Authorization for Payroll Direct Deposit to a Strong Funds Account form. Once
the Plan is established, you may alter the amount of the deposit, alter the
frequency of the deposit, or terminate your participation in the program by
notifying your employer.
AUTOMATIC EXCHANGE PLAN. The Automatic Exchange Plan allows you to make
regular, systematic exchanges (minimum $50) from one Strong Funds account into
another Strong Funds account. By setting up the Plan, you authorize the Fund and
its agents to redeem a set dollar amount or number of shares from the first
account and purchase shares of a second Strong Fund. In addition, you authorize
a Fund and its agents to accept telephone instructions to change the dollar
amount and frequency of the exchange. An exchange transaction is a sale and
purchase of shares for federal income tax purposes and may result in a capital
gain or loss. To establish the Plan, request a form by calling 1-800-368-3863.
To participate in the Automatic Exchange Plan, you must have an initial
account balance of $2,500 in the first account and at least the minimum initial
investment in the second account. Exchanges may be made on any day or days of
your choice. If the amount remaining in the first account is less than the
exchange amount you requested, then the remaining amount will be exchanged. At
such time as the first account has a zero balance, your participation in the
Plan will be terminated. You may also terminate the Plan at any time by calling
or writing to the Fund. Once participation in the Plan has been terminated for
any reason, to reinstate the Plan you must do so in writing; simply investing
additional funds will not reinstate the Plan.
SYSTEMATIC WITHDRAWAL PLAN. You can set up automatic withdrawals from your
account at regular intervals. To begin distributions, you must have an initial
balance of $5,000 in your account and withdraw at least $50 per payment. To
establish the Systematic Withdrawal Plan, request a form by calling
1-800-368-3863. Depending upon the size of the account and the withdrawals
requested (and fluctuations in net asset value of the shares redeemed),
redemptions for the purpose of satisfying such withdrawals may reduce or even
exhaust the account. If the amount remaining in the account is not sufficient to
meet a Plan payment, the remaining amount will be redeemed and the Plan will be
terminated.
-----------------------
PROSPECTUS PAGE II-11
<PAGE> 36
SPECIAL SITUATIONS
POWER OF ATTORNEY. If you are investing as attorney-in-fact for another
person, please complete the account application in the name of such person and
sign the back of the application in the following form: "[applicant's name] by
[your name], attorney-in-fact." To avoid having to file an affidavit prior to
each transaction, please complete the Power of Attorney form available from
Strong Funds at 1-800-368-3863. However, if you would like to use your own power
of attorney form, please call the same number for instructions.
CORPORATIONS AND TRUSTS. If you are investing for a corporation, please
include with your account application a certified copy of your corporate
resolution indicating which officers are authorized to act on behalf of the
corporation. As an alternative, you may complete a Certification of Authorized
Individuals form, which can be obtained from the Funds. Until a valid corporate
resolution or Certification of Authorized Individuals form is received by the
Fund, services such as telephone and wire redemption will not be established.
If you are investing as a trustee, please include the date of the trust. All
trustees must sign the application. If they do not, services such as telephone
and wire redemption will not be established. All trustees must sign redemption
requests unless proper documentation to the contrary is provided to the Fund.
Failure to provide these documents or signatures as required when you invest may
result in delays in processing redemption requests.
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you and
the Funds against fraudulent transactions by unauthorized persons. In the
following instances, the Funds will require a signature guarantee for all
authorized owners of an account:
- - when you add the telephone redemption option to your existing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $25,000;
- - when you request to redeem or redeposit shares that have been issued in
certificate form;
- - if you open an account and later decide that you want certificates;
- - when you request that redemption proceeds be sent to a different name or
address than is registered on your account;
- - if you add/change your name or add/remove an owner on your account; and
- - if you add/change the beneficiary on your transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor
institution, as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms, and others. PLEASE NOTE THAT A
NOTARY PUBLIC STAMP OR SEAL IS NOT ACCEPTABLE.
-----------------------
PROSPECTUS PAGE II-12
<PAGE> 37
STATEMENT OF ADDITIONAL INFORMATION
STRONG OPPORTUNITY FUND, INC.
STRONG GROWTH FUND, INC.
STRONG COMMON STOCK FUND, INC.
STRONG DISCOVERY FUND, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
This Statement of Additional Information is not a Prospectus and
should be read in conjunction with the Prospectus of Strong Opportunity Fund,
Inc. (the "Opportunity Fund"), Strong Growth Fund, Inc. (the "Growth Fund"),
Strong Common Stock Fund, Inc. (the "Common Stock Fund"), and Strong Discovery
Fund, Inc. (the "Discovery Fund") (hereinafter collectively referred to as the
"Funds") dated October 13, 1995. 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 October 13, 1995.
<PAGE> 38
STRONG GROWTH FUNDS
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Debt Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Depositary Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Foreign Currency -- Related Derivative Strategies -- Special Considerations . . . . . . . . . . . . . . . 11
Foreign Investment Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
High-Yield (High-Risk) Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Lending of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Mortgage- and Asset-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Mortgage Dollar Rolls and Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 17
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
When-Issued Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
DIRECTORS AND OFFICERS OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
INVESTMENT ADVISOR AND DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ADDITIONAL SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
FUND ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PORTFOLIO MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
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 October 13, 1995 and, if given or made,
such information or representations may not be relied upon as having been
authorized by the Funds.
This Statement of Additional Information does not constitute an offer to sell
securities.
<PAGE> 39
INVESTMENT RESTRICTIONS
The investment objective of each of the Funds is to seek capital
growth. The Funds' investment objectives and policies are described in detail
in the Prospectus under the caption "Investment Objectives and Policies." The
following are the Funds' fundamental investment limitations which cannot be
changed without shareholder approval.
Each Fund:
With respect to the International Stock and Asia Pacific Funds 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.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prohibit the Fund from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objective, policies, and restrictions as the
Fund.
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<PAGE> 40
The following are the Funds' non-fundamental operating policies which
may be changed by the Board of Directors of each Fund without shareholder
approval.
Each Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short,
or unless it covers such short sale as required by the current rules
and positions of the Securities and Exchange Commission or its staff,
and provided that transactions in options, futures contracts, options
on futures contracts, or other derivative instruments are not deemed
to constitute selling securities short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions;
and provided that margin deposits in connection with futures
contracts, options on futures contracts, or other derivative
instruments shall not constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities,
or such other amounts as may be permitted under the 1940 Act.
4. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
investment management company with substantially the same fundamental
investment objective, restrictions and policies as the Fund.
6. Purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its total
assets would be invested in the securities of issuers that, including
predecessor or unconditional guarantors, have a record of less than
three years of continuous operation. This policy does not apply to
securities of pooled investment vehicles or mortgage or asset-backed
securities.
7. Invest in direct interests in oil, gas, or other mineral exploration
programs or leases; however, the Fund may invest in the securities of
issuers that engage in these activities.
8. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act
and, in accordance with Rule 4.5, will use futures or options on
futures transactions solely for bona fide hedging transactions (within
the meaning of the Commodity Exchange Act), provided, however, that
the Fund may, in addition to bona fide hedging transactions, use
futures and options on futures transactions if the aggregate initial
margin and premiums required to establish such positions, less the
amount by which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed 5% of the
Fund's net assets.
In addition, (i) the aggregate value of securities underlying call
options on securities written by the Fund or obligations underlying
put options on securities written by the Fund determined as of the
date the options are written will not exceed 50% of the Fund's net
assets; (ii) the aggregate premiums paid on all options purchased by
the Fund and which are being held will not exceed 20% of the Fund's
net assets; (iii) the Fund will not purchase put or call options,
other than hedging positions, if, as a result thereof, more than 5% of
its total assets would be so invested; and (iv) the aggregate margin
deposits required on all futures and options on futures transactions
being held will not exceed 5% of the Fund's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Fund except as
may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging, or hypothecating may
not exceed 33 1/3% of the Fund's total assets at the time of the
borrowing or investment.
10. Purchase or retain the securities of any issuer if any officer or
director of the Fund or its investment advisor beneficially owns more
than 1/2 of 1% of the securities of such issuer and such officers and
directors together own beneficially more than 5% of the securities of
such issuer.
- 4 -
<PAGE> 41
11. Purchase warrants, valued at the lower of cost or market value, in
excess of 5% of the Fund's net assets. Included in that amount, but
not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on any stock exchange. Warrants acquired by the Fund in
units or attached to securities are not subject to these restrictions.
12. Borrow money except (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities
when bank borrowings exceed 5% of its total assets.
13. Make any loans other than loans of portfolio securities, except
through (i) purchases of debt securities or other debt instruments, or
(ii) engaging in repurchase agreements.
Except for the fundamental investment limitations listed above and
each Fund's investment objective, the other investment policies described in
the Prospectus and this Statement of Additional Information are not fundamental
and may be changed with approval of a Fund's Board of Directors.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds'
investment objectives, policies and techniques that are described in detail in
the Prospectus under the captions "Investment Objectives and Policies" and
"Implementation of Policies and Risks."
BORROWING
The Funds may borrow money from banks, limited by each Fund's
fundamental investment restriction to 33 1/3% of its total assets, and may
engage in mortgage dollar roll transactions and reverse repurchase agreements
which may be considered a form of borrowing. (See "Mortgage Dollar Rolls and
Reverse Repurchase Agreements" below.) In addition, each Fund may borrow up to
an additional 5% of its total assets from banks for temporary or emergency
purposes. A Fund will not purchase securities when bank borrowings exceed 5%
of the Fund's total assets.
DEBT OBLIGATIONS
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.
PRICE VOLATILITY. The market value of debt obligations is affected by
changes in prevailing interest rates. The market value of a debt obligation
generally reacts inversely to interest-rate changes, meaning, when prevailing
interest rates decline, an obligation's price usually rises, and when
prevailing interest rates rise, an obligation's price usually declines.
MATURITY. In general, the longer the maturity of a debt obligation,
the higher its yield and the greater its sensitivity to changes in interest
rates. Conversely, the shorter the maturity, the lower the yield but the
greater the price stability. Commercial paper is generally considered the
shortest form of debt obligation. The term "bond" generally refers to
securities with maturities longer than two years. Bonds with maturities of
three years or less are considered short-term, bonds with maturities between
three and seven years are considered intermediate-term, and bonds with
maturities greater than seven years are considered long-term.
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.
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<PAGE> 42
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.
See the Appendix for additional information.
TEMPORARY DEFENSIVE POSITION. When the Advisor determines that market
conditions warrant a temporary defensive position, the Opportunity Fund may
invest up to 30% of its total assets, the Common Stock Fund may invest up to
20% of its total assets, and the Growth and Discovery 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.
DEPOSITARY RECEIPTS
As indicated in the Prospectus, each Fund may invest in foreign
securities by purchasing depositary receipts, including American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
convertible into securities or issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. Bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement. For purposes of the Funds' investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership of common stock will be
treated as common stock.
ADR facilities may be established as either "unsponsored" or
"sponsored." While ADRS issued under these two types of facilities are in some
respects similar, there are distinctions between them relating to the rights
and obligations of ADR holders and the practices of market participants. A
depositary may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depositary requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depositary usually
charges fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distribution, and the performance of other services. The depositary of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. Sponsored ADR facilities are created in generally the same manner
as unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. As discussed in the Prospectus, the Funds may
use a variety of derivative instruments, including options, futures contracts
(sometimes referred to as "futures"), options on futures contracts, and forward
currency contracts for any lawful purpose consistent with each Fund's
investment objective, such as to hedge a Fund's portfolio, risk management, or
to attempt to enhance returns, but not for speculation.
The use of these instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several options and
futures exchanges upon which they may be traded, the Commodity Futures Trading
Commission ("CFTC") and various state regulatory authorities. In addition, the
Funds' ability to use these instruments will be limited by tax considerations.
- 6 -
<PAGE> 43
In addition to the products, strategies and risks described below and
in the Prospectus, the Advisor may discover additional derivative instruments
and other hedging techniques. These new opportunities may become available as
the Advisor develops new techniques or as regulatory authorities broaden the
range of permitted transactions. The Advisor may utilize these opportunities
to the extent that they are consistent with the Funds' investment objective and
permitted by the Funds' investment limitations and applicable regulatory
authorities.
SPECIAL RISKS OF THESE INSTRUMENTS. The use of derivative instruments
involves special considerations and risks as described below. Risks pertaining
to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon the
Advisor's ability to predict movements of the overall securities and currency
markets, which requires different skills than predicting changes in the prices
of individual securities. While the Advisor is experienced in the use of these
instruments, there can be no assurance that any particular strategy adopted
will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might
occur due to factors unrelated to the value of the investments being hedged,
such as speculative or other pressures on the markets in which these
instruments are traded. The effectiveness of hedges using instruments on
indices will depend on the degree of correlation between price movements in the
index and price movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. For example, if a Fund entered into
a short hedge because the Advisor projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the instrument. Moreover, if the price of the
instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss.
(4) As described below, a Fund might be required to maintain assets
as "cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close
out its positions in such instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. The requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. A Fund's ability to close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ("counter party") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to the Fund.
For a discussion of the federal income tax treatment of the Funds'
derivative instruments, see "Taxes -- Derivative Instruments" below.
GENERAL LIMITATIONS ON CERTAIN DERIVATIVE TRANSACTIONS. The Funds
have each filed a notice of eligibility for exclusion from the definition of
the term "commodity pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures markets. Pursuant to Rule
4.5 of the regulations under the Commodity Exchange Act (the "CEA"), the notice
of eligibility for each 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 a Fund may hold other
positions in futures contracts and related options that do not qualify as a
bona fide hedging position if the aggregate initial margin deposits and
premiums required to establish these positions, less the amount by which any
such options positions are "in the money," do not exceed 5% of the Fund's net
assets. Adoption of these guidelines does not limit the percentage of the
Fund's assets at risk to 5%.
In addition, (i) the aggregate value of securities underlying call
options on securities written by a Fund or obligations underlying put options
on securities written by a Fund determined as of the date the options are
written will not exceed 50% of the
- 7 -
<PAGE> 44
Fund's net assets; (ii) the aggregate premiums paid on all options purchased by
a Fund and which are being held will not exceed 20% of the Fund's net assets;
(iii) a Fund will not purchase put or call options, other than hedging
positions, if, as a result thereof, more than 5% of its total assets would be
so invested; and (iv) the aggregate margin deposits required on all futures and
options on futures transactions being held will not exceed 5% of a Fund's total
assets.
The foregoing limitations are not fundamental policies of the Funds
and may be changed by each Fund's Board of Directors without shareholder
approval as regulatory agencies permit.
Transactions using options (other than purchased options) expose the
Funds to counter-party risk. To the extent required by SEC guidelines, a Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options, or futures or (2)
cash and liquid high grade debt obligations with a value sufficient at all
times to cover its potential obligations to the extent not covered as provided
in (1) above. Each Fund will also set aside cash and/or appropriate liquid
assets in a segregated custodial account if required to do so by the SEC and
CFTC regulations. Assets used as cover or held in a segregated account cannot
be sold while the position in the corresponding option or futures contract is
open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of a Fund's assets to segregated accounts as a
cover could impede portfolio management or a Fund's ability to meet redemption
requests or other current obligations.
OPTIONS. Each Fund may purchase or write put and call options on
securities, on indices, and foreign currency, 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. Options that expire unexercised
have no value. Options used by a Fund may include European-style options.
This means that the option is only exercisable at its expiration. This is in
contrast to American-style options which are exercisable at any time prior to
the expiration date of the option.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, a Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Funds to
realize the profit or limit the loss on an option position prior to its
exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. OTC options are
contracts between a Fund and the other party to the transaction ("counter
party") (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Fund purchases or writes an OTC option, it relies on
the counter party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the counter party to do so would result in
the loss of any premium paid by the Fund as well as the loss of any expected
benefit of the transaction.
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<PAGE> 45
The Funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Funds
intend to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the counter party, or
by a transaction in the secondary market if any such market exists. Although
the Funds will enter into OTC options only with counter parties that are
expected to be capable of entering into closing transactions with the Funds,
there is no assurance that the Funds will in fact be able to close out an OTC
option at a favorable price prior to expiration. In the event of insolvency of
the counter party, a Fund might be unable to close out an OTC option position
at any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Fund could cause material losses because the Fund would be
unable to sell the investment used as a cover for the written option until the
option expires or is exercised.
The Funds may engage in options transactions on indices in much the
same manner as the options on securities discussed above, except that index
options may serve as a hedge against overall fluctuations in the securities
markets in general.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract the effectiveness of attempted
hedging.
SPREAD TRANSACTIONS. Each Fund may purchase covered spread options
from securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the Fund
does not own, but which is used as a benchmark. The risk to the Fund in
purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect the Fund against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
FUTURES CONTRACTS. Each 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 securities prices or currency
exchange rates and sales of futures as an offset against the effect of expected
declines in securities prices or currency exchange rates. The Funds' futures
transactions may be entered into for any lawful purpose consistent with the
Funds' investment objectives, such as hedging purposes, risk management, or to
enhance returns, but not for speculation. The Funds may also write put options
on futures contracts while at the same time purchasing call options on the same
futures contracts in order to create synthetically a long futures contract
position. Such options would have the same strike prices and expiration dates.
The Funds will engage in this strategy only when the Advisor believes it is
more advantageous to the Funds than is purchasing the futures contract.
To the extent required by regulatory authorities, the Funds will 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.
A 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
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<PAGE> 46
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. Transactions costs are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. A futures contract may be satisfied by delivery or purchase, as
the case may be, of the instrument, the currency, or by payment of the change
in the cash value of the index. More commonly, futures contracts are closed
out prior to delivery by entering into an offsetting transaction in a matching
futures contract. Although the value of an index might be a function of the
value of certain specified securities, no physical delivery of those securities
is made. If the offsetting purchase price is less than the original sale
price, a Fund realizes a gain; if it is more, a Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, a Fund realizes a gain; if it is less, a Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that a Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If a Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, a Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. government securities or other liquid, high grade debt obligations, in an
amount generally equal to 10% or less of the contract value. High grade
securities include securities rated "A" or better by an NRSRO. Margin must
also be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, a Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as "marking to market." Variation margin does not involve borrowing, but
rather represents a daily settlement of a Fund's obligations to or from a
futures broker. When a Fund purchases an option on a future, the premium paid
plus transaction costs is all that is at risk. In contrast, when a Fund
purchases or sells a futures contract or writes a call or put option thereon,
it is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If a Fund has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous. Purchasers and sellers of futures
positions and options on futures can enter into offsetting closing transactions
by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there
can be no assurance that such a market will exist for a particular contract at
a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
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
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by speculators in the future markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES -- SPECIAL CONSIDERATIONS
The Funds may purchase and sell foreign currency on a spot basis, and
may use currency-related derivatives instruments such as options on foreign
currencies, futures on foreign currencies, options on futures on foreign
currencies and forward currency contracts (i.e., an obligation to purchase or
sell a specific currency at a specified future date, which may be any fixed
number of days from the contract date agreed upon by the parties, at a price
set at the time the contract is entered into). The Funds may use these
instruments for hedging or any other lawful purpose consistent with its
investment objective, 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 the Funds'
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 its 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, the Funds might use currency-related derivative
instruments to "lock in" a U.S. dollar price for a portfolio investment,
thereby enabling the Funds to protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date the security is
purchased or sold and the date on which payment is made or received. The Funds
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 Funds' portfolio
securities denominated in such foreign currency. Alternatively, where
appropriate, the Funds 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 Funds.
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, the Funds 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 Funds 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 a 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 the Funds 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.
The Funds 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 Funds 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.
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<PAGE> 48
The use of currency-related derivative instruments by the Funds
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, the Funds 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, the Funds might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When the Funds engage 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 Funds will be subject to the risk
that a loss may be sustained by the Funds 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 Funds 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 Funds.
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 the Funds 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 the Funds. In addition, in the event of insolvency
of the counterparty, the Funds might be unable to close out a forward currency
contract at any time prior to maturity. In the case of an exchange- traded
instrument, the Funds 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, the Funds 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 the Funds 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 the Funds 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, the Funds 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
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<PAGE> 49
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 the Funds 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. The Funds 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 a 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 its
potential obligations under currency-related derivatives instruments. To the
extent the Funds' 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 the Funds' assets are so set aside,
this could impede portfolio management or the Funds' 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 Funds and its shareholders and is
consistent with the Funds' 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 Funds' entire portfolio and objectives. The
effectiveness of any transaction in a currency-related derivative instrument is
dependent on a variety of factors, including the Advisor's skill in analyzing
and predicting currency values and upon a correlation between price movements
of the currency instrument and the underlying security. There might be
imperfect correlation, or even no correlation, between price movements of an
instrument and price movements of investments being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which these instruments are traded. In addition, the Funds' 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 a 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.
FOREIGN INVESTMENT COMPANIES
Some of the countries in which each Fund may invest may not permit
direct investment by outside investors. Investments in such countries may only
be permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. Investing through such
vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the 1940 Act. Under the 1940 Act, a Fund may
invest up to 10% of its assets in shares of investment companies and up to 5%
of its assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
HIGH-YIELD (HIGH-RISK) SECURITIES
IN GENERAL. Each Fund has the authority to invest up to 5% of its net
assets in non-investment grade debt securities. Non-investment grade debt
securities (hereinafter referred to as "lower-quality securities") include (i)
bonds rated as low as C by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), or Fitch Investors Service, Inc.
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<PAGE> 50
("Fitch"), or CCC by Duff & Phelps, Inc. ("D&P"); (ii) commercial paper rated
as low as C by S&P, Not Prime by Moody's or Fitch 4 by Fitch; and (iii) unrated
debt securities of comparable quality. Lower-quality securities, while
generally offering higher yields than investment grade securities with similar
maturities, involve greater risks, including the possibility of default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. The special risk
considerations in connection with investments in these securities are discussed
below. Refer to the Appendix of this Statement of Additional Information for a
discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated securities market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such an
economic downturn could severely disrupt the market for and adversely affect
the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower-quality and comparable unrated securities also tend to be
more sensitive to economic conditions than are higher-rated securities. As a
result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, a Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable
unrated security will decrease in a rising interest rate market, and
accordingly so will a Fund's net asset value. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of
its portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce the Fund's asset base over which
expenses could be allocated and could result in a reduced rate of return for
the Fund.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or 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 Funds.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of lower-quality
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of
the issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in lower-quality and comparable unrated securities will be more
dependent on the Advisor's credit analysis than would be the case with
investments in investment-grade debt securities. The Advisor employs its own
credit research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. The Advisor continually monitors the investments in 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.
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<PAGE> 51
LIQUIDITY AND VALUATION. A Fund may have difficulty disposing of
certain lower-quality and comparable unrated securities because there may be a
thin trading market for such securities. Because not all dealers maintain
markets in all lower-quality and comparable unrated securities, there is no
established retail secondary market for many of these securities. The Funds
anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. As a result, a Fund's
asset value and ability to dispose of particular securities, when necessary to
meet the Fund's liquidity needs or in response to a specific economic event,
may be impacted. The lack of a liquid secondary market for certain securities
may also make it more difficult for a Fund to obtain accurate market quotations
for purposes of valuing the Fund's portfolio. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
RECENT AND PROPOSED LEGISLATION. Recent legislation has been adopted,
and from time to time proposals have been discussed, regarding new legislation
designed to limit the use of certain lower-quality and comparable unrated
securities by certain issuers. An example of legislation is a recent law which
requires federally insured savings and loan associations to divest their
investments in these securities over time. It is not currently possible to
determine the impact of the recent legislation or the proposed legislation on
the lower-quality and comparable unrated securities market. However, it is
anticipated that if additional legislation is enacted or proposed, it could
have a material affect on the value of these securities and the existence of a
secondary trading market for the securities.
ILLIQUID SECURITIES
The Funds may invest in illiquid securities (i.e., securities that are
not readily marketable). However, a Fund will not acquire illiquid securities
if, as a result, they would comprise more than 15% of the value of the Fund's
net assets (or such other amounts as may be permitted under the 1940 Act). The
Board of Directors of each Fund, or its delegate, has the ultimate authority to
determine, to the extent permissible under the federal securities laws, which
securities are illiquid for purposes of this limitation. Certain securities
exempt from registration or issued in transactions exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"), including
securities that may be resold pursuant to Rule 144A under the Securities Act,
may be considered liquid. The Board of Directors of each Fund has delegated to
Strong Capital Management, Inc. (the "Advisor") the day-to-day determination of
the liquidity of a security, although it has retained oversight and ultimate
responsibility for such determinations. Although no definitive liquidity
criteria are used, the Board of Directors has directed the Advisor to look to
such factors as (i) the nature of the market for a security (including the
institutional private resale market), (ii) the terms of certain securities or
other instruments allowing for the disposition to a third party or the issuer
thereof (e.g., certain repurchase obligations and demand instruments), (iii)
the availability of market quotations (e.g., for securities quoted in PORTAL
system), and (iv) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at
fair value as determined in good faith by the Board of Directors of each Fund.
If through the appreciation of restricted securities or the depreciation of
unrestricted securities, a Fund should be in a position where more than 15% of
the value of its net assets are invested in illiquid securities, including
restricted securities which are not readily marketable, 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
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<PAGE> 52
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Notwithstanding the above, the Advisor intends, as a matter of
internal policy, to limit each Fund's investments in illiquid securities to 10%
of its net assets.
LENDING OF PORTFOLIO SECURITIES
Each Fund is authorized to lend up to 33 1/3% of the total value of
its portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. However, the Funds do not presently intend to engage in such
lending. In determining whether to lend securities to a particular
broker-dealer or institutional investor, the Advisor will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. 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
Mortgage-backed securities represent direct or indirect participations
in, or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
collateralized mortgage obligations. Such securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, such as the
Government National Mortgage Association and the Federal National Mortgage
Association, or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by private lenders may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property, and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal
and interest on asset-backed securities may be supported by non-governmental
credit enhancements similar to those utilized in connection with
mortgage-backed securities.
The yield characteristics of mortgage- and asset-backed securities
differ from those of traditional debt securities. Among the principal
differences are that interest and principal payments are made more frequently
on mortgage-and asset-backed securities, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other
assets generally may be prepaid at any time. As a result, if 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 the 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.
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<PAGE> 53
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 DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Funds may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, 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" above.) When required by guidelines
of the SEC, a Fund will set aside permissible liquid assets in a segregated
account to secure its obligations to repurchase the security.
Each Fund may also enter into mortgage dollar rolls, in which the Fund
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. At the time the Fund would
enter into a mortgage dollar roll, it would set aside permissible liquid assets
in a segregated account to secure its obligation for the forward commitment to
buy mortgage-backed securities. Mortgage dollar roll transactions may be
considered a borrowing by the Funds. (See "Borrowing" above.)
The mortgage dollar rolls and reverse repurchase agreements entered
into by the Funds may be used as arbitrage transactions in which a Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar roll or reverse repurchase agreements. Since a Fund
will receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities or repurchase agreements will be high quality
and will mature on or before the settlement date of the mortgage dollar roll or
reverse repurchase agreement, the Advisor believes that such arbitrage
transactions do not present the risks to the Funds that are associated with
other types of leverage.
REPURCHASE AGREEMENTS
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
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
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<PAGE> 54
future. If a Fund sells securities short against the box, it may protect
unrealized gains, but will lose the opportunity to profit on such securities if
the price rises.
WARRANTS
Each Fund may acquire warrants. Warrants are securities giving the
holder the right, but not the obligation, to buy the stock of an issuer at a
given price (generally higher than the value of the stock at the time of
issuance) during a specified period or perpetually. Warrants may be acquired
separately or in connection with the acquisition of securities. A Fund will
not purchase warrants, valued at the lower of cost or market value, in excess
of 5% of the Fund's net assets. Included in that amount, but not to exceed 2%
of the Fund's net assets, may be warrants that are not listed on any stock
exchange. Warrants acquired by a Fund in units or attached to securities are
not subject to these restrictions. Warrants do not carry with them the right
to dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does
not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
WHEN-ISSUED SECURITIES
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, is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase. During the period between the purchase and settlement, no payment is
made by a Fund to the issuer and no interest on 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 respective net asset
values will be adversely affected by purchases of securities on a when-issued
basis.
The Funds will maintain cash and marketable securities equal in value
to commitments for when-issued securities. Such segregated securities either
will mature or, if necessary, be sold on or before the settlement date. When
the time comes to pay for when-issued securities, 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
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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<PAGE> 55
DIRECTORS AND OFFICERS OF THE FUNDS
Directors and officers of the Funds, together with information as to
their principal business occupations during the last five years, and other
information are shown below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an asterisk. Each officer
and director holds the same position with the following registered investment
companies: Strong Advantage Fund, Inc.; Strong American Utilities Fund, Inc.;
Strong Asia Pacific Fund, Inc.; Strong Asset Allocation Fund, Inc.; Strong
Corporate Bond Fund, Inc.; Strong Government Securities Fund, Inc.; Strong
Heritage Reserve Series, Inc.; Strong High-Yield Municipal Bond Fund, Inc.;
Strong Insured Municipal Bond Fund, Inc.; Strong International Bond Fund, Inc.;
Strong International Stock Fund, Inc.; Strong Money Market Fund, Inc.; Strong
Municipal Bond Fund, Inc.; Strong Municipal Money Market Fund, Inc.; Strong
Short-Term Bond Fund, Inc.; Strong Short-Term Global Bond Fund, Inc.; Strong
Short-Term Municipal Bond Fund, Inc.; Strong Total Return Fund, Inc.; and
Strong U.S. Treasury Money Fund, Inc. (collectively, the "Strong Funds"); and
Strong Institutional Funds, Inc.; Strong Special Fund II, Inc.; and Strong
Variable Insurance Funds, Inc.
*Richard S. Strong (DOB 5/12/42), Chairman of the Board and Director
of the Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the
Advisor, which he founded in 1974. Since August 1985, Mr. Strong has been a
Security Analyst and Portfolio Manager of the Advisor. In October 1991, Mr.
Strong also became the Chairman of the Advisor. Mr. Strong is a director of
the Advisor. Since October 1993, Mr. Strong has been Chairman and a director
of Strong Holdings, Inc., a Wisconsin corporation and subsidiary of the Advisor
("Holdings"), and the Fund's underwriter, Strong Funds Distributors, Inc., a
Wisconsin corporation and subsidiary of Holdings ("Distributor"). Since
January 1994, Mr. Strong has been Chairman and a director of Heritage Reserve
Development Corporation, a Wisconsin corporation and subsidiary of Holdings;
and since February 1994, Mr. Strong has been a member of the Managing Boards of
Fussville Real Estate Holdings L.L.C.), a Wisconsin Limited Liability Company
and subsidiary of the Advisor, and Fussville Development L.L.C. a Wisconsin
Limited Liability Company and subsidiary of the Advisor, and certain of its
subsidiaries. Mr. Strong has served as a director and Chairman of the Board of
the Opportunity Fund since commencement of operations in December 1985; as a
director of the Growth Fund since incorporation in December 1990 and as
Chairman of the Board since October 1993; as a director and Chairman of the
Board of the Common Stock Fund since incorporation in 1989; and as a director
and Chairman of the Board of the Discovery Fund since incorporation in 1987.
Marvin E. Nevins (DOB 7/9/18), Director of the Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of
Wisconsin Centrifugal Inc., a foundry. From July 1983 to December 1986, he was
Chairman of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins
is a former Chairman of the Wisconsin Association of Manufacturers & Commerce.
He was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin. Mr. Nevins has served
as a director of the (i) Opportunity Fund since commencement of operations in
December 1985; (ii) Growth Fund since incorporation in December 1990; (iii)
Common Stock Fund since incorporation in 1989; and (iv) Discovery Fund since
incorporation in 1987.
Willie D. Davis (DOB 7/24/34), Director of the Funds.
Mr. Davis has been director of Alliance Bank since 1980, Sara Lee
Corporation (a food/consumer products company) since 1983, KMart Corporation (a
discount consumer products company) since 1985, YMCA Metropolitan - Los Angeles
since 1985, Dow Chemical Company since 1988, MGM Grand, Inc. (an
entertainment/hotel company) since 1990, WICOR, Inc. (a utility company) since
1990, Johnson Controls, Inc. (an industrial company) since 1992, L.A. Gear (a
footwear/sportswear company) since 1992, and Rally's Hamburger, Inc. since
1994. Mr. Davis has been a trustee of the University of Chicago since 1980,
Marquette University since 1988, and Occidental College since 1990. Since
1977, Mr. Davis has been President and Chief Executive Officer of All Pro
Broadcasting, Inc. Mr. Davis was a director of the Fireman's Fund (an
insurance company) from 1975 until 1990. Mr. Davis has served as a director of
the Funds since July 1994.
- 19 -
<PAGE> 56
*John Dragisic (DOB 11/26/40), Vice Chairman and Director of the Funds.
Mr. Dragisic has been Vice Chairman and a director of the Advisor and
a director of Holdings and Distributor since July 1994. Mr. Dragisic
previously served as a director of Funds between 1991 and 1994. Mr. Dragisic
was the President and Chief Executive Officer of Grunau Company, Inc. (a
mechanical contracting and engineering firm), Milwaukee, Wisconsin from 1987
until July 1994. From 1981 to 1987, he was an Executive Vice President with
Grunau Company, Inc. From 1969 until 1973, Mr. Dragisic worked for the
InterAmerican Development Bank. Mr. Dragisic received his Ph.D. in Economics
in 1971 from the University of Wisconsin - Madison and his B.A. degree in
Economics in 1962 from Lake Forest College. Mr. Dragisic has served as Vice
Chairman of the Funds since July 1994 and director of the Funds since April
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. He has served as a director of the Funds since April 1995.
William F. Vogt (DOB 7/19/47), Director of the Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc.
since 1990. From 1982 until 1990, he served as Executive Director of
University Physicians of the University of Colorado. Mr. Vogt is the Past
President of the Medical Group Management Association and a Fellow of the
American College of Medical Practice Executives. He has served as a director
of the Funds since April 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 been the Vice
President of the Opportunity and Common Stock Funds since May 1993; the Growth
Fund since October 1993; and the Discovery Fund since April 1993.
Ann E. Oglanian (DOB 12/7/61), Secretary of the Funds.
Ms. Oglanian has been an Associate Counsel to the Advisor since
January 1992. Ms. Oglanian acted as Associate Counsel for the Chicago-based
investment management firm, Kemper Financial Services, Inc., from June 1988
until December 1991. Ms. Oglanian has been the Secretary of the Funds since
May 1994.
Thomas P. Lemke (DOB 7/30/54), Vice President of the Funds.
Mr. Lemke has been Senior Vice President, Secretary, and General
Counsel of the Advisor since September 1994. For two years prior to joining
the Advisor, Mr. Lemke acted as Resident Counsel for Funds Management at J.P.
Morgan & Co., Inc. From February 1989 until April 1992, Mr. Lemke acted as
Associate General Counsel to Sanford C. Bernstein Co., Inc. For two years
prior to that, Mr. Lemke was Of Counsel at the Washington, D.C. law firm of Tew
Jorden & Schulte, a successor of Finley, Kumble Wagner. From August 1979 until
December 1986, Mr. Lemke worked at the Securities and Exchange Commission, most
notably as the Chief Counsel to the Division of Investment Management (November
1984 - December 1986), and as Special Counsel to the Office of Insurance
Products, Division of Investment Management (April 1982 - October 1984). Mr.
Lemke has been a Vice President of the Funds since October 1994.
Ronald A. Neville (DOB 5/21/47), C.P.A., Treasurer of the Funds.
Mr. Neville has been the Senior Vice President and Chief Financial
Officer of the Advisor since January 1995. For fourteen years prior to that,
Mr. Neville worked at Twentieth Century Companies, Inc., most notably as Senior
Vice President and Chief Financial Officer (1988 until December 1994). Mr.
Neville received his M.B.A. in 1972 from the University of Missouri - Kansas
City and his B.A. degree in Business Administration and Economics in 1969 from
Drury College. Mr. Neville has been the Treasurer of the Funds since April
1995.
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<PAGE> 57
Except for Messrs. Nevins, Davis, Kritzik and Vogt, the address of all
of the above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 33963. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301, Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 2830 East Third Avenue, Denver, Colorado
80206.
The mutual fund complex that is managed by the Advisor, which is
composed of 26 open-end management investment companies consisting of 31 mutual
funds, of which the Funds are a part, in the aggregate, pays each Director who
is not a director, officer, or employee of the Advisor, or any affiliated
company (a "disinterested director") an annual fee of $50,000, plus $100 per
Board meeting for each mutual fund. In addition, each disinterested director
is reimbursed by the mutual funds for travel and other expenses incurred in
connection with attendance at such meetings. Other officers and directors of
the mutual funds receive no compensation or expense reimbursement from the
mutual funds.
As of March 31, 1995, the officers and directors of the Opportunity,
Growth, and Common Stock Funds in the aggregate beneficially owned less than 1%
of each Fund's then outstanding shares. As of March 31, 1995, the officers and
directors of the Discovery Fund in the aggregate beneficially owned 432,067
shares of the Fund's common stock, which was approximately 1.69% of the Fund's
then outstanding shares.
PRINCIPAL SHAREHOLDERS
As of March 31, 1995, the following persons owned of record or are
known by the Funds to own of record or beneficially, more than 5% of the listed
Fund's outstanding shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS FUND/SHARES PERCENT OF CLASS
---------------- ----------- ----------------
<S> <C> <C>
Charles Schwab & Co., Inc. Opportunity/7,186,979 22.03%
101 Montgomery Street Growth/4,310,613 21.06
San Francisco, California 94104 Common Stock/5,091,258 10.85
Discovery/4,521,473 17.70
</TABLE>
INVESTMENT ADVISOR 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 Vice Chairman and a director of
the Advisor, Mr. Totsky is a Senior Vice President of the Advisor, Mr. Lemke is
a Senior Vice President, Secretary and General Counsel of the Advisor, Mr.
Neville is a Senior Vice President and Chief Financial Officer of the Advisor,
and Ms. Oglanian is an Associate Counsel of the Advisor. A brief description
of each Fund's investment advisory agreement ("Advisory Agreement") is set
forth in the Prospectus under "About the Funds -- Management."
Each Fund's Advisory Agreement, dated May 1, 1995, was last approved
by shareholders at the annual meeting of shareholders held on April 13, 1995.
The Advisory Agreement is required to be approved annually by either the Board
of Directors of the Fund or by vote of a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act). In either case, each annual
renewal must be approved by the vote of a majority of the Fund's directors who
are not parties to the Advisory Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. Each Advisory Agreement is terminable, without penalty, on 60 days'
written notice by the Board of Directors of the Fund, by vote of a majority of
the Fund's outstanding voting securities, or by the Advisor, and will terminate
automatically in the event of its assignment.
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<PAGE> 58
Under the terms of each Advisory Agreement, the Advisor manages the
Fund's investments subject to the supervision of the Fund's Board of Directors.
The Advisor is responsible for investment decisions and supplies investment
research and portfolio management. At its expense, the Advisor provides office
space and all necessary office facilities, equipment and personnel for
servicing the investments of the Fund. The Advisor places all orders for the
purchase and sale of the Fund's portfolio securities at the Fund's expense.
Except for expenses assumed by the Advisor as set forth above or by
the Distributor as described below with respect to the distribution of a Fund's
shares, a Fund is responsible for all its other expenses, including, without
limitation, interest charges, taxes, brokerage commissions, and similar
expenses; expenses of issue, sale, repurchase, or redemption of shares;
expenses of registering or qualifying shares for sale; expenses for printing
and distribution costs of Prospectuses and quarterly financial statements
mailed to existing shareholders; and charges of custodians, transfer agents
(including the printing and mailing of reports and notices to shareholders),
registrars, auditing and legal services, clerical services related to
recordkeeping and shareholder relations, printing stock certificates; and fees
for directors who are not "interested persons" of the Advisor.
As compensation for its services, each Fund pays to the Advisor a
monthly management fee at the annual rate of 1.00% of the average daily net
asset value of the Fund. (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 following table sets forth certain information concerning
management fees for each Fund:
<TABLE>
<CAPTION>
Management Fee
Incurred Management Fee Management Fee
by Fund Waiver Paid by Fund
------- ------ ------------
<S> <C> <C> <C> <C>
Opportunity Fund
1992 $1,649,218 $ 0 $1,649,218
1993 $3,265,375 $ 0 $3,265,375
1994 $6,335,605 $ 0 $6,335,605
Growth Fund(1)
1994 $ 484,396 $ 0 $ 484,396
Common Stock Fund
1992 $ 954,784 $ 0 $ 954,784
1993 $5,801,331 $ 0 $5,801,331
1994 $7,989,263 $ 0 $7,989,263
Discovery Fund
1992 $1,673,425 $ 0 $1,673,425
1993 $2,236,540 $ 0 $2,236,540
1994 $3,647,967 $ 0 $3,647,967
</TABLE>
(1) Commenced operations on December 31, 1993.
The organizational expenses of the Growth Fund was approximately
$31,417, was 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.
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 the percentage of the average net asset value of the Fund for
such year. Such excess is determined by valuations made as of the close of
each business day of the year, which is the most restrictive percentage
provided by the laws of the various states in which the Fund's common stock is
qualified for sale; or if the states in which the Fund's common stock is
qualified for sale impose no restrictions, the Advisor shall reimburse the Fund
in the event the expenses and charges payable by the Fund in any fiscal year
(as described above) exceed 2%. The most restrictive percentage
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<PAGE> 59
limitation currently applicable to a Fund is 2.5% of its average daily net
assets up to $30,000,000, 2% on the next $70,000,000 of its average daily net
assets and 1.5% of its average daily net assets in excess of $100,000,000.
Reimbursement of expenses in excess of the applicable limitation will be made
on a monthly basis and will be paid to the Fund by reduction of the Advisor's
fee, subject to later adjustment, month by month, for the remainder of the
Fund's fiscal year. The Advisor may from time to time voluntarily absorb
expenses for a Fund in addition to the reimbursement of expenses in excess of
application limitations.
On July 12, 1994, the Securities and Exchange Commission (the SEC)
filed an administrative action (Order) against the Advisor, Mr. Strong, and
another employee of the Advisor in connection with conduct that occurred
between 1987 and early 1990. In re Strong/Corneliuson Capital Management, Inc.,
et al. Admin. Proc. File No. 3-8411. The proceeding was settled by consent
without admitting or denying the allegations in the Order. The Order alleged
that the Advisor and Mr. Strong aided and abetted violations of Section 17(a)
of the 1940 Act by effecting trades between mutual funds, and between mutual
funds and Harbour Investments Ltd. ("Harbour"), without complying with the
exemptive provisions of SEC Rule 17a-7 or otherwise obtaining an exemption. It
further alleged that the Advisor violated, and Mr. Strong aided and abetted
violations of, the disclosure provisions of the 1940 Act and the Investment
Advisers Act of 1940 by misrepresenting the Advisor's policy on personal
trading and by failing to disclose trading by Harbour, an entity in which
principals of the Advisor owned between 18 and 25 percent of the voting stock.
As part of the settlement, the respondents agreed to a censure and a cease and
desist order and the Advisor agreed to various undertakings, including adoption
of certain procedures and a limitation for six months on accepting certain
types of new advisory clients.
The staff of the U.S. Department of Labor (the "Staff") has contacted
the Advisor regarding alleged cross-trading of securities between 1987 and
early 1990 involving various customer accounts subject to the Employee
Retirement Security Act of 1974 ("ERISA") and managed by the Advisor. The
Advisor has informed the Staff of the basis for its position that the trades
complied with ERISA and that, in any event, any alleged noncompliance was not
the cause of any losses to the accounts. The Staff has stated that it
disagrees with the Advisor's positions, although to date it has not filed any
action against the Advisor. At this time, the Advisor is negotiating with the
Staff regarding a possible resolution of the matter, but it cannot presently
determine whether the matter will be settled or litigated or, if it is settled
or litigated, how it ultimately will be resolved. However, management
presently believes, based on current knowledge and the Advisor's insurance
coverage, that the ultimate resolution of this matter should not have a
material adverse effect on the Advisor's financial position.
The Advisor has adopted a Code of Ethics (the "Code") which governs
the personal trading activities of all "Access Persons" of the Advisor. Access
Persons include every director and officer of the Advisor and the investment
companies managed by the Advisor, including the Funds, as well as certain
employees of the Advisor who have access to information relating to the
purchase or sale of securities by the Advisor on behalf of accounts managed by
it. The Code is based upon the principal that such Access Persons have a
fiduciary duty to place the interests of the Advisor's clients ahead of their
own.
The Code requires Access Persons (other than Access Persons who are
independent directors of the investment companies managed by the Advisor,
including the Funds) to, among other things, preclear their securities
transactions (with limited exceptions, such as transactions in shares of mutual
funds, direct obligations of the U.S. government, and certain options on
broad-based securities market indexes) and to execute such transactions through
the Advisor's trading department. The Code, which applies to all Access Persons
(other than Access Persons who are independent directors of the investment
companies managed by the Advisor, including the Funds), includes a ban on
acquiring any securities in an initial public offering, other than a new
offering of a registered open-end investment company, and a prohibition from
profiting on short-term trading in securities. In addition, no Access Person
may purchase or sell any security which, at the time, is being purchased or
sold, or to the knowledge of the Access Person, is being considered for
purchase or sale, by the Advisor on behalf of any mutual fund or other account
managed by it. Finally, the Code provides for trading "black out" periods
which prohibit trading by Access Persons who are portfolio managers within
seven calendar days of trading in the same securities by any mutual fund or
other account managed by the portfolio manager.
Under a Distribution Agreement dated December 1, 1993 with the
Opportunity, Common Stock, and Discovery Funds, and a Distribution Agreement
dated December 20, 1993 with the Growth Fund (collectively, the "Distribution
Agreements"), Strong Funds Distributors, Inc. ("Distributor"), a subsidiary of
the Advisor, acts as underwriter of each Fund's shares. 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 additional costs of
printing Prospectuses and shareholder reports which are used
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<PAGE> 60
for selling purposes, as well as advertising and any other costs attributable
to the distribution of a Fund's shares. The Distributor is an indirect
subsidiary of the Advisor and controlled by the Advisor and Richard S. Strong.
Prior to December 1, 1993, the Advisor acted as underwriter for each Fund. On
December 1, 1993, the Distributor succeeded to the broker-dealer registration
of the Advisor and, in connection therewith, a Distribution Agreement was
executed on substantially identical terms as the former distribution agreement
with the Advisor as distributor. The Distribution Agreement is subject to the
same termination and renewal provisions as are described above with respect to
the Advisory Agreements.
From time to time, the Distributor may hold in-house sales incentive
programs for its associated persons under which these persons may receive
non-cash compensation awards in connection with the sale and distribution of a
Fund's shares. These awards may include items such as, but not limited to,
gifts, merchandise, gift certificates, and payment of travel expenses, meals
and lodging. As required by the National Association of Securities Dealers,
Inc. or NASD's proposed rule amendments in this area, any in-house sales
incentive program will be multi-product oriented, i.e., any incentive will be
based on an associated person's gross production of all securities within a
product type and will not be based on the sales of shares of any specifically
designated mutual fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities
for the Funds and for the placement of the Funds' investment business and the
negotiation of the commissions to be paid on such transactions. It is the
policy of the Advisor to seek the best execution at the best security price
available with respect to each transaction, in light of the overall quality of
brokerage and research services provided to the Advisor or the Funds. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained using a broker. The best price to the Funds means the best net price
without regard to the mix between purchase or sale price and commissions, if
any. In selecting broker-dealers and in negotiating commissions, the Advisor
considers a variety of factors, including best price and execution, the full
range of brokerage services provided by the broker, as well as its capital
strength and stability, and the quality of the research and research services
provided by the broker. Brokerage will not be allocated based on the sale of
any shares of the Strong Funds.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment advisor, under certain circumstances, to cause an account
to pay a broker or dealer a commission for effecting a transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting the transaction in recognition of the value of the brokerage and
research services provided by the broker or dealer. Brokerage and research
services include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreements, the Advisor
may cause the Funds to pay a broker, which provides brokerage and research
services to the Advisor, a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting the
transaction. The Advisor believes it is important to its investment
decision-making process to have access to independent research. The Advisory
Agreements provide that such higher commissions will not be paid by a Fund
unless (a) the Advisor determines in good faith that the amount is reasonable
in relation to the services in terms of the particular transaction or in terms
of the Advisor's overall responsibilities with respect to the accounts as to
which it exercises investment discretion; (b) such payment is made in
compliance with the provisions of Section 28(e), other applicable state and
federal laws, and the Advisory Agreement; and (c) in the opinion of the
Advisor, the total commissions paid by a Fund will be reasonable in relation to
the benefits to the Fund over the long term. The investment management fees
paid by the Funds under the Advisory Agreements are not reduced as a result of
the Advisor's receipt of research services.
Generally, research services provided by brokers may include
information on the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law interpretations,
political developments, legal developments affecting portfolio securities,
technical market action, pricing and appraisal services, credit analysis, risk
measurement analysis, performance analysis, and analysis of corporate
responsibility issues. Such research services are received primarily in the
form of written reports, telephone contacts, and personal meetings with
security analysts. In addition, such research services may be provided in the
form of access to various computer-generated data, computer hardware and
software, and
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<PAGE> 61
meetings arranged with corporate and industry spokespersons, economists,
academicians, and government representatives. In some cases, research services
are generated by third parties but are provided to the Advisor by or through
brokers. Such brokers may pay for all or a portion of computer hardware and
software costs relating to the pricing of securities.
Where the Advisor itself receives both administrative benefits and
research and brokerage services from the services provided by brokers, it makes
a good faith allocation between the administrative benefits and the research
and brokerage services, and will pay for any administrative benefits with cash.
In making good faith allocations of costs between administrative benefits and
research and brokerage services, a conflict of interest may exist by reason of
the Advisor's allocation of the costs of such benefits and services between
those that primarily benefit the Advisor and those that primarily benefit the
Funds and other advisory clients.
From time to time, the Advisor may purchase securities for a Fund in a
fixed price offering. In these situations, the seller may be a member of the
selling group that will, in addition to selling the securities to the Funds and
other advisory clients, provide the Advisor with research. The National
Association of Securities Dealers has adopted rules expressly permitting these
types of arrangements under certain circumstances. Generally, the seller will
provide research "credits" in these situations at a rate that is higher than
that which is available for typical secondary market transactions. These
arrangements may not fall within the safe harbor of Section 28(e).
Each year, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Funds and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
During its last fiscal year, the Advisor had an arrangement with
various brokers whereby, in consideration of the providing of research
services, the Advisor allocated brokerage to those firms, provided that their
brokerage and research services were satisfactory to the Advisor and their
execution capabilities were compatible with the Advisor's policy of seeking
best execution at the best security price available, as discussed above.
The Advisor may direct the purchase of securities on behalf of the
Funds and other advisory clients in secondary market transactions, in public
offerings directly from an underwriter, or in privately negotiated transactions
with an issuer. When the Advisor believes the circumstances so warrant,
securities purchased in public offerings may be resold shortly after
acquisition in the immediate aftermarket for the security in order to take
advantage of price appreciation from the public offering price or for other
reasons. Short-term trading of securities acquired in public offerings, or
otherwise, may result in higher portfolio turnover and associated brokerage
expenses.
The Advisor places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Advisor. Research services
furnished by firms through which the Funds effect their securities transactions
may be used by the Advisor in servicing all of its accounts; not all of such
services may be used by the Advisor in connection with the Funds. In the
opinion of the Advisor, it is not possible to measure separately the benefits
from research services to each of the accounts (including the Funds) managed by
the Advisor. Because the volume and nature of the trading activities of the
accounts are not uniform, the amount of commissions in excess of those charged
by another broker paid by each account for brokerage and research services will
vary. However, in the opinion of the Advisor, such costs to the Funds will not
be disproportionate to the benefits received by the Funds on a continuing
basis.
The Advisor seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by the
Funds and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the Funds.
In making such allocations between a Fund and other advisory accounts, the main
factors considered by the Advisor are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending
the investment.
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<PAGE> 62
The Opportunity, Growth, Common Stock, and Discovery Funds have each
entered into agreements with the Advisor and each of Salomon and PaineWebber
(collectively, the "Brokers"), in which the Brokers have agreed to pay directly
to vendors certain investment management and other related expenses incurred
and otherwise payable by the Funds ("Expense Agreements"). In accordance with
the Expense Agreements, the Advisor directs the delivery to the Brokers of
invoices determined by the Funds to be appropriate for payment by the Brokers.
The Brokers pay the invoices with the proceeds of certain commissions received
from the Funds. The Expense Agreements provide that a percentage of
commissions received from the Funds for completed agency transactions in
certain securities for the Funds, designated by the Advisor as directed
commissions subject to the Expense Agreements, shall be used by the Brokers to
pay the invoices. Investment management and other related expenses include
those payable by the Funds, as described under "Investment Advisor and
Distributor" in this Statement of Additional Information.
The Opportunity Fund paid brokerage commissions during 1992, 1993, and
1994 of approximately $721,000, $1,347,000, and $2,114,000, respectively. The
Growth Fund paid brokerage commissions during 1994 of approximately $549,000.
The Common Stock Fund paid brokerage commissions during 1992, 1993, and 1994 of
approximately $849,000, $2,120,000, and $2,905,000, respectively. The
Discovery Fund paid brokerage commissions during 1992, 1993, and 1994 of
approximately $4,310,000, $3,901,000, and $5,548,000, respectively.
For the 1993 and 1994 fiscal periods ended December 31, the Discovery
Fund's portfolio turnover rates were 668.2% and 606.1%, respectively. These
portfolio turnover rates for this Fund were higher than anticipated primarily
because the Fund employed a trading strategy to preserve the favorable tax
treatment available to it under the Internal Revenue Code of 1986 (the "Code"),
as amended.
CUSTODIAN
Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin 53201,
serves as custodian of the assets of the Opportunity, Growth, Common Stock, and
Discovery Funds. As a result, Firstar Trust Company 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.
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 for the Funds, plus out-of-pocket expenses, such as postage and
printing expenses in connection with shareholder communications. The Advisor
also receives an annual fee per closed account of $4.20 from each Fund. The
fees received and the services provided as transfer agent and dividend
disbursing agent are in addition to those received and provided by the Advisor
under the Advisory 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.
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<PAGE> 63
The following table sets forth certain information concerning amounts
paid by the Funds for transfer agency and dividend disbursing and printing and
mailing services:
Transfer Agency and Dividend Disbursement
Services Charges Incurred
-----------------------------------------------------
<TABLE>
<CAPTION>
Per Printing and Amounts Net Amount
Account Out-of-Pocket Mailing Waived By Paid By
Fund Charges Expenses Services Advisor Fund
-------- ------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Opportunity Fund
1992 $518,524 $108,267 $11,832 $ 0 $638,623
1993 818,157 177,231 20,947 0 1,016,335
1994 1,512,509 305,446 34,044 0 1,851,999
Growth Fund
1994 142,921 34,501 3,818 0 $181,240
Common Stock Fund
1992 $ 177,467 $ 45,831 $5,507 $0 $228,805
1993 1,304,233 392,470 43,107 0 1,739,810
1994 1,449,445 398,828 41,781 0 1,890,054
Discovery Fund
1992 $429,833 $101,455 $12,625 $0 $543,913
1993 591,796 139,185 16,937 0 747,918
1994 1,021,993 215,173 24,127 0 1,261,293
- ----------------------------------------------------------------------
</TABLE>
From time to time, the Funds, directly or indirectly through arrangements with
the Advisor, may pay amounts to third parties that provide transfer agent and
other administrative services relating to the Funds to persons who beneficially
own interests in the Funds, such as participants in 401(k) plans. These
services may include, among other things, sub-accounting services, answering
inquiries relating to the Funds, transmitting, on behalf of the Funds, proxy
statements, annual reports, updated Prospectuses, other communications
regarding the Funds, and related services as the Funds or beneficial owners may
reasonably request. In such cases, the Funds will not pay fees at a rate that
is greater than the rate the Funds are currently paying the Advisor for
providing these services to Fund shareholders.
TAXES
GENERAL
As indicated under "About the Funds - Distributions and Taxes" in the
Prospectus, each Fund intends to continue to qualify annually for treatment as
a regulated investment company ("RIC") under the Code. This qualification does
not involve government supervision of the Funds' management practices or
policies.
In order to qualify for treatment as a RIC under the Code, each Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. For each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities or foreign
currencies or other income (including gains from options, futures, or forward
contracts) derived with respect to its business of investing in securities of
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 were 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
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<PAGE> 64
with respect to securities) ("30% Limitation"); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs, and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
FOREIGN TRANSACTIONS
Dividends and interest 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. If more than 50% of the value of
a Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, it will be eligible to, and may, file an election with
the Internal Revenue Service that would enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions income taxes paid by it. Pursuant to the election, a Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by him, his proportionate share of those taxes, (2) treat his share of those
taxes and of any dividend paid by the Fund that represents income from foreign
or U.S. possessions sources as his own income from those sources, and (3)
either deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his federal income tax. Each Fund will report to its
shareholders shortly after each taxable year their respective shares of its
income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
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).
The Funds may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain on disposition of the stock (collectively,
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC
income will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If a Fund invests in a PFIC and elects to treat the PFIC
as a "qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) -- which probably would have to be distributed to its
shareholders to satisfy the Distribution Requirement and avoid imposition of
the 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.
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<PAGE> 65
The "Tax Simplification and Technical Corrections Bill of 1993,"
passed in May 1994 by the House of Representatives, would substantially modify
the taxation of U.S. shareholders of foreign corporations, including
eliminating the provisions described above dealing with PFICs and replacing
them (and other provisions) with a regulatory scheme involving entities called
"passive foreign corporations." Three similar bills were passed by Congress in
1991 and 1992 and were vetoed. It is unclear at this time whether, and in what
form, the proposed modifications may be enacted into law.
Pursuant to proposed regulations, open-end RICs such as the Funds
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Funds realize
in connection therewith. Gains from the disposition of foreign currencies
(except certain gains therefrom that may be 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, or forward currency contracts that are subject to section 1256 of the
Code ("Section 1256 Contracts") and are held by the Fund as of the end of the
year, as well as gains and losses on Section 1256 Contracts actually realized
during the year. Except for Section 1256 Contracts that are part of a "mixed
straddle" and with respect to which a Fund makes a certain election, any gain
or loss recognized with respect to Section 1256 Contracts is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Section 1256 Contract. Unrealized
gains on Section 1256 Contracts that have been held by a Fund for less than
three months as of the end of its taxable year, and that are recognized for
federal income tax purposes as described above, will not be considered gains on
investments held for less than three months for purposes of the 30% Limitation.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
Certain Funds may acquire zero-coupon, step-coupon, or other
securities issued with original issue discount. As a holder of those
securities, a Fund must include in its income the original issue discount that
accrues on the securities during the taxable year, even if the Fund receives no
corresponding payment on the securities during the year. Similarly, a Fund
must include in its income securities it receives as "interest" on pay-in-kind
securities. Because a Fund annually must distribute substantially all of its
investment company taxable income, including any original issue discount and
other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute 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
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<PAGE> 66
increase or decrease its investment company taxable income or net capital gain,
or both. In addition, any such gains may be realized on the disposition of
securities held for less than three months. Because of the 30% Limitation, any
such gains would reduce the Fund's ability to sell other securities, or
certain options, futures or forward 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, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the
NYSE will not be open for trading on the preceding Friday, and when any such
holiday falls on a Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or yearly accounting period.
Debt securities are valued by a pricing service that utilizes
electronic data processing techniques to determine values for normal
institutional-sized trading units of debt securities without regard to sale or
bid prices when such values are believed to more accurately reflect the fair
market value for such securities. Otherwise, sale or bid prices are used. Any
securities or other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board of
Directors of each Fund. Debt securities having remaining maturities of 60 days
or less when purchased are valued by the amortized cost method when the
respective Fund's Board of Directors determines that the fair value of such
securities is their amortized cost. Under this method of valuation, a security
is initially valued at its acquisition cost, and thereafter, amortization of
any discount or premium is assumed each day, regardless of the impact of the
fluctuating rates on the market value of the instrument.
ADDITIONAL SHAREHOLDER INFORMATION
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGES AND AUTOMATIC EXCHANGE PLAN
Shares of the Fund and any other funds sponsored by the Advisor may be
exchanged for each other at relative net asset values. Exchanges will be
effected by redemption of shares of the Fund held and purchase of shares of the
fund for which Fund shares are being exchanged (the "New Fund"). For federal
income tax purposes, any such exchange constitutes a sale upon which a capital
gain or loss will be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis. If
you are interested in exercising any of these exchange privileges, you should
obtain Prospectuses of other funds sponsored by the Advisor from the Advisor.
Upon a telephone exchange, the transfer agent establishes a new account in the
New Fund with the same registration and dividend and capital gains options as
the redeemed account, unless otherwise specified, and confirms the purchase to
you.
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.
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<PAGE> 67
The Telephone Exchange and Redemption Privileges and Automatic
Exchange Plan are available only in states where shares of the New Fund may be
sold, and may be modified or discontinued at any time. Additional information
regarding the Telephone Exchange and Redemption Privileges and Automatic
Exchange Plan is contained in the Funds' Prospectus.
RETIREMENT PLANS
Individual Retirement Account (IRA): Everyone under age 70 1/2 with earned
income may contribute to a tax-deferred IRA. The Strong Funds offer a prototype
plan for you to establish your own IRA. You are allowed to contribute up to the
lesser of $2,000 or 100% of your earned income each year to your IRA. Under
certain circumstances, your contribution will be deductible.
Direct Rollover IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or Code section
403(b) plan distribution directly into an IRA. This tax cannot be avoided if
you receive a distribution and then roll it over into an IRA. The amount of
your Direct Rollover IRA contribution will not be included in your taxable
income for the year.
Simplified Employee Pension Plan (SEP-IRA): A SEP-IRA allows an employer to
make deductible contributions to separate IRA accounts established for each
eligible employee.
Salary Reduction Simplified Employee Pension Plan (SAR SEP-IRA): A SAR SEP-IRA
is a type of SEP-IRA in which an employer may allow employees to defer part of
their salaries and contribute to an IRA account. These deferrals help lower the
employees' taxable income.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. There are three plan types: a profit-sharing
plan, a money purchase pension plan, and a paired plan (a combination of a
profit-sharing plan and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed to a retirement plan which
will earn tax-deferred income. A 401(k) plan is funded by employee
contributions, employer contributions, or a combination of both.
403(b)(7) Plan: A tax-sheltered custodial account designed to qualify under
section 403(b)(7) of the Code is available for use by employees of certain
educational, non-profit, hospital, and charitable organizations.
FUND ORGANIZATION
Each Fund is a Wisconsin corporation that is authorized to offer
separate series of shares representing interests in separate portfolios of
securities, each with differing investment objectives. The shares in any one
portfolio may, in turn, be offered in separate classes, each with differing
preferences, limitations or relative rights. However, the Articles of
Incorporation for each of the Funds provides that if additional classes of
shares are issued by a Fund, such new classes of shares may not affect the
preferences, limitations or relative rights of the Fund's outstanding shares.
In addition, the Board of Directors of each Fund is authorized to allocate
assets, liabilities, income and expenses to each series and class. Classes
within a series may have different expense arrangements than other classes of
the same series and, accordingly, the net asset value of shares within a series
may differ. Finally, all holders of shares of a Fund may vote on each matter
presented to shareholders for action except with respect to any matter which
affects only one or more series or class, in which case only the shares of the
affected series or class is entitled to vote. Fractional shares have the same
rights proportionately as do full shares. Shares of the Funds have no
preemptive, conversion, or subscription rights. Each Fund currently has only
one series of common stock outstanding. If a Fund issues additional series,
the assets belonging to each series of shares will be held separately by the
custodian, and in effect each series will be a separate fund.
- 31 -
<PAGE> 68
SHAREHOLDER MEETINGS
Each Fund is a Wisconsin corporation organized on the following dates
and currently has the following authorized shares of capital stock:
<TABLE>
<CAPTION>
Incorporation Authorized
Fund Date Shares Par Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Opportunity Fund 07/05/83 100,000,000 .01
Growth Fund 12/28/90 10,000,000,000 .00001
Common Stock Fund 11/11/88 300,000,000 .001
Discovery Fund 09/24/87 1,000,000,000 .001
</TABLE>
The Wisconsin Business Corporation Law permits registered investment
companies, such as the Funds, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the 1940 Act. Each Fund 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 Fund'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 Fund 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 Fund shall inform such shareholders of
the reasonable estimated costs of preparing and mailing the notice of the
meeting, and upon payment to the Fund of such costs, the Fund shall give not
less than ten nor more than sixty days notice of the special meeting.
PERFORMANCE INFORMATION
As described under "About the Funds - Performance Information" in the
Prospectus, each Fund's historical performance or return may be shown in the
form of "average annual total return," "total return," and "cumulative total
return." From time to time, the Advisor may voluntarily waive all or a portion
of its management fee and/or absorb certain expenses for each 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 a Fund.
AVERAGE ANNUAL TOTAL RETURN
The average annual total return of a Fund is computed by finding the
average annual compounded rates of return over these periods that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
n
P (1 + T) = ERV
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.
TOTAL RETURN
Calculation of a 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
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<PAGE> 69
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 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.
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.
Each of the 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. Each Fund's returns and net asset value will
fluctuate and shares are redeemable at the then current net asset value of the
Fund, which may be more or less than original cost. Factors affecting a Fund's
performance include general market conditions, operating expenses, and
investment management. Any additional fees charged by a dealer or other
financial services firm would reduce the returns described in this section.
The figures below show performance information for various periods
ended December 31, 1994. No adjustment has been made for taxes, if any,
payable on dividends. Securities prices fluctuated during these periods.
OPPORTUNITY FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $42,325 323.25% 17.39%
Five Years 10,000 17,140 71.40 11.38
One Year 10,000 10,318 3.18 3.18
</TABLE>
- -----------------------
(1) December 31, 1985
GROWTH FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $11,727 17.27% 17.27%
</TABLE>
- --------------------
(1) December 31, 1993
- 33 -
<PAGE> 70
COMMON STOCK FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $23,872 138.72% 19.01%
One Year 10,000 9,952 -0.49 -0.49
</TABLE>
- ------------------------
(1) December 29, 1989
DISCOVERY FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $29,557 195.57% 16.74%
Five Years 10,000 19,155 91.55 13.88
One Year 10,000 9,432 -5.68 -5.68
</TABLE>
- ------------------------
(1) December 31, 1987
The Opportunity, Growth, Common Stock, and Discovery Funds' total
returns for the three months ending March 31, 1995, were 5.69%, 7.06%, 7.10%,
and 4.53%, respectively.
COMPARISONS
(1) U.S. TREASURY BILLS, NOTES, OR BONDS
Investors may want to compare the performance of a Fund to that of
U.S. Treasury bills, notes or bonds, which are issued by the U.S. government.
Treasury obligations are issued in selected denominations. Rates of Treasury
obligations are fixed at the time of issuance and payment of principal and
interest is backed by the full faith and credit of the United States Treasury.
The market value of such instruments will generally fluctuate inversely with
interest rates prior to maturity and will equal par value at maturity.
Generally, the values of obligations with shorter maturities will fluctuate
less than those with longer maturities.
(2) CERTIFICATES OF DEPOSIT
Investors may want to compare a Fund's performance to that of
certificates of deposit offered by banks and other depositary institutions.
Certificates of deposit may offer fixed or variable interest rates and
principal is guaranteed and may be insured. Withdrawal of the deposits prior to
maturity normally will be subject to a penalty. Rates offered by banks and
other depositary institutions are subject to change at any time specified by
the issuing institution.
(3) MONEY MARKET FUNDS
Investors may also want to compare performance of a Fund to that of
money market funds. Money market fund yields will fluctuate and shares are not
insured, but share values usually remain stable.
(4) LIPPER ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT
RANKING ORGANIZATIONS From time to time, in marketing and other fund
literature, a Fund's performance may be compared to the performance of
other mutual funds in general or to the performance of particular types of
mutual funds, with similar investment goals, as
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<PAGE> 71
tracked by independent organizations. Among these organizations, Lipper, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, may be cited. Lipper
performance figures are based on changes in net asset value, with all income
and capital gain dividends reinvested. Such calculations do not include the
effect of any sales charges imposed by other funds. A Fund will be compared to
Lipper's appropriate fund category, that is, by fund objective and portfolio
holdings. A Fund's performance may also be compared to the average performance
of its Lipper category.
(5) MORNINGSTAR, INC.
A Fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc. which rates funds on the basis of historical
risk and total return. Morningstar's ratings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for 3, 5, and 10
year periods. Ratings are not absolute and do not represent future results.
(6) INDEPENDENT SOURCES
Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning a Fund, including reprints of, or
selections from, editorials or articles about a Fund, especially those with
similar objectives. Sources for Fund performance information and articles
about a Fund may include publications such as Money, Forbes, Kiplinger's, Smart
Money, Morningstar, Inc., Financial World, Business Week, U.S. News and World
Report, The Wall Street Journal, Barron's, and a variety of investment
newsletters.
(7) INDICES
A Fund may compare its performance to a wide variety of indices
including the following:
(a) Consumer Price Index
(b) Dow Jones Average of 30 Industrials
(c) NASDAQ Over-the-Counter Composite Index
(d) Standard & Poor's 500 Stock Index
(e) Standard & Poor's 400 Mid-Cap Stock Index
(f) Standard & Poor's 600 Small-Cap Index
(g) Wilshire 4500 Index
(h) Wilshire 5000 Index
(i) Wilshire Small Cap Index
(j) Wilshire Small Cap Growth Index
(k) Wilshire Small Cap Value Index
(l) Wilshire Midcap 750 Index
(m) Wilshire Midcap Growth Index
(n) Wilshire Midcap Value Index
(o) Wilshire Large Cap Growth Index
(p) Russell 1000 Index
(q) Russell 1000 Growth Index
(r) Russell 2000 Index
(s) Russell 2000 Small Stock Index
(t) Russell 2000 Growth Index
(u) Russell 2000 Value Index
(v) Russell 2500 Index
(w) Russell 3000 Stock Index
(x) Russell MidCap Index
(y) Russell MidCap Growth Index
(z) Russell MidCap Value Index
(aa) Value Line Index
(bb) Morgan Stanley Capital International EAFE(R) Index (Net
Dividend, Gross Dividend, and Price-Only). In addition, a Fund
may compare its performance to certain other indices that
measure stock market performance in geographic areas in which
the Fund may invest. The market prices and yields of the
stocks in these indexes will fluctuate. A Fund may also
compare its portfolio weighting to the EAFE Index weighting,
which represents the relative capitalization of the major
overseas markets on a dollar-adjusted basis
- 35 -
<PAGE> 72
(cc) Morgan Stanley Capital International World Index
There are differences and similarities between the investments that a
Fund may purchase for its portfolio and the investments measured by these
indices.
(8) HISTORICAL ASSET CLASS RETURNS
From time to time, marketing materials may portray the historical
returns of various asset classes. Such presentations will typically compare
the average annual rates of return of inflation, U.S. Treasury bills, bonds,
common stocks, and small stocks. There are important differences between each
of these investments that should be considered in viewing any such comparison.
The market value of stocks will fluctuate with market conditions, and
small-stock prices generally will fluctuate more than large-stock prices.
Stocks are generally more volatile than bonds. In return for this volatility,
stocks have generally performed better than bonds or cash over time. Bond
prices generally will fluctuate inversely with interest rates and other market
conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and payment of principal and interest may
be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
- 36 -
<PAGE> 73
(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 U.S. Treasury Money Fund Current income, a stable share price, and daily liquidity.
Strong Money Market Fund Current income, a stable share price, and daily liquidity.
Strong Heritage Money Fund Current income, a stable share price, and daily liquidity.
Strong Municipal Money Market Federally tax-exempt current income, a stable share-price, and daily
Fund liquidity.
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low
degree of share-price fluctuation.
Strong Short-Term Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a low degree of share-price fluctuation.
Strong Short-Term Global Bond Total return by investing for a high level of income with a low degree
Fund of share-price fluctuation.
Strong Government Securities Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
Strong Insured Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a moderate degree of share-price fluctuation.
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
Strong Corporate Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
Strong International Bond Fund High total return by investing for both income and capital
appreciation.
Strong High-Yield Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income.
Strong Asset Allocation Fund High total return consistent with reasonable risk over the long term.
Strong 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 Opportunity Fund Capital growth.
Strong Growth Fund Capital growth.
Strong Common Stock Fund* Capital growth.
Strong Discovery Fund Capital growth.
Strong International Stock Fund Capital growth.
Strong Asia Pacific Fund Capital growth.
</TABLE>
* The Strong Common Stock Fund is currently closed to new investors.
The Advisor also serves as Advisor or Subadvisor to several management
investment companies, some of which fund variable annuity separate accounts of
certain insurance companies.
- 37 -
<PAGE> 74
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 Growth Funds and determine which Fund or
combination of Funds best meets your personal investment objectives, they are
described in the same Prospectus. Though they appear in the same Prospectus,
each of the Growth Funds is a separately incorporated investment company.
Because the Funds share a Prospectus, there may be the possibility of cross
liability between the Funds.
ADDITIONAL FUND INFORMATION
(1) PORTFOLIO CHARACTERISTICS
In order to present a more complete picture of a Fund's portfolio,
marketing materials may include various actual or estimated portfolio
characteristics, including but not limited to median market capitalizations,
earnings per share, alphas, betas, price/earnings ratios, returns on equity,
dividend yields, capitalization ranges, growth rates, price/book ratios, top
holdings, sector breakdowns, asset allocations, quality breakdowns, and
breakdowns by geographic region.
(2) MEASURES OF VOLATILITY AND RELATIVE PERFORMANCE
Occasionally statistics may be used to specify Fund volatility or
risk. The general premise is that greater volatility connotes greater risk
undertaken in achieving performance. Measures of volatility or risk are
generally used to compare the Fund's net asset value or performance relative to
a market index. One measure of volatility is beta. Beta is the volatility of
a fund relative to the total market as represented by the Standard & Poor's 500
Stock Index. A beta of more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates volatility less than the market.
Another measure of volatility or risk is standard deviation. Standard deviation
is a statistical tool that measures the degree to which a fund's performance
has varied from its average performance during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of a(x - x )2
i m
------------
n-1
where a = "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.
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<PAGE> 75
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor,
owned by professionals active in its management. Recognizing that investors are
the focus of its business, the Advisor strives for excellence both in
investment management and in the service provided to investors. This commitment
affects many aspects of the business, including professional staffing, product
development, investment management, and service delivery. Through its
commitment to excellence, the Advisor intends to benefit investors and to
encourage them to think of Strong Funds as their mutual fund family.
The increasing complexity of the capital markets requires specialized
skills and processes for each asset class and style. Therefore, the Advisor
believes that active management should produce greater returns than a passively
managed index. The Advisor has brought together a group of top-flight
investment professionals with diverse product expertise, and each concentrates
on their investment specialty. The Advisor believes that people are the firm's
most important asset. For this reason, continuity of professionals is critical
to the firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their
impact on the Funds may be used in advertisements and sales materials. Such
factors that may impact the Funds include, but are not limited to, changes in
interest rates, political developments, the competitive environment, consumer
behavior, industry trends, technological advances, macroeconomic trends, and
the supply and demand of various financial instruments. In addition, marketing
materials may cite the portfolio management's views or interpretations of such
factors.
EIGHT BASIC PRINCIPLES FOR SUCCESSFUL MUTUAL FUND INVESTING
These common sense rules are followed by many successful investors.
They make sense for beginners, too. If you have a question on these principles,
or would like to discuss them with us, please contact us at 1-800-368-3863.
1. Have a plan - even a simple plan can help you take control of your
financial future. Review your plan once a year, or if your circumstances
change.
2. Start investing as soon as possible. Make time a valuable ally. Let it put
the power of compounding to work for you, while helping to reduce your
potential investment risk.
3. Diversify your portfolio. By investing in different asset classes - stocks,
bonds, and cash - you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.
4. Invest regularly. Investing is a process, not a one-time event. By
investing regularly over the long term, you reduce the impact of short-
term market gyrations, and you attend to your long-term plan before you're
tempted to spend those assets on short-term needs.
5. Maintain a long-term perspective. For most individuals, the best discipline
is staying invested as market conditions change. Reactive, emotional
investment decisions are all too often a source of regret - and principal
loss.
6. Consider stocks to help achieve major long-term goals. Over time, stocks
have provided the more powerful returns needed to help the value of your
investments stay well ahead of inflation.
7. Keep a comfortable amount of cash in your portfolio. To meet current needs,
including emergencies, use a money market fund or a bank account - not your
long-term investment assets.
8. Know what you're buying. Make sure you understand the potential risks and
rewards associated with each of your investments. Ask questions... request
information...make up your own mind. And choose a fund company that helps
you make informed investment decisions.
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<PAGE> 76
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.
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.
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<PAGE> 77
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.
OPPORTUNITY AND COMMON STOCK FUNDS
The Advisor uses a research-intensive, "bottom up" securities
selection discipline to identify well-run, profitable companies whose prospects
for growth and other financial characteristics, when compared to the price of
their securities, indicate fundamental value and the potential for significant
capital appreciation. The Advisor's goal is to find well-managed companies
that have sustainable growth prospects but that are selling at prices below
their private market values. While not limited to smaller-capitalization
stocks, this investment approach often leads to smaller, newer companies that
have not yet captured the attention of investment professionals.
It should be noted, however, that investments in securities of under
researched companies with smaller market capitalizations, while generally
offering a greater opportunity for appreciation, also involve a greater risk of
depreciation than securities of companies with larger market capitalization.
In addition, since companies with smaller market capitalizations are not as
broadly traded as those of companies with larger market capitalizations. these
securities are often subject to wider and more abrupt fluctuations in market
price.
The Advisor's investment philosophy is that (i) underfollowed stocks
with low institutional ownership and low analyst coverage tend to be
undervalued; (ii) unpopular or "quiet" sectors of the market tend to be
undervalued; (iii) stock prices are more volatile than underlying intrinsic
business values; and (iv) smaller capitalization stocks historically have had
higher growth rates and have outperformed larger cap stocks, but may also
entail significantly greater price variability than those of larger companies.
The Advisor's investment process includes (i) independent, fundamental
analysis; (ii) screening for stocks covered by fewer than 10 analysts; (iii)
identifying unpopular or "quiet" sectors of the market; (iv) identifying
companies with consistent earnings per share growth greater than 10% and
price/earnings ratios below the S&P 500; (v) visiting companies and meeting
management; (vi) establishing intrinsic business value and buy/sell targets,
and (vii) diversifying the portfolio.
The Advisor considers selling a stock when it reaches 80 to 100% of
private market value, it becomes widely followed, or there is a change in
company fundamentals.
- 41 -
<PAGE> 78
GROWTH 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 manager for the Fund, Mr. Ronald C. Ognar,
leans more toward growth, although he keeps an eye on valuations. The Fund's
core investments tend to be growth stocks at reasonable prices. These core
holdings are supplemented by stocks that have strong growth prospects. 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. Other characteristics that the Advisor looks for in companies
include low cost production, innovative products, and strong fundamentals
versus an index. In short, they offer some unique, sustainable competitive
advantage. These advantages can be found in companies of all market
capitalizations. However, the Advisor believes that the key is the management.
Mr. Ognar meets face-to-face with the management of many companies, which
helps him get to know and trust a company and the people in charge of it.
Currently, the Advisor is focusing on some companies that are
undergoing positive change. Oftentimes, a new product, a new technology, or a
change in management can positively affect a company's earnings growth
prospects. Themes also play a part in the investment strategy. Some examples
would be the aging population, telecommunications, and the rapid development of
foreign economies where U.S. companies have strong revenue growth.
The Advisor believes that, in the '90s, growth investors need to have
both large and small companies because core holdings with growing dividends are
usually found in larger companies, but faster growth should continue in medium
and small companies. Therefore, the Advisor utilizes a broad range of equity
market capitalizations.
The Advisor seeks to manage risk by adhering to price disciplines,
diversifying holdings across sectors, and, when appropriate, building cash
reserves.
DISCOVERY FUND
While the Fund has the ability to take advantage of favorable trends
in stock prices, it also retains the flexibility to invest up to 100% of its
assets in conservative, short-term, money market securities. The need for this
flexibility is based on a fundamental belief by the Advisor 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. The Fund is managed to capitalize on
change, which can include technological, regulatory, political, social,
economic, market, management and demographic change.
The Advisor's investment philosophy is that (i) maximum capital growth
should be aggressively pursued in a favorable market environment; (ii) capital
preservation is critical under unfavorable market conditions; and (iii) broad
use of asset classes and investment vehicles provides flexibility in achieving
capital growth and risk control. The Advisor also believes that (i) the
purpose of investment capital is to finance corporate growth, (ii) companies
that are growing rapidly often provide excellent opportunities for capital
appreciation, (iii) assessing the management behind a company is as important
as "crunching the numbers", and (iv) American and foreign economies are
increasingly intertwined, creating growth opportunities for both American and
foreign companies.
The Advisor's investment process includes (i) independent, fundamental
analysis; (ii) top-down economic and secular research to determine the current
position of the economic cycle, identify unique secular trends and themes, and
allocate asset classes; (iii) bottom-up security analysis and selection process
with particular emphasis on the following: free cash flow, revenue and earnings
growth, balance sheet strength, share repurchase programs, competitive
position, discounted cash flow value, private market value, relative price
earnings ratio, and assessment of management, including on-site visits; (iv)
reducing equity exposure in bear markets; and (v) aggressively pursuing unique
investment opportunities.
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<PAGE> 79
The Advisor considers selling a stock when there is a change in market
conditions, a change in company fundamentals, or when the stock is excessively
overvalued. The Advisor attempts to reduce risk by diversifying broadly across
industries and by generally limiting position sizes to 5% or less.
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 that is attached hereto contains the following
financial information for each Fund:
(a) Schedule of Investments in Securities.
(b) Statement of Operations.
(c) Statement of Assets and Liabilities.
(d) Statement of Changes in Net Assets.
(e) Notes to Financial Statements.
(f) Financial Highlights.
(g) Report of Independent Accountants.
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<PAGE> 80
APPENDIX
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the
obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The 'BB' rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied 'BBB-' rating.
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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-' debt rating. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest
is being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grade period. The 'D' rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such Bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes Bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
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Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of the
issuers is generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.
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<PAGE> 83
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the risk
factor varies from industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor
in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD
and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. 'DDD' represents the highest
potential for recovery of these bonds, and 'D' represents the
lowest potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture
restrictions is important to the analysis of a company's operating and
financial constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
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<PAGE> 84
RATING SCALE DEFINITION
- --------------------------------------------------------------------------------
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.
AA Risk is modest, but may vary slightly from time to
AA- time because of economic conditions.
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic stress.
- --------------------------------------------------------------------------------
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this
category.
- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
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.
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DD Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- --------------------------------------------------------------------------------
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.
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<PAGE> 85
Ratings graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
STANDARD & POOR'S NOTE RATINGS
A S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating.
The following criteria will be used in making the assessment:
Amortization schedule - the larger the final maturity relative
to other maturities, the more likely the issue is to be
treated as a note.
Source of payment - the more the issue depends on the market
for its refinancing, the more likely it is to be considered a
note.
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay interest and principal, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's makes no representation that such
obligations are exempt from
A-6
<PAGE> 86
registration under the Securities Act of 1933, nor does it represent that any
specific note is a valid obligation of a rated issuer or issued in conformity
with any applicable law. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
(i) leading market positions in well established industries, (ii) high rates of
return on funds employed, (iii) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (iv) broad margins in
earnings coverage of fixed financial charges and high internal cash generation,
and (v) well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All
security elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ (Exceptionally Strong Credit Quality) Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
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<PAGE> 87
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 utilized by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which as defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
Rating Scale: Definition
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors
and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing
requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
Duff 3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
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<PAGE> 88
Non-investment Grade
Duff 4 Speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt
service. Operating factors and market access may be
subject to a high degree of variation.
Default
Duff 5 Issuer failed to meet scheduled principal and/or
interest payments.
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
The TBW Short-Term Ratings apply, unless otherwise noted, to
unsubordinated instruments of the rated entities with a maturity of one year or
less, including deposits, bank notes, bankers' acceptances, federal funds,
letters of credit, commercial paper and other obligations comparable in
priority and security to those specifically listed herein. These ratings do
not consider any collateral or security as the basis for the rating, although
some of the securities may in fact have collateral. Further, these ratings do
not incorporate consideration of the possible sovereign risk associated with a
foreign deposit (defined as a deposit taken in a branch outside the country in
which the rated entity is headquartered) of the rated entity. TBW Short-Term
Ratings are intended to assess the likelihood of an untimely or incomplete
payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3 The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA SHORT-TERM RATINGS
IBCA Short-Term Ratings assess the borrowing characteristics of banks
and corporations, and the capacity for timely repayment of debt obligations.
The Short-Term Ratings relate to debt which has a maturity of less than one
year.
A1+ Obligations supported by the highest capacity for timely
repayment and possess a particularly strong credit feature.
A1 Obligations supported by the highest capacity for timely
repayment.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or which
are currently in default.
D Obligations which are currently in default.
A-9
