As filed with the Securities and Exchange Commission on or about June 26, 1998
Securities Act Registration No. 2-99439
Investment Company Act Registration No. 811-4374
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 17 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 18 [X]
(Check appropriate box or boxes)
STRONG MONEY MARKET FUND, INC.
(Exact Name of Registrant as Specified in Charter)
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Address of Principal Executive Offices) (Zip
Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
Thomas P. Lemke
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule
485
[X] on July 1, 1998 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule
485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule
485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
1
<PAGE>
STRONG MONEY MARKET FUND, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
<TABLE>
<CAPTION>
<S> <C>
Caption or Subheading in Prospectus or
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------------------------------
PART A - Information Required in Prospectus
1. Cover Page Cover Page
2. Synopsis Expenses; Highlights
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objective and Policies; Implementation of
Policies and Risks; About the Funds - Organization
5. Management of the Fund About the Funds - Management
5A. Management's Discussion of Fund Performance *
6. Capital Stock and Other Securities About the Funds - Organization, - Distributions and
Taxes; Shareholders Manual - Shareholder Services
7. Purchase of Securities Being Offered Shareholder Manual - How to Buy Shares, -
Determining Your Share Price, - Shareholder Services
8. Redemption or Repurchase Shareholder Manual - How to Sell Shares, -
Determining Your Share Price, - Shareholder Services
9. Pending Legal Proceedings Inapplicable
PART B - Information Required in Statement of Additional
Information
10. Cover Page Cover page
11. Table of Contents Table of Contents
12. General Information and History **
13. Investment Objectives and Policies Investment Restrictions; Investment Policies and
Techniques
14. Management of the Fund Directors and Officers
15. Control Persons and Principal Holders of Securities Principal Shareholders; Directors and Officers;
Investment Advisor; Distributor
16. Investment Advisory and Other Services Investment Advisor; Distributor; About the Funds -
Management (in Prospectus); Custodian; Transfer
Agent and Dividend Disbursing Agent; Independent
Accountants; Legal Counsel
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Caption or Subheading in Prospectus or
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
- ------------------------------------------------------------
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Included in Prospectus under the heading About the
Funds - Organization and in the Statement of
Additional Information under the heading Shareholder
Meetings
19. Purchase, Redemption and Pricing of Securities Being Included in Prospectus under the headings:
Offered Shareholder Manual - How to Buy Shares, -
Determining Your Share Price, - How to Sell Shares, -
Shareholder Services; and in the Statement of
Additional Information under the headings:
Additional Shareholder Information; and
Determination of Net Asset Value
20. Tax Status Included in Prospectus under the heading About the
Funds - Distributions and Taxes; and in the Statement
of Additional Information under the heading Taxes
21. Underwriters Investment Advisor; Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
* Complete answer to Item is contained in the Registrant's Annual Report.
** Complete answer to Item is contained in the Registrant's Prospectus.
STRONG CASH MANAGEMENT FUNDS
STRONG HERITAGE MONEY FUND STRONG FUNDS
STRONG MONEY MARKET FUND P.O. Box 2936
STRONG MUNICIPAL MONEY MARKET FUND Milwaukee, Wisconsin 53201
STRONG STEP 1 MONEY FUND TELEPHONE: (414) 359-1400
TOLL-FREE: (800) 368-3863
STRONG ADVANTAGE FUND DEVICE FOR THE HEARING-IMPAIRED:
STRONG MUNICIPAL ADVANTAGE FUND (800) 999-2780
www.strong-funds.com
The Strong Family of Funds ("Strong Funds") is a family of more than forty
diversified and non-diversified mutual funds. All of the Strong Funds are
no-load funds. There are no sales charges or 12b-1 fees. Strong Funds include
growth funds, conservative equity funds, income funds, municipal income funds,
international funds, and cash management funds. The Strong Cash Management
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 Strong Cash Management Funds, dated July 1, 1998
("SAI"), which contains further information, is incorporated by reference into
this Prospectus, and has been filed with the Securities and Exchange Commission
("SEC"). The SAI, which may be revised from time to time, is available without
charge upon request to the above-noted address or telephone number. If you
would like to electronically access additional information about the Funds
after reading this prospectus, you may do so by accessing the SEC's World Wide
Web site (http://www.sec.gov) that contains the SAI regarding the Funds and
other related materials.
AN INVESTMENT IN THE STRONG HERITAGE MONEY FUND, STRONG MONEY MARKET FUND,
STRONG MUNICIPAL MONEY MARKET FUND, OR STRONG STEP 1 MONEY FUND IS NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THESE FUNDS
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. THE
STRONG MUNICIPAL ADVANTAGE FUND AND THE STRONG ADVANTAGE FUND ARE NOT MONEY
MARKET FUNDS AND THEIR NET ASSET VALUES WILL FLUCTUATE.
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.
July 1, 1998
1
<PAGE>
STRONG CASH MANAGEMENT FUNDS
The Strong Heritage Money Fund and Strong Step 1 Money Fund, both of which are
series of Strong Heritage Reserve Series, Inc., Strong Municipal Money Market
Fund and Strong Municipal Advantage Fund, both of which are series of Strong
Municipal Funds, Inc., Strong Advantage Fund, Inc., and Strong Money Market
Fund, Inc. are each separately incorporated, diversified, open-end management
investment companies, or diversified series thereof.
STRONG MONEY FUNDS
STRONG HERITAGE MONEY, STRONG MONEY MARKET, AND STRONG STEP 1 MONEY FUNDS
("Heritage Money Fund," "Money Market Fund," and "Step 1 Money Fund") seek
current income, a stable share price, and daily liquidity. The Funds invest in
corporate, bank, and government instruments that present minimal credit risk.
STRONG MUNICIPAL MONEY MARKET FUND ("Municipal Money Fund") seeks federally
tax-exempt current income, a stable share price, and daily liquidity. The Fund
invests in high-quality, short-term municipal obligations that present minimal
credit risk.
STRONG ULTRA-SHORT BOND FUNDS*
STRONG MUNICIPAL ADVANTAGE FUND ("Municipal Advantage Fund") seeks federally
tax-exempt current income with a very low degree of share-price fluctuation.
The Fund invests primarily in ultra short-term, investment-grade municipal
obligations, and its average effective portfolio maturity will normally be one
year or less. THE MUNICIPAL ADVANTAGE FUND IS NOT A MONEY MARKET FUND.
STRONG ADVANTAGE FUND ("Advantage Fund") seeks current income with a very low
degree of share-price fluctuation. The Fund invests primarily in ultra
short-term, investment-grade debt obligations, and its average effective
portfolio maturity will normally be one year or less. THE ADVANTAGE FUND IS NOT
A MONEY MARKET FUND.
* BECAUSE THE MUNICIPAL ADVANTAGE AND ADVANTAGE FUNDS' SHARE PRICES WILL VARY,
THE FUNDS ARE NOT APPROPRIATE INVESTMENTS FOR THOSE WHOSE PRIMARY OBJECTIVE IS
ABSOLUTE PRINCIPAL STABILITY.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
EXPENSES I-4
FINANCIAL HIGHLIGHTS I-6
HIGHLIGHTS I-13
INVESTMENT OBJECTIVES AND POLICIES I-14
Comparing the Funds I-15
Strong Heritage Money Fund I-15
Strong Money Market Fund I-16
Strong Municipal Money Market Fund I-17
Strong Step 1 Money Fund I-18
Strong Advantage Fund I-19
Strong Municipal Advantage Fund I-19
FUNDAMENTALS OF FIXED INCOME INVESTING I-20
IMPLEMENTATION OF POLICIES AND RISKS I-23
ABOUT THE FUNDS I-34
SHAREHOLDER MANUAL II-1
APPENDIX A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the SAI, and
if given or made, such information or representations may not be relied upon as
having been authorized by the Funds. This Prospectus does not constitute an
offer to sell securities in any state or jurisdiction in which such offering
may not lawfully be made.
3
<PAGE>
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>
<CAPTION>
<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*
Check-Writing Fees NONE*
</TABLE>
* The Heritage Money Fund charges a fee of $3.00 for each redemption,
exchange, and check written against your account. However, these transaction
fees are waived if your total assets in Strong Funds is $100,000 or more.
There are certain charges associated with retirement accounts (such as a $10
charge for closing an IRA account) and with certain special shareholder
services offered by the Funds. Additionally, purchases and redemptions may also
be made through broker-dealers or other financial intermediaries who may charge
fees for their services. (See "Shareholder Manual - How to Buy Shares" and "-
How to Sell Shares.")
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
MANAGEMENT OTHER 12B-1 TOTAL OPERATING
FUND FEES EXPENSES FEES EXPENSES
- ---------------------- ---------- -------- ----- ---------------
Heritage Money 0.50% 0.07% NONE 0.45%*
- ---------------------- ---------- -------- ----- ---------------
Money Market 0.50 0.37 NONE 0.87
- ---------------------- ---------- -------- ----- ---------------
Municipal Money Market 0.50 0.10 NONE 0.60
- ---------------------- ---------- -------- ----- ---------------
Step 1 Money 0.50 1.50 NONE 0.00*
- ---------------------- ---------- -------- ----- ---------------
Advantage 0.60 0.17 NONE 0.77
- ---------------------- ---------- -------- ----- ---------------
Municipal Advantage 0.60 0.07 NONE 0.67
- ---------------------- ---------- -------- ----- ---------------
</TABLE>
* Total Operating Expenses reflect the Advisor's waiver of management fees
and absorptions as described below. Without such waivers and absorptions, the
total operating expenses of the Heritage Money and Step 1 Money Funds would
have been 0.57% and 2.00%, respectively.
From time to time, the Funds' investment advisor, Strong Capital Management,
Inc. (the "Advisor"), may voluntarily waive its management fee and/or absorb
certain expenses for a Fund. The expenses specified in the table above for the
Municipal Money and Advantage Funds are based on actual expenses incurred
during the year ended February 28, 1998. The Advisor waived a portion of its
management fee and absorbed certain expenses for the Heritage Money, Municipal
Advantage, and Step 1 Money Funds during the fiscal period ended February 28,
1998. Therefore, the Other Expenses for the Heritage Money, Municipal
Advantage, and Step 1 Money Funds have been restated for the fiscal year ended
February 28, 1998 to include such management fees and/or expenses. The Advisor
waived a portion of its management fee and absorbed certain expenses for the
Money Market Fund during the fiscal period ended October 31, 1997. Therefore,
the other expenses for the Money Market Fund have been restated for the fiscal
year ended October 31, 1997 to include such management fees and/or expenses.
The actual Total Operating Expenses incurred for the above stated periods for
the Heritage Money, Money Market, Municipal Advantage, and Step 1 Money Funds
after waivers and absorptions were 0.25%, 0.48%, 0.45%, and 0.00%, respectively.
4
<PAGE>
THE ADVISOR HAS AGREED TO VOLUNTARILY WAIVE THE ADVISOR'S MANAGEMENT FEE AND
ABSORB OPERATING EXPENSES TO THE EXTENT NECESSARY TO MAINTAIN THE HERITAGE
MONEY FUND'S TOTAL OPERATING EXPENSES AT NO MORE THAN 0.45% UNTIL JANUARY 1,
1999. THE ADVISOR HAS ALSO AGREED TO VOLUNTARILY WAIVE ALL THE ADVISOR'S
MANAGEMENT FEES AND ABSORB OPERATING EXPENSES OF THE STEP 1 MONEY FUND UNTIL
AUGUST 1, 1998.
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:
PERIOD (IN YEARS)
FUND 1 3 5 10
Heritage Money $6 $18 $32 $71
Money Market 9 28 48 107
Municipal Money Market 6 19 33 75
Step 1 Money 21 65 111 239
Advantage 8 25 43 95
Municipal Advantage 7 21 37 83
The Example is based on each Fund's "Total Operating Expenses" before any
waivers and absorptions, as described above. PLEASE REMEMBER THAT THE EXAMPLE
SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE EXPENSES AND THAT
ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. The assumption in the
Example of a 5% annual return is required by regulations of the SEC applicable
to all mutual funds. The assumed 5% annual return is not a prediction of, and
does not represent, the projected or actual performance of a Fund's shares.
FINANCIAL HIGHLIGHTS
The following annual Financial Highlights for each of the Funds has been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
Their reports for the Funds for the fiscal years ended October 31, 1997 (Money
Market Fund) and February 28, 1998 (Advantage, Heritage Money, Municipal
Advantage, Municipal Money, and Step 1 Money Funds), are included in each
Fund's Annual Reports that are contained in the Funds' SAI. The Financial
Highlights for the Funds should be read in conjunction with the Financial
Statements and related notes included in each Fund's Annual Report which may be
obtained without charge by calling or writing Strong Funds. The following
presents information relating to a share of common stock of each of the Funds,
outstanding for the entire period ended as indicated.
5
<PAGE>
STRONG ADVANTAGE FUND
<TABLE>
<CAPTION>
<S> <C>
SELECTED PER-SHARE DATA (a)
---------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income From Investment Operations Less Distributions Ratios and Supplemental Data
--------------------------------- ------------------ --------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Net Realized In Excess
Value, Net and Unrealized Total from From Net of Net Net Asset
Beginning Investment Gains (Losses) Investment Investment Realized Total Value, End
Year Ended of Period Income on Investments Operations Income Gains Distributions of Period
Feb. 28, 1998 $10.09 $0.62 ($0.01) $0.61 ($0.62) __ ($0.62) $10.08
Feb. 28, 1997 10.03 0.62 0.06 0.68 (0.62) __ (0.62) 10.09
Feb. 29, 1996 (b) 10.04 0.10 (0.01) 0.09 (0.10) __ (0.10) 10.03
Dec. 31, 1995 9.98 0.67 0.06 0.73 (0.67) __ (0.67) 10.04
Dec. 31, 1994 10.19 0.55 (0.19) 0.36 (0.55) ($0.02) (0.57) 9.98
Dec. 31, 1993 10.01 0.59 0.18 0.77 (0.59) __ (0.59) 10.19
Dec. 31, 1992 9.90 0.70 0.11 0.81 (0.70) __ (0.70) 10.01
Dec. 31, 1991 9.67 0.76 0.23 0.99 (0.76) __ (0.76) 9.90
Dec. 31, 1990 9.87 0.83 (0.20) 0.63 (0.83) __ (0.83) 9.67
Dec. 31, 1989 10.00 1.03 (0.13) 0.90 (1.03) __ (1.03) 9.87
Dec. 31, 1988(c) 9.99 0.09 0.01 0.10 (0.09) __ (0.09) 10.00
<S> <C> <C> <C> <C> <C> <C>
Ratio of Net
Net Assets, Ratio of Ratio Expenses Investment
End of Expenses to to Average Net Income to Portfolio
Total Period (In Average Net Assets Without Average Net Turnover
Year Ended Return Millions) Assets Waivers Assets Rate
Feb. 28, 1998 +6.3% $2,164 0.8% 0.8% 6.2% 109.6%
Feb. 28, 1997 +7.0% 1,520 0.8% 0.8% 6.2% 154.9%
Feb. 29, 1996 (b) +0.9% 1,000 0.8%* 0.8%* 6.3%* 17.2%
Dec. 31, 1995 +7.5% 990 0.8% 0.8% 6.6% 183.7%
Dec. 31, 1994 +3.6% 911 0.8% 0.8% 5.6% 221.0%
Dec. 31, 1993 +7.9% 415 0.9% 0.9% 5.8% 304.8%
Dec. 31, 1992 +8.4% 272 1.0% 1.0% 7.0% 316.1%
Dec. 31, 1991 +10.6% 143 1.2% 1.2% 7.8% 503.0%
Dec. 31, 1990 +6.6% 119 1.2% 1.2% 8.5% 274.1%
Dec. 31, 1989 +9.4% 143 1.1% 1.2% 10.0% 211.3%
Dec. 31, 1988(c) +1.0% 8 1.1%* 1.7%* 11.1%* 22.9%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
Fund outstanding for the entire period.
(b) For the two month period ended February 29, 1996. Total return
and portfolio turnover rate are not annualized.
(c) Inception date is November 25, 1988. Total return and portfolio
turnover rate are not annualized.
1
<PAGE>
STRONG HERITAGE MONEY FUND
<TABLE>
<CAPTION>
<S> <C>
SELECTED PER-SHARE DATA (a)
---------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income From Investment Operations Less Distributions Ratios and Supplemental Data
--------------------------------- ------------------ ------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Total Net Asset
Value Net Net Realized from From Net Capital Value,
Beginning Investment Losses on Investment Investment Total Contribution End of
Year Ended of Period Income Investments Operations Income Distributions (Note 4) Period
Feb. 28, 1998 $1.00 $0.05 -- $0.05 ($0.05) ($0.05) ___ $1.00
Feb. 28, 1997 1.00 0.06 ($0.01) 0.05 (0.06) (0.06) $0.01 1.00
Feb. 28, 1996(b) 1.00 0.04 -- 0.04 (0.04) (0.04) ___ 1.00
<S> <C> <C> <C> <C> <C>
Ratio of
Expenses to Ratio of Net
Ratio of Average Net Investment
Net Assets, Expenses to Assets Without Income to
Total Return End of Period Average Net Waivers and Average Net
Year Ended (In Millions) Assets Absorptions Assets
Feb. 28, 1998 +5.6% $1,484 0.2% 0.6% 5.4%
Feb. 28, 1997 +5.7%(c) 2,000 0.1% 0.6% 5.6%
Feb. 28, 1996(b) +4.1% 942 0.0%*(d) 0.6%* 5.9%*
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
Fund outstanding for the entire period.
(b) For the period from June 29, 1995 (inception) to February 29,
1996. Total return is not annualized.
(c) Had the Advisor not made the capital contribution as described in
the notes to the financial statements, the adjusted total return would have
been 5.0% for the fiscal year ended February 28, 1997.
(d) Amount calculated is less than $0.01 or 0.1%.
2
<PAGE>
STRONG MONEY MARKET FUND
<TABLE>
<CAPTION>
<S> <C>
SELECTED PER-SHARE DATA (a)
---------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income From Investment Operations Less Distributions Ratios and Supplemental Data
--------------------------------- ------------------ ------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value, Net Net Realized Total from From Net Capital Net Asset
Beginning Investment Losses on Investment Investment Total Contribution Value, End of
Year Ended of Period Income Investments Operations Income Distributions (Note 4) Period
Oct. 31, 1997 $1.00 $0.05 ($0.01) $0.04 ($0.05) ($0.05) $0.01 $1.00
Oct. 31, 1996 1.00 0.05 ___ 0.05 (0.05) (0.05) ___ 1.00
Oct. 31, 1995(b) 1.00 0.05 ___ 0.05 (0.05) (0.05) ___ 1.00
Dec. 31, 1994 1.00 0.04 ___ 0.04 (0.04) (0.04) ___ 1.00
Dec. 31, 1993 1.00 0.03 ___ 0.03 (0.03) (0.03) ___ 1.00
Dec. 31, 1992 1.00 0.04 ___ 0.04 (0.04) (0.04) ___ 1.00
Dec. 31, 1991 1.00 0.06 ___ 0.06 (0.06) (0.06) ___ 1.00
Dec. 31, 1990 1.00 0.08 ___ 0.08 (0.08) (0.08) ___ 1.00
Dec. 31, 1989 1.00 0.09 ___ 0.09 (0.09) (0.09) ___ 1.00
Dec. 31, 1988 1.00 0.07 ___ 0.07 (0.07) (0.07) ___ 1.00
Dec. 31, 1987 1.00 0.06 ___ 0.06 (0.06) (0.06) ___ 1.00
<S> <C> <C> <C> <C> <C>
Ratio of
Expenses to Ratio of Net
Ratio of Average Net Investment
Net Assets, Expenses to Assets Without Income to
Total Return End of Period Average Net Waivers and Average Net
Year Ended (In Millions) Assets Absorptions Assets
Oct. 31, 1997 +5.3%(c) $1,838 0.5% 0.9% 5.2%
Oct. 31, 1996 +5.4% 1,949 0.4% 0.8% 5.3%
Oct. 31, 1995(b) +5.2% 1,934 0.0%* 0.7%* 6.1%*
Dec. 31, 1994 +4.0% 541 0.6% 0.9% 4.0%
Dec. 31, 1993 +2.9% 330 0.7% 1.0% 2.9%
Dec. 31, 1992 +3.7% 390 0.8% 1.1% 3.7%
Dec. 31, 1991 +6.1% 534 0.7% 1.0% 6.0%
Dec. 31, 1990 +8.1% 769 0.7% 0.9% 7.8%
Dec. 31, 1989 +9.2% 829 0.7% 1.0% 8.8%
Dec. 31, 1988 +7.5% 464 1.1% 1.1% 7.4%
Dec. 31, 1987 +6.4% 195 0.8% 1.1% 6.6%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
Fund outstanding for the entire period.
(b) Total return is not annualized. In 1995, the Fund changed its
fiscal year end from December to October.
(c) Had the Advisor not made the capital contribution as described in
Note 4, the adjusted total return would have been 4.5% for the year ended
October 31, 1997.
3
<PAGE>
STRONG MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
<S> <C>
SELECTED PER-SHARE DATA (a)
---------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income From Investment Ratios and Supplemental Data
Operations Less Distributions (b)
---------------------- ---------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset,
Value, Net Total from From Net Net Asset
Beginning Investment Investment Investment Total Value, End Total
Year Ended of Period Income Operations Income Distributions of Period Return
Feb. 28, 1998 $1.00 $0.04 $0.04 ($0.04) ($0.04) $1.00 +3.6%
Feb. 28, 1997 1.00 0.03 0.03 (0.03) (0.03) 1.00 +3.5%
Feb. 28, 1996(c) 1.00 0.01 0.01 (0.01) (0.01) 1.00 +0.6%
Dec. 31, 1995 1.00 0.04 0.04 (0.04) (0.04) 1.00 +4.1%
Dec. 31, 1994 1.00 0.03 0.03 (0.03) (0.03) 1.00 +2.9%
Dec. 31, 1993 1.00 0.02 0.02 (0.02) (0.02) 1.00 +2.5%
Dec. 31, 1992 1.00 0.03 0.03 (0.03) (0.03) 1.00 +3.4%
Dec. 31, 1991 1.00 0.05 0.05 (0.05) (0.05) 1.00 +5.2%
Dec. 31, 1990 1.00 0.06 0.06 (0.06) (0.06) 1.00 +6.1%
Dec. 31, 1989 1.00 0.06 0.06 (0.06) (0.06) 1.00 +6.1%
Dec. 31, 1988 1.00 0.05 0.05 (0.05) (0.05) 1.00 +5.2%
<S> <C> <C> <C>
Ratio of Net
Investment
Ratio of Expenses Income to Average
Net Assets, End of to Average Net Net Assets
Year Ended Period (In Millions) Assets
Feb. 28, 1998 $1,871 0.6% 3.5%
Feb. 28, 1997 1,895 0.6% 3.5%
Feb. 28, 1996(c) 1,609 0.6%* 3.6%*
Dec. 31, 1995 1,416 0.6% 4.0%
Dec. 31, 1994 1,261 0.6% 2.9%
Dec. 31, 1993 1,173 0.7% 2.5%
Dec. 31, 1992 1,105 0.7% 3.3%
Dec. 31, 1991 782 0.7% 5.0%
Dec. 31, 1990 218 0.8% 6.0%
Dec. 31, 1989 74 0.9% 5.9%
Dec. 31, 1988 77 0.8% 5.0%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
Fund outstanding for the entire period.
(b) Tax-exempt for regular federal income tax purposes.
(c) For the two month period ended February 29, 1996. Total return is
not annualized.
4
<PAGE>
STRONG MUNICIPAL ADVANTAGE FUND
<TABLE>
<CAPTION>
<S><C>
SELECTED PER-SHARE DATA (a)
---------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income From Investment Operations Less Distributions Ratios and Supplemental Data
--------------------------------- ------------------ ----------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Net Total Net
Asset Net Realized from From From Net Assets
Value, Invest- and Un- Invest- Net Net Total Asset End of
Begin- ment realized ment Invest- Real- Dis- Value, Period
ning of In- Gains on Opera- ment ized trib- End of Total (In Mil-
Period come Investments tions Income Gains utions Period Return lions)
Feb. 28, 1998 $5.01 $0.22 $0.02 $0.24 ($0.22) __ $0.22) $5.03 +5.0% $1,012
Feb. 28, 1997 5.01 0.25 0.00(c) 0.25 (0.25) $0.00(c) (0.25) 5.01 +5.1% 644
Feb. 29, 1996(b) 5.00 0.06 0.01 0.07 (0.06) __ (0.06) 5.01 +1.4% 132
<S> <C> <C> <C> <C>
Ratio of
Expenses to Ratio of Net
Ratio of Average Net Investment
Expenses to Assets Without Income to Portfolio
Average Net Waivers and Average Net Turnover
Year Ended Assets Absorptions Assets Rate
Feb. 28, 1998 0.4% 0.7% 4.5% 49.6%
Feb. 28, 1997 0.0%(c) 0.7% 5.0% 40.8%
Feb. 29, 1996(b) 0.0%* 0.7%* 4.9%* 17.1%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
Fund outstanding for the entire period.
(b) For the period from November 30, 1995 (inception) to February 29,
1996. Total return and portfolio turnover rate are not annualized.
(c) Amount calculated is less than $0.01 or 0.1%.
5
<PAGE>
STRONG STEP 1 MONEY FUND
<TABLE>
<CAPTION>
<S><C>
SELECTED PER-SHARE DATA (a)
---------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income From Investment Less Distributions Ratios and Supplemental Data
Operations
---------------------- ------------------ ---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Net Assets,
Value, Net Total from From Net Net Asset End of
Beginning Investment Investment Investment Total Value, End Total Period (In
Year Ended of Period Income Operations Income Distributions of Period Return Millions)
Feb. 28, 1998(b) $1.00 $0.00(c) $0.00(c) -- -- $1.00 +0.5% $7
<S> <C> <C> <C>
Ratio of Expenses Ratio of Net
to Average Net Investment
Ratio of Expenses Assets Without Income to Average
to Average Net Waivers and Net Assets
Year Ended Assets Absorptions
Feb. 28, 1998(b) 0.0%* 2.0%* 6.1%*
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
Fund outstanding for the entire period.
(b) For the period from January 31, 1998 (inception) to February 28,
1998. Total return is not annualized.
(c) Amount calculated is less than $0.01 or 0.1%.
6
<PAGE>
9
<PAGE>
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has distinct investment objectives and policies. Each Fund seeks to
provide income consistent with its maturity, quality, and other standards as
set forth under "Investment Objectives and Policies."
IMPLEMENTATION OF POLICIES AND RISKS
While the Heritage Money, Money Market, Municipal Money, and Step 1 Money Funds
may not engage in derivative transactions, the Municipal Advantage and
Advantage Funds may engage in such transactions, including options, futures,
and options on futures transactions within specified limits. Each Fund may
invest in when-issued securities, illiquid securities, and repurchase
agreements. In addition, the Heritage Money, Money Market, Step 1 Money, and
Advantage Funds may also invest in foreign securities. Each Fund may engage in
reverse repurchase agreements and mortgage dollar roll transactions. The
Municipal Advantage and Advantage Funds may invest a portion of their assets in
junk bonds. (See "Implementation of Policies and Risks" and "Fundamentals of
Fixed Income Investing - Credit Quality.")
MANAGEMENT
The Advisor, Strong Capital Management, Inc., serves as investment advisor to
the Funds. The Advisor provides investment management services for mutual funds
and other investment portfolios representing assets of over $30 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
12b-1 charges and, with the exception of the Heritage Money Fund, no redemption
fees. The Heritage Money, Money Market, Municipal Money, and Step 1 Money Funds
seek to maintain stable net asset values of $1.00 per share. The net asset
values of the Municipal Advantage and Advantage Funds change daily with the
value of each Fund's portfolio. You can locate the net asset value for a Fund
in newspaper listings of mutual fund prices under the "Strong Funds" heading or
at our site on the World Wide Web at http://www.strong-funds.com. (See
"Shareholder Manual - How to Buy Shares" and "- How to Sell Shares.")
SHAREHOLDER SERVICES
Shareholder benefits provided by each Fund 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, with
the exception of the Heritage Money Fund, free check writing and a no-minimum
investment program. (See "Shareholder Manual - Shareholder Services.")
DIVIDENDS AND OTHER DISTRIBUTIONS
The policy of each Fund is to pay dividends from net investment income monthly
and to distribute substantially all net realized capital gains, if any,
annually. (See "About the Funds - Distributions and Taxes.")
INVESTMENT OBJECTIVES AND POLICIES
The descriptions that follow are designed to help you choose the Fund that best
fits your investment objective. You may want to pursue more than one objective
by investing in more than one of the Funds or by investing in one of the other
Strong Funds, which are described in separate prospectuses. Each Cash
Management Fund's investment objective is discussed below in connection with
the Fund's investment policies. Because of the risks inherent in all
investments, there can be no assurance that the Funds will meet their
objectives.
Each Fund's return and risk potential depends in part on the maturity and
credit-quality characteristics of the underlying investments in its portfolio.
In general, longer-maturity fixed-income securities carry higher yields and
greater price volatility than shorter-term fixed-income securities.
10
<PAGE>
Similarly, fixed-income securities issued by less-creditworthy entities tend to
carry higher yields than those with higher credit ratings. (See "Fundamentals
of Fixed Income Investing" for a more detailed discussion of the principles and
risks associated with fixed-income securities.)
COMPARING THE FUNDS
The following summary is intended to help distinguish the Funds and help you
determine their suitability for your investments.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AVERAGE CREDIT INCOME DEGREE OF
FUND MATURITY QUALITY POTENTIAL SHARE-PRICE
FLUCTUATION
- ---------------------- --------------- ------------- --------- ---------------
Heritage Money 90 days or less Two highest Low Stable, but not
Money Market guaranteed
Municipal Money Market
Step 1 Money
- ---------------------- --------------- --------- ---------------
Municipal Advantage 1 year or less At least 90% Low to Very low
investment Moderate
grade*
- ---------------------- --------------- ------------- ---------
Advantage 1 year or less At least 75% Low to Very low
investment Moderate
grade*
- ---------------------- --------------- ------------- ---------
</TABLE>
* The Advantage Fund and the Municipal Advantage Fund may invest up to 25%
and 10%, respectively, of their assets in junk bonds rated BB by S&P or another
nationally recognized statistical rating organization or "NRSRO."
The Municipal Money and Municipal Advantage Funds are designed for investors
whose income tax levels enable them to benefit from tax-exempt income. In
general, neither of these Funds is an appropriate investment for tax-deferred
retirement plans, such as Individual Retirement Accounts.
Each Fund has adopted certain fundamental investment restrictions that are set
forth in the Funds' 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 in 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.
STRONG HERITAGE MONEY FUND
The Heritage Money Fund seeks current income, a stable share price, and daily
liquidity. The Fund invests in corporate, bank, and government instruments that
present minimal credit risk.
The Fund is designed for investors who are willing to maintain a balance of at
least $25,000 in order to pursue higher yields from lower expenses and to gain
greater control over their transaction costs. Because the Fund seeks to
maintain a constant net asset value of $1.00 per share, capital appreciation is
not expected to play a role in the Fund's returns, and dividend income alone
will provide its entire investment return. All money market instruments can
change in value when interest rates or an issuer's creditworthiness change
dramatically. THE FUND CANNOT GUARANTEE THAT IT WILL ALWAYS BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE. An investment in the Fund is
neither insured nor guaranteed by the U.S. government.
The Fund invests in a combination of bank, corporate, and government
obligations that present minimal credit risks. The Fund restricts its
investments to instruments that meet the maturity and quality
11
<PAGE>
standards required or permitted by Rule 2a-7 under the Investment Company Act
of 1940 ("1940 Act") for money market funds. Accordingly, the Fund:
(i) limits its average portfolio maturity to ninety days or less;
(ii) buys only securities with remaining maturities of 397 days or less;
and
(iii) buys only U.S. dollar-denominated securities that present minimal
credit risk and are "high quality," as described below.
The Fund invests only in high-quality securities. Accordingly, the Fund will
invest at least 95% of its total assets in "first-tier" securities, generally
defined as those securities that, at the time of acquisition, are rated in the
highest rating category by at least two nationally recognized statistical
rating organizations ("NRSROs") or, if unrated, are determined by the Advisor
to be of comparable quality. The balance of the Fund, up to 5% of its total
assets, may be invested in securities that are considered "second-tier"
securities, generally defined as those securities that, at the time of
acquisition, are rated in the second-highest rating category or are determined
by the Advisor to be of comparable quality. (See "Fundamentals of Fixed Income
Investing - Credit Quality.")
STRONG MONEY MARKET FUND
The Money Market Fund seeks current income, a stable share price, and daily
liquidity. The Fund's investments include corporate, bank, and government
instruments that present minimal credit risk.
The Fund is designed for investors who seek money-market yields with no
anticipated fluctuations in principal. Because the Fund seeks to maintain a
constant net asset value of $1.00 per share, capital appreciation is not
expected to play a role in the Fund's returns, and dividend income alone will
provide its entire investment return. All money market instruments can change
in value when interest rates or an issuer's creditworthiness changes
dramatically. Although the Fund's share price has remained constant in the
past, THE FUND CANNOT GUARANTEE THAT IT WILL ALWAYS BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. An investment in the Fund is neither
insured nor guaranteed by the U.S. government.
The Fund invests in a combination of bank, corporate, and government
obligations that present minimal credit risk. The Fund may also participate in
pooled transactions involving these types of securities with other Strong
Funds. The Fund restricts its investments to instruments that meet certain
maturity and quality standards required or permitted by Rule 2a-7 under the
1940 Act for money market funds. Accordingly, the Fund:
(i) limits its average portfolio maturity to ninety days or less;
(ii) buys only securities with remaining maturities of 397 days or less;
and
(iii) buys only U.S. dollar-denominated securities that present minimal
credit risk and are "high quality," as described below.
The Fund invests only in high-quality securities. Accordingly, the Fund will
invest at least 95% of its total assets in "first-tier" securities, generally
defined as those securities that, at the time of acquisition, are rated in the
highest rating category by at least two NRSROs or, if unrated, are determined
by the Advisor to be of comparable quality. The balance of the Fund, up to 5%
of its total assets, may be invested in securities that are considered
"second-tier" securities, generally defined as those securities that, at the
time of acquisition, are rated in the second-highest rating category or are
determined by the Advisor to be of comparable quality.
STRONG MUNICIPAL MONEY MARKET FUND
The Municipal Money Market Fund seeks federally tax-exempt current income, a
stable share price, and daily liquidity.
The Fund is designed for investors who seek income exempt from federal income
taxes with no anticipated fluctuations in principal. Because the Fund seeks to
maintain a constant net asset value of $1.00 per share, capital appreciation is
not expected to play a role in the Fund's returns, and dividend
12
<PAGE>
income alone will provide its entire investment return. All money market
instruments, including high-quality municipal obligations, can change in value
when interest rates or an issuer's creditworthiness changes significantly. THE
FUND CANNOT GUARANTEE THAT IT WILL ALWAYS BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE. An investment in the Fund is neither insured
nor guaranteed by the U.S. government.
The Fund invests in a diversified portfolio of high-quality, short-term
municipal obligations. (See "Implementation of Policies and Risks - Municipal
Obligations.") The Fund restricts its investments to instruments that meet
certain maturity and quality standards required or permitted by Rule 2a-7 under
the 1940 Act for tax-exempt money market funds. Accordingly, the Fund:
(i) limits its average portfolio maturity to ninety days or less;
(ii)buys only obligations with remaining maturities of 397 days or less;
and
(iii) buys only U.S. dollar-denominated obligations that present minimal
credit risk and are "high quality," meaning they are rated in one of the top
two rating categories by at least one NRSRO or are unrated and determined by
the Advisor to be of comparable quality. (See "Fundamentals of Fixed Income
Investing - Credit Quality.")
As a fundamental policy at least 80% of the Fund's net assets will be invested
in municipal securities under normal market conditions. (See "Implementation of
Policies and Risks - Debt Obligations - Municipal Obligations.") Generally,
municipal obligations are those whose interest is exempt from federal income
tax. The Fund may invest, without limitation, in municipal obligations whose
interest is a tax-preference item for purposes of the federal alternative
minimum tax ("AMT"). For taxpayers who are subject to the AMT, a substantial
portion of the Fund's distributions may not be exempt from federal income tax.
Accordingly, the Fund's net return may be lower for those taxpayers. (Consult
with your tax adviser to determine whether you are subject to the AMT, and see
"About the Funds - Distributions and Taxes" for more information.) The Fund may
also invest up to 20% of its net assets in taxable securities of comparable
quality to its investments in municipal securities, including U.S. government
securities, bank and corporate obligations, and short-term fixed-income
securities.
STRONG STEP 1 MONEY FUND
The Step 1 Money Fund seeks current income, a stable share price, and daily
liquidity. The Fund's investments include corporate, bank, and government
instruments that present minimal credit risk. Only individuals may become
shareholders of the Step 1 Money Fund.
Recognizing that cash and liquidity are important parts of any investor's
portfolio, the Step 1 Money Fund has been designed to help individual investors
take a first step toward building a diversified investment portfolio. Because
the Fund seeks to maintain a constant net asset value of $1.00 per share,
capital appreciation is not expected to play a role in the Fund's returns, and
dividend income alone will provide its entire investment return. All money
market instruments can change in value when interest rates or an issuer's
creditworthiness changes dramatically. THE FUND CANNOT GUARANTEE THAT IT WILL
ALWAYS BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. An
investment in the Fund is neither insured nor guaranteed by the U.S.
government.
The Fund invests in a combination of bank, corporate, and government
obligations that present minimal credit risk. The Fund restricts its
investments to instruments that meet certain maturity and quality standards
required or permitted by Rule 2a-7 under the 1940 Act for money market funds.
Accordingly, the Fund:
(i) limits its average portfolio maturity to ninety days or less;
(ii) buys only securities with remaining maturities of 397 days or less;
and
(iii)buys only U.S. dollar-denominated securities that present minimal
credit risk and are "high quality," as described below.
13
<PAGE>
The Fund invests only in high-quality securities. Accordingly, the Fund will
invest at least 95% of its total assets in "first-tier" securities, generally
defined as those securities that, at the time of acquisition, are rated in the
highest rating category by at least two NRSROs or, if unrated, are determined
by the Advisor to be of comparable quality. The balance of the Fund, up to 5%
of its total assets, may be invested in securities that are considered
"second-tier" securities, generally defined as those securities that, at the
time of acquisition, are rated in the second-highest rating category or are
determined by the Advisor to be of comparable quality.
STRONG ADVANTAGE FUND
The Advantage Fund seeks current income with a very low degree of share-price
fluctuation. The Fund invests primarily in ultra short-term investment-grade
debt obligations. The Fund is designed for investors who seek higher yields
than money market funds generally offer and who are willing to accept some
modest principal fluctuation in order to achieve that objective. BECAUSE ITS
SHARE PRICE WILL VARY, THE FUND IS NOT AN APPROPRIATE INVESTMENT FOR THOSE
WHOSE PRIMARY OBJECTIVE IS ABSOLUTE PRINCIPAL STABILITY. The Fund's investments
include a combination of high-quality money market instruments, as well as
securities with longer maturities and debt obligations of lower quality. Under
normal market conditions, it is anticipated that the Fund will maintain an
average effective portfolio maturity of one year or less. There is no maturity
limit on any individual bond in the Fund's portfolio. 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.
Under normal market conditions, at least 75% of the Fund's net assets will be
invested in investment-grade debt obligations, which generally include a range
of obligations from those in the highest rating category to those rated in the
fourth-highest rating category (E.G., BBB or higher by S&P). The Fund may also
invest up to 25% of its net assets in non-investment-grade debt obligations
that are rated in the fifth-highest rating category (E.G., BB by S&P) or
unrated securities of comparable quality. In general, non-investment-grade
securities are regarded as predominantly speculative with respect to the
capacity of the issuer to pay interest and repay principal. However, because
these securities compose the tier immediately below investment grade, they are
considered the least speculative non-investment-grade securities. (See
"Fundamentals of Fixed Income Investing - Credit Quality.")
STRONG MUNICIPAL ADVANTAGE FUND
The Municipal Advantage Fund seeks federally tax-exempt current income with a
very low degree of share-price fluctuation. The Fund invests primarily in ultra
short-term, investment-grade municipal obligations.
The Fund is designed for investors who seek higher tax-exempt yields than
municipal money market funds generally offer and who are willing to accept some
modest principal fluctuation in order to achieve that objective. BECAUSE ITS
SHARE PRICE WILL VARY, THE FUND IS NOT AN APPROPRIATE INVESTMENT FOR THOSE
WHOSE PRIMARY OBJECTIVE IS ABSOLUTE PRINCIPAL STABILITY. The Fund's investments
include a combination of high-quality money market instruments, as well as
securities with longer maturities and debt obligations of lower quality. Under
normal market conditions, it is anticipated that the Fund will maintain an
average effective portfolio maturity of one year or less. There is no maturity
limit on any individual bond in the Fund's portfolio. 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.
Under normal market conditions, the Fund will invest at least 90%, which
generally include a range of obligations from those in the highest rating
category to those in the fourth-highest rating category (E.G., BBB or higher by
Standard & Poor's Ratings Group or "S&P"). However, the Fund may invest up to
10% of its net assets in non-investment-grade debt obligations that are rated
in the fifth-highest rating category (E.G., BB by S&P) or unrated securities of
comparable quality. BB securities compose the tier immediately below investment
grade and are considered the least speculative non-investment-grade security.
(See "Fundamentals of Fixed Income Investing - Credit Quality.")
14
<PAGE>
As a fundamental policy at least 80% of the Fund's net assets will be invested
in municipal securities under normal market conditions. (See "Implementation of
Policies and Risks - Debt Obligations - Municipal Obligations.") Generally,
municipal obligations are those whose interest is exempt from federal income
tax. The Fund may invest, without limitation, in municipal obligations whose
interest is a tax-preference item for purposes of the AMT. For taxpayers who
are subject to the AMT, a substantial portion of the Fund's distributions may
not be exempt from federal income tax. Accordingly, the Fund's net return may
be lower for those taxpayers. (Consult with your tax adviser to determine
whether you are subject to the AMT, and see "About the Fund - Distributions and
Taxes" for more information.) The Fund may also invest up to 20% of its net
assets in taxable securities of comparable quality to its investments in
municipal securities, including U.S. government securities, bank and corporate
obligations, and short-term fixed-income securities. The Fund may invest in
taxable bonds to take advantage of capital gain opportunities.
FUNDAMENTALS OF
FIXED INCOME INVESTING
The Funds may invest in a wide variety of debt obligations and other
securities. (See "Implementation of Policies and Risks - Debt Obligations.")
Issuers of debt obligations have a contractual obligation to pay interest at a
specified rate ("coupon rate") on specified dates and to repay principal ("face
value" or "par value") on a specified maturity date. Certain debt obligations,
including municipal obligations, (usually intermediate- and long-term
obligations) have provisions that allow the issuer to redeem or "call" the
obligation before its maturity. Issuers are most likely to call such
obligations during periods of falling interest rates. As a result, a Fund may
be required to invest the unanticipated proceeds of the called obligations at
lower interest rates, which may cause the Fund's income to decline.
Although the net asset values of the Municipal Advantage and Advantage Funds
are expected to fluctuate, the Advisor actively manages each Fund's portfolio
and adjusts its average effective portfolio maturity according to the Advisor's
interest rate outlook while seeking to avoid or reduce, to the extent possible,
any negative changes in net asset value. The Heritage Money, Money Market,
Municipal Money, and Step 1 Money Funds each seek to maintain a stable net
asset value of $1.00 per share.
PRICE VOLATILITY
The market value of debt obligations, including municipal obligations, is
affected by changes in prevailing interest rates. The market value of a debt
obligation generally reacts inversely to interest rate changes, meaning, when
prevailing interest rates decline, an obligation's price usually rises, and
when prevailing interest rates rise, an obligation's price usually declines. A
fund portfolio consisting primarily of debt obligations will react similarly to
changes in interest rates.
MATURITY
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater its sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
A Fund's portfolio maturity represents an average based on the actual stated
maturity dates of the debt securities in the Fund's portfolio, except that (i)
variable-rate securities are deemed to mature at the next interest rate
adjustment date, (ii) debt securities with put features are deemed to mature at
the next put-exercise date, (iii) the maturity of mortgage-backed securities is
determined on an "expected life" basis, as determined by the Advisor, and (iv)
securities being hedged with futures contracts may be deemed to have a longer
maturity, in the case of purchases of futures contracts, and a shorter
maturity, in the case of sales of futures contracts, than they would otherwise
be deemed to have. In addition, a security that is subject to redemption at the
option of the issuer on a particular date ("call date"), which is prior to the
security's stated maturity, may be deemed to mature on the call date rather
than on its stated maturity date. The call date of a security will be used to
calculate portfolio maturity when the Advisor reasonably anticipates, based
upon information available to it, that the issuer will exercise its right to
redeem the
15
<PAGE>
security. The Heritage Money, Money Market, Municipal Money, and Step 1 Money
Funds will calculate portfolio maturity in accordance with Rule 2a-7 under the
1940 Act.
16
<PAGE>
CREDIT QUALITY
The values of debt obligations may also be affected by changes in the credit
rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment
of interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less-creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings.
In conducting its credit research and analysis, the Advisor considers both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings
compiled by a number of NRSROs, which include Standard & Poor's Ratings Group
("S&P"), Moody's Investor Services, Duff & Phelps Rating Co., Thomson
BankWatch, Inc., and Fitch IBCA, Inc. Please refer to the Appendix in the
Funds' SAI for a more detailed description of the ratings of the NRSROs.
INVESTMENT-GRADE DEBT OBLIGATIONS. Debt obligations rated in the
highest-through the medium-quality categories are commonly referred to as
"investment-grade" debt obligations and include the following:
- - U.S. government securities;
- - bonds or bank obligations rated in one of the four highest rating categories
(e.g., BBB or higher by S&P);
- - short-term notes rated in one of the two highest rating categories (E.G.,
SP-2 or higher by S&P);
- - short-term bank obligations rated in one of the three highest rating
categories (E.G., A-3 or higher by S&P), with respect to obligations maturing
in one year or less;
- - commercial paper rated in one of the three highest rating categories (E.G.,
A- 3 or higher by S&P);
- - unrated debt obligations determined by the Advisor to be of comparable
quality; and
- - repurchase agreements involving investment-grade debt obligations.
Investment-grade debt obligations are generally believed to have relatively low
degrees of credit risk. All ratings are determined at the time of investment.
Any subsequent rating downgrade of a debt obligation will be monitored by the
Advisor to consider what action, if any, a Fund should take consistent with its
investment objective, and with respect to the Heritage Money, Money Market,
Municipal Money, and Step 1 Money Funds, Rule 2a-7 under the 1940 Act. For
purposes of determining whether a security is investment grade, the Advisor may
use the highest rating assigned to that security by any NRSRO.
HIGH-YIELD (HIGH-RISK) SECURITIES. High-yield (high-risk) securities, also
referred to as "junk bonds," are those securities that are rated lower than
investment grade and unrated securities of comparable quality. Although these
securities generally offer higher yields than investment-grade securities with
similar maturities, lower-quality securities involve greater risks, including
the possibility of default or bankruptcy. In general, they are regarded to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Other potential risks associated with investing in
high-yield securities include:
- - substantial market-price volatility resulting from changes in interest rates,
changes in or uncertainty about economic conditions, and changes in the actual
or perceived ability of the issuer to meet its obligations;
- - greater sensitivity of highly leveraged issuers to adverse economic changes
and individual-issuer developments;
- - subordination to the prior claims of other creditors;
- - additional Congressional attempts to restrict the use or limit the tax and
other advantages of these securities; and
- - adverse publicity and changing investor perceptions about these securities.
As with any other asset in a Fund's portfolio, any reduction in the value of
such securities as a result of the factors listed above would be reflected in
the net asset value of the Fund. In addition, a Fund that invests in
lower-quality securities may incur additional expenses to the extent it is
required to seek
17
<PAGE>
recovery upon a default in the payment of principal and/or interest on its
holdings. As a result of the associated risks, successful investments in
high-yield, high-risk securities will be more dependent on the Advisor's credit
analysis than generally would be the case with investments in investment-grade
securities.
It is uncertain how the high-yield market will perform during a prolonged
period of rising interest rates. A prolonged economic downturn or a prolonged
period of rising interest rates could adversely affect the market for these
securities, increase their volatility, and reduce their value and liquidity. In
addition, lower-quality securities tend to be less liquid than higher-quality
debt securities because the market for them is not as broad or active. If
market quotations are not available, these securities will be valued in
accordance with procedures established by a Fund's Board of Directors. Judgment
may, therefore, play a greater role in valuing these securities. The lack of a
liquid secondary market may have an adverse effect on market price and a Fund's
ability to sell particular securities.
See the Appendix for information concerning the credit quality of the Municipal
Advantage and Advantage Funds' investments throughout the fiscal periods ended
February 28, 1998.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to certain
restrictions described below), the Funds may invest in some or all of the
following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of certain of these securities and investment techniques
and the associated risks is contained in the SAI.
DEBT OBLIGATIONS
The Heritage Money, Money Market, and Step 1 Money Funds limit their
investments to corporate, bank, and government debt obligations that meet the
requirements of Rule 2a-7 under the 1940 Act. The Municipal Money Fund
generally limits its investments to municipal obligations that meet the
requirements of Rule 2a-7 under the 1940 Act. The Municipal Advantage and the
Advantage Funds generally invest in any type of debt obligation consistent with
the Funds' investment objectives and policies. For additional information, see
"Investment Objectives and Policies."
TYPES OF OBLIGATIONS. Debt obligations include (i) corporate debt securities,
including bonds, debentures, and notes; (ii) bank obligations, such as
certificates of deposit, banker's acceptances, and time deposits of domestic
and foreign banks and their subsidiaries and branches, and domestic savings and
loan associations; (iii) commercial paper (including variable-amount master
demand notes); (iv) repurchase agreements; (v) loan interests; (vi) foreign
debt obligations issued by foreign issuers traded either in foreign markets or
in domestic markets through depositary receipts; (vii) convertible securities -
debt obligations of corporations convertible into or exchangeable for equity
securities or debt obligations that carry with them the right to acquire equity
securities, as evidenced by warrants attached to such securities, or acquired
as part of units of the securities; (viii) preferred stocks - securities that
represent an ownership interest in a corporation and that give the owner a
prior claim over common stock on the company's earnings or assets; (ix) trust
preferred securities - certain obligations which have characteristics of both
debt and preferred stock; (x) U.S. government securities; (xi) mortgage-backed
securities, collateralized mortgage obligations, and similar securities; and
(xii) municipal obligations.
U.S. GOVERNMENT SECURITIES
U.S. government securities are issued or guaranteed by the U.S. government or
its agencies or instrumentalities. Securities issued by the government include
U.S. Treasury obligations, such as Treasury bills, notes, and bonds. Securities
issued or guaranteed by government agencies or instrumentalities include
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
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("GNMA"), including GNMA pass-through certificates, whose securities are
supported by the full faith and credit of the United States;
- - the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association, the Interamerican Development Bank,
and International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators in mortgage loans, including savings associations, mortgage
bankers, commercial banks, investment bankers, and special purpose entities
(collectively, "private lenders"). Mortgage-backed securities issued by private
lenders may be supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by the U.S. government
or one of its agencies or instrumentalities, or they may be issued without any
governmental guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement, such as letters of credit, reserve funds,
overcollateralization, and guarantees by third parties.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first-lien
mortgage loans or interests therein; rather they include assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property and receivables from credit
card or other revolving credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may be supported by
non-governmental credit enhancements similar to those utilized in connection
with mortgage-backed securities.
The yield characteristics of mortgage- and asset-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if a Fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is
slower than expected will reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government sponsored mortgage-backed securities.
Stripped mortgage- or asset-backed securities receive differing proportions of
the interest and principal payments from the underlying assets. The market
value of such securities generally is more sensitive to changes in prepayment
and interest rates than is the case with traditional mortgage- and asset-backed
securities, and in some cases the market value may be extremely volatile. With
respect to certain stripped securities, such as interest-only ("IO") and
principal-only ("PO") classes, a rate of prepayment
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that is faster or slower than anticipated may result in the Fund failing to
recover all or a portion of its investment, even though the securities are
rated investment grade.
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LOAN INTERESTS
Loan interests are interests in amounts owed by a corporate, governmental or
other borrower to lenders or lending syndicates. Loan interests purchased by a
Fund may have a maturity of any number of days or years, and may be secured or
unsecured. Loan interests, which may take the form of participation interests
in, assignments of, or notations of a loan, may be acquired from U.S. and
foreign banks, insurance companies, finance companies or other financial
institutions that have made loans or are members of a lending syndicate or from
the holders of loan interests. Loan interests involve the risk of loss in case
of default or bankruptcy of the borrower and, in the case of participation
interests, involve a risk of insolvency of the agent lending bank or other
financial intermediary. Loan interests are not rated by any NRSROs and are, at
present, not readily marketable and may be subject to contractual restrictions
on resale.
MUNICIPAL OBLIGATIONS
IN GENERAL. Municipal obligations are debt obligations issued by or on behalf
of states, territories, and possessions of the United States and the District
of Columbia and their political subdivisions, agencies, and instrumentalities.
Municipal obligations generally include debt obligations issued to obtain funds
for various public purposes. Certain types of municipal obligations are issued
in whole or in part to obtain funding for privately operated facilities or
projects. Municipal obligations include general obligation bonds, revenue
bonds, industrial development bonds, notes, municipal lease obligations, and
mortgage-backed bonds.
BONDS AND NOTES. General obligation bonds are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of interest and
principal. Revenue bonds are payable only from the revenues derived from a
project or facility or from the proceeds of a specified revenue source.
Industrial development bonds are generally revenue bonds secured by payments
from and the credit of private users. Municipal notes are issued to meet the
short-term funding requirements of state, regional, and local governments.
Municipal notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax and revenue anticipation notes, construction
loan notes, short-term discount notes, tax-exempt commercial paper, demand
notes, and similar instruments. Municipal obligations include obligations, the
interest on which is exempt from federal income tax, that may become available
in the future as long as the Board of Directors of a Fund determines that an
investment in any such type of obligation is consistent with that Fund's
investment objective.
LEASE OBLIGATIONS. Municipal lease obligations may take the form of a lease, an
installment purchase, or a conditional sales contract. They are issued by state
and local governments and authorities to acquire land, equipment, and
facilities, such as state and municipal vehicles, telecommunications and
computer equipment, and other capital assets. A Fund may purchase these
obligations directly, or it may purchase participation interests in such
obligations. (See "Participation Interests" below.) Municipal leases are
generally subject to greater risks than general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet in order to issue municipal obligations. Municipal
leases may contain a covenant by the state or municipality to budget for,
appropriate, and make payments due under the obligation. Certain municipal
leases may, however, contain "non-appropriation" clauses which provide that the
issuer is not obligated to make payments on the obligation in future years
unless funds have been appropriated for this purpose each year. Accordingly,
such obligations are subject to "non-appropriation" risk. While municipal
leases are secured by the underlying capital asset, it may be difficult to
dispose of any such asset in the event of non-appropriation or other default.
MORTGAGE-BACKED BONDS. A Fund's investments in municipal obligations may
include mortgage-backed municipal obligations, which are a type of municipal
security issued by a state, authority, or municipality to provide financing for
residential housing mortgages to target groups, generally low-income
individuals who are first-time home buyers. A Fund's interest, evidenced by
such obligations, is an undivided interest in a pool of mortgages. Payments
made on the underlying mortgages and passed through to the Fund will represent
both regularly scheduled principal and interest payments. A Fund may also
receive additional principal payments representing prepayments of the
underlying mortgages. While a
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certain level of prepayments can be expected, regardless of the interest rate
environment, it is anticipated that prepayment of the underlying mortgages will
accelerate in periods of declining interest rates. In the event that a Fund
receives principal prepayments in a declining interest-rate environment, its
reinvestment of such funds may be in bonds with a lower yield.
FOREIGN SECURITIES AND CURRENCIES
The Heritage Money, Money Market, Step 1 Money, and Advantage Funds each may
invest up to 25% of their net assets directly or indirectly in foreign
securities. In accordance with Rule 2a-7 under the 1940 Act, the Heritage
Money, Money Market, and Step 1 Money Funds will limit their investments in
foreign securities to those denominated in U.S. dollars. The Funds may invest
in U.S. securities enhanced as to credit quality or liquidity by foreign
issuers without regard to this limitation. 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, and difficulty of enforcing obligations in other countries; and
- - diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance-of-payments positions. Many foreign securities
may be less liquid and their prices more volatile than comparable U.S.
securities. Although the Funds generally invest only in securities that are
regularly traded on recognized exchanges or in over-the-counter ("OTC")
markets, from time to time foreign securities may be difficult to liquidate
rapidly without adverse price effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs, may be higher than
those attributable to domestic investing.
Because the Advantage Fund may invest in foreign securities which are
denominated in non-U.S. currencies, the investment performance of the Fund
could be affected by changes in foreign currency exchange rates to some extent.
The value of the 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 Advantage Fund 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.")
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with certain banks and non-bank
dealers. In a repurchase agreement, a Fund buys a security at one price, and at
the time of sale, the seller agrees to repurchase the obligation at a mutually
agreed upon time and price (usually within seven days). The repurchase
agreement determines the yield during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the value of the underlying
security. A Fund may enter into repurchase agreements with respect to any
security in which it may invest. The Advisor will monitor, on an ongoing basis,
the value of the underlying securities to ensure that the value always equals
or exceeds the repurchase price plus accrued interest. Repurchase agreements
could involve certain risks in the event of a default or insolvency of the
other party to the agreement, including possible delays or restrictions upon a
Fund's ability to dispose of the underlying securities. Although no definitive
creditworthiness criteria are used, the Advisor reviews the creditworthiness of
the banks and non-bank dealers with which the Funds enter into repurchase
agreements to evaluate those risks. A Fund may, under certain
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circumstances, deem repurchase agreements collateralized by U.S. government
securities to be investments in U.S. government securities.
DERIVATIVE INSTRUMENTS
The Advantage and Municipal Advantage Funds may use derivative instruments for
any lawful purpose consistent with each Fund's investment objective such as
hedging or managing risk. Derivative instruments are commonly defined to
include securities or contracts whose values depend on (or "derive" from) the
value of one or more other assets, such as securities, currencies, or
commodities. These "other assets" are commonly referred to as "underlying
assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to OPTIONS or FORWARD CONTRACTS. Options and forward
contracts are considered to be the basic "building blocks" of derivatives. For
example, forward-based derivatives include forward contracts, swap contracts,
as well as exchange-traded futures. Option-based derivatives include privately
negotiated, OTC options (including caps, floors, collars, and options on
forward and swap contracts) and exchange-traded options on futures. Diverse
types of derivatives may be created by combining options or forward contracts
in different ways, and by applying these structures to a wide range of
underlying assets.
An option is a contract in which the "holder" ("buyer") pays a certain amount
("premium") to the "writer" ("seller") to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time.
The holder pays the premium at inception and has no further financial
obligation. The holder of an option-based derivative generally will benefit
from favorable movements in the price of the underlying asset but is not
exposed to corresponding losses due to adverse movements in the value of the
underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long" position) and
a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed future
date and the seller agrees to deliver the asset. The seller hopes that the
market price on the delivery date is less than the agreed upon price, while the
buyer hopes for the contrary. The change in value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset.
Derivative instruments may include (i) options; (ii) futures; (iii) options on
futures; (iv) short sales, in which a Fund sells a security for delivery at a
future date; (v) swaps, in which two parties agree to exchange a series of cash
flows in the future, such as interest-rate payments; (vi) interest-rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap";
(vii) interest-rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall
below a specified level, or "floor"; (viii) forward currency contracts and
foreign currency exchange-related securities; and (ix) structured instruments
which combine the foregoing in different ways.
Derivatives may be exchange-traded or OTC transactions between private parties.
OTC transactions are subject to additional risks, such as the credit risk of
the counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. Derivative instruments may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. When required by SEC
guidelines, a Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under the derivative.
The successful use of derivatives by a Fund is dependent upon a variety of
factors, particularly the Advisor's ability to correctly anticipate trends in
the underlying asset. In a hedging transaction, if the Advisor incorrectly
anticipates trends in the underlying asset, a Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect
correlation between a Fund's derivative transactions and the instruments being
hedged. To the extent that the Fund is engaging in derivative transactions for
risk management, the Fund's successful use of such transactions is more
dependent upon
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the Advisor's ability to correctly anticipate such trends, since losses in
these transactions may not be offset by gains in the Fund's portfolio or 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.
A Fund may also use derivative instruments to make investments that are
consistent with a Fund's investment objective but that are impracticable or not
feasible in the cash market (E.G., using derivative instruments to create a
synthetic security or to derive exposure to a region or asset class when cash
markets are inefficient and/or illiquid). A Fund will only engage in this
strategy when the Advisor reasonably believes it to be more advantageous to the
Fund.
In addition to the derivative instruments and strategies described above, the
Advisor expects to discover additional derivative instruments and other trading
techniques. The Advisor may utilize these new trading techniques to the extent
that they are consistent with a Fund's investment objective and permitted by
the Fund's investment limitations, operating policies, and applicable
regulatory authorities.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY SECURITIES
Each Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date.
Purchasing when-issued or delayed-delivery securities allows a Fund to lock in
a fixed price or yield on a security it intends to purchase. However, when a
Fund purchases these types of securities, it immediately assumes the risk of
ownership, including the risk of price fluctuation.
The greater a Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued or delayed-delivery 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 them for the purpose of actually acquiring the
securities, unless, after entering into the commitment, a sale appears
desirable for investment reasons. When required by SEC guidelines, a Fund will
set aside permissible liquid assets in a segregated account to secure its
outstanding commitments for these types of securities.
ILLIQUID SECURITIES
The Advantage and Municipal Advantage Funds may each invest up to 15% of their
net assets in illiquid securities. The Heritage Money, Money Market, Municipal
Money, and Step 1 Money Funds may each invest up to 10% of their respective net
assets in illiquid securities. Illiquid securities are those securities that
are not readily marketable, including restricted securities and repurchase
obligations maturing in more than seven days. Certain restricted securities
which may be resold to institutional investors under Rule 144A under the
Securities Act of 1933 and Section 4(2) commercial paper may be determined to
be liquid under guidelines adopted by each Fund's Board of Directors.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Advantage Fund may invest without limitation and the Municipal Advantage
Fund may invest up to 15% of its net assets 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 taxable zero-coupon,
step-coupon, and pay-in-kind securities to include in income each year the
portion of the original issue discount (or deemed discount) and other non-cash
income on such securities accrued during that year. In order to continue to
qualify for treatment as a "regulated investment company" under the Internal
Revenue Code of 1986 ("IRC") and avoid a certain excise tax, the Funds may be
required to distribute a portion of such discount and income and may be
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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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REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR ROLLS
Each Fund may enter into mortgage dollar rolls, in which the Fund would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. When required by SEC
guidelines, a Fund would set aside permissible liquid assets in a segregated
account to secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions may be considered
a borrowing by the Funds.
The Funds may also engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, the
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing. When required by SEC guidelines, a Fund will set aside
permissible liquid assets in a segregated account to secure its obligation to
repurchase the security.
The mortgage dollar rolls and reverse repurchase agreements entered into by the
Funds may be used as arbitrage transactions in which a Fund will maintain an
offsetting position in investment-grade debt obligations or repurchase
agreements that mature on or before the settlement date of the related mortgage
dollar roll or reverse repurchase agreement. Since a Fund will receive interest
on the securities or repurchase agreements in which it invests 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. The
Heritage Money and Municipal Money Funds only engage in transactions
permissible under Rule 2a-7.
PARTICIPATION INTERESTS
If a Fund may invest in municipal obligations, it may also invest in
participation interests in municipal obligations without limitation. A
participation interest gives a Fund an undivided interest in a municipal
obligation in the proportion that the Fund's participation interest bears to
the principal amount of the obligation. These instruments may have fixed,
floating, or variable rates of interest. A Fund will only purchase
participation interests if accompanied by an opinion of counsel that the
interest earned on the underlying municipal obligations will be tax-exempt. If
a Fund purchases unrated participation interests, the Board of Directors or its
delegate must have determined that the credit risk is equivalent to the rated
obligations in which the Fund may invest. Participation interests may be
backed by a letter of credit or guaranty of the selling institution. When
determining whether such a participation interest meets a Fund's credit quality
requirements, the Fund may look to the credit quality of any financial
guarantor providing a letter of credit or guaranty.
STANDBY COMMITMENTS
In order to facilitate portfolio liquidity, the Municipal Money and Municipal
Advantage Funds may each acquire standby commitments from brokers, dealers, or
banks with respect to securities in their respective portfolios. Standby
commitments entitle the holder to achieve same-day settlement and receive an
exercise price equal to the amortized cost of the underlying security plus
accrued interest. Standby commitments generally increase the cost of the
acquisition of the underlying security, thereby reducing the yield. Standby
commitments are subject to the issuer's ability to fulfill its obligation upon
demand. Although no definitive creditworthiness criteria are used, the Advisor
reviews the creditworthiness of the brokers, dealers, and banks from which a
Fund obtains standby commitments to evaluate those risks.
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SECTOR CONCENTRATION
From time to time, the Municipal Money and Municipal Advantage Funds may each
invest 25% or more of their respective net assets in municipal obligations that
are related in such a way that an economic, business, or political development
or change affecting one such security could also affect the other securities.
Such related sectors may include hospitals, retirement centers, pollution
control, single-family housing, multiple-family housing, industrial
development, utilities, education, and general obligation bonds. The Municipal
Money and Municipal Advantage Funds also may invest 25% or more of their
respective net assets in municipal obligations whose issuers are located in the
same state.
CASH MANAGEMENT
The Municipal Advantage and Advantage Funds may invest directly in cash and
short-term fixed-income securities, including, for this purpose, shares of one
or more money market funds managed by the Advisor (collectively, "Strong Money
Funds"). The Strong Money Funds seek current income, a stable share price of
$1.00, and daily liquidity. All money market instruments can change in value
when interest rates or an issuer's creditworthiness change dramatically. The
Strong Money Funds cannot guarantee that they will always be able to maintain a
stable net asset value of $1.00 per share. Each Fund may also participate in
pooled transactions involving cash and short-term fixed-income securities with
other Strong Funds.
PORTFOLIO TURNOVER
The Municipal Advantage and Advantage Funds' historical portfolio turnover rate
is listed under "Financial Highlights." The annual portfolio turnover rate
indicates changes in a Fund's portfolio. The turnover rate may vary from year
to year, as well as within a year. It may also be affected by sales of
portfolio securities necessary to meet cash requirements for redemption of
shares. High portfolio turnover in any year will result in the payment by a
Fund of above-average amounts of transaction costs and could result in the
payment by shareholders of above-average amounts of taxes on realized
investment gains.
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 "Advisory Agreements") with Strong Capital Management,
Inc. ("Advisor"). Except for the management fee arrangements, the Advisory
Agreements are substantially identical. The Advisor manages each Fund's
investments and business affairs subject to the supervision of each Fund's
Board of Directors.
ADVISOR. The Advisor began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and
profit-sharing plans, as well as mutual funds, several of which are funding
vehicles for variable insurance products. As of May 31, 1998, the Advisor had
over $30 billion under management. The Advisor's principal mailing address is
P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong, the Chairman
of the Board of each Fund, is the controlling shareholder of the Advisor.
As compensation for its services, each Fund pays the Advisor a monthly
management fee based on a percentage of each Fund's average daily net asset
value. The annual rates are as follows: Heritage Money, Money Market, Municipal
Money, and Step 1 Money Funds, 0.50%; and Municipal Advantage and Advantage
Funds, 0.60%. From time to time, the Advisor may voluntarily waive all or a
portion of its management fee and/or absorb certain Fund expenses without
further notification of the commencement or termination of such waiver or
absorption. Any such waiver or absorption will temporarily lower a Fund's
overall expense ratio and increase a Fund's overall return to investors.
Except for expenses assumed by the Advisor or Strong Funds Distributors, Inc.,
the Fund is responsible for all its other expenses, including, without
limitation, interest charges, taxes, brokerage commissions, and similar
expenses; expenses of issue, sale, repurchase, or redemption of shares;
expenses of registering or qualifying shares for sale with the states and the
SEC; expenses of printing and distribution of prospectuses to existing
shareholders; charges of custodians (including fees as custodian for keeping
books
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and similar services for the Fund), transfer agents (including the printing and
mailing of reports and notices to shareholders), registrars, auditing and legal
services, and clerical services related to recordkeeping and shareholder
relations; printing of stock certificates; fees for directors who are not
"interested persons" of the Advisor; expenses of indemnification; extraordinary
expenses; and costs of shareholder and director meetings.
The Advisor permits portfolio managers and other persons who may have access to
information about the purchase or sale of securities in the Funds' portfolio
("access persons") to purchase and sell securities for their own accounts,
subject to the Advisor's policy governing personal investing. The policy
requires access persons to conduct their personal investment activities in a
manner that the Advisor believes is not detrimental to a Fund or to the
Advisor's other advisory clients. Among other things, the policy requires
access persons to obtain preclearance before executing personal trades and
prohibits access persons from keeping profits derived from the purchase or sale
of the same security within 60 calendar days. See the SAI for more information.
YEAR 2000 RISKS. Like other mutual funds and financial and business operations
around the world, the Funds could be adversely affected if the computer
software, and to a lesser extent, hardware used by the Advisor and other
service providers are not able to process and calculate date-related
information and data before, during, and after January 1, 2000. This is
commonly known as the "Year 2000 Issue." The Advisor is taking steps that it
believes are reasonably designed to address the Year 2000 Issue with respect to
the computer software and hardware that it uses and to obtain satisfactory
assurances that comparable steps are being taken by the Funds' other major
service providers. However, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Funds.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Strong Cash Management Funds.
STRONG HERITAGE MONEY FUND
STRONG MONEY MARKET FUND
STRONG STEP 1 MONEY FUND
JAY N. MUELLER. Mr. Mueller joined the Advisor in September 1991 as a
securities analyst and portfolio manager. For four years prior to that, he was
a securities analyst and portfolio manager with R. Meeder & Associates of
Dublin, Ohio. Mr. Mueller received his B.A. in Economics in 1982 from the
University of Chicago. Mr. Mueller is also a Chartered Financial Analyst. He
has managed the Strong Heritage Money Fund since its inception in June 1995,
the Strong Money Market Fund since September 1991, and the Strong Step 1 Money
Fund since January 1998.
STRONG MUNICIPAL MONEY MARKET FUND
STRONG MUNICIPAL ADVANTAGE FUND
STEVEN D. HARROP. A Chartered Financial Analyst, Mr. Harrop joined the Advisor
in 1991. Previously, he was employed by USAA Investment Management Company,
where he co-managed a balanced fund and managed five tax-exempt funds. Mr.
Harrop received his B.S. in Business in 1972 from Brigham Young University and
his M.M. in Business in 1973 from Northwestern University. He has managed the
Strong Municipal Money Market Fund since 1991 and the Strong Municipal
Advantage Fund since its inception in November 1995.
STRONG ADVANTAGE FUND
JEFFREY A. KOCH. Mr. Koch joined the Advisor as a portfolio manager and
securities analyst in June 1989. For a brief period prior to that, he was a
market-maker clerk at Fossett Corporation, a clearing firm. Mr. Koch received
his B.A. in Economics in 1987 from the University of Minnesota-Morris and his
M.B.A. in Finance in 1989 from Washington University in St. Louis, Missouri.
Mr. Koch is also a Chartered Financial Analyst. Mr. Koch has managed or
co-managed the Strong Advantage Fund since 1991.
28
<PAGE>
LYLE J. FITTERER. Mr. Fitterer joined the Advisor in 1989 after receiving his
B.S. in Accounting in 1989 from the University of North Dakota. Previously, he
served the Advisor as a fixed-income research analyst and trader. Mr. Fitterer
has also served as a trader for the Advisor's equity products and as manager of
the Strong Funds' fixed-income accounting department. He is a Certified Public
Accountant. Mr. Fitterer has co-managed the Fund since March 1997.
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin 53201, also acts as
dividend-disbursing agent and transfer agent for the Funds. The Advisor is
compensated for its services based on an annual fee per account plus certain
out-of-pocket expenses. The fees received and the services provided as transfer
agent and dividend-disbursing agent are in addition to those received and
provided under the Advisory Agreements between the Advisor and the Funds.
DISTRIBUTOR
Strong Funds Distributors, Inc., P.O. Box 2936, Milwaukee, Wisconsin 53201, an
indirect subsidiary of the Advisor, acts as distributor of the shares of the
Funds.
ORGANIZATION
SHAREHOLDER RIGHTS. The Heritage Money and Step 1 Money Funds are both series
of common stock of Strong Heritage Reserve Series, Inc., and the Municipal
Money and Municipal Advantage Funds are both series of common stock of Strong
Municipal Funds, Inc. Strong Heritage Reserve Series, Inc., Strong Municipal
Funds, Inc., Strong Money Market Fund, Inc., and Strong Advantage Fund, Inc.
are each Wisconsin corporations authorized to issue an indefinite number of
shares of common stock and series and classes of shares of common stock. Each
share of each Fund 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 annual meetings of
shareholders unless required by the 1940 Act. Shareholders have certain rights,
including the right to call an annual meeting upon a vote of 10% of the Fund's
outstanding shares for the purpose of voting to remove one or more directors or
to transact any other business. The 1940 Act requires the Fund to assist the
shareholders in calling such a meeting.
SHAREHOLDER PRIVILEGES. The shareholders of each Fund may benefit from the
privileges described in the "Shareholder Manual" (see page II-1). However,
each Fund reserves the right, at any time and without prior notice, to suspend,
limit, modify, or terminate any of these privileges or their use in any manner
by any person or class.
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. Unless you choose otherwise, all
your dividends and capital gains distributions will be automatically reinvested
in additional Fund shares. Or, you may elect to have all your dividends and
capital gain distributions from a Fund automatically invested in additional
shares of another Strong Fund. Shares are purchased at the net asset value
determined on the payment date. If you request in writing that your dividends
and other distributions be paid in cash, a Fund will credit your bank account
by Electronic Funds Transfer ("EFT") or issue a check to you within five
business days of the payment date. You may change your election at any time by
calling or writing the Fund. The Fund must receive any such change 7 days (15
days for EFT) prior to a dividend or capital gain distribution payment date in
order for the change to be effective for that payment.
The policy of each Fund is to pay dividends from net investment income monthly
and to distribute substantially all net realized capital gains, if any, and
gains from foreign currency transactions, if any, annually. Each Fund may make
additional distributions if necessary to avoid imposition of a 4% excise tax on
undistributed income and gains. Each Fund declares dividends on each day its
net asset value is calculated, except for bank holidays. Income earned on
weekends, holidays (including bank holidays), and
29
<PAGE>
days on which net asset value is not calculated is declared as a dividend on
the day on which a Fund's net asset value was most recently calculated.
If you have chosen to receive dividends and/or capital gain distributions in
cash and the postal or other delivery service is unable to deliver checks to
your address of record, your distribution option will automatically be
converted to having all dividend and other distributions reinvested in
additional Fund shares. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
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 other than
exempt-interest dividends declared by the Municipal Money and Municipal
Advantage Funds as described below ("taxable distributions") that are derived
from investment company taxable income (consisting generally of net investment
income, net short-term capital gain and net gains from certain foreign currency
transactions, if any). Distributions by the Municipal Advantage and Advantage
Funds from net capital gain (the excess of net long-term capital gain over net
short-term capital loss), when designated as such, are taxable to you as
long-term capital gains, regardless of how long you have held your Fund shares.
The Funds' taxable distributions are taxable in the year they are paid, whether
they are taken in cash or reinvested in additional shares, except that certain
taxable distributions declared in the last three months of the year and paid in
January are taxable as if paid on December 31. All state laws provide a
pass-through to mutual fund shareholders of the state and local income tax
exemption afforded owners of direct U.S. government obligations, although there
are conditions to this treatment in some states. You will be notified annually
of the percentage of a Fund's income that is derived from U.S. government
securities.
If a Fund's taxable 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.
With respect to the Municipal Money and Municipal Advantage Funds, if the Funds
satisfy certain requirements described under "Taxes" in the SAI - which the
Funds intend to continue to do - dividends paid by the Funds from the interest
earned on municipal bonds will constitute "exempt-interest dividends" and will
not be subject to federal income tax. However, the Funds may invest in
municipal bonds the interest on which is a tax preference item for purposes of
the federal alternative minimum tax ("AMT"). Exempt-interest dividends
distributed to corporate shareholders also may be subject to the AMT regardless
of the types of municipal bonds in which the Funds invest, depending on the
corporation's tax status. Distributions by the Funds may be subject to state
and local taxes, depending on the laws of your home state and locality. You
will be subject to federal income tax at ordinary income rates on any income
dividends you receive that are derived from interest on taxable securities or
from net realized short-term capital gains.
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. With respect to the Municipal Advantage and Advantage
Funds only, your redemption of shares of the Fund may result in taxable gain or
loss to you, depending upon whether the redemption proceeds payable to you are
more or less than your adjusted cost basis for the redeemed shares. Similar tax
consequences generally will result from an exchange of shares of the Fund for
shares of another Strong Fund. If you purchase shares of one of these Funds
within 30 days before or after redeeming shares of the same Fund at a loss, a
portion or all of that loss will not be deductible and will increase the cost
basis of the newly purchased shares. In addition, if you redeem shares out of a
non-IRA retirement account, you will be subject to withholding for federal
income tax purposes unless you transfer the distribution directly to an
"eligible retirement plan." In addition, if you redeem all shares in an account
at any time during a month, dividends credited to the account since the
beginning of the month through the day of redemption may be paid with the
redemption proceeds.
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<PAGE>
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 taxable dividends (in the case of the Heritage
Money, Money Market, Municipal Money, and Step 1 Money Funds), and from all
dividends, capital gain distributions, and redemption proceeds (in the case of
the Municipal Advantage and Advantage Funds), payable to you. Withholding at
that rate from taxable 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 IRC and, if so
qualified, will not be liable for federal income tax on earnings and gains
distributed to its shareholders in a timely manner.
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effects on the Funds and investors therein. See
the SAI for a further discussion. There may be other federal, state, or local
tax considerations applicable to a particular investor. You are therefore urged
to consult your own tax adviser.
PERFORMANCE INFORMATION
Each Fund may advertise a variety of types of performance information,
including "yield," "average annual total return," "total return," and
"cumulative total return." The Heritage Money, Money Market, Municipal Money,
and Step 1 Money Funds may also advertise "effective yield." In addition, the
Municipal Money and Municipal Advantage Funds may also advertise "equivalent
taxable yield." Each of these figures is based upon historical results and does
not represent the future performance of a Fund.
Yield is an annualized figure, which means that it is assumed that a Fund
generates the same level of net investment income over a one-year period. The
Heritage Money, Money Market, Municipal Money, and Step 1 Money Funds' yield
and effective yield are measures of the net investment income per share earned
by such Fund over a specific seven-day period and are shown as a percentage of
the investment. However, effective yield will be slightly higher than the yield
because effective yield assumes that the net investment income earned by a Fund
will be reinvested. The Municipal Advantage and Advantage Funds' yield is a
measure of the net investment income per share earned by a Fund over a specific
30-day period and is shown as a percentage of the net asset value of the Fund's
shares at the end of the period. Equivalent taxable yield represents the amount
a taxable investment would need to generate to equal a Fund's yield for an
investor at stated tax rates.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund assuming
the reinvestment of all dividends and distributions. Total return figures are
not annualized and simply represent the aggregate change of a Fund's
investments over a specified period of time.
31
<PAGE>
SHAREHOLDER MANUAL
<TABLE>
<CAPTION>
<S> <C>
HOW TO BUY SHARES II-1
DETERMINING YOUR SHARE PRICE II-6
HOW TO SELL SHARES II-7
SHAREHOLDER SERVICES II-10
REGULAR INVESTMENT PLANS II-12
RETIREMENT PLAN SERVICES II-14
SPECIAL SITUATIONS II-14
</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 Municipal Advantage and Advantage Funds' net asset value changes
daily, your purchase price will be the next net asset value determined after
the Fund receives and accepts your purchase order. Your money will begin
earning dividends the first business day after your purchase order is accepted
in proper form.
PLEASE NOTE THAT THE MAXIMUM INVESTMENT IN THE STEP 1 MONEY FUND IS $20,000.
This means that you may not make a purchase of shares if the amount purchased
would cause the value of your account to exceed $20,000. In addition, you may
only open one regular and one IRA account in the Step 1 Money Fund.
Whether you are opening a new account or adding to an existing one, the Fund
provides you with several methods to buy its shares.
32
<PAGE>
TO OPEN A NEW ACCOUNT
<TABLE>
<CAPTION>
<S> <C>
MAIL BY CHECK
Complete and sign the application. Make your check or money order
payable to "Strong Funds."
Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If
you're using an express delivery service, send to Strong Funds, 900
Heritage Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
Call 1-800-368-3863 for instructions on establishing an account with an
exchange by mail.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
TELEPHONE BY EXCHANGE
Call 1-800-368-3863 to establish a new account by exchanging funds from
1-800-368-3863 an existing Strong Funds account.
24 HOURS A DAY, Sign up for telephone exchange services when you open your account. To add
7 DAYS A WEEK the telephone exchange option to your account, call 1-800-368-3863 for a
Shareholder Account Options Form.
Please note that your accounts must be identically registered and that you
must exchange enough into the new account to meet the minimum initial
investment.
Or use STRONG DIRECTSM, Strong Funds' automated telephone response system.
Call 1-800-368-7550.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
IN PERSON Stop by our Investor Center in Menomonee Falls, Wisconsin. Call 1-800
368-3863 for hours and directions.
The Investor Center
canwill only accept checks or money orders
made payable to "Strong Funds."
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
WIRE Call 1-800-368-3863 for instructions on opening an account by wire.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM."(1)
PLEASE NOTE THAT THE If you sign up for Strong's Automatic Investment Plan when you open your
AUTOMATIC INVESTMENT account and contribute monthly, Strong Funds will waive the Fund's
PLAN MAY BE minimum initial investment (see chart on page II-4).
DISCONTINUED FOR THE Complete the Automatic Investment Plan section on the account
STEP 1 MONEY FUND application.
WHEN YOUR NEXT Mail to the address indicated on the application.
PURCHASE WOULD CAUSE
THE ACCOUNT TO EXCEED
$20,000.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
BROKER You may purchase shares in the Fund through a broker-dealer or other
DEALER(2) 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>
(1) Not available for the Heritage Money Fund.
(2) Not available for the Step 1 Money Fund.
33
<PAGE>
TO ADD TO AN EXISTING ACCOUNT
<TABLE>
<S> <C>
BY CHECK
- - Complete an Additional Investment Form provided at the bottom of your account
statement, or write a note indicating your fund account number and
registration. Make your check or money order payable to "Strong Funds."
- - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
using an express delivery service, send to Strong Funds, 900 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- - Call 1-800-368-3863 for instructions on exchanging by mail.
BY EXCHANGE
- - Add to an account by exchanging funds from another Strong Funds account.
- - Sign up for telephone exchange services when you open your account. To add
the telephone exchange option to your account, call 1-800-368-3863 for a
Shareholder Account Options Form.
- - Please note that the accounts must be identically registered and that the
minimum exchange is $50(1) 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.(2) To add this option to your account, call 1-800-368-3863 for a
Shareholder Account Options Form.
Or use STRONG DIRECT SM, Strong Funds' automated telephone response system.
Call 1-800-368-7550.
- - Stop by our Investor Center in Menomonee Falls, Wisconsin. Call
1-800-368-3863 for hours and directions.
- - The Investor Center will only accept checks or money orders made payable to
"Strong Funds."
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)(1) into your Strong Funds account from your bank checking, savings, or
NOW account. Complete the Automatic Investment Plan section on the account
application.
- - AUTOMATIC EXCHANGE PLAN. Make regular, systematic exchanges (minimum $50)(3)
from one eligible Strong Funds account to another. Call 1-800-368-3863 for an
application.
- - PAYROLL DIRECT DEPOSIT. Have a specified amount (minimum $50)(3) 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 shares into a broker-dealer
street name account from the broker-dealer.
(1) Not available for the Heritage Money Fund.
(2) With respect to the Heritage Money Fund, additional investments from
$1,000 to $25,000 may be made.
(3) The minimum amount for the Heritage Money Fund is $1,000
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<PAGE>
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.
- - Step 1 Money Fund Account Limit - You may only open one regular and one IRA
account in the Fund. In addition, only individuals may open accounts in the
Fund (including individual trust accounts).
- - A Fund reserves the right to:
(i) decline to accept your purchase order upon receipt for any reason,
and;
(ii) With respect to the Step 1 Money Fund, reverse purchase transactions
that have caused the value of your account to exceed $20,000 and close
accounts that exceed the Fund's account limit including the redemption of
all shares in such account.
- - Step 1 Money Fund Maximum Investment Requirement - PLEASE NOTE THAT THE
MAXIMUM INVESTMENT IN THE FUND IS $20,000. This means that you may not make a
purchase of shares if the amount purchased would cause the value of your
account to exceed $20,000.
- - Exchange Feature - Please note that certain Strong Funds that you may
exchange into may impose a redemption fee of 0.5% on shares held for less
than six months.
- - Minimum Investment Requirements:
To open a regular account $2,500 (Heritage Money - $25,000)
(Step 1 Money - $1,000)
To open an IRA, Roth IRA,
or one-person SEP-IRA account $250 (Heritage Money - $25,000)
To open an Education IRA account $500*
To open an UGMA/UTMA account $250
To add to an existing account $50 (Heritage Money - $1,000)
For Heritage Money, Advantage, and Money Market Funds Only:
To open a SIMPLE, SEP-IRA, Keogh, Profit Sharing
or Money Purchase Pension Plan, or 403(b) account. ........the lesser of $250
or $25 per month
(Heritage Money - $25,000)
To open a qualified retirement plan
account where the Advisor or a financial
intermediary provides administrative services No Minimum
(Heritage Money - $25,000)
</TABLE>
* Not eligible for the Automatic Investment Plan and No-Minimum Investment
Program. Education IRA accounts may not be opened in the Heritage Money Fund.
All of the Funds (except the Heritage Money Fund) offer a No-Minimum Investment
Program that waives the minimum initial investment requirements for investors
who participate in the Strong Automatic Investment Plan and invest monthly
(described on page II-12). Unless you participate in the
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<PAGE>
Strong No-Minimum Investment Program, please ensure that your purchases meet
the minimum investment requirements.
Under certain circumstances (for example, if you discontinue a No-Minimum
Investment Program before you reach a Fund's minimum initial investment), each
Fund reserves the right to close your account. Before taking such action, a
Fund will provide you with written notice and at least 60 days in which to
reinstate an investment program or otherwise reach the minimum initial
investment required.
- - ACCOUNT MAINTENANCE (HERITAGE MONEY FUND). With respect to the Heritage Money
Fund only, the Advisor, acting as the Fund's transfer agent, reserves the right
to deduct a quarterly account maintenance fee of $3.00 for accounts with a
value of less than $25,000. The fee will not be deducted if a shareholder's
total assets in Strong Funds equals $100,000 or more. Eligibility for the
waiver is determined by aggregating Strong Funds mutual fund accounts
maintained by the Fund's transfer agent that are registered under the same tax
identification number or that list the same tax identification number for the
custodian of a Uniform Gifts/Transfers to Minors Act account. If your Heritage
Money Fund account falls below $25,000, you may be given notice to re-establish
the minimum balance. If you do not so increase your balance within 60 days, the
Advisor reserves the right to close your account and send the proceeds to you.
Note that retirement accounts that fall below the $25,000 minimum are subject
to being closed which may result in the imposition of income tax withholding
requirements and other penalties.
- - MUNICIPAL MONEY FUND. Shareholders of the Municipal Money Fund with account
balances of $5 million or greater who have completed the appropriate
documentation will receive a dividend on the day of a purchase transaction (a
"Same-Day Dividend") if the transaction is conducted in accordance with the
following procedures. Shareholders who have account balances of less than $5
million but whose purchase transaction would increase the account balances to
$5 million or greater may also receive a Same-Day Dividend. To receive a
Same-Day Dividend, you must place an irrevocable purchase order by calling
1-800-733-2274 before 9:00 a.m. Central Time ("CT"). Payment by federal funds
must be received by Firstar Bank, N.A., the Fund's agent, by 2:30 p.m. CT that
day. Any failure to deliver payment by such deadline may result in cancellation
of the order or liability for the resulting interest expense. Payment for the
purchase must be wired as follows:
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA routing number: 075000022
Account number: 112737-090
For further credit to: (insert your account number and registration)
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 and applied daily when determining the NAV.
With respect to the Municipal Advantage and Advantage Funds, debt securities,
including municipal obligations, are valued at fair market value as determined
by a pricing service that is designated by the Board of Directors of each Fund.
The pricing service generally values securities at the average of the most
recent bid and asked prices, but may also look to such factors as market
transactions among institutional investors and dealer quotations for similar
securities in determining the value of debt securities. Any securities or other
assets for which market quotations are not readily available are valued at fair
value as
36
<PAGE>
determined in good faith by the Board of Directors. Any debt securities having
remaining maturities of 60 days or less are valued by the amortized cost method
when the Board of Directors determines that the fair value of such securities
is their amortized cost.
The securities in the portfolios of the Heritage Money, Money Market, Municipal
Money, and Step 1 Money Funds are valued on an amortized-cost basis. 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 fluctuating interest rates on the market value of
the instrument. Under most conditions, management believes it will be possible
to maintain the NAV of these Funds at $1.00 per share. Calculations are
periodically made to compare the value of a Fund's portfolio valued at
amortized cost with market values. If a deviation of 1/2 of 1% or more were to
occur between the NAV calculated by reference to market values and a Fund's
$1.00 per share NAV, or if there were any other deviation that the Board of
Directors believed would result in a material dilution to shareholders or
purchasers, the Board of Directors would promptly consider what action, if any,
should be initiated.
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 a 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.
With respect to the Heritage Money Fund only, unless your total assets in
Strong Funds equals $100,000 or more, the Fund reserves the right to deduct
from your account a $3.00 transaction fee for each redemption, exchange, or
check. There are no transaction fees for redemptions in the Money Market,
Municipal Money, Step 1 Money, Municipal Advantage, and Advantage Funds.
To redeem shares, you may use any of the methods described in the following
chart. However, if you are selling shares in a retirement account, please call
1-800-368-3863 for instructions. Please note that there is a $10.00 fee for
closing an IRA or other retirement account or for transferring assets to
another custodian. For your protection, certain requests may require a
signature guarantee. (See "Special Situations - Signature Guarantees.")
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TO SELL SHARES
- ---------------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
($3 FEE FOR HERITAGE Write a "letter of instruction" that includes the following information: your
MONEY FUND) account number, the dollar amount or number of shares you wish to redeem,
FOR YOUR PROTECTION CERTAIN each owner's name, your street address, and the signature of each owner as it
REDEMPTION REQUESTS MAY appears on the account.
REQUIRE A SIGNATURE Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
GUARANTEE. SEE "SPECIAL using an express delivery service, send to 900 Heritage Reserve, Menomonee
SITUATIONS - SIGNATURE Falls, Wisconsin 53051.
GUARANTEES." 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.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
TELEPHONE Sign up for telephone redemption services when you open your account. To add the
($3 FEE FOR HERITAGE telephone redemption option to your account, call 1-800-368-3863 for a Shareholder
MONEY FUND) Account Options Form.
Once the telephone redemption option is in place, you may sell shares(1) by phone
1-800-368-3863 and arrange to receive the proceeds in one of three ways:
24 HOURS A DAY,
7 DAYS A WEEK TO RECEIVE A CHECK BY MAIL
We will mail a check to the address to which your account is registered at no
charge. (EXCEPT WITH RESPECT TO THE HERITAGE MONEY FUND, FOR WHICH A $3 FEE
MAY BE CHARGED).
If you wish to redeem shares in the Fund, for an additional $10 fee, we will deliver
your check via an expedited delivery service.
TO DEPOSIT BY EFT
We will transmit the proceeds by Electronic Funds Transfer (EFT) to a pre
authorized bank account at no charge. (EXCEPT WITH RESPECT TO THE HERITAGE
MONEY FUND, FOR WHICH A $3 FEE MAY BE CHARGED.) 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. There may be an additional $3 fee charged for a
Heritage Money Fund account.
You may also use STRONG DIRECTSM, Strong Funds' automated telephone response
system. Call 1-800-368-7550.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
CHECK WRITING Sign up for the free (EXCEPT WITH RESPECT TO THE HERITAGE MONEY FUND) check-writing
($3 PER CHECK FEE FOR HERITAGE privilege when you open your account. To add check writing to an existing account
MONEY FUND) or to order additional checks, call 1-800-368-3863.
(LIMITED TO WRITING THREE Please keep in mind that all check redemptions must be for a minimum of
CHECKS ON A STEP 1 MONEY $500(1) and that you cannot write a check to close an account.
FUND ACCOUNT)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
AUTOMATICALLY(2) You can set up automatic withdrawals from your account at regular intervals. To
($3 FEE FOR HERITAGE MONEY establish the Systematic Withdrawal Plan, request a form by calling 1-800-368
FUND) 3863.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
BROKER-DEALER(2) You may also redeem shares through broker-dealers or other financial
(VARIES BY intermediaries who may charge a transaction fee.
INSTITUTION)
</TABLE>
(1) The minimum amount for the Heritage Money Fund is $1,000.
(2) Not available for Step 1 Money Fund
38
<PAGE>
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 or electronic transaction
has cleared your bank, which generally occurs within ten calendar days.
- - You may be charged a $10 service fee for a stop-payment and replacement of a
redemption or dividend check.
- - The right of redemption may be suspended during any period in which (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined by
the SEC exists, making disposal of portfolio securities or valuation of net
assets of a Fund not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must endorse
the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - For complete redemptions from the Heritage Money Fund only, the $3.00
transaction fee charged by the Heritage Money Fund will be deducted from the
proceeds of the transaction. For partial redemptions, the $3.00 transaction
fee will be deducted from your account.
- - MUNICIPAL MONEY FUND. Shareholders of the Municipal Money Fund with account
balances of at least $5 million who have completed the appropriate
documentation may receive a redemption wire on the day of a redemption
transaction (a "Same-Day Wire") if the redemption order is placed by calling
1-800-733-2274 by 9:00 a.m. CT. Dividends will not be earned on the day of
redemption on amounts redeemed with a same-day wire. If you redeem all shares
in an account, dividends credited to the account since the beginning of the
month up to the day of redemption will be paid the day after redemption
proceeds are paid.
REDEMPTIONS IN KIND
For each Fund (except for the Step 1 Money Fund), if the Advisor determines
that existing conditions make cash payments undesirable, redemption payments
(including the satisfaction of share drafts) may be made in whole or in part in
securities or other financial assets, valued for this purpose as they are
valued in computing the NAV for the Fund's shares. Shareholders receiving
securities or other financial assets on redemption may realize a gain or loss
for tax purposes, and will incur any costs of sale, as well as the associated
inconveniences.
39
<PAGE>
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. In these situations, investors may want to consider using
STRONGDIRECTSM, our automated telephone system, to effect such a transaction by
calling 1-800-368-7550.
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus, or e-mail us at [email protected].
STRONG DIRECTSM AUTOMATED TELEPHONE SYSTEM. Also available 24 hours a day, the
STRONG DIRECTSM automated response system enables you to use a touch-tone phone
to hear fund quotes and returns on any Strong Fund. You may also confirm
account balances, hear records of recent transactions and dividend activity
(1-800-368-5550), and perform purchases, exchanges or redemptions among your
existing Strong accounts (1-800-368-7550). You may also perform an exchange to
open a new Strong account provided that your account has the telephone exchange
option. Please note that your accounts must be identically registered and you
must exchange enough into the new account to meet the minimum initial
investment. Your account information is protected by a personal code.
STRONG NETDIRECTSM. Available 24 hours a day from your personal computer,
STRONG NETDIRECTSM allows you to use the Internet to access your Strong Funds
account information. You may access specific account history, view current
account balances, obtain recent dividend activity, and perform purchases,
exchanges, or redemptions among your existing Strong accounts.
To register for netDirect, please visit our web site at http://www.
strong-funds.com. Your account information is protected by a personal password
and Internet encryption technology. For more information on this service,
please call 1-800-359-3379 or e-mail us at [email protected].
STATEMENTS AND REPORTS. At a minimum, each Fund will confirm all transactions
for your account on a quarterly basis. We recommend that you file each
quarterly statement - and, especially, each calendar year-end statement - with
your other important financial papers, since you may need to refer to them at a
later date for tax purposes. Should you need additional copies of previous
statements, you may order confirmation statements for the current and preceding
year at no charge. Statements for earlier years are available for $10 each.
Call 1-800-368-3863 to order past statements.
Each year, you will also receive a statement confirming the tax status of any
distributions paid to you, as well as an annual report containing audited
financial statements and a semi-annual report.
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 or call us at 1-800-368-3863 if your address
changes. You may use the Additional Investment Form at the bottom of
40
<PAGE>
your confirmation statement, or simply write us a letter of instruction that
contains the following information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to an account's registration - such as adding or removing a joint
owner, changing an owner's name, or changing the type of your account - must
also be submitted in writing. Please call 1-800-368-3863 for instructions. For
your protection, some requests may require a signature guarantee.
TRANSACTION SERVICES
EXCHANGE PRIVILEGE. You may exchange shares between identically registered
Strong Funds accounts, either in writing, by telephone, or through your
personal computer. By establishing exchange services, you authorize the Fund
and its agents to act upon your instruction through the telephone or personal
computer to exchange shares from any account you specify. For tax purposes, an
exchange is considered a sale and a purchase. Please obtain and read the
appropriate prospectus before investing in any of the Strong Funds. Since an
excessive number of exchanges may be detrimental to the Funds, each Fund
reserves the right to discontinue the exchange privilege of any shareholder at
any time.
CHECK-WRITING PRIVILEGES. You may also redeem shares by check in amounts of
$500 or more ($1,000 or more for the Heritage Money Fund). With respect to all
of the Funds except the Heritage Money Fund, there is no charge for this
privilege. The Step 1 Money Fund has a limit of three checks for your account.
The Heritage Money Fund may charge a $3.00 redemption fee per check written
unless your total assets in Strong Funds is $100,000 or more. Redemption by
check cannot be honored if share certificates are outstanding and would need to
be liquidated to honor the check. In addition, a check may not be honored if
the check results in you redeeming more than the lesser of $250,000 or 1% of
the Fund's assets during any 90-day period and the Advisor determines that
existing conditions make cash payments undesirable. Checks are supplied free of
charge, and additional checks will be sent to you upon request. The Funds do
not return the checks you write, although copies are available upon request.
You may place stop-payment requests on checks by calling Strong Funds at
1-800-368-3863. A $10 fee will be charged for each stop-payment request. A stop
payment will remain in effect for two weeks following receipt of oral
instructions (six months following written instructions) by Strong Funds.
If there are insufficient cleared shares in your account to cover the amount of
your redemption by check, the check will be returned, marked "insufficient
funds," and a fee of $10 will be charged to the account.
REGULAR INVESTMENT PLANS
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in a Fund from your bank checking, savings, or
NOW account. You may choose to make investments on any day of the month in
amounts of $50 or more ($1,000 for the Heritage Money Fund). You can set up the
Automatic Investment Plan with any financial institution that is a member of
the Automated Clearing House. Because each Fund has the right to close an
investor's account for failure to reach the minimum initial investment, please
consider your ability to continue this Plan until you reach the minimum initial
investment. To establish the Plan, complete the Automatic Investment Plan
section on the account application, or call 1-800-368-3863 for an application.
THE AUTOMATIC INVESTMENT PLAN WILL BE DISCONTINUED FOR THE STEP 1 MONEY FUND
WHEN YOUR NEXT AUTOMATIC PURCHASE WOULD CAUSE YOUR ACCOUNT BALANCE TO EXCEED
$20,000.
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 for all but
Heritage Money Fund, which requires a minimum of $1,000) are
41
<PAGE>
made automatically from your payroll check into your existing Fund account. By
enrolling in the Plan, you authorize your employer or its agents to deposit a
specified amount from your payroll check into the Fund's bank account. In most
cases, your Fund account will be credited the day after the amount is received
by the Fund's bank. In order to participate in the Plan, your employer must
have direct deposit capabilities through the Automated Clearing House available
to its employees. The Plan may be used for other direct deposits, such as
social security checks, military allotments, and annuity payments.
To establish Direct Deposit for your account, call 1-800-368-3863 to request a
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. THE PAYROLL DIRECT DEPOSIT PLAN MAY BE
DISCONTINUED FOR THE STEP 1 MONEY FUND WHEN YOUR NEXT AUTOMATIC PURCHASE WOULD
CAUSE YOUR ACCOUNT BALANCE TO EXCEED $20,000.
AUTOMATIC EXCHANGE PLAN. The Automatic Exchange Plan allows you to make
regular, systematic exchanges (minimum $50 for all but Heritage Money Fund,
which requires a minimum of $1,000) 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 (the Heritage Money Fund requires $50,000 initial account
balance in such Fund and the Step 1 Money Fund requires $2,500 initial account
balance in such Fund) in the first 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. The Heritage Money Fund charges a
$3.00 fee for each exchange. However, this fee is waived if your total assets
in Strong Funds is $100,000 or more.
SYSTEMATIC WITHDRAWAL PLAN. You may set up automatic withdrawals from your
account at regular intervals. To begin distributions, you must have an initial
balance of $5,000 (the Heritage Money Fund requires $50,000 initial account
balance in such Fund) in your account and withdraw at least $50 ($1,000 for the
Heritage Money Fund) 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, if any, 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. Note that with respect to each
withdrawal made against the Heritage Money Fund, a $3.00 redemption fee will be
charged. However, this fee is waived if your total assets in Strong Funds is
$100,000 or more.
RETIREMENT PLAN SERVICES
We offer a wide variety of retirement plans for individuals and institutions,
including large and small businesses. For information on IRAs, including Roth
IRAs, or SEP-IRAs, for a one-person business, call 1-800-368-3863. If you are
interested in opening a 401(k) or other company-sponsored retirement plan
(SIMPLE, SEP, Keogh, 403(b)(7), pension or profit sharing), call 1-800-368-2882
and a Strong Retirement Plan Specialist will help you determine which
retirement plan would be best for your company. Complete instructions about how
to establish and maintain your plan and how to open accounts for you and your
employees will be included in the retirement plan kit you receive in the mail.
SPECIAL SITUATIONS
42
<PAGE>
POWER OF ATTORNEY. If you are investing as attorney-in-fact for another person,
please complete the account application in the name of such person and sign the
back of the application in the following form: "[applicant's name] by [your
name], attorney-in-fact." To avoid having to file an affidavit prior to each
transaction, please complete the Power of Attorney form available from Strong
Funds at 1-800-368-3863. However, if you would like to use your own power of
attorney form, please call the same number for instructions.
CORPORATIONS AND TRUSTS. If you are investing for a corporation, please include
with your account application a certified copy of your corporate resolution
indicating which officers are authorized to act on behalf of the corporation.
As an alternative, you may complete a Certification of Authorized Individuals,
which can be obtained from the Funds. Until a valid corporate resolution or
Certification of Authorized Individuals is received by the Fund, services such
as telephone redemption, wire redemption, and check writing will not be
established.
If you are investing as a trustee (including trustees of a retirement plan),
please include the date of the trust. All trustees must sign the application.
If they do not, services such as telephone redemption, wire redemption, and
check writing will not be established. All trustees must sign redemption
requests unless proper documentation to the contrary is provided to the Fund.
Failure to provide these documents or signatures as required when you invest
may result in delays in processing redemption requests.
FINANCIAL INTERMEDIARIES. If you purchase or redeem shares of a Fund through a
financial intermediary, certain features of the Fund relating to such
transactions may not be available or may be modified. In addition, certain
operational policies of a Fund, including those related to settlement and
dividend accrual, may vary from those applicable to direct shareholders of the
Fund and may vary among intermediaries. We urge you to consult your financial
intermediary for more information regarding these matters. In addition, a Fund
may pay, directly or indirectly through arrangements with the Advisor, amounts
to financial intermediaries that provide transfer agent type and/or other
administrative services to their customers provided, however, that the Fund
will not pay more for these services through intermediary relationships than it
would if the intermediaries' customers were direct shareholders in the Fund.
Certain financial intermediaries may charge an advisory, transaction, or other
fee for their services. You will not be charged for such fees if you purchase
or redeem your Fund shares directly from a Fund without the intervention of a
financial intermediary.
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you and the
Funds against fraudulent transactions by unauthorized persons. In the following
instances, the Funds will require a signature guarantee for all authorized
owners of an account:
- - when you add the telephone redemption or check-writing options to your exist-
ing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $50,000;
- - 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.
43
<PAGE>
APPENDIX
RATINGS OF DEBT OBLIGATIONS:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
STANDARD & POOR'S MOODY'S INVESTOR DUFF & PHELPS THOMSON
DEFINITION RATINGS GROUP SERVICES FITCH IBCA, INC. RATING CO. BANKWATCH, INC.
- ------------------- ----------------- ---------------- ---------------- ------------- ---------------
Highest quality AAA Aaa AAA AAA AAA
High quality AA Aa AA AA AA
Upper medium grade A A A A A
Medium grade BBB Baa BBB BBB BBB
Low grade BB Ba BB BB BB
Speculative B B B B B
Submarginal CCC, CC, C Caa, Ca CCC, CC, C CCC CCC, CC
Probably in default D C DDD, DD, D DD D
</TABLE>
44
<PAGE>
ASSET COMPOSITION
For the fiscal year ended February 28, 1998, the following Funds' assets
were invested in the credit categories shown below. Percentages are computed on
a dollar-weighted basis and are an average of twelve monthly calculations.
<TABLE>
<CAPTION>
ADVANTAGE FUND MUNICIPAL ADVANTAGE FUND
--------------- ------------------------
<S> <C> <C> <C> <C>
ADVISOR'S ASSESSMENT ADVISOR'S ASSESSMENT
RATED OF RATED OF
RATING SECURITIES* UNRATED SECURITIES SECURITIES* UNRATED SECURITIES
- ------- --------------- -------------------- ------------------------ ------------------------
- ------- --------------- -------------------- ------------------------ ------------------------
AAA 16.1% 0.4% 14.8% 0.6%
AA 11.6 0.3 27.5 0.1
A 19.8 1.9 19.2 2.7
BBB 25.7 1.7 12.9 20.9
BB 19.3 1.8 0.6 0.7
B 1.4 ___ ___ ___
CCC ___ ___ ___ ___
CC ___ ___ ___ ___
C ___ ___ ___ ___
D ___ ___ ___ ___
Unrated 6.1 ___ 25.0
Total 100.0% 6.1% 100.0% 25.0%
- ------- --------------- -------------------- ------------------------ ------------------------
- ------- --------------- -------------------- ------------------------ ------------------------
</TABLE>
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see the preceding table for the rating
categories of the six NRSROs).
45
<PAGE>
NOTES
46
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
STRONG HERITAGE MONEY FUND
STRONG MONEY MARKET FUND
STRONG MUNICIPAL MONEY MARKET FUND
STRONG STEP 1 MONEY FUND
STRONG ADVANTAGE FUND
STRONG MUNICIPAL ADVANTAGE FUND
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
e-mail: [email protected]
Web Site: http://www.strong-funds.com
Throughout this SAI, "the Fund" is intended to refer to each Fund listed above,
unless otherwise indicated. This SAI is not a Prospectus and should be read
together with the Prospectus for the Fund dated July 1, 1998. Requests for
copies of the Prospectus should be made by calling any number listed above.
The financial statements appearing in the Annual Report, which accompanies this
SAI, are incorporated into this SAI by reference.
2
<PAGE>
July 1, 1998
2
<PAGE>
TABLE OF CONTENTS PAGE
INVESTMENT RESTRICTIONS........................................................3
INVESTMENT POLICIES AND TECHNIQUES.............................................5
Asset-Backed Debt Obligations..................................................5
Borrowing......................................................................5
Convertible Securities.........................................................6
Depositary Receipts............................................................6
Derivative Instruments.........................................................7
Duration......................................................................16
Foreign Investment Companies..................................................16
Foreign Securities............................................................17
High-Yield (High-Risk) Securities.............................................17
Illiquid Securities...........................................................19
Lending of Portfolio Securities...............................................20
Loan Interests................................................................20
Maturity......................................................................21
Mortgage- and Asset-Backed Debt Securities....................................21
Municipal Obligations.........................................................22
Repurchase Agreements.........................................................23
Rule 2a-7: Maturity, Quality, and Diversification Restrictions...............23
Reverse Repurchase Agreements and Mortgage Dollar Rolls.......................24
Sector Concentration..........................................................25
Short Sales...................................................................25
Taxable Securities............................................................25
Variable- or Floating-Rate Securities.........................................25
Warrants......................................................................26
When-Issued and Delayed-Delivery Securities...................................27
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities..........................27
DIRECTORS AND OFFICERS........................................................27
PRINCIPAL SHAREHOLDERS........................................................29
INVESTMENT ADVISOR............................................................29
DISTRIBUTOR...................................................................33
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................33
CUSTODIAN.....................................................................37
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT..................................37
TAXES.........................................................................38
DETERMINATION OF NET ASSET VALUE..............................................41
ADDITIONAL SHAREHOLDER INFORMATION............................................42
ORGANIZATION..................................................................43
SHAREHOLDER MEETINGS..........................................................44
PERFORMANCE INFORMATION.......................................................44
GENERAL INFORMATION...........................................................53
PORTFOLIO MANAGEMENT..........................................................55
INDEPENDENT ACCOUNTANTS.......................................................56
LEGAL COUNSEL.................................................................56
FINANCIAL STATEMENTS..........................................................57
APPENDIX......................................................................58
No person has been authorized to give any information or to make any
representations other than those contained in this SAI and its corresponding
Prospectus, and if given or made, such information or representations may not
be relied upon as having been authorized. This SAI does not constitute an
offer to sell securities.
4
<PAGE>
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT LIMITATIONS
The following are the Fund's fundamental investment limitations which, along
with the Fund's investment objective (which is described in the Prospectus),
cannot be changed without shareholder approval.
Unless indicated otherwise below, the 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, (1) more than 5% of the
Fund's total assets would be invested in the securities of that issuer, or (2)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer.
2. May (1) borrow money from banks and (2) make other investments or engage
in other transactions permissible under the Investment Company Act of 1940
("1940 Act") which may involve a borrowing, provided that the combination of
(1) and (2) 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 (1) purchases of
debt securities or other debt instruments, or (2) 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.
10. May not, under normal market conditions, invest less than 80% of its
net assets in municipal securities.
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With respect to Advantage, Heritage Money, Money Market, and Step 1 Money
Funds, Fundamental Policy No. 10 does not apply because they are not municipal
funds.
With respect to Heritage Money Fund, Fundamental Policy No. 7 shall not limit
the Fund's purchases of obligations issued by domestic banks.
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NON-FUNDAMENTAL OPERATING POLICIES
The following are the Fund's non-fundamental operating policies which may be
changed by the Fund's Board of Directors without shareholder approval.
Unless indicated otherwise below, the 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 ("SEC") 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% (10% with respect to a money fund) of its net assets would be invested
in illiquid securities, or such other amounts as may be permitted under the
1940 Act.
4. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
investment management company with substantially the same fundamental
investment objective, restrictions and policies as the Fund.
6. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act and, in
accordance with Rule 4.5, will use futures or options on futures transactions
solely for bona fide hedging transactions (within the meaning of the Commodity
Exchange Act), provided, however, that the Fund may, in addition to bona fide
hedging transactions, use futures and options on futures transactions if the
aggregate initial margin and premiums required to establish such positions,
less the amount by which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed 5% of the Fund's net
assets.
7. Borrow money except (1) from banks or (2) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when bank
borrowings exceed 5% of its total assets.
8. Make any loans other than loans of portfolio securities, except through
(1) purchases of debt securities or other debt instruments, or (2) engaging in
repurchase agreements.
9. Engage in any transaction or practice which is not permissible under
Rule 2a-7 of the 1940 Act, notwithstanding any other fundamental investment
limitation or non-fundamental operating policy.
With respect to the Advantage and Municipal Advantage Funds, Non-Fundamental
Policy No. 9 does not apply because they are not money market funds.
Unless noted otherwise, if a percentage restriction is adhered to at the time
of investment, a later increase or decrease in percentage resulting from a
change in the Fund's assets (I.E. due to cash inflows or redemptions) or in
market value of the investment or the Fund's assets will not constitute a
violation of that restriction.
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INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment
objective, policies, and techniques described in the Prospectus.
THE FOLLOWING SECTION APPLIES TO THE HERITAGE MONEY, MONEY MARKET, AND STEP 1
MONEY FUNDS ONLY:
ASSET-BACKED DEBT OBLIGATIONS
Asset-backed debt obligations represent direct or indirect participation in, or
secured by and payable from, assets such as motor vehicle installment sales
contracts, other installment loan contracts, home equity loans, leases of
various types of property, and receivables from credit card or other revolving
credit arrangements. Asset-backed debt obligations may include collateralized
mortgage obligations ("CMOs") issued by private companies. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on asset-backed securities generally depends on
the rate of principal payments received on the underlying assets which in turn
may be affected by a variety of economic and other factors. As a result, the
yield on any asset-backed security is difficult to predict with precision and
actual yield to maturity may be more or less than the anticipated yield to
maturity. The yield characteristics of asset-backed debt obligations differ
from those of traditional debt obligations. Among the principal differences
are that interest and principal payments are made more frequently on
asset-backed debt obligations, usually monthly, and that principal may be
prepaid at any time because the underlying assets generally may be prepaid at
any time. As a result, if these debt obligations are purchased 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 these debt
obligations are purchased at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is
slower than expected will reduce yield to maturity. Accelerated prepayments on
debt obligations purchased at a premium also imposes a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full.
While many asset-backed securities are issued with only one class of security,
many asset-backed securities are issued in more than one class, each with
different payment terms. Multiple class asset-backed securities are issued for
two main reasons. First, multiple classes may be used as a method of
providing credit support. This is accomplished typically through creation of
one or more classes whose right to payments on the asset-backed security is
made subordinate to the right to such payments of the remaining class or
classes. Second, multiple classes may permit the issuance of securities with
payment terms, interest rates, or other characteristics differing both from
those of each other and from those of the underlying assets. Examples include
so-called "strips" (asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of
non-asset-backed securities, such as floating interest rates (i.e., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
Asset-backed securities backed by assets, other than as described above, or in
which the payment streams on the underlying assets are allocated in a manner
different than those described above may be issued in the future. The Fund may
invest in such asset-backed securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of the Fund.
BORROWING
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The Fund may borrow money from banks and make other investments or engage in
other transactions permissible under the 1940 Act which may be considered a
borrowing (such as mortgage dollar rolls and reverse repurchase agreements).
However, the Fund may not purchase securities when bank borrowings exceed 5% of
the Fund's total assets. Presently, the Fund only intends to borrow from banks
for temporary or emergency purposes.
THE FOLLOWING PARAGRAPH APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
The Fund has established a line-of-credit ("LOC") with certain banks by which
it may borrow funds for temporary or emergency purposes. A borrowing is
presumed to be for temporary or emergency purposes if it is repaid by the Fund
within 60 days and is not extended or renewed. The Fund intends to use the LOC
to meet large or unexpected redemptions that would otherwise force the Fund to
liquidate securities under circumstances which are unfavorable to the Fund's
remaining shareholders. The Fund pays a commitment fee to the banks for the
LOC.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
CONVERTIBLE SECURITIES
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into or exchanged for a specified amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the
holder to receive interest normally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security matures or is redeemed,
converted, or exchanged. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
Most convertible securities currently are issued by U.S. companies, although a
substantial Eurodollar convertible securities market has developed, and the
markets for convertible securities denominated in local currencies are
increasing.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The investment value of a convertible
security is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on
the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. Generally, the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. A
convertible security generally will sell at a premium over its conversion value
by the extent to which investors place value on the right to acquire the
underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If
a convertible security is called for redemption, the Fund will be required to
permit the issuer to redeem the security, convert it into the underlying common
stock, or sell it to a third party.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE FUND ONLY:
DEPOSITARY RECEIPTS
The 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 of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs,
in registered form, are denominated in U.S. dollars and are designed for use in
the U.S. securities markets, while EDRs, in bearer form, may be denominated in
other currencies and are designed for use in the European securities markets.
ADRs are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts
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evidencing a similar arrangement. For purposes of the Fund's investment
policies, ADRs and EDRs are deemed to have the same classification as the
underlying securities they represent, except that ADRs and EDRs shall be
treated as indirect foreign investments. For example, an ADR or EDR
representing ownership of common stock will be treated as common stock.
Depositary receipts do not eliminate all of the risks associated with directly
investing in the securities of foreign issuers.
ADR facilities may be established as either "unsponsored" or "sponsored." While
ADRs issued under these two types of facilities are in some respects similar,
there are distinctions between them relating to the rights and obligations of
ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without participation by (or
even necessarily the permission 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 facility. The depositary usually charges
fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions, and the performance of other services. The depositary of an
unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not obligated to distribute communications
received from the issuer of the deposited securities or to disclose material
information about such issuer in the U.S. and there may not be a correlation
between such information and the market value of the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary, and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY, EXCEPT THAT THE SECTION REGARDING FOREIGN CURRENCY DOES NOT APPLY TO THE
MUNICIPAL ADVANTAGE FUND:
DERIVATIVE INSTRUMENTS
IN GENERAL. The Fund may use derivative instruments for any lawful purpose
consistent with its investment objective such as hedging or managing risk.
Derivative instruments are commonly defined to include securities or contracts
whose values depend on (or "derive" from) the value of one or more other
assets, such as securities, currencies, or commodities. These "other assets"
are commonly referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to OPTIONS or FORWARD CONTRACTS. Options and forward
contracts are considered to be the basic "building blocks" of derivatives. For
example, forward-based derivatives include forward contracts, swap contracts,
as well as exchange-traded futures. Option-based derivatives include privately
negotiated, over-the-counter ("OTC") options (including caps, floors, collars,
and options on forward and swap contracts) and exchange-traded options on
futures. Diverse types of derivatives may be created by combining options or
forward contracts in different ways, and by applying these structures to a wide
range of underlying assets.
An option is a contract in which the "holder" (the buyer) pays a certain amount
("premium") to the "writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time.
The holder pays the premium at inception and has no further financial
obligation. The holder of an option-based derivative generally will benefit
from favorable movements in the price of the underlying asset but is not
exposed to corresponding losses due to adverse movements in the value of the
underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long" position) and
a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed
future date and the seller agrees to
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deliver the asset. The seller hopes that the market price on the delivery date
is less than the agreed upon price, while the buyer hopes for the contrary. The
change in value of a forward-based derivative generally is roughly proportional
to the change in value of the underlying asset.
HEDGING. The Fund may use derivative instruments to protect against possible
adverse changes in the market value of securities held in, or are anticipated
to be held in, its portfolio. Derivatives may also be used to "lock-in"
realized but unrecognized gains in the value of its portfolio securities.
Hedging strategies, if successful, can reduce the risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce the
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. To the extent that a hedge matures prior
to or after the disposition of the investment subject to the hedge, any gain or
loss on the hedge will be realized earlier or later than any offsetting gain or
loss on the hedged investment.
MANAGING RISK. The Fund may also use derivative instruments to manage the
risks of its portfolio. Risk management strategies include, but are not
limited to, facilitating the sale of portfolio securities, managing the
effective maturity or duration of debt obligations in its portfolio,
establishing a position in the derivatives markets as a substitute for buying
or selling certain securities, or creating or altering exposure to certain
asset classes, such as equity, debt, or foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way to invest than "traditional" securities (I.E., stocks
or bonds) would.
EXCHANGE AND OTC DERIVATIVES. Derivative instruments may be exchange-traded or
traded in OTC transactions between private parties. Exchange-traded
derivatives are standardized options and futures contracts traded in an auction
on the floor of a regulated exchange. Exchange contracts are generally very
liquid. The exchange clearinghouse is the counterparty of every contract.
Thus, each holder of an exchange contract bears the credit risk of the
clearinghouse (and has the benefit of its financial strength) rather than that
of a particular counterparty. OTC transactions are subject to additional
risks, such as the credit risk of the counterparty to the instrument, and are
less liquid than exchange-traded derivatives since they often can only be
closed out with the other party to the transaction.
RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments involves
risks and special considerations as described below. Risks pertaining to
particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as the risk
of the underlying assets, namely that the value of the underlying asset may go
up or down. Adverse movements in the value of an underlying asset can expose
the Fund to losses. Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly the
ability of Strong Capital Management, Inc. ("Advisor"), to predict movements of
the securities, currencies, and commodity markets, which requires different
skills than predicting changes in the prices of individual securities. There
can be no assurance that any particular strategy adopted will succeed. The
Advisor's decision to engage in a derivative instrument will reflect its
judgment that the derivative transaction will provide value to the Fund and its
shareholders and is consistent with the Fund's objectives, investment
limitations, and operating policies. In making such a judgment, the Advisor
will analyze the benefits and risks of the derivative transaction and weigh
them in the context of the Fund's entire portfolio and investment objective.
(2) CREDIT RISK. The Fund will be subject to the risk that a loss may be
sustained as a result of the failure of a counterparty to comply with the terms
of a derivative instrument. The counterparty risk for exchange-traded
derivative instruments is generally less than for privately negotiated or OTC
derivative instruments, since generally a clearing agency, which is the issuer
or counterparty to each exchange-traded instrument, provides a guarantee of
performance. For privately negotiated instruments, there is no similar
clearing agency guarantee. In all transactions, the Fund will bear the risk
that the counterparty will default, and this could result in a loss of the
expected benefit of the derivative transaction and possibly other losses. The
Fund will enter into transactions in derivative instruments only with
counterparties that the Advisor reasonably believes are capable of performing
under the contract.
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(3) CORRELATION RISK. When a derivative transaction is used to completely
hedge another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments. With
a perfect hedge, the value of the combined position remains unchanged for any
change in the price of the underlying asset. With an imperfect hedge, the
values of the derivative instrument and its hedge are not perfectly correlated.
Correlation risk is the risk that there might be imperfect correlation, or even
no correlation, between price movements of an instrument and price movements of
investments being hedged. For example, if the value of a derivative
instruments used in a short hedge (such as writing a call option, buying a put
option, or selling a futures contract) increased by less than the decline in
value of the hedged investments, the hedge would not be perfectly correlated.
Such a lack of correlation might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or other pressures on the
markets in which these instruments are traded. The effectiveness of hedges
using instruments on indices will depend, in part, on the degree of correlation
between price movements in the index and price movements in the investments
being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity risk.
Liquidity risk is the risk that a derivative instrument cannot be sold, closed
out, or replaced quickly at or very close to its fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. The Fund might be required by applicable
regulatory requirement to maintain assets as "cover," maintain segregated
accounts, and/or make margin payments when it takes positions in derivative
instruments involving obligations to third parties (I.E., instruments other
than purchased options). If the Fund was unable to close out its positions in
such instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired, matured, or was
closed out. The requirements might impair 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. The Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any derivatives position can
be sold or closed out at a time and price that is favorable to the Fund.
(5) LEGAL RISK. Legal risk is the risk of loss caused by the legal
unenforcibility of a party's obligations under the derivative. While a party
seeking price certainty agrees to surrender the potential upside in exchange
for downside protection, the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a counterparty that has
lost money in a derivative transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative products.
(6) SYSTEMIC OR "INTERCONNECTION" RISK. Interconnection risk is the risk
that a disruption in the financial markets will cause difficulties for all
market participants. In other words, a disruption in one market will spill
over into other markets, perhaps creating a chain reaction. Much of the OTC
derivatives market takes place among the OTC dealers themselves, thus creating
a large interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create losses
at other dealers and destabilize the entire market for OTC derivative
instruments.
GENERAL LIMITATIONS. The use of derivative instruments is subject to
applicable regulations of the 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 Fund's
ability to use derivative instruments may be limited by certain tax
considerations.
The Fund has filed a notice of eligibility for exclusion from the definition of
the term "commodity pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures markets. In accordance with
Rule 4.5 of the regulations under the Commodity Exchange Act ("CEA"), the
notice of eligibility for the Fund includes representations that the Fund will
use futures contracts and related options solely for bona fide hedging purposes
within the meaning of CFTC regulations, provided that the Fund may hold other
positions in futures contracts and related options that do not qualify as a
bona fide hedging position if the aggregate initial margin deposits and
premiums required to establish these positions, less the amount by which any
such futures contracts and related options positions are "in the money," do not
exceed 5% of the Fund's net assets. Adherence to these guidelines does not
limit the Fund's risk to 5% of the Fund's assets.
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The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging the Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of the Fund's assets, as defined under the 1940 Act, the SEC
has stated that the Fund may use coverage or the segregation of the Fund's
assets. To the extent required by SEC guidelines, the Fund will not enter into
any such transactions unless it owns either: (1) an offsetting ("covered")
position in securities, options, futures, or derivative instruments; or (2)
cash or liquid securities positions with a value sufficient at all times to
cover its potential obligations to the extent that the position is not
"covered". The Fund will also set aside cash and/or appropriate liquid assets
in a segregated custodial account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be
sold while the derivative position is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of the Fund's
assets to segregated accounts could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
In some cases, the Fund may be required to maintain or limit exposure to a
specified percentage of its assets to a particular asset class. In such cases,
when the Fund uses a derivative instrument to increase or decrease exposure to
an asset class and is required by applicable SEC guidelines to set aside liquid
assets in a segregated account to secure its obligations under the derivative
instruments, the Advisor may, where reasonable in light of the circumstances,
measure compliance with the applicable percentage by reference to the nature of
the economic exposure created through the use of the derivative instrument and
not by reference to the nature of the exposure arising from the liquid assets
set aside in the segregated account (unless another interpretation is specified
by applicable regulatory requirements).
OPTIONS. The Fund may use options for any lawful purpose consistent with its
investment objective such as hedging or managing risk. An option is a contract
in which the "holder" (the buyer) pays a certain amount ("premium") to the
"writer" (the seller) to obtain the right, but not the obligation, to buy from
the writer (in a "call") or sell to the writer (in a "put") a specific asset at
an agreed upon price ("strike price" or "exercise price") at or before a
certain time ("expiration date"). The holder pays the premium at inception and
has no further financial obligation. The holder of an option will benefit from
favorable movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option will receive fees or premiums but is exposed to
losses due to changes in the value of the underlying asset. The Fund may buy
or write (sell) put and call options on assets, such as securities, currencies,
financial commodities, and indices of debt and equity securities ("underlying
assets") and enter into closing transactions with respect to such options to
terminate an existing position. Options used by the Fund may include European,
American, and Bermuda style options. If an option is exercisable only at
maturity, it is a "European" option; if it is also exercisable prior to
maturity, it is an "American" option. If it is exercisable only at certain
times, it is a "Bermuda" option.
The Fund may purchase (buy) and write (sell) put and call options underlying
assets and enter into closing transactions with respect to such options to
terminate an existing position. The purchase of a call option serves as a long
hedge, and the purchase of a put option serves as a short hedge. Writing put
or call options can enable the 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 the 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 decreases 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.
The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the 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
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known as a closing purchase transaction. Conversely, the 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 Fund to realize the profit or limit the loss on an
option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases or writes an OTC option,
it relies on the counterparty to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty 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.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with counter parties that are expected to
be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund 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
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration. If the 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 Fund may engage in options transactions on indices in much the same manner
as the options on securities discussed above, except the index options may
serve as a hedge against overall fluctuations in the securities market
represented by the relevant market index.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of the
attempted hedging.
SPREAD TRANSACTIONS. The Fund may use spread transactions for any lawful
purpose consistent with its investment objective such as hedging or managing
risk. The 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 relation 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. The Fund may use futures contracts for any lawful purpose
consistent with its investment objective such as hedging or managing risk. The
Fund may enter into futures contracts, including, but not limited to, interest
rate and index futures. The 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 Fund 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 Fund will engage in this strategy only when the Advisor believes it is more
advantageous to the Fund than purchasing the futures contract.
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To the extent required by regulatory authorities, the Fund only enters 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 the Fund's exposure to market or interest rate fluctuations, the Fund
may be able to hedge its exposure more effectively and perhaps at a lower cost
through the use of futures contracts.
An interest rate futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (E.G., debt security) for a specified price at a designated date,
time, and place. An index futures contract is an agreement pursuant to which
the parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index futures contract was
originally written. Transaction costs are incurred when a futures contract is
bought or sold and margin deposits must be maintained. A futures contract may
be satisfied by delivery or purchase, as the case may be, of the instrument 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, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting sale price is
more than the original purchase price, the Fund realizes a gain; if it is less,
the Fund realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Fund will be able
to enter into an offsetting transaction with respect to a particular futures
contract at a particular time. If the 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 the Fund upon entering into a futures contract. Instead,
at the inception of a futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash
and/or other appropriate liquid assets in an amount generally equal to 10% or
less of the contract value. Margin must also be deposited when writing a call
or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility,
the 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 the Fund's obligations to or from a futures broker. When
the Fund purchases an option on a future, the premium paid plus transaction
costs is all that is at risk. In contrast, when the 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 the 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 Fund intends
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 the 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
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daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities
markets involving arbitrage, "program trading" and other investment strategies
might result in temporary price distortions.
FOREIGN CURRENCIES. The Fund 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 Fund may use these
instruments for hedging or any other lawful purpose consistent with the Fund's
investment objective, including transaction hedging, anticipatory hedging,
cross hedging, proxy hedging, and position hedging. The Fund's use of
currency-related derivative instruments will be directly related to the Fund's
current or anticipated portfolio securities, and the Fund 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 investment portfolio. 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 Fund might use currency-related derivative instruments to
"lock in" a U.S. dollar price for a portfolio investment, thereby enabling the
Fund to protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date the security is purchased or sold and the
date on which payment is made or received. The Fund also might use
currency-related derivative instruments when the Advisor believes that one
currency may experience a substantial movement against another currency,
including the U.S. dollar, and it may use currency-related derivative
instruments to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the
Fund may use currency-related derivative instruments to hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. The use of this basket hedging technique may be more
efficient and economical than using separate currency-related derivative
instruments for each currency exposure held by the Fund. Furthermore,
currency-related derivative instruments may be used for short hedges - for
example, the 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 Fund may use a currency-related derivative instrument to shift
exposure to foreign currency fluctuations from one foreign country to another
foreign country where the Advisor believes that the foreign currency exposure
purchased will appreciate relative to the U.S. dollar and thus better protect
the Fund against the expected decline in the foreign currency exposure sold.
For example, if the Fund owns securities denominated in a foreign currency and
the Advisor believes that currency will decline, it might enter into a forward
contract to sell an appropriate amount of the first foreign currency, with
payment to be made in a second foreign currency that the Advisor believes would
better protect the Fund against the decline in the first security than would a
U.S. dollar exposure. Hedging transactions that use two foreign currencies are
sometimes referred to as "cross hedges." The effective use of currency-related
derivative instruments by the Fund in a cross hedge is dependent upon a
correlation between price movements of the two currency instruments and the
underlying security involved, and the use of two currencies magnifies the risk
that movements in the price of one instrument may not correlate or may
correlate unfavorably with the foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the currency
instruments used or investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
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The Fund also might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using currency-related derivative instruments on
another foreign currency or a basket of currencies, the values of which the
Advisor believes will have a high degree of positive correlation to the value
of the currency being hedged. The risk that movements in the price of the
hedging instrument will not correlate perfectly with movements in the price of
the currency being hedged is magnified when this strategy is used.
The use of currency-related derivative instruments by the Fund involves a
number of risks. The value of currency-related derivative instruments depends
on the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such derivative
instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots (generally consisting of transactions of greater than $1 million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments might be
required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
When the Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for
exchange-traded instruments is generally less than for privately negotiated or
OTC currency instruments, since generally a clearing agency, which is the
issuer or counterparty to each instrument, provides a guarantee of performance.
For privately negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the transaction and possibly other losses to the Fund. The Fund
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 Fund will in fact be able to close out a forward currency contract (or
any other currency-related derivative instrument) at a time and price favorable
to the Fund. In addition, in the event of insolvency of the counterparty, the
Fund might be unable to close out a forward currency contract at any time prior
to maturity. In the case of an exchange-traded instrument, the Fund will be
able to close the position out only on an exchange which provides a market for
the instruments. The ability to establish and close out positions on an
exchange is subject to the maintenance of a liquid market, and there can be no
assurance that a liquid market will exist for any instrument at any specific
time. In the case of a privately negotiated instrument, the Fund will be able
to realize the value of the instrument only by entering into a closing
transaction with the issuer or finding a third party buyer for the instrument.
While the Fund will enter into privately negotiated transactions only with
entities who are expected to be capable of entering into a closing transaction,
there can be no assurance that the Fund will in fact be able to enter into such
closing transactions.
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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 Fund might need to purchase or sell foreign currencies
in the spot (cash) market. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily in
the OTC market, the Fund will normally purchase or sell OTC options on foreign
currency only when the Advisor reasonably believes a liquid secondary market
will exist for a particular option at any specific time.
There will be a cost to the Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. The Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to resell that currency to the
dealer.
When required by the SEC guidelines, the Fund will set aside permissible liquid
assets in segregated accounts or otherwise cover the Fund's potential
obligations under currency-related derivatives instruments. To the extent the
Fund's assets are so set aside, they cannot be sold while the corresponding
currency position is open, unless they are replaced with similar assets. As a
result, if a large portion of the Fund's assets are so set aside, this could
impede portfolio management or the Fund's ability to meet redemption requests
or other current obligations.
The Advisor's decision to engage in a transaction in a particular
currency-related derivative instrument will reflect the Advisor's judgment that
the transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives and policies. In making such a judgment,
the Advisor will analyze the benefits and risks of the transaction and weigh
them in the context of the Fund's entire portfolio and objectives. The
effectiveness of any transaction in a currency-related derivative instrument is
dependent on a variety of factors, including the Advisor's skill in analyzing
and predicting currency values and upon a correlation between price movements
of the currency instrument and the underlying security. There might be
imperfect correlation, or even no correlation, between price movements of an
instrument and price movements of investments being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which these instruments are traded. In addition, the Fund's use of
currency-related derivative instruments is always subject to the risk that the
currency in question could be devalued by the foreign government. In such a
case, any long currency positions would decline in value and could adversely
affect any hedging position maintained by the Fund.
The Fund's dealing in currency-related derivative instruments will generally be
limited to the transactions described above. However, the Fund reserves the
right to use currency-related derivatives instruments for different purposes
and under different circumstances. Of course, the Fund is 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
Fund's securities that are attributable to other (I.E., non-currency related)
causes. Moreover, while the use of currency-related derivatives instruments
may reduce the risk of loss due to a decline in the value of a hedged currency,
at the same time the use of these instruments tends to limit any potential gain
which may result from an increase in the value of that currency.
SWAP AGREEMENTS. The Fund may enter into interest rate, securities index,
commodity, or security and currency exchange rate swap agreements for any
lawful purpose consistent with the Fund's investment objective, such as for the
purpose of attempting to obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or spread. The Fund also may enter
into swaps in order to protect against an increase in the price of, or the
currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to several years. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or
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realized on particular predetermined investments or instruments. The gross
returns to be exchanged or "swapped" between the parties are calculated with
respect to a "notional amount" (I.E., the return on or increase in value of a
particular dollar amount invested at a particular interest rate) in a
particular foreign currency, or in a "basket" of securities representing a
particular index. Swap agreements may include interest rate caps, under which,
in return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or "cap;" interest rate
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates fall below a specified level, or
"floor;" and interest rate collars, under which a party sells a cap and
purchases a floor, or vice versa, in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, the Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement ("net amount").
The Fund's obligation under a swap agreement will be accrued daily (offset
against amounts owed to the Fund) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash and/or other appropriate liquid assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend, in part, on the Advisor's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Swap agreements may be considered to be
illiquid. Moreover, the Fund bears the risk of loss of the amount expected to
be received under a swap agreement in the event of the default or bankruptcy of
a swap agreement counterparty. Certain restrictions imposed on the Fund by the
Internal Revenue Code of 1986 ("IRC") may limit the Fund's ability to use swap
agreements. The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that the Advisor
reasonably believes are capable of performing under the swap agreements. If
there is a default by the other party to such a transaction, the Fund will have
to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In addition to the
derivative instruments and strategies described above and in the Prospectus,
the Advisor expects to discover additional derivative instruments and other
hedging or risk management techniques. The Advisor may utilize these new
derivative instruments and techniques to the extent that they are consistent
with the Fund's investment objective and permitted by the Fund's investment
limitations, operating policies, and applicable regulatory authorities.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
DURATION
Duration was developed as a more precise alternative to the concept of
"maturity." Traditionally, a debt obligations' maturity has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
maturity measures only the time until a debt obligation provides its final
payment, taking no account of the pattern of the security's payments prior to
maturity. In contrast, duration incorporates a bond's yield, coupon interest
payments, final maturity and call features into one measure. Duration
management is one of the fundamental tools used by the Advisor.
Duration is a measure of the expected life of a debt obligation on a present
value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, the time the principal payments
are expected to be received, and weights them by the present values of the cash
to be received at each future point in time. For any debt obligation with
interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest of a fixed income security, the longer
the duration of the security; conversely, the higher the stated or coupon rate
of interest of a fixed income security, the shorter the duration of the
security.
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Futures, options and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions will lengthen the duration of the Fund's
portfolio by approximately the same amount of time that holding an equivalent
amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount of time
that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
Finally, the duration of a debt obligation may vary over time in response to
changes in interest rates and other market factors.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE FUND ONLY:
FOREIGN INVESTMENT COMPANIES
The Fund may invest, to a limited extent, in foreign investment companies.
Some of the countries in which the Fund invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may be
less expensive and more expedient for the Fund to invest in a foreign
investment company in a country which permits direct foreign investment.
Investing through such vehicles may involve frequent or layered fees or
expenses and may also be subject to limitation under the 1940 Act. Under the
1940 Act, the Fund may invest up to 10% of its assets in shares of other
investment companies and up to 5% of its assets in any one investment company
as long as the investment does not represent more than 3% of the voting stock
of the acquired investment company. The Fund does not intend to invest in such
investment companies unless, in the judgment of the Advisor, the potential
benefits of such investments justify the payment of any associated fees and
expenses.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE FUND ONLY:
FOREIGN SECURITIES
Investing in foreign securities involves a series of risks not present in
investing in U.S. securities. Many of the foreign securities held by the Fund
will not be registered with the SEC, nor will the foreign issuers be subject to
SEC reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning U.S. companies. Disclosure and regulatory standards in
many respects are less stringent in emerging market countries than in the U.S.
and other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets,
and enforcement of existing regulations may be extremely limited. Foreign
companies, and in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting, auditing and financial
reporting standards, or to other regulatory requirements comparable to those
applicable to U.S. companies. The Fund's net investment income and capital
gains from its foreign investment activities may be subject to non-U.S.
withholding taxes.
The costs attributable to foreign investing that the Fund must bear frequently
are higher than those attributable to domestic investing; this is particularly
true with respect to emerging capital markets. For example, the cost of
maintaining custody of foreign securities exceeds custodian costs for domestic
securities, and transaction and settlement costs of foreign investing also
frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the Fund may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities.
Tax treaties between the U.S. and foreign countries, however, may reduce or
eliminate the amount of foreign tax to which the Fund would be subject.
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Foreign markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when
assets of the Fund are uninvested and are earning no investment return. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result either
in losses to the Fund due to subsequent declines in the value of such portfolio
security or, if the Fund has entered into a contract to sell the security,
could result in possible liability to the purchaser.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
HIGH-YIELD (HIGH-RISK) SECURITIES
IN GENERAL. Non-investment grade debt obligations ("lower-quality securities")
include (1) bonds rated as low as C by Moody's Investors Service ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), and comparable ratings of other
nationally recognized statistical rating organizations ("NRSROs"); (2)
commercial paper rated as low as C by S&P, Not Prime by Moody's, and comparable
ratings of other NRSROs; and (3) unrated debt obligations of comparable
quality. Lower-quality securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to the Appendix for
a description of the securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated security market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such
conditions could severely disrupt the market for and adversely affect the value
of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, the 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 the Fund's net asset value. If the 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), the Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would force the Fund to sell the more liquid
portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, the Fund may
have to replace the securities with a lower yielding security, which would
result in a lower return for the Fund.
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CREDIT RATINGS. Credit ratings issued by credit rating agencies are designed
to evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of lower-quality
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of
the issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in lower-quality and comparable unrated obligations will be more
dependent on the Advisor's credit analysis than would be the case with
investments in investment-grade debt obligations. The Advisor employs its own
credit research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. The Advisor continually monitors the investments in the Fund's
portfolio and carefully evaluates whether to dispose of or to retain
lower-quality and comparable unrated securities whose credit ratings or credit
quality may have changed.
LIQUIDITY AND VALUATION. The 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 Fund anticipates
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, the 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 the Fund to obtain accurate market quotations for purposes
of valuing the Fund's portfolio. Market quotations are generally available on
many lower-quality and comparable unrated issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. During periods of thin trading, the spread between bid and
asked prices is likely to increase significantly. In addition, adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
LEGISLATION. Legislation may be adopted, from time to time, designed to limit
the use of certain lower-quality and comparable unrated securities by certain
issuers. It is anticipated that if additional legislation is enacted or
proposed, it could have a material affect on the value of these securities and
the existence of a secondary trading market for the securities.
ILLIQUID SECURITIES
The Fund may invest in illiquid securities (I.E., securities that are not
readily marketable). However, the Fund will not acquire illiquid securities
if, as a result, the illiquid securities would comprise more than 15% (10% for
money market funds) of the value of the Fund's net assets (or such other
amounts as may be permitted under the 1940 Act). However, as a matter of
internal policy, the Advisor intends to limit the Fund's investments in
illiquid securities to 10% of its net assets.
The Board of Directors of the 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 ("Securities Act"),
such as securities that may be resold to institutional investors under Rule
144A under the Securities Act and Section 4(2) commercial paper, may be
considered liquid under guidelines adopted by the Fund's Board of Directors.
The Board of Directors of the Fund has delegated to the Advisor the day-to-day
determination of the liquidity of a security, although it has retained
oversight and ultimate responsibility for such determinations. The Board of
Directors has directed the Advisor to look to such factors as (1) the frequency
of trades or quotes for a security, (2) the number of dealers willing to
purchase or sell the security and number of potential buyers, (3) the
willingness of dealers to undertake to make a market in the security, (4) the
nature of the security and nature of the marketplace trades, such as the time
needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer, (5) the likelihood that the security's marketability
will be maintained throughout the anticipated holding period, and (6) any other
relevant factors. The Advisor may determine 4(2) commercial paper to be liquid
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if (1) the 4(2) commercial paper is not traded flat or in default as to
principal and interest, (2) the 4(2) commercial paper is rated in one of the
two highest rating categories by at least two NRSROs, or if only one NRSRO
rates the security, by that NRSRO, or is determined by the Advisor to be of
equivalent quality, and (3) the Advisor considers the trading market for the
specific security taking into account all relevant factors. With respect to
any foreign holdings, a foreign security may be considered liquid by the
Advisor (despite its restricted nature under the Securities Act) if the
security can be freely traded in a foreign securities market and all the facts
and circumstances support a finding of liquidity.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the 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, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced in accordance with
pricing procedures adopted by the Board of Directors of the Fund. If through
the appreciation of restricted securities or the depreciation of unrestricted
securities the Fund should be in a position where more than 15% of the value of
its net assets are invested in illiquid securities, including restricted
securities which are not readily marketable (except for 144A Securities and
4(2) commercial paper deemed to be liquid by the Advisor), the Fund will take
such steps as is deemed advisable, if any, to protect the liquidity of the
Fund's portfolio.
The Fund may sell OTC options and, in connection therewith, segregate assets or
cover its obligations with respect to OTC options written by the Fund. The
assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that
the Fund may repurchase any OTC option it writes at a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. Although the Fund is authorized to lend, the Fund does not
presently intend to engage in lending. In determining whether to lend
securities to a particular broker-dealer or institutional investor, the Advisor
will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Fund will retain authority to terminate any loans at any time. The Fund 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 Fund
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 Fund 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 the Fund's interest.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE FUND ONLY:
LOAN INTERESTS
The Fund may acquire a loan interest (a "Loan Interest"). A Loan Interest is
typically originated, negotiated, and structured by a U.S. or foreign
commercial bank, insurance company, finance company, or other financial
institution ("Agent") for a lending syndicate of financial institutions. The
Agent typically administers and enforces the loan on behalf of the other
lenders in the syndicate. In addition, an institution, typically but not
always the Agent ("Collateral Bank"), holds collateral (if any) on behalf of
the lenders. These Loan Interests may take the form of participation interests
in, assignments of or novations of a loan during its secondary distribution, or
direct interests during a primary distribution. Such Loan Interests may be
acquired from U.S. or foreign banks, insurance companies, finance companies, or
other financial institutions who have made loans or are members of a lending
syndicate or from other holders of Loan Interests. The Fund may also acquire
Loan Interests under which the Fund derives its rights directly from the
borrower. Such Loan Interests are separately enforceable by the Fund against
the borrower and all payments of interest and principal are typically made
directly to the Fund from the borrower. In the event that the Fund and other
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lenders become entitled to take possession of shared collateral, it is
anticipated that such collateral would be held in the custody of a Collateral
Bank for their mutual benefit. The Fund may not act as an Agent, a Collateral
Bank, a guarantor or sole negotiator or structurer with respect to a loan.
The Advisor will analyze and evaluate the financial condition of the borrower
in connection with the acquisition of any Loan Interest. The Advisor also
analyzes and evaluates the financial condition of the Agent and, in the case of
Loan Interests in which the Fund does not have privity with the borrower, those
institutions from or through whom the Fund derives its rights in a loan
("Intermediate Participants").
In a typical loan, the Agent administers the terms of the loan agreement. In
such cases, the Agent is normally responsible for the collection of principal
and interest payments from the borrower and the apportionment of these payments
to the credit of all institutions which are parties to the loan agreement. The
Fund will generally rely upon the Agent or an Intermediate Participant to
receive and forward to the Fund its portion of the principal and interest
payments on the loan. Furthermore, unless under the terms of a participation
agreement the Fund has direct recourse against the borrower, the Fund will rely
on the Agent and the other members of the lending syndicate to use appropriate
credit remedies against the borrower. The Agent is typically responsible for
monitoring compliance with covenants contained in the loan agreement based upon
reports prepared by the borrower. The seller of the Loan Interest usually
does, but is often not obligated to, notify holders of Loan Interests of any
failures of compliance. The Agent may monitor the value of the collateral and,
if the value of the collateral declines, may accelerate the loan, may give the
borrower an opportunity to provide additional collateral or may seek other
protection for the benefit of the participants in the loan. The Agent is
compensated by the borrower for providing these services under a loan
agreement, and such compensation may include special fees paid upon structuring
and funding the loan and other fees paid on a continuing basis. With respect
to Loan Interests for which the Agent does not perform such administrative and
enforcement functions, the Fund will perform such tasks on its own behalf,
although a Collateral Bank will typically hold any collateral on behalf of the
Fund and the other lenders pursuant to the applicable loan agreement.
A financial institution's appointment as Agent may usually be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held
by the Agent under the loan agreement should remain available to holders of
Loan Interests. However, if assets held by the Agent for the benefit of the
Fund were determined to be subject to the claims of the Agent's general
creditors, the Fund might incur certain costs and delays in realizing payment
on a loan interest, or suffer a loss of principal and/or interest. In
situations involving Intermediate Participants, similar risks may arise.
Purchasers of Loan Interests depend primarily upon the creditworthiness of the
borrower for payment of principal and interest. If the Fund does not receive
scheduled interest or principal payments on such indebtedness, the Fund's share
price and yield could be adversely affected. Loans that are fully secured
offer the Fund more protections than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
borrower's obligation, or that the collateral can be liquidated. Indebtedness
of borrowers whose creditworthiness is poor involves substantially greater
risks, and may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a small
fraction of the amount owed. Direct indebtedness of developing countries will
also involve a risk that the governmental entities responsible for the
repayment of the debt may be unable, or unwilling, to pay interest and repay
principal when due.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
MATURITY
The Fund's average portfolio maturity represents an average based on the actual
stated maturity dates of the debt securities in the Fund's portfolio, except
that (1) variable-rate securities are deemed to mature at the next
interest-rate adjustment date, (2) debt securities with put features are deemed
to mature at the next put-exercise date, (3) the maturity of mortgage-backed
securities is determined on an "expected life" basis as determined by the
Advisor, and (4) securities being hedged with futures contracts may be deemed
to have a longer maturity, in the case of purchases of futures contracts, and a
shorter maturity, in the case of sales of futures contracts, than they would
otherwise be deemed to have. In addition, a security that is subject to
redemption at the option of the issuer on a particular date ("call date"),
which is prior to the security's stated maturity, may be deemed to mature on
the call date rather than on its stated maturity date. The call date of a
security will be used to calculate average portfolio maturity when the
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Advisor reasonably anticipates, based upon information available to it, that
the issuer will exercise its right to redeem the security. The average
portfolio maturity of the Fund is dollar-weighted based upon the market value
of the Fund's securities at the time of the calculation.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
MORTGAGE- AND ASSET-BACKED DEBT 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. Asset-backed debt obligations represent direct or
indirect participation in, or are secured by and payable from, assets such as
motor vehicle installment sales contracts, other installment loan contracts,
home equity loans, leases of various types of property, and receivables from
credit card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any mortgage- and asset-backed security is
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional debt
securities. Among the principal differences are that interest and principal
payments are made more frequently on mortgage-and asset-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the 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 the 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 the Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government-sponsored mortgage-backed securities.
While many mortgage- and asset-backed securities are issued with only one class
of security, many are issued in more than one class, each with different
payment terms. Multiple class mortgage- and asset-backed securities are issued
for two main reasons. First, multiple classes may be used as a method of
providing credit support. This is accomplished typically through creation of
one or more classes whose right to payments on the security is made subordinate
to the right to such payments of the remaining class or classes. Second,
multiple classes may permit the issuance of securities with payment terms,
interest rates, or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (mortgage- and asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-mortgage-
or asset-backed securities, such as floating interest rates (I.E., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
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The Fund 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 the Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
Mortgage- and asset-backed securities backed by assets, other than as described
above, or in which the payment streams on the underlying assets are allocated
in a manner different than those described above may be issued in the future.
The Fund may invest in such securities if such investment is otherwise
consistent with its investment objectives and policies and with the investment
restrictions of the Fund.
MUNICIPAL OBLIGATIONS
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements
of state, regional, and local governments. Municipal notes include tax
anticipation notes, bond anticipation notes, revenue anticipation notes, tax
and revenue anticipation notes, construction loan notes, short-term discount
notes, tax-exempt commercial paper, demand notes, and similar instruments.
Municipal obligations include obligations, the interest on which is exempt from
federal income tax, that may become available in the future as long as the
Board of Directors of the Fund determines that an investment in any such type
of obligation is consistent with that Fund's investment objective.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities, such as
state and municipal vehicles, telecommunications and computer equipment, and
other capital assets. The Fund may purchase these obligations directly, or it
may purchase participation interests in such obligations. Municipal leases are
generally subject to greater risks than general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet in order to issue municipal obligations. Municipal
leases may contain a covenant by the state or municipality to budget for,
appropriate, and make payments due under the obligation. Certain municipal
leases may, however, contain "non-appropriation" clauses which provide that the
issuer is not obligated to make payments on the obligation in future years
unless funds have been appropriated for this purpose each year. Accordingly,
such obligations are subject to "non-appropriation" risk. While municipal
leases are secured by the underlying capital asset, it may be difficult to
dispose of any such asset in the event of non-appropriation or other default.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the 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 the 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 Fund enters
into repurchase agreements to evaluate those risks. The Fund may, under
certain circumstances, deem repurchase agreements collateralized by U.S.
government securities to be investments in U.S. government securities.
THE FOLLOWING SECTION APPLIES TO THE HERITAGE MONEY, MONEY MARKET, MUNICIPAL
MONEY, AND STEP 1 MONEY FUNDS ONLY:
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RULE 2A-7: MATURITY, QUALITY, AND DIVERSIFICATION RESTRICTIONS
All capitalized but undefined terms in this discussion shall have the meaning
such terms have in Rule 2a-7 under the 1940 Act. The Fund is subject to
certain maturity restrictions in accordance with Rule 2a-7 for money market
funds that use the amortized cost method of valuation to maintain a stable net
asset value of $1.00 per share. Accordingly, the Fund will (1) maintain a
dollar weighted average portfolio maturity of 90 days or less, and (2) will
purchase securities with a remaining maturity of no more than 13 months (397
calendar days). Further, the Fund will limit its investments to U.S.
dollar-denominated securities which represent minimal credit risks and meet
certain credit quality and diversification requirements. For purposes of
calculating the maturity of portfolio instruments, the Fund will follow the
requirements of Rule 2a-7. Under Rule 2a-7, the maturity of portfolio
instruments is calculated as indicated below.
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining (calculated from the trade date or such other date on which
the Fund's interest in the instrument is subject to market action) until the
date noted on the face of the instrument as the date on which the principal
amount must be paid, or in the case of an instrument called for redemption, the
date on which the redemption payment must be made, except that:
(1) An instrument that is issued or guaranteed by the U.S. government or
any agency thereof which has a variable rate of interest readjusted no less
frequently than every 762 days shall be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate.
(2) A Variable Rate Instrument, the principal amount of which is scheduled
on the face of the instrument to be paid on 397 calendar days or less shall be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
(3) A Variable Rate Instrument that is subject to a Demand Feature shall be
deemed to have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
(4) A Floating Rate Instrument that is subject to a Demand Feature shall be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
(5) A repurchase agreement shall be deemed to have a maturity equal to the
period remaining until the date on which the repurchase of the underlying
securities is scheduled to occur, or, where no date is specified, but the
agreement is subject to a demand, the notice period applicable to a demand for
the repurchase of the securities.
The Fund is subject to certain credit quality restrictions pursuant to Rule
2a-7 under the 1940 Act. The Fund will invest at least 95% of its assets in
instruments determined to present minimal credit risks and, at the time of
acquisition, are (1) obligations issued or guaranteed by the U.S. government,
its agencies, or instrumentalities; (2) rated by at least two nationally
recognized rating agencies (or by one agency if only one agency has issued a
rating) (the "required rating agencies") in the highest rating category for
short-term debt obligations; (3) unrated but whose issuer is rated in the
highest category by the required rating agencies with respect to a class of
short-term debt obligations or any security within that class that is
comparable in priority and security with the instrument; or (4) unrated (other
than the type described in (3)) but determined by the Board of Directors of the
Fund to be of comparable quality to the foregoing (provided the unrated
security has not received a short-term rating, and with respect to a long-term
security with a remaining maturity within the Fund's maturity restrictions, has
not received a long-term rating from any agency that is other than in its
highest rating category). The foregoing are referred to as "first-tier
securities."
The balance of the securities in which the Fund may invest are instruments
determined to present minimal credit risks, which do not qualify as first-tier
securities, and, at the time of acquisition, are (1) rated by the required
rating agencies in one of the two highest rating categories for short-term debt
obligations; (2) unrated but whose issuer is rated in one of the two highest
categories by the required rating agencies with respect to a class of
short-term debt obligations or any security within that class that is
comparable in priority and security with the obligation; or (3) unrated (other
than described in (2)) but determined by the Board of Directors of the Fund to
be of comparable quality to the foregoing (provided the unrated security has
not received a short-term
27
<PAGE>
rating and, with respect to a long-term security with a remaining maturity
within the Fund's maturity restrictions, has not received a long-term rating
from any agency that is other than in one of its highest two rating
categories). The foregoing are referred to as "second-tier securities."
In addition to the foregoing guidelines, the Fund is subject to certain
diversification restrictions pursuant to Rule 2a-7 under the 1940 Act, which
include (1) the Fund will not acquire a second-tier security of an issuer if,
after giving effect to the acquisition, the Fund would have invested more than
the greater of 1% of its total assets or one million dollars in second-tier
securities issued by that issuer, or (2) the Fund will not invest more than 5%
of the Fund's assets in the securities (other than securities issued by the
U.S. government or any agency or instrumentality thereof) issued by a single
issuer, except for certain investments held for not more than 3 business days.
REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR ROLLS
The Fund may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions as discussed below. In a reverse repurchase agreement, the Fund
would sell a security and enter into an agreement to repurchase the security at
a specified future date and price. The Fund generally retains the right to
interest and principal payments on the security. Since the Fund receives cash
upon entering into a reverse repurchase agreement, it may be considered a
borrowing. When required by guidelines of the SEC, the Fund will set aside
permissible liquid assets in a segregated account to secure its obligations to
repurchase the security.
The 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 the 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 Fund.
The mortgage dollar rolls and reverse repurchase agreements entered into by the
Fund may be used as arbitrage transactions in which the 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 the 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 Fund that are associated with other types of
leverage.
THE FOLLOWING SECTION APPLIES TO THE MUNICIPAL MONEY AND MUNICIPAL ADVANTAGE
FUNDS ONLY:
SECTOR CONCENTRATION
From time to time, the Fund may invest 25% or more of its assets in municipal
bonds that are related in such a way that an economic, business, or political
development or change affecting one such security could also affect the other
securities (for example, securities whose issuers are located in the same
state). Such related sectors may include hospitals, retirement centers,
pollution control, single family housing, multiple family housing, industrial
development, utilities, education, and general obligation bonds. The Fund also
may invest 25% or more of its assets in municipal bonds whose issuers are
located in the same state. Such states may include California, Pennsylvania,
Texas, New York, Florida, and Illinois.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
SHORT SALES
28
<PAGE>
The Fund may sell securities short (1) to hedge unrealized gains on portfolio
securities or (2) if it covers such short sale with liquid assets as required
by the current rules and positions of the SEC or its staff. Selling securities
short against the box involves selling a security that the Fund owns or has the
right to acquire, for delivery at a specified date in the future. If the 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.
THE FOLLOWING SECTION APPLIES TO THE MUNICIPAL MONEY AND MUNICIPAL ADVANTAGE
FUNDS ONLY:
TAXABLE SECURITIES
From time to time when the Advisor deems it appropriate, the Fund may invest up
to 20% of its net assets on a temporary basis in taxable investments (of
comparable quality to their respective tax-free investments), which would
produce interest not exempt from federal income tax, including among others:
(1) obligations issued or guaranteed, as to principal and interest, by the
United States government, its agencies, or instrumentalities; (2) obligations
of financial institutions, including banks, savings and loan institutions,
insurance companies and mortgage banks, such as certificates of deposit,
bankers' acceptances, and time deposits; (3) corporate obligations, including
preferred stock and commercial paper, with equivalent credit quality to the
municipal securities in which the Fund may invest; and (4) repurchase
agreements with respect to any of the foregoing instruments. For example, the
Fund may invest in such taxable investments pending the investment or
reinvestment of such assets in municipal securities, in order to avoid the
necessity of liquidating portfolio securities to satisfy redemptions or pay
expenses, or when such action is deemed to be in the interest of the Fund's
shareholders. In addition, the Fund may invest up to 100% of its total assets
in private activity bonds, the interest on which is a tax-preference item for
taxpayers subject to the federal alternative minimum tax.
VARIABLE- OR FLOATING-RATE SECURITIES
The Fund may invest in securities which offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a
new interest rate at fixed intervals (E.G., daily, monthly, semi-annually,
etc.). Floating-rate securities generally provide for automatic adjustment of
the interest rate whenever some specified interest rate index changes. The
interest rate on variable- or floating-rate securities is ordinarily determined
by reference to or is a percentage of a bank's prime rate, the 90-day U.S.
Treasury bill rate, the rate of return on commercial paper or bank certificates
of deposit, an index of short-term interest rates, or some other objective
measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on seven days notice; in
other cases, the demand feature is exercisable at any time on 30 days notice or
on similar notice at intervals of not more than one year. Some securities
which do not have variable or floating interest rates may be accompanied by
puts producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, the Fund may consider that instrument's maturity to be shorter than its
stated maturity.
Variable-rate demand notes include master demand notes which are obligations
that permit the Fund to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Fund, as lender,
and the borrower. The interest rates on these notes fluctuate from time to
time. The issuer of such obligations normally has a corresponding right, after
a given period, to prepay in its discretion the outstanding principal amount of
the obligations plus accrued interest upon a specified number of days notice to
the holders of such obligations. The interest rate on a floating-rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and
is adjusted automatically each time such rate is adjusted. The interest rate
on a variable-rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be traded. There generally
is not an established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and
interest on demand. Such obligations frequently are not rated by credit rating
agencies and, if not so rated, the Fund may invest in them only if the Advisor
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Fund may invest. The Advisor, on
29
<PAGE>
behalf of the Fund, will consider on an ongoing basis the creditworthiness of
the issuers of the floating- and variable-rate demand obligations in the Fund's
portfolio.
The Fund will not invest more than 15% of its net assets (10% for money market
funds) in variable- and floating-rate demand obligations that are not readily
marketable (a variable- or floating-rate demand obligation that may be disposed
of on not more than seven days notice will be deemed readily marketable and
will not be subject to this limitation). In addition, each variable- or
floating-rate obligation must meet the credit quality requirements applicable
to all the Fund's investments at the time of purchase. When determining
whether such an obligation meets the Fund's credit quality requirements, the
Fund may look to the credit quality of the financial guarantor providing a
letter of credit or other credit support arrangement.
In determining the Fund's weighted average portfolio maturity, the Fund will
consider a floating- or variable-rate security to have a maturity equal to its
stated maturity (or redemption date if it has been called for redemption),
except that it may consider (1) variable-rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest rate,
unless subject to a demand feature, (2) variable-rate securities subject to a
demand feature to have a remaining maturity equal to the longer of (a) the next
readjustment in the interest rate or (b) the period remaining until the
principal can be recovered through demand, and (3) floating-rate securities
subject to a demand feature to have a maturity equal to the period remaining
until the principal can be recovered through demand. Variable- and
floating-rate securities generally are subject to less principal fluctuation
than securities without these attributes since the securities usually trade at
amortized cost following the readjustment in the interest rate.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE FUND ONLY:
WARRANTS
The Fund may acquire warrants. Warrants are securities giving the holder the
right, but not the obligation, to buy the stock of an issuer at a given price
(generally higher than the value of the stock at the time of issuance) during a
specified period or perpetually. Warrants may be acquired separately or in
connection with the acquisition of securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that
they entitle their holder to purchase, and they do not represent any rights in
the assets of the issuer. As a result, warrants may be considered to have more
speculative characteristics than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant ceases to have value if it is not
exercised prior to its expiration date.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or delayed-delivery basis.
The price of debt obligations so purchased, which may be expressed in yield
terms, generally is fixed at the time the commitment to purchase is made, but
delivery and payment for the securities take place at a later date. During the
period between the purchase and settlement, no payment is made by the 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 and
delayed-delivery securities may be sold prior to the settlement date, the Fund
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the Fund
makes the commitment to purchase these types of securities, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Fund does not believe that its net asset value will be adversely
affected by these types of securities purchases.
To the extent required by the SEC, the Fund will maintain cash and marketable
securities equal in value to commitments for when-issued or delayed-delivery
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the
30
<PAGE>
settlement date. When the time comes to pay for when-issued or
delayed-delivery securities, the 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 or delayed-delivery
securities themselves (which may have a market value greater or less than the
Fund's payment obligation).
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may invest in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon and step-coupon securities are sold at a deep discount
to their face value. Pay-in-kind securities pay interest through the issuance
of additional securities. Because such securities do not pay current cash
income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, federal
income tax law requires the holders of zero-coupon, step-coupon, and
pay-in-kind securities to include in income each year the portion of the
original issue discount (or deemed discount) and other non-cash income on such
securities accruing that year. In order to continue to qualify as a "regulated
investment company" or "RIC" under the IRC and avoid a certain excise tax, the
Fund may be required to distribute a portion of such discount and income and
may be required to dispose of other portfolio securities, which may occur in
periods of adverse market prices, in order to generate cash to meet these
distribution requirements.
DIRECTORS AND OFFICERS
Directors and officers of the Fund, together with information as to their
principal business occupations during the last five years, and other
information are shown below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an asterisk (*). Each
officer and director holds the same position with the 26 registered open-end
management investment companies consisting of 48 mutual funds ("Strong Funds").
The Strong Funds, in the aggregate, pay each Director who is not a director,
officer, or employee of the Advisor, or any affiliated company (a
"disinterested director") an annual fee of $50,000, plus $100 per Board meeting
for each Strong Fund. In addition, each disinterested director is reimbursed
by the Strong Funds for travel and other expenses incurred in connection with
attendance at such meetings. Other officers and directors of the Strong Funds
receive no compensation or expense reimbursement from the Strong Funds.
*RICHARD S. STRONG (DOB 5/12/42), Director and Chairman of the Board of the
Strong Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the Advisor,
which he founded in 1974. Since August 1985, Mr. Strong has been a Security
Analyst and Portfolio Manager of the Advisor. In October 1991, Mr. Strong also
became the Chairman of the Advisor. Mr. Strong is a Director of the Advisor.
Mr. Strong has been in the investment management business since 1967.
MARVIN E. NEVINS (DOB 7/19/18), Director of the Strong 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.
WILLIE D. DAVIS (DOB 7/24/34), Director of the Strong 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, 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 and Marquette University since 1988. Since 1977, Mr.
31
<PAGE>
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.
STANLEY KRITZIK (DOB 1/9/30), Director of the Strong 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.
WILLIAM F. VOGT (DOB 7/19/47), Director of the Strong 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.
THOMAS P. LEMKE (DOB 7/30/54), Vice President of the Strong Funds.
Mr. Lemke has been Senior Vice President, Secretary, and General Counsel of the
Advisor since September 1994 and Chief Operating Officer of the Advisor since
November 1997. 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
SEC, 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).
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the
Strong Funds.
Mr. Shenkenberg has been Acting General Counsel of the Advisor since January
1998. From November 1996 until January 1998, Mr. Shenkenberg acted as Deputy
General Counsel to the Advisor. From December 1992 until November 1996, Mr.
Shenkenberg acted as Associate Counsel to the Advisor. From June 1987 until
December 1992, Mr. Shenkenberg was an attorney for Godfrey & Kahn, S.C., a
Milwaukee law firm.
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Strong Funds.
Mr. Weitzer has been Senior Counsel of the Advisor since December 1997. From
July 1993 until December 1997, Mr. Weitzer acted as Associate Counsel to the
Advisor.
MARY F. HOPPA (DOB 5/31/64), Vice President of the Strong Funds.
Ms. Hoppa has been Vice President and Director of Mutual Fund Administration of
the Advisor since January 1998. From October 1996 to January 1998, Ms. Hoppa
acted as Director of Transfer Agency Services of the Advisor and, from January
1988 to October 1996, as Transfer Agency Systems Liaison Manager of the
Advisor. From January 1987 to January 1988, Ms. Hoppa acted as a Shareholder
Services Associate of the Advisor.
JOHN A. FLANAGAN (DOB 6/5/46), Treasurer of the Strong Funds.
Mr. Flanagan has been Senior Vice President of the Advisor since April 1997.
For three years prior to joining the Advisor, Mr. Flanagan was a Partner with
Coopers & Lybrand L.L.P. (an international professional services firm). From
November 1992 to April 1994, Mr. Flanagan was an independent consultant. From
October 1970 to November 1992, Mr. Flanagan was with Ernst & Young (an
international professional services firm), most notably as Partner in charge of
the Investment Company Practice of that firm's Boston office from 1982 to 1992.
32
<PAGE>
Except for Messrs. Nevins, Davis, Kritzik, and Vogt, the address of all of the
above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 34108. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301. Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 2830 East Third Avenue, Denver, Colorado
80206.
Unless otherwise noted below, as of May 30, 1998, the officers and directors of
the Fund in the aggregate beneficially owned less than 1% of the Fund's then
outstanding shares.
FUND SHARES PERCENT
- ------ ------ -------
None
PRINCIPAL SHAREHOLDERS
Unless otherwise noted below, as of May 30, 1998 no persons owned of record or
are known to own of record or beneficially more than 5% of the Fund's then
outstanding shares.
NAME AND ADDRESS SHARES PERCENT
- ---------------- ---------- ----------
None
INVESTMENT ADVISOR
The Fund has entered into an Advisory Agreement with Strong Capital Management,
Inc. ("Advisor"). Mr. Strong controls the Advisor. Mr. Strong is the Chairman
and a Director of the Advisor, Mr. Lemke is the Chief Operating Officer, a
Senior Vice President, Secretary, and General Counsel of the Advisor, Mr.
Flanagan is a Senior Vice President of the Advisor, Mr. Shenkenberg is Vice
President, Assistant Secretary, and Acting General Counsel of the Advisor, and
Mr. Weitzer is Senior Counsel of the Advisor.
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. The 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.
33
<PAGE>
Under the terms of the 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. The Advisory Agreement authorizes the
Advisor to delegate its investment advisory duties to a subadvisor in
accordance with a written agreement under which the subadvisor would furnish
such investment advisory services to the Advisor. In that situation, the
Advisor continues to have responsibility for all investment advisory services
furnished by the subadvisor under the subadvisory agreement. 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 Strong
Funds Distributors, Inc. with respect to the distribution of the Fund's shares,
the Fund is responsible for all its other expenses, including, without
limitation, interest charges, taxes, brokerage commissions, and similar
expenses; expenses of issue, sale, repurchase or redemption of shares; expenses
of registering or qualifying shares for sale with the states and the SEC;
expenses for printing and distribution of prospectuses to existing
shareholders; charges of custodians (including fees as custodian for keeping
books and similar services for the Fund), transfer agents (including the
printing and mailing of reports and notices to shareholders), registrars,
auditing and legal services, and clerical services related to recordkeeping and
shareholder relations; printing of stock certificates; fees for directors who
are not "interested persons" of the Advisor; expenses of indemnification;
extraordinary expenses; and costs of shareholder and director meetings.
As compensation for its services, the Fund pays to the Advisor a monthly
management fee at the annual rate specified below of the average daily net
asset value of the Fund. From time to time, the Advisor may voluntarily waive
all or a portion of its management fee for the Fund.
FUND ANNUAL RATE
- ---------------------------- --------------------
Heritage Money Fund 0.50%
Money Market Fund 0.50%
Municipal Money Market Fund 0.50%
Step 1 Money Fund 0.50%
Advantage Fund 0.60%
Municipal Advantage Fund 0.60%
The Fund paid the following management fees for the time periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MANAGEMENT FEE
FISCAL YEAR ENDED MANAGEMENT FEE ($) WAIVER($) AFTER WAIVER ($)
- ----------------- ------------------ ---------------- ----------------
</TABLE>
Heritage Money Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2/29/96(1) 1,618,972 1,567,383 51,589
2/28/97 7,586,904 6,800,327 786,576
2/28/98 8,707,440 4,390,949 4,316,491
</TABLE>
34
<PAGE>
Money Market Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
12/31/94 2,159,922 1,108,463 1,051,459
10/31/95* 7,241,685 6,653,346 588,339
10/31/96 9,951,778 2,566,311 7,385,467
10/31/97 9,599,484 482,401 9,117,083
</TABLE>
Municipal Money Market Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
12/31/95 6,526,085 0 6,526,085
2/29/96** 1,248,094 0 1,248,094
2/28/97 8,729,286 0 8,729,286
2/28/98 9,310,640 0 9,310,640
</TABLE>
Step 1 Money Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2/28/98(2) 2,182 2,182 0
</TABLE>
Advantage Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
12/31/95 5,383,923 0 5,383,923
2/29/96** 974,030 0 974,030
2/28/97 7,395,454 0 7,395,454
2/28/98 11,086,463 0 11,086,463
</TABLE>
Municipal Advantage Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2/29/96(3) 67,974 67,974 0
2/28/97 2,321,942 2,287,263 34,679
2/28/98 5,033,884 1,266,133 3,767,751
</TABLE>
* For the ten-month fiscal year ended October 31, 1995.
** For the two-month fiscal year ended February 29, 1996.
(1) Commenced operations on June 29, 1995.
(2) Commenced operations on January 31, 1998.
(3) Commenced operations on November 30, 1995.
The organizational expenses for the Fund which were advanced by the Advisor and
which will be reimbursed by the Fund over a period of not more than 60 months
from the Fund's date of inception are listed below.
<TABLE>
<CAPTION>
<S> <C>
FUND ORGANIZATIONAL EXPENSES
- ------------------------ ------------------------
Step 1 Money Fund $1,057
Municipal Advantage Fund $82,660
Heritage Money Fund $92,657
</TABLE>
The Advisory Agreement requires the Advisor to reimburse the Fund in the event
that the expenses and charges payable by the Fund in any fiscal year, including
the management fee but excluding taxes, interest, brokerage commissions, and
similar fees and to the extent permitted extraordinary expenses, exceed two
percent (2%) of the average net asset value of the Fund for such year, as
determined by valuations made as of the close of each business day of the year.
Reimbursement of expenses in excess of the applicable limitation will be made
on a monthly basis and will be paid to the Fund by reduction of the Advisor's
fee, subject to later adjustment, month by month, for the remainder of the
Fund's fiscal year. The Advisor may from time to time voluntarily absorb
expenses for the Fund in addition to the reimbursement of expenses in excess of
applicable limitations.
35
<PAGE>
On July 12, 1994, 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 found that the Advisor and Mr. Strong aided and abetted
violations of Section 17(a) of the 1940 Act by effecting trades between mutual
funds, and between mutual funds and Harbour Investments Ltd. ("Harbour"),
without complying with the exemptive provisions of SEC Rule 17a-7 or otherwise
obtaining an exemption. It further found that the Advisor violated, and Mr.
Strong aided and abetted violations of, the disclosure provisions of the 1940
Act and the Investment Advisers Act of 1940 by misrepresenting the Advisor's
policy on personal trading and by failing to disclose trading by Harbour, an
entity in which principals of the Advisor owned between 18 and 25 percent of
the voting stock. As part of the settlement, the respondents agreed to a
censure and a cease and desist order and the Advisor agreed to various
undertakings, including adoption of certain procedures and a limitation for six
months on accepting certain types of new advisory clients.
On June 6, 1996, the Department of Labor ("DOL") filed an action against the
Advisor for equitable relief alleging violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") in connection with cross trades that
occurred between 1987 and late 1989 involving certain pension accounts managed
by the Advisor. Contemporaneous with this filing, the Advisor, without
admitting or denying the DOL's allegations, agreed to the entry of a consent
judgment resolving all matters relating to the allegations. Reich v. Strong
Capital Management, Inc., (U.S.D.C. E.D. WI) ("Consent Judgment"). Under the
terms of the Consent Judgment, the Advisor agreed to reimburse the affected
accounts a total of $5.9 million. The settlement did not have any material
impact on the Advisor's financial position or operations.
The Fund and the Advisor have adopted a Code of Ethics ("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 Fund, 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 Fund and the Advisor 's other
clients ahead of their own.
The Code requires Access Persons (other than Access Persons who are independent
directors of the investment companies managed by the Advisor, including the
Fund) 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 Fund), includes a ban on
acquiring any securities in an initial public offering, other than a new
offering of a registered open-end investment company, and a prohibition from
profiting on short-term trading in securities. In addition, no Access Person
may purchase or sell any security which is contemporaneously being purchased or
sold, or to the knowledge of the Access Person, is being considered for
purchase or sale, by the Advisor on behalf of any mutual fund or other account
managed by it. Finally, the Code provides for trading "black out" periods of
seven calendar days during which time Access Persons who are portfolio managers
may not trade in securities which have been purchased or sold by any mutual
fund or other account managed by the portfolio manager.
The Advisor provides investment advisory services for multiple clients and may
give advice and take action, with respect to any client, that may differ from
the advice given, or the timing or nature of action taken, with respect to any
one account. However, the Advisor will allocate over a period of time, to the
extent practical, investment opportunities to each account on a fair and
equitable basis relative to other similarly-situated client accounts. The
Advisor, its principals and associates (to the extent not prohibited by the
Code), and other clients of the Advisor may have, acquire, increase, decrease,
or dispose of securities or interests therein at or about the same time that
the Advisor is purchasing or selling securities or interests therein for an
account which purchase or sale is or may be deemed to be inconsistent with the
actions taken by such persons.
From time to time, the Advisor votes the shares owned by the Fund according to
its Statement of General Proxy Voting Policy ("Proxy Voting Policy"). The
general principal of the Proxy Voting Policy is to vote any beneficial interest
in an equity security prudently and solely in the best long-term economic
interest of the Fund and its beneficiaries considering all relevant factors and
without undue influence from individuals or groups who may have an economic
interest in the outcome of a proxy vote. Shareholders may obtain a copy of the
Proxy Voting Policy upon request from the Advisor.
36
<PAGE>
The Advisor also provides a program of custom portfolio management called the
Strong Advisor. This program is designed to determine which investment
approach fits an investor's financial needs and then provides the investor with
a custom built portfolio of Strong Funds based on that allocation. The
Advisor, on behalf of participants in the Strong Advisor program, may determine
to invest a portion of the program's assets in any one Strong Fund, which
investment, particularly in the case of a smaller Strong Fund, could represent
a material portion of the Fund's assets. In such cases, a decision to redeem
the Strong Advisor program's investment in a Fund on short notice could raise a
potential conflict of interest for the Advisor, between the interests of
participants in the Strong Advisor program and of the Fund's other
shareholders. In general, the Advisor does not expect to direct the Strong
Advisor program to make redemption requests on short notice. However, should
the Advisor determine this to be necessary, the Advisor will use its best
efforts and act in good faith to balance the potentially competing interests of
participants in the Strong Advisor program and the Fund's other shareholders in
a manner the Advisor deems most appropriate for both parties in light of the
circumstances.
For more complete information about the Advisor, including its services,
investment strategies, policies, and procedures, please call 1-800-368-3863 and
ask for a copy of the Advisor's Form ADV.
DISTRIBUTOR
Under a Distribution Agreement with the Fund ("Distribution Agreement"), Strong
Funds Distributors, Inc. ("Distributor") acts as underwriter of the Fund's
shares. Mr. Strong is the Chairman and Director of the Distributor, Mr. Lemke
is a Vice President of the Distributor, and Mr. Shenkenberg is a Vice President
and Secretary of the Distributor. The Distribution Agreement provides that the
Distributor will use its best efforts to distribute the Fund's shares. Since
the Fund is a "no-load" fund, no sales commissions are charged on the purchase
of Fund shares. The Distribution Agreement further provides that the
Distributor will bear the additional costs of printing prospectuses and
shareholder reports which are used for selling purposes, as well as advertising
and any other costs attributable to the distribution of the Fund's shares. The
Distributor is an indirect subsidiary of the Advisor and controlled by the
Advisor and Richard S. Strong. The Distribution Agreement is subject to the
same termination and renewal provisions as are described above with respect to
the Advisory Agreement.
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 the 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 proposed rule amendments of the National
Association of Securities Dealers, Inc. ("NASD"), 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
Fund and for the placement of the Fund's 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 Fund. In OTC
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 Fund 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.
37
<PAGE>
The Advisor has adopted procedures that provide generally for the Advisor to
seek to bunch orders for the purchase or sale of the same security for the
Fund, other mutual funds managed by the Advisor, and other advisory clients
(collectively, "client accounts"). The Advisor will bunch orders when it deems
it to be appropriate and in the best interest of the client accounts. When a
bunched order is filled in its entirety, each participating client account will
participate at the average share price for the bunched order on the same
business day, and transaction costs shall be shared pro rata based on each
client's participation in the bunched order. When a bunched order is only
partially filled, the securities purchased will be allocated on a pro rata
basis to each client account participating in the bunched order based upon the
initial amount requested for the account, subject to certain exceptions, and
each participating account will participate at the average share price for the
bunched order on the same business day.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment advisor, under certain circumstances, to cause an account to pay
a broker or dealer a commission for effecting a transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
the transaction in recognition of the value of the brokerage and research
services provided by the broker or dealer. Brokerage and research services
include (1) 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; (2) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement, the Advisor may cause
the Fund 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 Agreement provides that such
higher commissions will not be paid by the Fund unless (1) 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; (2) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal laws, and the
Advisory Agreement; and (3) in the opinion of the Advisor, the total
commissions paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term. The investment management fee paid by the Fund
under the Advisory Agreement is not reduced as a result of the Advisor's
receipt of research services.
Generally, research services provided by brokers may include information on the
economy, industries, groups of securities, individual companies, statistical
information, accounting and tax law interpretations, political developments,
legal developments affecting portfolio securities, technical market action,
pricing and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. Such
research services are received primarily in the form of written reports,
telephone contacts, and personal meetings with security analysts. In addition,
such research services may be provided in the form of access to various
computer-generated data, computer hardware and software, and meetings arranged
with corporate and industry spokespersons, economists, academicians, and
government representatives. In some cases, research services are generated by
third parties but are provided to the Advisor by or through brokers. Such
brokers may pay for all or a portion of computer hardware and software costs
relating to the pricing of securities.
Where the Advisor itself receives both administrative benefits and research and
brokerage services from the services provided by brokers, it makes a good faith
allocation between the administrative benefits and the research and brokerage
services, and will pay for any administrative benefits with cash. In making
good faith allocations 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 Fund and
other advisory clients.
From time to time, the Advisor may purchase new issues of securities for the
Fund in a fixed income 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 Fund and other advisory clients, provide the Advisor with research. The
NASD 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).
38
<PAGE>
At least annually, 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 Fund and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e), the
Advisor allocates brokerage to those firms, provided that the value of any
research and brokerage services was reasonable in relationship to the amount of
commission paid and was subject to best execution. In no case will the
Advisor make binding commitments as to the level of brokerage commissions it
will allocate to a broker, nor will it commit to pay cash if any informal
targets are not met. The Advisor anticipates it will continue to enter into
such brokerage arrangements.
The Advisor may direct the purchase of securities on behalf of the Fund 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 Fund effects its 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 Fund. In the
opinion of the Advisor, it is not possible to measure separately the benefits
from research services to each of the accounts 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 Fund will not be
disproportionate to the benefits received by the Fund on a continuing basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In
making such allocations between the Fund and other advisory accounts, the main
factors considered by the Advisor are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending
the investment.
Where consistent with a client's investment objectives, investment
restrictions, and risk tolerance, the Advisor may purchase securities sold in
underwritten public offerings for client accounts, commonly referred to as
"deal" securities. The Advisor has adopted deal allocation procedures
("Procedures"), summarized below, that reflect the Advisor's overriding policy
that deal securities must be allocated among participating client accounts in a
fair and equitable manner and that deal securities may not be allocated in a
manner that unfairly discriminates in favor of certain clients or types of
clients.
The Procedures provide that, in determining which client accounts a portfolio
manager team will seek to have purchase deal securities, the team will consider
all relevant factors including, but not limited to, the nature, size, and
expected allocation to the Advisor of deal securities; the size of the
account(s); the accounts' investment objectives and restrictions; the risk
tolerance of the client; the client's tolerance for possibly higher portfolio
turnover; the amount of commissions generated by the account during the past
year; and the number and nature of other deals the client has participated in
during the past year.
Where more than one of the Advisor's portfolio manager team seeks to have
client accounts participate in a deal and the amount of deal securities
allocated to the Advisor by the underwriting syndicate is less than the
aggregate amount ordered by the Advisor (a "reduced allocation"), the deal
securities will be allocated among the portfolio manager teams based on all
relevant factors. The primary factor shall be assets under management,
although other factors that may be considered in the allocation decision
include,
39
<PAGE>
but are not limited to, the nature, size, and expected allocation of the deal;
the amount of brokerage commissions or other amounts generated by the
respective participating portfolio manager teams; and which portfolio manager
team is primarily responsible for the Advisor receiving securities in the deal.
Based on relevant factors, the Advisor has established general allocation
percentages for its portfolio manager teams, and these percentages are reviewed
on a regular basis to determine whether asset growth or other factors make it
appropriate to use different general allocation percentages for reduced
allocations.
When a portfolio manager team receives a reduced allocation of deal securities,
the portfolio manager team will allocate the reduced allocation among client
accounts in accordance with the allocation percentages set forth in the team's
initial allocation instructions for the deal securities, except where this
would result in a DE MINIMIS allocation to any client account. On a regular
basis, the Advisor reviews the allocation of deal securities to ensure that
they have been allocated in a fair and equitable manner that does not unfairly
discriminate in favor of certain clients or types of clients.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"). The Fund's procedures in selecting FCMs to execute the
Fund's transactions in futures contracts are similar to those in effect with
respect to brokerage transactions in securities.
The Fund paid the following brokerage commissions for the time periods
indicated:
FISCAL YEAR ENDED BROKERAGE COMMISSIONS ($)
- ---------------------- -------------------------
Heritage Money Fund
2/29/96(1) 0
2/28/97 0
2/28/98 0
Money Market Fund
12/31/94 0
10/31/95* 0
10/31/96 0
10/31/97 0
Municipal Money Market Fund
12/31/95 0
2/29/96** 0
2/28/97 0
2/28/98 0
Step 1 Money Fund
2/28/98(2) 0
Advantage Fund
12/31/95 471,848(4)
2/29/96** 0
2/28/97 127,430
2/28/98 244,178
Municipal Advantage Fund
2/29/96(3) 0
2/28/97 12,642
2/28/98 5,300
* For the ten-month fiscal year ended October 31, 1995.
** For the two-month fiscal year ended February 29, 1996.
(1) Commenced operations on June 29, 1995.
(2) Commenced operations on January 31, 1998.
(3) Commenced operations on November 30, 1995.
(4) The Fund paid higher brokerage commissions for the fiscal year ended
December 31, 1995, due to trading strategies employed in response to volatile
foreign market conditions. These strategies were designed to help the Fund
achieve current income in pursuit of its investment objective.
Unless otherwise noted below, the Fund has not acquired securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
their parents:
<TABLE>
<CAPTION>
<S> <C>
REGULAR BROKER OR DEALER (OR PARENT) ISSUER VALUE OF SECURITIES OWNED AS OF OCTOBER 31, 1997
- ----------------------------------------------- -------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith, Inc. $25,534,000 (Money Market)
CS First Boston Corporation $25,000,000 (Money Market)
Goldman Sachs & Co. $19,935,000 (Money Market)
Salomon Brothers Inc. $19,822,000 (Money Market)
REGULAR BROKER OR DEALER (OR PARENT) ISSUER VALUE OF SECURITIES OWNED AS OF FEBRUARY 28, 1998
- ----------------------------------------------- -------------------------------------------------
Lehman Brothers, Inc. $20,050,000 (Advantage)
Salomon Brothers, Inc. $4,400,000 (Advantage)
Morgan Stanley, Dean Witter & Co. $22,157,000 (Heritage Money)
Credit Suisse First Boston Corporation $19,761,000 (Heritage Money)
Goldman Sachs & Co. $19,691,000 (Heritage Money)
Salomon Smith Barney, Inc. $11,215,000 (Heritage Money)
Merrill Lynch, Pierce, Fenner & Smith, Inc. $6,252,000 (Heritage Money)
Bank of America NT & SA $3,999,000 (Heritage Money)
</TABLE>
CUSTODIAN
As custodian of the Fund's assets, Firstar Trust Company, P.O. Box 761,
Milwaukee, Wisconsin 53201, has custody of all securities and cash of the Fund,
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 officers of the Fund. The custodian is in no way
responsible for any of the investment policies or decisions of the Fund. With
respect to money market funds, the custodian has entered into a sub-custodial
arrangement with Bankers Trust Company ("BTC" by which BTC may retain custody
of certain money fund foreign securities. The custodian and, if applicable,
the sub-custodian are in no way responsible for any of the investment policies
or decisions of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Advisor acts as transfer agent and dividend-disbursing agent for the Fund.
The Advisor is compensated based on an annual fee per open account of $21.75
for equity funds, $31.50 for income and municipal income funds, and $32.50 for
money market 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 $4.20 from the Fund. The fees
received and the services provided as transfer agent and dividend disbursing
agent are in addition to those received and provided by the Advisor under the
Advisory Agreements. In addition, the Advisor provides certain printing and
mailing services for the Fund, such as printing and mailing of shareholder
account statements, checks, and tax forms.
From time to time, the Fund, directly or indirectly through arrangements with
the Advisor, and/or the Advisor may pay amounts to third parties that provide
transfer agent type services and other administrative services relating to the
Fund to persons who beneficially own interests in the Fund, such as
participants in 401(k) plans. These services may include, among other things,
sub
41
<PAGE>
accounting services, transfer agent type activities, answering inquiries
relating to the Fund, transmitting proxy statements, annual reports, updated
prospectuses, other communications regarding the Fund, and related services as
the Fund or beneficial owners may reasonably request. In such cases, the Fund
will not pay fees based on the number of beneficial owners at a rate that is
greater than the rate the Fund is currently paying the Advisor for providing
these services to Fund shareholders.
The Fund paid the following amounts for the time periods indicated for transfer
agency and dividend disbursing and printing and mailing services:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PER ACCOUNT OUT-OF-POCKET PRINTING/MAILING TOTAL COST AFTER
FUND CHARGES ($) EXPENSES ($) SERVICES ($) WAIVER ($) WAIVER ($)
- ------------ ------------ ------------- ---------------- ------------ ----------------
</TABLE>
Heritage Money Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
2/29/96(1) 62,482 171,458 951 234,794 97
2/28/97 354,819 453,008 9,070 816,897 0
2/28/98 477,274 431,083 9,553 917,910 0
</TABLE>
Money Market Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
12/31/94 1,073,113 355,873 31,377 187 1,460,176
10/31/95* 2,043,185 695,541 54,137 2,763,250 29,613
10/31/96 3,940,389 1,424,481 105,757 5,470,627 0
10/31/97 4,578,923 1,388,238 97,226 6,064,387 0
</TABLE>
Municipal Money Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
12/31/95 864,872 484,927 28,572 0 1,378,371
2/29/96** 149,387 150,720 6,413 0 306,520
2/28/97 920,594 755,631 25,882 0 1,702,107
2/28/98 867,309 773,566 20,806 0 1,661,681
</TABLE>
Step 1 Money Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
2/28/98(2) 1,891 229 0 2,120 0
</TABLE>
Advantage Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
12/31/95 1,419,225 158,634 23,771 0 1,601,630
2/29/96** 236,170 47,564 6,990 0 290,724
2/28/97 1,760,983 216,305 27,756 0 2,005,044
2/28/98 2,273,544 216,681 27,375 0 2,517,600
</TABLE>
Municipal Advantage Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
2/29/96(3) 3,169 2,295 0 5,464 0
2/28/97 146,569 49,738 3,424 199,731 0
2/28/98 280,757 93,357 4,766 256,950 121,930
</TABLE>
* For the ten-month fiscal year ended October 31, 1995.
** For the two-month fiscal year ended February 29, 1996.
(1) Commenced operations on June 29, 1995.
(2) Commenced operations on January 31, 1998.
(3) Commenced operations on November 30, 1995.
42
<PAGE>
TAXES
GENERAL
The Fund intends to qualify annually for treatment as a regulated investment
company ("RIC") under the IRC. This qualification does not involve government
supervision of the Fund's management practices or policies. The following
federal tax discussion is intended to provide you with an overview of the
impact of federal income tax provisions on the 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 the Fund's current
ability to pass-through earnings without taxation at the Fund level, or
otherwise materially changes the Fund's tax treatment, could adversely affect
the value of a shareholder's investment in the Fund. Because the Fund's taxes
are a complex matter, you should consult your tax adviser for more detailed
information concerning the taxation of the Fund and the federal, state, and
local tax consequences to shareholders of an investment in the Fund.
In order to qualify for treatment as a RIC under the IRC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if applicable) ("Distribution Requirement") and
must meet several additional requirements. 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 if applicable) or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of
investing in securities ("Income Requirement"); (2) 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 (3) 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.
The 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.
THE FOLLOWING SECTION APPLIES TO THE MUNICIPAL MONEY MARKET AND MUNICIPAL
ADVANTAGE FUNDS ONLY:
MUNICIPAL SECURITIES
A substantial portion of the dividends paid by the Fund will qualify as
exempt-interest dividends and thus will be excludable from gross income by its
shareholders, if the Fund satisfies the requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a); the Fund intends to continue to satisfy this requirement.
The aggregate dividends excludable from the Fund's shareholders' gross income
may not exceed the Fund's net tax-exempt income. The shareholders' treatment
of dividends from the Fund under local and state income tax laws may differ
from the treatment thereof under the Tax Code.
43
<PAGE>
Tax-exempt interest attributable to certain private activity bonds ("PABs")
(including, in the case of a RIC receiving interest on such bonds, a
proportionate part of the exempt-interest dividends paid by that RIC) is
subject to the alternative minimum tax. Exempt-interest dividends received by
a corporate shareholder also may be indirectly subject to that tax without
regard to whether the Fund's tax-exempt interest was attributable to such
bonds. Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by PABs or industrial development
bonds ("IDBs") should consult their tax advisors before purchasing shares of
the Fund because, for users of certain of these facilities, the interest on
such bonds is not exempt from federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of PABs or IDBs.
The Fund may invest in municipal bonds that are purchased, generally not on
their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with
original issue discount, a price less than the amount of the issue price plus
accrued original issue discount) ("municipal market discount bonds"). Market
discount generally arises when the value of the bond declines after issuance
(typically, because of an increase in prevailing interest rates or a decline in
the issuer's creditworthiness). Gain on the disposition of a municipal market
discount bond purchased by the Fund after April 30, 1993 (other than a bond
with a fixed maturity date within one year from its issuance), generally is
treated as ordinary (taxable) income, rather than capital gain, to the extent
of the bond's accrued market discount at the time of disposition. Market
discount on such a bond generally is accrued ratably, on a daily basis, over
the period from the acquisition date to the date of maturity. In lieu of
treating the disposition gain as above, the Fund may elect to include market
discount in its gross income currently, for each taxable year to which it is
attributable.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE FUND ONLY:
FOREIGN TRANSACTIONS
Dividends and interest received by the 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 U.S 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 the 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. The 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 the shareholder, the
shareholder's proportionate share of those taxes, (2) treat the shareholder's
share of those taxes and of any dividend paid by the Fund that represents
income from foreign or U.S. possessions sources as the shareholder's own income
from those sources, and (3) either deduct the taxes deemed paid by the
shareholder in computing the shareholder's taxable income or, alternatively,
use the foregoing information in calculating the foreign tax credit against the
shareholder's federal income tax. The 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.
The Fund holding foreign securities in its investment portfolio 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 the 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 the 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 Fund may invest in the stock of "passive foreign investment companies"
("PFICs") in accordance with its investment objective, policies and
restrictions. 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, the 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
44
<PAGE>
its shareholders. If the 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.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling (writing)
options and futures and entering into forward currency contracts, if
applicable, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains and losses the Fund
realizes in connection therewith. Gains from the disposition of foreign
currencies, if any (except certain gains therefrom that may be excluded by
future regulations), and income from transactions in options, futures, and
forward currency contracts, if applicable, derived by the Fund with respect to
its business of investing in securities or foreign currencies, if applicable,
will qualify as permissible income under the Income Requirement.
For federal income tax purposes, the Fund is required to recognize as income
for each taxable year its net unrealized gains and losses on options, futures,
or forward currency contracts, if any, that are subject to section 1256 of the
IRC ("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 the 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.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may acquire zero-coupon, step-coupon, or other securities issued with
original issue discount. As a holder of those securities, the 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, the Fund must include in
its income securities it receives as "interest" on pay-in-kind securities.
Because the 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. The Fund may realize capital gains or
losses from those sales, which would increase or decrease its investment
company taxable income or net capital gain, or both.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund will be determined as of the close of trading
on each day the New York Stock Exchange ("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.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
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 the Fund. Debt
securities having remaining maturities of 60 days or less are valued by the
amortized cost method when the Fund's Board of Directors determines that the
fair value of such securities is their amortized cost. Under this method of
valuation, a
45
<PAGE>
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.
THE FOLLOWING SECTION APPLIES TO THE HERITAGE MONEY, MONEY MARKET, MUNICIPAL
MONEY, AND STEP 1 MONEY FUNDS ONLY:
The Fund values its securities on the amortized cost basis and seek to maintain
their net asset value at a constant $1.00 per share. In the event a difference
of 1/2 of 1% or more were to occur between the net asset value calculated by
reference to market values and the Fund's $1.00 per share net asset value, or
if there were any other deviation which the Fund's Board of Directors believed
would result in a material dilution to shareholders or purchasers, the Board of
Directors would consider taking any one or more of the following actions or any
other action considered appropriate: selling portfolio securities to shorten
average portfolio maturity or to realize capital gains or losses, reducing or
suspending shareholder income accruals, redeeming shares in kind, or utilizing
a value per unit based upon available indications of market value. Available
indications of market value may include, among other things, quotations or
market value estimates of securities and/or values based on yield data relating
to money market securities that are published by reputable sources.
ADDITIONAL SHAREHOLDER INFORMATION
TELEPHONE AND INTERNET EXCHANGE/REDEMPTION PRIVILEGES
The Fund employs reasonable procedures to confirm that instructions
communicated by telephone or the Internet are genuine. The Fund 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 or the
Internet, providing written confirmations of such transactions to the address
of record, tape recording telephone instructions and backing up Internet
transactions.
REDEMPTION-IN-KIND
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one
shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the
assets of the Fund. If the Advisor determines that existing conditions make
cash payments undesirable, redemption payments may be made in whole or in part
in securities or other financial assets, valued for this purpose as they are
valued in computing the NAV for the Fund's shares (a "redemption-in-kind").
Shareholders receiving securities or other financial assets in a
redemption-in-kind may realize a gain or loss for tax purposes, and will incur
any costs of sale, as well as the associated inconveniences. If you expect to
make a redemption in excess of the lesser of $250,000 or 1% of the Fund's
assets during any 90-day period and would like to avoid any possibility of
being paid with securities in-kind, you may do so by providing Strong Funds
with an unconditional instruction to redeem at least 15 calendar days prior to
the date on which the redemption transaction is to occur, specifying the dollar
amount or number of shares to be redeemed and the date of the transaction
(please call 1-800-368-3863). This will provide the Fund with sufficient time
to raise the cash in an orderly manner to pay the redemption and thereby
minimize the effect of the redemption on the interests of the Fund's remaining
shareholders.
Redemption checks in excess of the lesser of $250,000 or 1% of the Fund's
assets during any 90-day period may not be honored by the Fund if the Advisor
determines that existing conditions make cash payments undesirable.
RIGHT OF SET-OFF
To the extent not prohibited by law, the Fund, any other Strong Fund, and the
Advisor, each has the right to set-off against a shareholder's account balance
with a Strong Fund, and redeem from such account, any debt the shareholder may
owe any of these entities. This right applies even if the account is not
identically registered.
BROKERS RECEIPT OF PURCHASE AND REDEMPTION ORDERS
46
<PAGE>
The Fund has authorized certain brokers to accept purchase and redemption
orders on the Fund's behalf. These brokers are, in turn, authorized to
designate other intermediaries to accept purchase and redemption orders on the
Fund's behalf. The Fund will be deemed to have received a purchase or
redemption order when an authorized broker or, if applicable, a broker's
authorized designee, accepts the order. Purchase and redemption orders
received in this manner will be priced at the Fund's net asset value next
computed after they are accepted by an authorized broker or the broker's
authorized designee.
RETIREMENT PLANS
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT (IRA): Everyone under age 70 1/2 with
earned income may contribute to a tax-deferred Traditional IRA. The Strong
Funds offer a prototype plan for you to establish your own Traditional IRA. You
are allowed to contribute up to the lesser of $2,000 or 100% of your earned
income each year to your Traditional IRA (or up to $4,000 between your
Traditional IRA and your non-working spouses' Traditional IRA). Under certain
circumstances, your contribution will be deductible.
ROTH IRA: Taxpayers, of any age, who have earned income, and whose adjusted
gross income ("AGI") does not exceed $110,000 (single) or $160,000 (joint) can
contribute to a Roth IRA. Allowed contributions begin to phase-out at $95,000
(single) or $150,000 (joint). You are allowed to contribute up to the lesser
of $2,000 or 100% of earned income each year into a Roth IRA. If you also
maintain a Traditional IRA, the maximum contribution to your Roth IRA is
reduced by any contributions that you make to your Traditional IRA.
Distributions from a Roth IRA, if they meet certain requirements, may be
federally tax free. If your AGI is $100,000 or less, you can convert your
Traditional IRAs into a Roth IRA. Conversions of earnings and deductible
contributions are taxable in the year of the distribution. The early
distribution penalty does not apply to amounts converted to a Roth IRA even if
you are under age 59 1/2.
EDUCATION IRA: Taxpayers may contribute up to $500 per year into an Education
IRA for the benefit of a child under age 18. Total contributions to any one
child cannot exceed $500 per year. The contributor must have adjusted income
under $110,000 (single) or $160,000 (joint) to contribute to an Education IRA.
Allowed contributions begin to phase-out at $95,000 (single) or $150,000
(joint). Withdrawals from the Education IRA to pay qualified higher education
expenses are federally tax free. Any withdrawal in excess of higher education
expenses for the year are potentially subject to tax and an additional 10%
penalty.
DIRECT ROLLOVER IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or IRC section
403(b) plan distribution directly into an IRA. The distribution must be
eligible for rollover. The amount of your Direct Rollover IRA contribution
will not be included in your taxable income for the year.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP-IRA): A SEP-IRA plan allows an employer
to make deductible contributions to separate IRA accounts established for each
eligible employee.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLAN (SAR SEP-IRA): A SAR SEP-IRA
plan is a type of SEP-IRA plan in which an employer may allow employees to
defer part of their salaries and contribute to an IRA account. These deferrals
help lower the employees' taxable income. Please note that you may no longer
open new SAR SEP-IRA plans (since December 31, 1996). However, employers with
SAR SEP-IRA plans that were established prior to January 1, 1997 may still open
accounts for new employees.
SIMPLIFIED INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE-IRA): A SIMPLE-IRA plan
is a retirement savings plan that allows employees to contribute a percentage
of their compensation, up to $6,000, on a pre-tax basis, to a SIMPLE-IRA
account. The employer is required to make annual contributions to eligible
employees' accounts. All contributions grow tax-deferred.
DEFINED CONTRIBUTION PLAN: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans,
money purchase pension plans, and paired plans (a combination of a
profit-sharing plan and a money purchase plan).
401(K) PLAN: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
47
<PAGE>
403(B)(7) PLAN: A 403(b)(7) plan is a tax-sheltered custodial account designed
to qualify under section 403(b)(7) of the IRC and is available for use by
employees of certain educational, non-profit, hospital, and charitable
organizations.
ORGANIZATION
The Fund is either a "Corporation" or a "Series" of common stock of a
Corporation, as described in the chart below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Incorporation Date Series Authorized Par
Corporation Date Created Shares Value ($)
- ------------------------------------ ------------- ----------- ----------------- ----------
Strong Heritage Reserve Series, Inc. 06/02/89 Indefinite .00001
-Strong Heritage Money Fund 05/11/95 Indefinite .00001
-Strong Step 1 Money Fund 1/21/98 Indefinite .00001
Strong Money Market Fund, Inc. 07/19/85 Indefinite .0001
Strong Municipal Funds, Inc. (1) 07/28/96 Indefinite .00001
-Strong Municipal Money Market Fund 07/28/86 Indefinite .000001
-Strong Municipal Advantage Fund 10/27/95 Indefinite .00001
Strong Advantage Fund, Inc. 08/31/88 Indefinite .0001
</TABLE>
(1) Prior to October 27, 1995, the Fund's name was Strong Municipal Money
Market Fund, Inc.
The Corporation 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 the
Corporation provide that if additional series of shares are issued by the
Corporation, such new series of shares may not affect the preferences,
limitations or relative rights of the Corporation's outstanding shares. In
addition, the Board of Directors of the Corporation is authorized to allocate
assets, liabilities, income and expenses to each series and class. Classes
within a series may have different expense arrangements than other classes of
the same series and, accordingly, the net asset value of shares within a series
may differ. Finally, all holders of shares of the Corporation may vote on each
matter presented to shareholders for action except with respect to any matter
which affects only one or more series or class, in which case only the shares
of the affected series or class are entitled to vote. Fractional shares have
the same rights proportionately as do full shares. Shares of the Corporation
have no preemptive, conversion, or subscription rights. If the Corporation
issues additional series, the assets belonging to each series of shares will be
held separately by the custodian, and in effect each series will be a separate
fund.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered investment companies,
such as the Fund, to operate without an annual meeting of shareholders under
specified circumstances if an annual meeting is not required by the 1940 Act.
The Fund has adopted the appropriate provisions in its Bylaws and may, at its
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.
The 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 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
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<PAGE>
The Strong Funds may advertise a variety of types of performance information as
more fully described below. The Fund's performance is historical and past
performance does not guarantee the future performance of the Fund. From time
to time, the Advisor may agree to waive or reduce its management fee and/or to
absorb certain operating expenses for the Fund. Waivers of management fees and
absorption of expenses will have the effect of increasing the Fund's
performance.
THE FOLLOWING SECTION APPLIES TO THE HERITAGE MONEY, MONEY MARKET, MUNICIPAL
MONEY MARKET, AND STEP 1 MONEY FUNDS ONLY:
7-DAY CURRENT AND EFFECTIVE YIELD
The Fund's 7-day current yield quotation is based on a seven-day period and is
computed as follows. The first calculation is net investment income per share,
which is accrued interest on portfolio securities, plus amortized discount,
minus amortized premium, less accrued expenses. This number is then divided by
the price per share (expected to remain constant at $1.00) at the beginning of
the period ("base period return"). The result is then divided by 7 and
multiplied by 365 and the resulting yield figure is carried to the nearest
one-hundredth of one percent. Realized capital gains or losses and unrealized
appreciation or depreciation of investments are not included in the
calculation. The Fund's effective yield is determined by taking the base
period return (computed as described above) and calculating the effect of
assumed compounding. Effective yield is equal [(base period return +
1)(365/7)]- 1.
THE FOLLOWING SECTION APPLIES TO THE ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS
ONLY:
30-DAY YIELD
The Fund's yield is computed in accordance with a standardized method
prescribed by rules of the SEC. Under that method, the current yield quotation
for the Fund is based on a one month or 30-day period. In computing its yield,
the Fund follows certain standardized accounting practices specified by rules
of the SEC. These practices are not necessarily consistent with those that the
Fund uses to prepare annual and interim financial statements in conformity with
generally accepted accounting principles. The yield is computed by dividing
the net investment income per share earned during the 30-day or one month
period by the maximum offering price per share on the last day of the period,
according to the following formula:
YIELD = 2[( A-B + 1)6 - 1]
cd
Where a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
THE FOLLOWING SECTION APPLIES TO THE MUNICIPAL MONEY MARKET AND MUNICIPAL
ADVANTAGE FUNDS ONLY:
TAXABLE EQUIVALENT YIELD
The Fund's tax-equivalent yield is computed by dividing that portion of the
Fund's yield (computed as described above) that is tax-exempt by one minus the
stated federal income tax rate and adding the result to that portion, if any,
of the yield of the Fund that is not tax-exempt. Tax-equivalent yield does not
reflect possible variations due to the federal alternative minimum tax.
An investor may want to determine which investment, tax-exempt or taxable, will
provide you with a higher after-tax return. To determine the tax-equivalent
yield, simply divide the yield from the tax-exempt investment by the sum of (1
minus the investor's marginal tax rate). The tables below are provided for
making this calculation for selected tax-exempt yield and taxable income
levels. These yields are presented for purposes of illustration only and are
not representative of any yield that a Fund may generate. The tables are based
upon the 1998 federal tax rates (in effect as of January 1, 1998).
49
<PAGE>
<TABLE>
<CAPTION>
A TAX-FREE YIELD OF:
- ------------------------------------ -------- -------------------------------------------------------------
4% 5% 6% 7% 8%
1998 Taxable Income Levels*
- ------------------------------------ -------- --------------------------------------- ----- ----- ------ ------
Single Married Filing Marginal IS EQUIVALENT TO A TAXABLE YIELD OF:
Jointly Tax Rate
- --------------------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
under 25,350 under 42,350 15% 4.71% 5.88% 7.06% 8.24% 9.41%
- --------------------- --------------- -------- ------ ----- ----- ------ ------
25,350-61,400 42,350-102,300 28% 5.56% 6.94% 8.33% 9.72% 11.11%
- --------------------- --------------- -------- --------------------------------------
61,400-128,100 102,300-155,950 31% 5.80% 7.25% 8.70% 10.14% 11.59%
- --------------------- --------------- -------- --------------------------------------
128,100 155,950-278,450 36% 6.25% 7.81% 9.38% 10.94% 12.50%
278,450
- --------------------- --------------- -------- --------------------------------------- ----- ----- ------ ------
over 278,450 over 278,450 39.6% 6.62% 8.28% 9.93% 11.59% 13.25%
- --------------------- --------------- -------- --------------------------------------- ----- ----- ------ ------
</TABLE>
* A taxpayer with an adjusted gross income in excess of $117,950 may, to
the extent such taxpayer itemizes deductions, be subject to a higher effective
marginal rate.
DISTRIBUTION RATE
The distribution rate for the Fund is computed, according to a non-standardized
formula, by dividing the total amount of actual distributions per share paid by
the Fund over a twelve month period by the Fund's net asset value on the last
day of the period. The distribution rate differs from the Fund's yield because
the distribution rate includes distributions to shareholders from sources other
than dividends and interest, such as short-term capital gains. Therefore, the
Fund's distribution rate may be substantially different than its yield. Both
the Fund's yield and distribution rate will fluctuate.
AVERAGE ANNUAL TOTAL RETURN
The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the SEC. The average annual total
return for the Fund for a specific period is calculated by first taking a
hypothetical $10,000 investment ("initial investment") in the Fund's shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The redeemable value is then divided by
the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period.
TOTAL RETURN
Calculation of the Fund's total return is not subject to a standardized
formula. Total return performance for a specific period is calculated by first
taking an investment (assumed below to be $10,000) ("initial investment") in
the Fund's shares on the first day of the period and computing the "ending
value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends paid by the Fund have been reinvested at net asset
value of the Fund on the reinvestment dates during the period. Total return
may also be shown as the increased dollar value of the hypothetical investment
over the period.
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
50
<PAGE>
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.
[CAPTION]
SPECIFIC FUND PERFORMANCE
7-DAY YIELD
(7-day period ended February 28, 1998)
<TABLE>
<CAPTION>
<S>
After Waivers/Absorptions
- --------- ------- --------- -------------- ---------- --------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current Effective Tax Equivalent Waived Absorbed Current Yield Effective Yield
Fund Yield Yield Yield (31% Tax Management Expenses
Bracket) Fees
- --------- ------- --------- -------------- ---------- --------- ------------- ---------------
Heritage 5.40% 5.54% NA .20% .06% 5.14% 5.27%
Money
- --------- ------- --------- -------------- ---------- --------- ------------- ---------------
Money 5.21% 5.34% NA .02% .33% 4.86% 4.98%
Market
- --------- ------- --------- -------------- ---------- --------- ------------- ---------------
Municipal 3.37% 3.42% CURRENT EFFECTIVE 0 0 3.37% 3.42%
Money
Market 4.88% 4.96%
- --------- ------- --------- -------------- ---------- --------- ------------- ---------------
Step 1 5.79% 5.96% NA .50% .78% 4.51% 4.61%
Money
- --------- ------- --------- -------------- ---------- --------- ------------- ---------------
</TABLE>
30-DAY YIELD
(30-day period ended February 28, 1998)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Tax Equivalent Waived
Yield (31% Tax Management Absorbed Yield After Waivers
Fund Yield Bracket) Fees Expenses and Absorptions
- --------- ------ -------------- ---------- --------- -------------------
Advantage 6.36% NA 0 0 6.36%
- --------- ------ -------------- ---------- --------- -------------------
Municipal 3.92% 5.68% .07% .05% 3.80%
Advantage
- --------- ------ -------------- ---------- --------- -------------------
</TABLE>
TOTAL RETURN
HERITAGE MONEY FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Time Period Initial $10,000 Ending value Cumulative Average Annual
Investment February 28, 1998 Total Return Total Return
- ------------- --------------- ----------------- ------------ --------------
One Year $10,000 $10,558 5.58% 5.58%
- ------------- --------------- ----------------- ------------ --------------
Life of Fund* $10,000 $11,613 16.13% 5.75%
- ------------- --------------- ----------------- ------------ --------------
</TABLE>
* Commenced operations July 29, 1995.
MONEY MARKET FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending value Cumulative Average Annual
Time Period Investment October 31, 1997 Total Return Total Return
- ------------- --------------- ---------------- ------------ ---------------
One Year $10,000 $10,532 5.32% 5.32%
- ------------- --------------- ---------------- ------------ ---------------
Five Year $10,000 $12,571 25.71% 4.68%
- ------------- --------------- ---------------- ------------ ---------------
Ten Year $10,000 $17,675 76.75% 5.86%
- ------------- --------------- ---------------- ------------ ---------------
Life of Fund* $10,000 $20,082 100.82% 5.97%
- ------------- --------------- ---------------- ------------ ---------------
</TABLE>
* Commenced operations on October 22, 1985.
MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending value Cumulative Average Annual
Time Period Investment February 28, 1998 Total Return Total Return
- ------------- --------------- ----------------- ------------ ---------------
One Year $10,000 $10,360 3.60% 3.60%
- ------------- --------------- ----------------- ------------ ---------------
Five Year $10,000 $11,801 18.01% 3.37%
- ------------- --------------- ----------------- ------------ ---------------
Ten Year $10,000 $15,140 51.40% 4.23%
- ------------- --------------- ----------------- ------------ ---------------
Life of Fund* $10,000 $16,089 60.90% 4.28%
- ------------- --------------- ----------------- ------------ ---------------
</TABLE>
* Commenced operations on October 23, 1986.
STRONG STEP 1 MONEY FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending value Cumulative Average Annual
Time Period Investment February 28, 1998 Total Return Total Return
- ------------- --------------- ----------------- ------------ ---------------
Life of Fund* $10,000 $10,045 0.45% N/A
- ------------- --------------- ----------------- ------------ ---------------
</TABLE>
* Commenced operations on January 31, 1998.
STRONG ADVANTAGE FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending value Cumulative Average Annual
Time Period Investment February 28, 1998 Total Return Total Return
- ------------- --------------- ----------------- ------------ ---------------
One Year $10,000 $10,626 6.26% 6.26%
- ------------- --------------- ----------------- ------------ ---------------
Five Year $10,000 $13,525 35.25% 6.23%
- ------------- --------------- ----------------- ------------ ---------------
Life of Fund* $10,000 $19,479 94.79% 7.46%
- ------------- --------------- ----------------- ------------ ---------------
</TABLE>
* Commenced operations on November 25, 1988
STRONG MUNICIPAL ADVANTAGE FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending value Cumulative Average Annual
Time Period Investment February 28, 1998 Total Return Total Return
- ------------ --------------- ----------------- ------------ ---------------
One Year $10,000 $10,499 4.99% 4.99%
- ------------ --------------- ----------------- ------------ ---------------
Life of Fund $10,000 $11,195 11.95% 5.15%
- ------------ --------------- ----------------- ------------ ---------------
</TABLE>
* Commenced operations on November 30, 1995.
COMPARISONS
52
<PAGE>
U.S. TREASURY BILLS, NOTES, OR BONDS. Investors may want to compare the
performance of the Fund to that of U.S. Treasury bills, notes, or bonds, which
are issued by the U.S. Government. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities.
CERTIFICATES OF DEPOSIT. Investors may want to compare the 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.
MONEY MARKET FUNDS. Investors may also want to compare performance of the Fund
to that of money market funds. Money market fund yields will fluctuate and
shares are not insured, but share values usually remain stable.
LIPPER ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT RANKING
ORGANIZATIONS. From time to time, in marketing and other fund literature, the
Fund's performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value,
with all income and capital gains dividends reinvested. Such calculations do
not include the effect of any sales charges imposed by other funds. The Fund
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings. The Fund's performance may also be compared
to the average performance of its Lipper category.
MORNINGSTAR, INC. The 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.
INDEPENDENT SOURCES. Evaluations of fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the Fund,
especially those with similar objectives. Sources for fund performance and
articles about the Fund may include publications such as Money, Forbes,
Kiplinger's, Smart Money, Financial World, Business Week, U.S. News and World
Report, The Wall Street Journal, Barron's, and a variety of investment
newsletters.
VARIOUS BANK PRODUCTS. The Fund's performance also may be compared on a before
or after-tax basis to various bank products, including the average rate of bank
and thrift institution money market deposit accounts, Super N.O.W. accounts and
certificates of deposit of various maturities as reported in the Bank Rate
Monitor, National Index of 100 leading banks, and thrift institutions as
published by the Bank Rate Monitor, Miami Beach, Florida. The rates published
by the Bank Rate Monitor National Index are averages of the personal account
rates offered on the Wednesday prior to the date of publication by 100 large
banks and thrifts in the top ten Consolidated Standard Metropolitan Statistical
Areas. The rates provided for the bank accounts assume no compounding and are
for the lowest minimum deposit required to open an account. Higher rates may
be available for larger deposits.
With respect to money market deposit accounts and Super N.O.W. accounts,
account minimums range upward from $2,000 in each institution and compounding
methods vary. Super N.O.W. accounts generally offer unlimited check writing
while money market deposit accounts generally restrict the number of checks
that may be written. If more than one rate is offered, the lowest rate is
used. Rates are determined by the financial institution and are subject to
change at any time specified by the institution. Generally, the rates offered
for these products take market conditions and competitive product yields into
consideration when set. Bank products represent a taxable alternative income
producing product. Bank and thrift institution deposit accounts may be
insured. Shareholder accounts in the Fund are not insured. Bank passbook
savings accounts compete with money market mutual fund products with respect to
certain liquidity features but may not offer all of the features available from
a money market mutual
53
<PAGE>
fund, such as check writing. Bank passbook savings accounts normally offer a
fixed rate of interest while the yield of the Fund fluctuates. Bank checking
accounts normally do not pay interest but compete with money market mutual fund
products with respect to certain liquidity features (E.G.., the ability to
write checks against the account). Bank certificates of deposit may offer
fixed or variable rates for a set term. (Normally, a variety of terms are
available.) Withdrawal of these deposits prior to maturity will normally be
subject to a penalty. In contrast, shares of the Fund are redeemable at the
net asset value (normally, $1.00 per share) next determined after a request is
received, without charge.
INDICES. The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments that a Fund may
purchase and the investments measured by the indices.
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.
STRONG FUNDS. The Strong Funds offer a comprehensive range of conservative to
aggressive investment options. The Strong Funds and their investment objectives
are listed below. The Funds are listed in ascending order of risk and return,
as determined by the Funds' Advisor.
FUND NAME INVESTMENT OBJECTIVE
<TABLE>
<CAPTION>
<S> <C>
Strong Step 1 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 liquidity.
Fund
- --------------------------------- -------------------------------------------------------------------------------------
Strong Municipal Advantage Fund Federally tax-exempt current income with a very low degree of share-price
fluctuation.
- --------------------------------- -------------------------------------------------------------------------------------
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
- --------------------------------- -------------------------------------------------------------------------------------
Strong Short-Term Municipal Bond Total return by investing for a high level of federally tax-exempt current income
Fund with a low degree of share-price fluctuation.
- --------------------------------- -------------------------------------------------------------------------------------
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low degree of
share price fluctuation.
- --------------------------------- -------------------------------------------------------------------------------------
Strong Short-Term Global Bond Total return by investing for a high level of income with a low degree of share-price
Fund fluctuation.
- --------------------------------- -------------------------------------------------------------------------------------
Strong Short-Term High Yield Total return by investing for a high level of federally tax-exempt current income
Municipal Fund with a moderate degree of share-price fluctuation.
- --------------------------------- -------------------------------------------------------------------------------------
Strong Short-Term High Yield Bond Total return by investing for a high level of current income with a moderate 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 Municipal Bond Fund Total return by investing for a high level of federally tax-exempt current income
with a moderate degree of share-price fluctuation.
- --------------------------------- -------------------------------------------------------------------------------------
Strong Corporate Bond Fund Total return by investing for a high level of current income with a moderate degree
of share-price fluctuation.
- --------------------------------- -------------------------------------------------------------------------------------
Strong High-Yield Municipal Bond Total return by investing for a high level of federally tax-exempt current income.
Fund
- --------------------------------- -------------------------------------------------------------------------------------
Strong High-Yield Bond Fund Total return by investing for a high level of current income and capital growth.
- --------------------------------- -------------------------------------------------------------------------------------
Strong Global High-Yield Bond Fund Total return by investing for a high level of current income and capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong International Bond Fund High total return by investing for both income and capital appreciation.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Asset Allocation Fund High total return consistent with reasonable risk over the long term.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Equity Income Fund Total return by investing for both income and capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong American Utilities Fund Total return by investing for both income and capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Blue Chip 100 Fund Total return by investing for both income and capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Limited Resources Fund Total return by investing for both capital growth and income.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Total Return Fund High total return by investing for capital growth and income.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Growth and Income Fund High total return by investing for capital growth and income.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Index 500 Fund To approximate as closely as practicable (before fees and expenses) the
capitalization weighted total rate of return of that portion of the U.S.
market for publicly traded common stocks composed of the larger capitalized
companies.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Schafer Balanced Fund Total return by investing for both income and capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Schafer Value Fund Long-term capital appreciation principally through investment in common stocks and
other equity securities. Current income is a secondary objective.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Dow 30 Value Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Value Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Opportunity Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Mid Cap Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Common Stock Fund* Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Strategic Growth Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Small Cap Value Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Growth Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Discovery Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Small Cap Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Growth 20 Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong International Stock Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Overseas Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Foreign MajorMarketsSM Capital growth.
Fund
- ---------------------------------- ------------------------------------------------------------------------------------
Strong Asia Pacific Fund Capital growth.
- ---------------------------------- ------------------------------------------------------------------------------------
</TABLE>
* The Fund is closed to new investors, except the Fund may continue to
offer its shares through certain 401(k) plans and similar company-sponsored
retirement plans.
The Advisor also serves as Advisor to several management investment companies,
some of which fund variable annuity separate accounts of certain insurance
companies.
The Fund may from time to time be compared to other Strong 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.
TYING TIME FRAMES TO YOUR GOALS. There are many issues to consider as you make
your investment decisions, including analyzing your risk tolerance, investing
experience, and asset allocations. You should start to organize your
investments by learning to link your many financial goals to specific time
frames. Then you can begin to identify the appropriate types of investments to
help meet your goals. As a general rule of thumb, the longer your time
horizon, the more price fluctuation you will be able to tolerate in pursuit of
higher returns. For that reason, many people with longer-term goals select
stocks or long-term bonds, and many people with nearer-term goals match those
up with for instance, short-term bonds. The Advisor developed the
55
<PAGE>
following suggested holding periods to help our investors set realistic
expectations for both the risk and reward potential of our funds. (See table
below.) Of course, time is just one element to consider when making your
investment decision.
STRONG FUNDS SUGGESTED MINIMUM HOLDING PERIODS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
UNDER 1 YEAR 1 TO 2 YEARS 4 TO 7 YEARS 5 OR MORE YEARS
- --------------------------- ------------------------------- ------------------------------ ---------------------------
Money Market Fund Advantage Fund Government Securities Fund Asset Allocation Fund
Heritage Money Fund Municipal Advantage Fund Municipal Bond Fund American Utilities Fund
Municipal Money Market Fund Corporate Bond Fund Index 500 Fund
Step 1 Money Fund 2 TO 4 YEARS International Bond Fund Total Return Fund
Short-Term Bond Fund High-Yield Municipal Bond Fund Opportunity Fund
Short-Term Municipal Bond Fund High-Yield Bond Fund Growth Fund
Short-Term Global Bond Fund Global High-Yield Bond Fund Common Stock Fund*
Short-Term High Yield Bond Fund Discovery Fund
Short-Term High Yield Municipal International Stock Fund
Fund Asia Pacific Fund
Value Fund
Small Cap Fund
Growth and Income Fund
Equity Income Fund
Mid Cap Fund
Schafer Value Fund
Growth 20 Fund
Blue Chip 100 Fund
Small Cap Value Fund
Dow 30 Value Fund
Schafer Balanced Fund
Limited Resources Fund
Overseas Fund
Foreign MajorMarketsSM
Fund
Strategic Growth Fund
</TABLE>
* This Fund is closed to new investors, except the Fund may continue to
offer its shares through certain 401(k) plans and similar company-sponsored
retirement plans.
ADDITIONAL FUND INFORMATION
PORTFOLIO CHARACTERISTICS. In order to present a more complete picture of the
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.
56
<PAGE>
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 S(xi - xm)2
n-1
Where: S = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
Statistics may also be used to discuss the 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.
DURATION. Duration is a calculation that seeks to measure the price
sensitivity of a bond or a bond fund to changes in interest rates. It measures
bond price sensitivity to interest rate changes by taking into account the time
value of cash flows generated over the bond's life. Future interest and
principal payments are discounted to reflect their present value and then are
multiplied by the number of years they will be received to produce a value that
is expressed in years. Since duration can also be computed for the Fund, you
can estimate the effect of interest rates on the Fund's share price. Simply
multiply the Fund's duration by an expected change in interest rates. For
example, the price of the Fund with a duration of two years would be expected
to fall approximately two percent if market interest rates rose by one
percentage point.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor, owned by
professionals active in its management. Recognizing that investors are the
focus of its business, the Advisor strives for excellence both in investment
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires specialized skills
and processes for each asset class and style. Therefore, the Advisor believes
that active management should produce greater returns than a passively managed
index. The Advisor has brought together a group of top-flight investment
professionals with diverse product expertise, and each concentrates on their
investment specialty. The Advisor believes that people are the firm's most
important asset. For this reason, continuity of professionals is critical to
the firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their impact on
the Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund include, but are not limited to, changes in interest rates,
political developments, the competitive environment, consumer behavior,
industry trends, technological advances, macroeconomic trends, and the supply
and demand of various financial instruments. In addition, marketing materials
may cite the portfolio management's views or interpretations of such factors.
EIGHT BASIC PRINCIPLES FOR SUCCESSFUL MUTUAL FUND INVESTING
These common sense rules are followed by many successful investors. They make
sense for beginners, too. If you have a question on these principles, or would
like to discuss them with us, please contact us at 1-800-368-3863.
1. HAVE A PLAN - even a simple plan can help you take control of your
financial future. Review your plan once a year, or if your circumstances
change.
2. START INVESTING AS SOON AS POSSIBLE. Make time a valuable ally. Let it
put the power of compounding to work for you, while helping to reduce your
potential investment risk.
3. DIVERSIFY YOUR PORTFOLIO. By investing in different asset classes -
stocks, bonds, and cash - you help protect against poor performance in one type
of investment while including investments most likely to help you achieve your
important goals.
4. INVEST REGULARLY. Investing is a process, not a one-time event. By
investing regularly over the long term, you reduce the impact of short-term
market gyrations, and you attend to your long-term plan before you're tempted
to spend those assets on short-term needs.
5. MAINTAIN A LONG-TERM PERSPECTIVE. For most individuals, the best
discipline is staying invested as market conditions change. Reactive, emotional
investment decisions are all too often a source of regret - and principal loss.
6. CONSIDER STOCKS TO HELP ACHIEVE MAJOR LONG-TERM GOALS. Over time, stocks
have provided the more powerful returns needed to help the value of your
investments stay well ahead of inflation.
7. KEEP A COMFORTABLE AMOUNT OF CASH IN YOUR PORTFOLIO. To meet current
needs, including emergencies, use a money market fund or a bank account - not
your long-term investment assets.
8. KNOW WHAT YOU'RE BUYING. Make sure you understand the potential risks
and rewards associated with each of your investments. Ask questions... request
information...make up your own mind. And choose a fund company that helps you
make informed investment decisions.
STRONG RETIREMENT PLAN SERVICES
Strong Retirement Plan Services offers a full menu of high quality, affordable
retirement plan options, including traditional money purchase pension and
profit sharing plans, 401(k) plans, simplified employee pension plans, salary
reduction plans, Keoghs, and 403(b) plans. Retirement plan specialists are
available to help companies determine which type of retirement plan may be
appropriate for their particular situation.
MARKETS. The retirement plan services provided by the Advisor focus on four
distinct markets, based on the belief that a retirement plan should fit the
customer's needs, not the other way around.
1. SMALL COMPANY PLANS. Small company plans are designed for companies
with 1-50 plan participants. The objective is to incorporate the features and
benefits typically reserved for large companies, such as sophisticated
recordkeeping systems, outstanding service, and investment expertise, into a
small company plan without administrative hassles or undue expense. Small
company plan sponsors receive a comprehensive plan administration manual as
well as toll-free telephone support.
2. LARGE COMPANY PLANS. Large company plans are designed for companies
with between 51 and 1,000 plan participants. Each large company plan is
assigned a team of professionals consisting of an account manager, who is
typically an attorney, CPA, or holds a graduate degree in business, a
conversion specialist (if applicable), an accounting manager, a legal/technical
manager, and an education/communications educator.
3. WOMEN-OWNED BUSINESSES.
4. NON-PROFIT AND EDUCATIONAL ORGANIZATIONS (THE 403(B) MARKET).
TURNKEY APPROACH. The retirement plans offered by the Advisor are designed to
be streamlined and simple to administer. To this end, the Advisor has invested
heavily in the equipment, systems, and people necessary to adopt or convert a
plan, and to keep it running smoothly. The Advisor provides all aspects of the
plan, including plan design, administration, recordkeeping, and investment
management. To streamline plan design, the Advisor provides customizable
IRS-approved prototype documents. The Advisor's services also include annual
government reporting and testing as well as daily valuation of each
participant's account. This structure is intended to eliminate the confusion
and complication often associated with dealing with multiple vendors. It is
also designed to save plan sponsors time and expense.
The Advisor strives to provide one-stop retirement savings programs that
combine the advantages of proven investment management, flexible plan design,
and a wide range of investment options. The open architecture design of the
plans allow for the use of the family of mutual funds managed by the Advisor as
well as a stable asset value option. Large company plans may supplement these
options with their company stock (if publicly traded) or funds from other
well-known mutual fund families.
EDUCATION. Participant education and communication is key to the success of
any retirement program, and therefore is one of the most important services
that the Advisor provides. The Advisor's goal is twofold: to make sure that
plan participants fully understand their options and to educate them about the
lifelong investment process. To this end, the Advisor provides attractive,
readable print materials that are supplemented with audio and video tapes, and
retirement education programs.
SERVICE. The Advisor's goal is to provide a world class level of service. One
aspect of that service is an experienced, knowledgeable team that provides
ongoing support for plan sponsors, both at adoption or conversion and
throughout the life of a plan. The Advisor is committed to delivering accurate
and timely information, evidenced by straightforward, complete, and
understandable reports, participant account statements, and plan summaries.
The Advisor has designed both "high-tech" and "high-touch" systems, providing
an automated telephone system as well as personal contact. Participants can
access daily account information, conduct transactions, or have questions
answered in the way that is most comfortable for them.
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
The Fund's portfolio manager(s) 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.
HERITAGE MONEY, MONEY MARKET, AND STEP 1 MONEY FUNDS
The Advisor's investment philosophy for managing taxable money market funds
includes the following basic beliefs:
- - Successful fixed-income management begins with a top-down, fundamental
analysis of the economy, interest rates, and the supply and demand for
credit.
- - Value can be added through active management of average maturity, yield curve
positioning, sector emphasis, and issue selection.
The Heritage Money Fund is designed for investors who place a premium on the
value of the money fund portions of their portfolios and are seeking higher
yields over the long-term than a typical money fund through lower costs. The
Fund pursues a higher yield by reducing costs in two ways. First, investors
are required to maintain higher account balances, enabling the Fund to reduce
costs through economies of scale and more efficient operation. Second, with
certain exceptions, investors are charged a fee on transactions. These charges
help to reduce Fund costs because they are paid to the Fund. The Fund's
investors are rewarded for being disciplined because the fewer transactions
they perform, the fewer charges they incur. The Fund's low-cost design is
built into its structure and is intended to provide long-term continuous value
for its investors.
The Step 1 Money Fund has been designed to help investors take a 1st step
toward building a diversified investment portfolio.
MUNICIPAL MONEY FUND
The Advisor's investment philosophy includes the following basic beliefs:
- - Successful fixed-income management begins with a top-down analysis of the
economy, interest rates, and the supply of and demand for credit.
- - Defining benchmarks for duration, yield-curve characteristics, and
sector/quality composition, making only moderate deviations from those
benchmarks, and then modeling the effects of different economic scenarios on
the portfolio is an efficient way to add value and control risk.
- - Intensive research on individual issuers can uncover solid investment
opportunities, especially in improving credits.
MUNICIPAL ADVANTAGE FUND
The Advisor believes that the Fund represents an opportunity for investors
seeking higher yields than municipal money market funds generally provide, with
less share-price fluctuation than short-term bond funds generally provide. As
an ultra-short term bond fund with an average effective maturity of one year or
less, the Fund may complement a short-term cash-oriented investment portfolio,
by providing higher risk and return potential than a money market fund.
The Advisor intends to adjust the average effective portfolio maturity,
carefully select market sectors, industries, and issues, and intensively manage
other aspects of the portfolio to pursue the investment objectives of the Fund.
The investment process is research driven, and includes extensive canvassing of
available municipal securities.
The Advisor believes that a considerable portion of the municipal investment
marketplace consists of smaller, local individual issuers which are
underfollowed and which offer potential value. The Advisor intends to actively
seek out such issuers. After locating such issues, independent, fundamental
analysis is conducted to determine their suitability, from the standpoint of
credit risk and return potential, for the portfolio. By this active management
approach, the Advisor intends to add value to the investment selection process,
and to the portfolio as a whole.
ADVANTAGE FUND
The Advisor's investment philosophy includes the following basic beliefs:
- - Active management pursued by a team with a uniform discipline across the
fixed income spectrum can produce results that are superior to those produced
through passive management.
- - Controlling risk by making only moderate deviations from the defined
benchmark is the cornerstone of successful fixed income investing.
- - Successful fixed income management is best pursued on a top-down basis
utilizing fundamental techniques.
The investment process includes decisions made at four levels that are
consistent with the Advisor's viewpoint of the path of economic activity,
interest rates, and the supply of and demand for credit.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 411 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, are the independent accountants for the Fund, 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 legal counsel for the Fund.
FINANCIAL STATEMENTS
The Annual Report for the Fund that is attached to this SAI contains the
following audited financial information:
1. Schedule of Investments in Securities.
2. Statement of Operations.
3. Statement of Assets and Liabilities.
4. Statement of Changes in Net Assets.
5. Notes to Financial Statements.
6. Financial Highlights.
7. Report of Independent Accountants.
APPENDIX
BOND RATINGS
STANDARD & POOR'S ISSUE CREDIT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium-term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement of the obligation and takes into account the
currency in which the obligation is denominated.
Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers to be
reliable. Standard & Poor's does not perform an audit in connection with any
credit ratings and may, on occasion, rely on unaudited financial information.
Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition
to the usual long-term rating. Medium-term notes are assigned long-term
ratings.
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment capacity and willingness of the obligor to meet
its financial commitment on an obligation 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.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy.
AAA Obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet is financial commitment on the
obligation is extremely strong.
AA Obligation rated 'AA' differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Obligation rated 'A' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB Obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues . However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet the financial commitment on the
obligation.
B Obligation rated 'B' is more vulnerable to nonpayment than obligations rated
'BB' but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC Obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC Obligation rated 'CC' is currently highly vulnerable to nonpayment.
C Obligation rated 'C' may be used to cover a situation where a bankruptcy
petition has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D Obligation rated 'D' is in payment default. The 'D' rating category is used
when payments on an obligation 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 or the taking of a similar action if
payments on an obligation are jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(I.E., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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 IBCA, INC. ("FITCH") LONG-TERM NATIONAL CREDIT RATINGS
AAA
Obligations which have the highest rating assigned by Fitch on its national
rating scale for that country. This rating is automatically assigned to all
obligations issued or guaranteed by the sovereign state. Capacity for timely
repayment of principal and interest is extremely strong, relative to other
obligors in the same country.
AA
Obligations for which capacity for timely repayment of principal and interest
is very strong relative to other obligors in the same country. The risk
attached to these obligations differs only slightly from the country's highest
rated debt.
A
Obligations for which capacity for timely repayment of principal and interest
is strong relative to other obligors in the same country. However, adverse
changes in business, economic or financial conditions are more likely to affect
the capacity for timely repayment than for obligations in higher rated
categories.
BBB
Obligations for which capacity for timely repayment of principal and interest
is adequate relative to other obligors in the same country. However, adverse
changes in business, economic or financial conditions are more likely to affect
the capacity for timely repayment than for obligations in higher rated
categories.
BB
Obligations for which capacity for timely repayment of principal and interest
is uncertain relative to other obligors in the same country. Within the
context of the country, these obligations are speculative to some degree and
capacity for timely repayment remains susceptible over time to adverse changes
in business, financial or economic conditions.
B
Obligations for which capacity for timely repayment of principal and interest
is uncertain relative to other obligors in the same country. Timely repayment
of principal and interest is not sufficiently protected against adverse changes
in business, economic or financial conditions and these obligations are more
speculative than those in higher rated categories.
CCC
Obligations for which there is a current perceived possibility of default
relative to other obligors in the same country. Timely repayment of principal
and interest is dependent on favorable business, economic or financial
conditions and these obligations are far more speculative than those in higher
rated categories.
CC
Obligations which are highly speculative relative to other obligors in the same
country or which have a high risk of default.
C
Obligations which are currently in default.
DUFF & PHELPS, INC. LONG-TERM DEBT AND PREFERRED STOCK RATINGS
Rating 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. Risk is modest,
but may
AA vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are
more
A variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
to
BB- industry conditions or company fortunes. Overall quality may move up
or
down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be
met
B when due. Financial protection factors will fluctuate widely according
to
B- economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a
higher
or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty
exists as to
timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or
interest payments.
DP Preferred stock with dividend arrearages.
THOMSON BANKWATCH LONG-TERM DEBT RATINGS
Long-Term Debt Ratings assigned by Thomson BankWatch also weigh heavily
government ownership and support. The quality of both the company's management
and franchise are of even greater importance in the Long-Term Debt Rating
decisions. Long-Term Debt Ratings look out over a cycle and are not adjusted
frequently for what it believes are short-term performance aberrations.
Long-Term Debt Ratings can be restricted to local currency debt - ratings will
be identified by the designation LC. In addition, Long-Term Debt Ratings may
include a plus (+) or minus (-) to indicate where within the category the issue
is placed. BankWatch Long-Term Debt Ratings are based on the following scale:
INVESTMENT GRADE
AAA (LC-AAA) - Indicates that the ability to repay principal and interest on a
timely basis is extremely high.
AA (LC-AA) - Indicates a very strong ability to repay principal and interest on
a timely basis, with limited incremental risk compared to issues rated in the
highest category.
A (LC-A) - Indicates the ability to repay principal and interest is strong.
Issues rated A could be more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
BBB (LC-BBB) - The lowest investment-grade category; indicates an acceptable
capacity to repay principal and interest. BBB issues are more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
NON-INVESTMENT GRADE - may be speculative in the likelihood of timely repayment
of principal and interest
BB (LC-BB) - While not investment grade, the BB rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the ability to
adequately service debt obligations.
B (LC-B) - Issues rated B show higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely
basis.
CCC (LC-CCC) - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
CC (LC-CC) - CC is applied to issues that are subordinate to other obligations
rated CCC and are afforded less protection in the event of bankruptcy or
reorganization.
D (LC-D) - Default.
SHORT-TERM RATINGS
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
'A-1'
A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
'A-2'
A short-term obligation rated 'A-2' is somewhat more susceptible to the averse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its
financial commitment on the obligations is satisfactory.
'A-3'
A short-term obligation rated 'A-3' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
'B'
A short-term obligation rated 'B' is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligations; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
'C'
A short-term obligation rated 'C' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
'D'
A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: (i) leading
market positions in well-established industries, (ii) high rates of return on
funds employed, (iii) conservative capitalization structure with moderate
reliance on debt and ample asset protection, (iv) broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and (v)
well established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
FITCH IBCA, INC. ("FITCH") SHORT-TERM NATIONAL CREDIT RATINGS
F1
Obligations assigned this rating have the highest capacity for timely repayment
under Fitch's national rating scale for that country, relative to other
obligations in the same country. This rating is automatically assigned to all
obligations issued or guaranteed by the sovereign state. Where issues possess
a particularly strong credit feature, a "+" is added to the assigned rating.
F2
Obligations supported by a strong capacity for timely repayment relative to
other obligors in the same country. However, the relative degree of risk is
slightly higher than for issues classified as 'A1' and capacity for timely
repayment may be susceptible to adverse change in business, economic, or
financial conditions.
F3
Obligations supported by an adequate capacity for timely repayment relative to
other obligors in the same country. Such capacity is more susceptible to
adverse changes in business, economic, or financial conditions than for
obligations in higher categories.
B
Obligations for which the capacity for timely repayment is uncertain relative
to other obligors in the same country. The capacity for timely repayment is
susceptible to adverse changes in business, economic, or financial conditions.
C
Obligations for which there is a high risk of default to other obligors in the
same country or which are in default.
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
RATING: DEFINITION
HIGH GRADE
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
SATISFACTORY GRADE
D-3 Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
NON-INVESTMENT GRADE
D-4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
DEFAULT
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
TBW assigns Short-Term Debt Ratings to specific debt instruments with original
maturities of one year or less.
TBW-1 (LC-1) The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 (LC-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 (LC-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 (LC-4) The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
[ Insert graphic caption or data file here ]
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STRONG MONEY MARKET FUND, INC.
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements (all included or incorporated by reference in
Parts A & B) (Audited)
Schedule of Investments in Securities
Statement of Operations
Statement of Assets and Liabilities
Statement of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
Incorporated by reference to the Annual Report to Shareholders of the Strong
Money Market Fund dated October 31, 1997 pursuant to Rule 411 under the
Securities Act of 1933. (File Nos. 2-99439 and 811-4374)
(b) Exhibits
(1) Articles of Incorporation dated July 31, 1996(3)
(2) Bylaws dated October 20, 1995(2)
(2.1) Amendment to Bylaws dated May 1, 1998
(3) Inapplicable
(4) Specimen Stock Certificate(2)
(5) Investment Advisory Agreement(1)
(6) Distribution Agreement(2)
(7) Inapplicable
(8) Custody Agreement(2)
(8.1) Amendment to Custody Agreement dated August 26, 1996(3)
(9) Shareholder Servicing Agent Agreement(2)
(10) Inapplicable
(11) Consent of Independent Accountants
(12) Inapplicable
(13) Inapplicable
(14.1) Prototype Defined Contribution Retirement Plan - No. 1(2)
(14.1.1) Prototype Defined Contribution Retirement Plan - No. 2(2)
(14.2) Individual Retirement Custodial Account(2)
(14.3) Section 403(b)(7) Retirement Plan(2)
(14.4) Simplified Employee Pension Plan(3)
(15) Inapplicable
(16) Computation of Performance Figures(4)
(17) Financial Data Schedule(4)
(18) Inapplicable
(19) Power of Attorney dated February 25, 1997(3)
(20) Letter of Representation
(21.1) Code of Ethics for Access Persons dated October 18,
1996(3)
(21.2) Code of Ethics for Non-Access Persons dated October 18,
1996(3)
__________________________
(1) Incorporated herein by reference to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A of Registrant filed on or about April
24, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A of Registrant filed on or about
February 27, 1996.
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(3) Incorporated herein by reference to Post-Effective Amendment No. 15 to
the Registration Statement on Form N-1A of Registrant filed on or about
February 26, 1997.
(4) Incorporated herein by reference to Post-Effective Amendment No. 16 to
the Registration Statement on Form N-1A of Registrant filed on or about
February 27, 1998.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant neither controls any person nor is under common control with
any other person.
Item 26. NUMBER OF HOLDERS OF SECURITIES
Number of Record Holders
TITLE OF CLASS AS OF MAY 31, 1998
Common Stock, $.0001 par value 124,920
Item 27. INDEMNIFICATION
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Group and Great
American Insurance Company in the aggregate amount of $100,000,000, subject to
certain deductions. Pursuant to the authority of the Wisconsin Business
Corporation Law ("WBCL"), Article VII of Registrant's Bylaws provides as
follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01. MANDATORY INDEMNIFICATION. The Corporation shall
indemnify, to the full extent permitted by the WBCL, as in effect from time to
time, the persons described in Sections 180.0850 through 180.0859 (or any
successor provisions) of the WBCL or other provisions of the law of the State
of Wisconsin relating to indemnification of directors and officers, as in
effect from time to time. The indemnification afforded such persons by this
section shall not be exclusive of other rights to which they may be entitled as
a matter of law.
SECTION 7.02. PERMISSIVE SUPPLEMENTARY BENEFITS. The Corporation may,
but shall not be required to, supplement the right of indemnification under
Section 7.01 by (a) the purchase of insurance on behalf of any one or more of
such persons, whether or not the Corporation would be obligated to indemnify
such person under Section 7.01; (b) individual or group indemnification
agreements with any one or more of such persons; and (c) advances for related
expenses of such a person.
SECTION 7.03. AMENDMENT. This Article VII may be amended or repealed
only by a vote of the shareholders and not by a vote of the Board of Directors.
SECTION 7.04. INVESTMENT COMPANY ACT. In no event shall the Corporation
indemnify any person hereunder in contravention of any provision of the
Investment Company Act.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The information contained under "About the Funds - Management" in the
Prospectus and under "Directors and Officers," "Investment Advisor," and
"Distributor" in the Statement of Additional Information is hereby incorporated
by reference pursuant to Rule 411 under the Securities Act of 1933.
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Item 29. PRINCIPAL UNDERWRITERS
(a) Strong Funds Distributors, Inc., principal underwriter for Registrant,
also serves as principal underwriter for Strong Advantage Fund, Inc.; Strong
Asia Pacific Fund, Inc.; Strong Asset Allocation Fund, Inc.; Strong Common
Stock Fund, Inc.; Strong Conservative Equity Funds, Inc.; Strong Corporate Bond
Fund, Inc.; Strong Discovery Fund, Inc.; Strong Equity Funds, Inc.; Strong
Government Securities Fund, Inc.; Strong Heritage Reserve Series, Inc.; Strong
High-Yield Municipal Bond Fund, Inc.; Strong Income Funds, Inc.; Strong
Institutional Funds, Inc.; Strong International Equity Funds, Inc.; Strong
International Income Funds, Inc.; Strong Municipal Bond Fund, Inc.; Strong
Municipal Funds, Inc.; Strong Opportunity Fund, Inc.; Strong Opportunity Fund
II, Inc.; Strong Schafer Funds, Inc.; Strong Schafer Value Fund, Inc.; Strong
Short-Term Bond Fund, Inc.; Strong Short-Term Global Bond Fund, Inc.; Strong
Short-Term Municipal Bond Fund, Inc.; Strong Total Return Fund, Inc.; and
Strong Variable Insurance Funds, Inc.
(b) The information contained under "About the Funds - Management" in the
Prospectus and under "Directors and Officers," "Investment Advisor," and
"Distributor" in the Statement of Additional Information is hereby incorporated
by reference pursuant to Rule 411 under the Securities Act of 1933.
(c) Inapplicable
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Vice President,
Thomas P. Lemke, at Registrant's corporate offices, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
Item 31. MANAGEMENT SERVICES
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 32. UNDERTAKINGS
The Registrant undertakes to furnish to each person to whom a prospectus
is delivered, upon request and without charge, a copy of the Registrant's
latest annual report to shareholders.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment No. 17 to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment No. 17 to the Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the Village of Menomonee Falls, and State of Wisconsin on the
25th day of June, 1998.
STRONG MONEY MARKET FUND, INC.
(Registrant)
By: /S/ THOMAS P. LEMKE
Thomas P. Lemke, Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 17 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME TITLE DATE
- --------------------- ------------------------------------ -------------
Vice President (Principal Executive
/s/ Thomas P. Lemke Officer) June 25, 1998
- ---------------------
Thomas P. Lemke
/s/ Richard S. Strong Chairman of the Board and a Director June 25, 1998
- ---------------------
Richard S. Strong
Treasurer (Principal Financial and
/s/ John A. Flanagan Accounting Officer) June 25, 1998
- ---------------------
John A. Flanagan
Director June 25, 1998
- ---------------------
Willie D. Davis*
Director June 25, 1998
- ---------------------
William F. Vogt*
Director June 25, 1998
- ---------------------
Stanley Kritzik*
</TABLE>
* John S. Weitzer signs this document pursuant to powers of attorney filed
with Post-Effective Amendment No. 15 to the Registration Statement on Form
N-1A.
By: /S/ JOHN S. WEITZER
John S. Weitzer
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
EDGAR
EXHIBIT NO. EXHIBIT EXHIBIT NO.
(2.1) Amendment to Bylaws EX-99.B2.1
(11) Consent of Independent Accountants EX-99.B11
(20) Letter of Representation EX-99.B20
</TABLE>
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<PAGE>
AMENDMENT TO BYLAWS
On May 1, 1998, the Board of Directors amended the second sentence of
Article III, Section 3.01 of the Bylaws to read as follows:
"The number of directors of the corporation shall be at least two but no
more than six, and as established from time to time by resolution of the
directors."
1
<PAGE>
1
<PAGE>
Consent of Independent Accountants
To the Board of Directors of
Strong Money Market Fund, Inc.
We consent to the incorporation by reference in Post-Effective
Amendment No. 17 to the Registration Statement of Strong Money
Market Fund, Inc. on Form N-1A of our report dated December 9,
1997 on our audit of the financial statements and financial
highlights of Strong Money Market Fund, Inc., which report is
included in the Annual Report to Shareholders for the year ended
October 31, 1997, which is also incorporated by reference in the
Registration Statement. We also consent to the reference to our
Firm under the caption "Independent Accountants" in the
Statement of Additional Information and in the "Financial
Highlights" section of the Prospectus.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
June 25, 1998
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<PAGE>
GODFREY & KAHN, S.C.
ATTORNEYS AT LAW
780 North Water Street
Milwaukee, Wisconsin 53202
Phone: (414) 273-3500 Fax: (414) 273-5198
June 25, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: STRONG MONEY MARKET FUND, INC.
Gentlemen:
We represent Strong Money Market Fund, Inc. (the "Company"), in
connection with its filing of Post-Effective Amendment No. 17 (the
"Post-Effective Amendment") to the Company's Registration Statement
(Registration Nos. 2-99439; 811-4374) on Form N-1A under the Securities Act of
1933 (the "Securities Act") and the Investment Company Act of 1940. The
Post-Effective Amendment is being filed pursuant to Rule 485(b) under the
Securities Act.
We have reviewed the Post-Effective Amendment and, in accordance with
Rule 485(b)(4) under the Securities Act, hereby represent that the
Post-Effective Amendment does not contain disclosures which would render it
ineligible to become effective pursuant to Rule 485(b).
Very truly yours,
GODFREY & KAHN, S.C.
/s/ Pamela M. Krill
Pamela M. Krill
MW1-124914-1
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