<PAGE> 1
As filed with the Securities and Exchange Commission on or about June 27, 1997
Securities Act Registration No. 33-7603
Investment Company Act Registration No. 811-4770
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. 14 [X]
--
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 15 [X]
--
(Check appropriate box or boxes)
STRONG MUNICIPAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
Thomas P. Lemke
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Name and Address of Agent for Service)
Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Securities Act of 1933; the Registrant's Rule 24f-2 Notice
for the fiscal year ended February 28, 1997 was filed on or about April 23,
1997.
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, 1997 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
STRONG MUNICIPAL FUNDS, INC.
CROSS REFERENCE SHEET
For Strong Municipal Money Market Fund and
Strong Municipal Advantage Fund
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
<TABLE>
<CAPTION>
Caption or Subheading in Prospectus or
Item No. on Form N-1A Statement of Additional Information
- ------------------------------------------------ ----------------------------------------
<S> <C>
PART A - Information Required in Prospectus
1. Cover Page Cover Page
2. Synopsis Expenses; Highlights
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Strong Cash Management Funds;
Investment Objectives and Policies;
Fundamentals of Fixed Income
Investing; Implementation of Policies
and Risks; About the Funds -
Organization
5. Management of the Fund About the Funds - Management; Financial
Highlights
5A. Management's Discussion of Fund Performance *
6. Capital Stock and Other Securities About the Funds - Organization, -
Distributions and Taxes; 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 of the Funds
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Caption or Subheading in Prospectus or
Item No. on Form N-1A Statement of Additional Information
- ------------------------------------------------------ --------------------------------------
<S> <C>
15. Control Persons and Principal Holders of Principal Shareholders; Directors and
Securities Officers of the Funds; Investment
Advisor and Distributor
16. Investment Advisory and Other Services Investment Advisor and Distributor;
About the Funds - Management (in
Prospectus); Custodian; Transfer
Agent and Dividend-Disbursing Agent;
Independent Accountants; Legal
Counsel
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Included in Prospectus under the
heading About the Funds -
Organization and in the Statement of
Additional Information under the
heading Shareholder Meetings
19. Purchase, Redemption and Pricing of Securities Included in Prospectus under the
Being Offered headings: Shareholder Manual - How
to Buy Shares,
- Determining Your Share Price, - How
to Sell Shares, - Shareholder
Services; and in the Statement of
Additional Information under the
headings: Additional Shareholder
Information; Investment Advisor and
Distributor; and Determination of Net
Asset Value
20. Tax Status Included in Prospectus under the
heading About the Funds -
Distributions and Taxes; and in the
Statement of Additional Information
under the heading Taxes
21. Underwriters Investment Advisor and Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
* Complete answer to Item is contained in the Fund's Annual Report.
** Complete answer to Item is contained in the Fund's Prospectus.
<PAGE> 4
STRONG CASH MANAGEMENT FUNDS
<TABLE>
<S> <C>
STRONG FUNDS
STRONG HERITAGE MONEY FUND P.O. Box 2936
STRONG MUNICIPAL MONEY MARKET FUND Milwaukee, Wisconsin 53201
STRONG MUNICIPAL ADVANTAGE FUND Telephone: (414) 359-1400
STRONG ADVANTAGE FUND Toll-Free: (800) 368-3863
Device for the
Hearing-Impaired:
(800) 999-2780
</TABLE>
The Strong Family of Funds ("Strong Funds") is a family of more than thirty
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, 1997,
contains further information, is incorporated by reference into this Prospectus,
and has been filed with the Securities and Exchange Commission ("SEC"). This
Statement, which may be revised from time to time, is available without charge
upon request to the above-noted address or telephone number. If you would like
to electronically access additional information about the Funds after reading
the prospectus, you may do so by accessing the SEC's World Wide Web site (at
http://www.sec.gov) that contains the Statement of Additional Information
regarding the Funds and other related materials.
AN INVESTMENT IN THE STRONG HERITAGE MONEY FUND OR STRONG MUNICIPAL MONEY
MARKET 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, 1997
---------------------
PROSPECTUS PAGE I-1
<PAGE> 5
STRONG CASH MANAGEMENT FUNDS
The Strong Heritage Money Fund, a series of Strong Heritage Reserve Series,
Inc., Strong Municipal Money Market Fund and Strong Municipal Advantage Fund,
both of which are a series of Strong Municipal Funds, Inc., and Strong Advantage
Fund, Inc. are separately incorporated, diversified, open-end management
investment companies, or diversified series thereof.
STRONG MONEY FUNDS
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.
STRONG MUNICIPAL MONEY MARKET FUND (the "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 (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, 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 (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, 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.
---------------------
PROSPECTUS PAGE I-2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
EXPENSES..................................... I-4
FINANCIAL HIGHLIGHTS......................... I-6
HIGHLIGHTS................................... I-9
INVESTMENT OBJECTIVES AND POLICIES........... I-10
Comparing the Funds................. I-11
Strong Heritage Money Fund.......... I-11
Strong Municipal Money Market
Fund.............................. I-12
Strong Municipal Advantage Fund..... I-13
Strong Advantage Fund............... I-14
FUNDAMENTALS OF FIXED INCOME INVESTING....... I-15
IMPLEMENTATION OF POLICIES AND RISKS......... I-19
ABOUT THE FUNDS.............................. I-30
SHAREHOLDER MANUAL........................... II-1
APPENDIX..................................... A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the Statement
of Additional Information, and if given or made, such information or
representations may not be relied upon as having been authorized by the Funds.
This Prospectus does not constitute an offer to sell securities in any state or
jurisdiction in which such offering may not lawfully be made.
---------------------
PROSPECTUS PAGE I-3
<PAGE> 7
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Funds, will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............. NONE
Sales Load Imposed on Reinvested
Dividends................................. NONE
Deferred Sales Load......................... NONE
Redemption Fees............................. NONE*
Exchange Fees............................... NONE*
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 account balance at the time of the transaction is $100,000 or
more.
There are certain charges associated 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>
Management Other 12b-1 Total Operating
Fund Fees Expenses Fees Expenses
<S> <C> <C> <C> <C>
Heritage Money .50% .10% NONE .45%*
Municipal Money .50 .14 NONE .64
Municipal Advantage .60 .13 NONE .60*
Advantage .60 .22 NONE .82
</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 Fund would have been .60% and of the
Municipal Advantage Fund would have been .73%.
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, 1997. The Advisor waived a portion of its management
fee and absorbed certain expenses for the Heritage
---------------------
PROSPECTUS PAGE I-4
<PAGE> 8
Money and Municipal Advantage Funds during the fiscal period ended February 28,
1997. Therefore, the Other Expenses for the Heritage Money and Municipal
Advantage Funds have been restated for the fiscal year ended February 28, 1997
to include such management fees and/or expenses. The actual Total Operating
Expenses incurred for the above stated periods for the Heritage Money and
Municipal Advantage Funds after waivers and absorptions were .05% and .01%,
respectively.
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 .45% UNTIL JANUARY 1, 1999. THE
ADVISOR HAS AGREED TO VOLUNTARILY WAIVE THE ADVISOR'S MANAGEMENT FEE AND ABSORB
OPERATING EXPENSES TO THE EXTENT NECESSARY TO MAINTAIN THE MUNICIPAL ADVANTAGE
FUND'S TOTAL OPERATING EXPENSES AT NO MORE THAN .60% THROUGH NOVEMBER 30, 1997.
EXAMPLE. You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period (in years)
Fund 1 3 5 10
<S> <C> <C> <C> <C>
Heritage Money $ 6 $19 $33 $ 75
Municipal Money 7 20 36 80
Municipal Advantage 7 23 41 91
Advantage 8 26 46 101
</TABLE>
- ----------------------------------------------------------------------------
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.
---------------------
PROSPECTUS PAGE I-5
<PAGE> 9
FINANCIAL HIGHLIGHTS
The following annual Financial Highlights for each of the Funds has been
audited by Coopers & Lybrand L.L.P., independent certified public
accountants. Their report for the fiscal year ended February 28, 1997 is
included in the Funds' Annual Report that is contained in the Funds'
Statement of Additional Information. The Financial Highlights for the Funds
should be read in conjunction with the Financial Statements and related notes
included in the Funds' Annual Report 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 as indicated.
----------------------------------------------------------------------
----------------------
<TABLE>
<CAPTION>
STRONG MUNICIPAL STRONG HERITAGE
ADVANTAGE FUND MONEY FUND
2/28/97 2/29/96* 2/28/97 2/29/96*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.01 $ 5.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.25 0.06 0.06 0.04
Net Realized and Unrealized Gains (Losses) on
Investments -- 0.01 (0.01) --
------------ ------------ ------------ ------------
Total from Investment Operations 0.25 0.07 0.05 0.04
LESS DISTRIBUTIONS:
From Net Investment Income (0.25) (0.06) (0.06) (0.04)
------------ ------------ ------------ ------------
TOTAL DISTRIBUTIONS (0.25) (0.06) (0.06) (0.04)
CAPITAL CONTRIBUTION -- -- 0.01 --
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD $ 5.01 $ 5.01 $ 1.00 $ 1.00
============ ============ ============ ============
TOTAL RETURN +5.1% +1.4% +5.7%** +4.1%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (In Thousands) $ 644,263 $ 132,493 $ 2,000,158 $ 942,053
Ratio of Expenses to Average Net Assets 0.0% 0.0%*** 0.1% 0.0%***
Ratio of Expenses to Average Net Assets Without
Waivers and Absorptions 0.7% 0.7%*** 0.6% 0.6%***
Ratio of Net Investment Income to Average Net
Assets 5.0% 4.9%*** 5.6% 5.9%***
Portfolio Turnover Rate 40.8% 17.1% N/A N/A
</TABLE>
* Inception dates for the Municipal Advantage and Heritage Money Funds are
November 30, 1995 and June 29, 1995, respectively. Total return and
portfolio turnover rate are not annualized.
** Had the Adviser not made the capital contribution as described in the
notes to the financial statements contained in the Funds' Annual Report,
the adjusted total return would have been 5.0% for the fiscal year ended
February 28, 1997.
*** Calculated on an annualized basis.
---------------------
PROSPECTUS PAGE I-6
<PAGE> 10
------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRONG MUNICIPAL MONEY MARKET FUND
2/28/97 2/29/96* 12/31/95 12/31/94 12/31/93 12/31/92
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net Investment Income 0.03 0.01 0.04 0.03 0.02 0.03
Distributions from Net Investment
Income** (0.03) (0.01) (0.04) (0.03) (0.02) (0.03)
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ========== ==========
TOTAL RETURN +3.5% +0.6% +4.1% +2.9% +2.5% +3.4%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (In
Thousands) $1,894,897 $1,608,905 $1,416,442 $1,260,617 $1,172,560 $1,105,491
Ratio of Expenses to Average Net Assets 0.6% 0.6%*** 0.6% 0.6% 0.7% 0.7%
Ratio of Net Investment Income to
Average Net Assets 3.5% 3.6%*** 4.0% 2.9% 2.5% 3.3%
</TABLE>
* For the two month period ended February 29, 1996. Total return is not
annualized.
** Tax-exempt for regular Federal income tax purposes.
*** Calculated on an annualized basis.
---------------------
PROSPECTUS PAGE I-7
<PAGE> 11
------------------------------------------------------------------
<TABLE>
<CAPTION>
STRONG ADVANTAGE FUND
2/28/97 2/29/96* 12/31/95 12/31/94 12/31/93 12/31/92
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.03 $ 10.04 $ 9.98 $ 10.19 $ 10.01 $ 9.90
INCOME FROM INVESTMENT OPERATIONS:
- ---------------------------------------
Net Investment Income 0.62 0.10 0.67 0.55 0.59 0.70
Net Realized and Unrealized Gains
(Losses) on Investments 0.06 (0.01) 0.06 (0.19) 0.18 0.11
---------- -------- -------- -------- -------- --------
Total from Investment Operations 0.68 0.09 0.73 0.36 0.77 0.81
LESS DISTRIBUTIONS:
- ---------------------------------------
From Net Investment Income (0.62) (0.10) (0.67) (0.55) (0.59) (0.70)
In Excess of Net Realized Gains -- -- -- (0.02) -- --
---------- -------- -------- -------- -------- --------
Total Distributions (0.62) (0.10) (0.67) (0.57) (0.59) (0.70)
---------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.09 $ 10.03 $ 10.04 $ 9.98 $ 10.19 $ 10.01
========== ======== ======== ======== ======== ========
TOTAL RETURN +7.0% +0.9% +7.5% +3.6% +7.9% +8.4%
Ratios and Supplemental Data
- ---------------------------------------
Net Assets, End of Period (In
Thousands) $1,519,694 $999,780 $989,701 $910,508 $415,465 $272,348
Ratio of Expenses to Average Net Assets 0.8% 0.8%** 0.8% 0.8% 0.9% 1.0%
Ratio of Net Investment Income to
Average Net Assets 6.2% 6.3%** 6.6% 5.6% 5.8% 7.0%
Portfolio Turnover Rate 154.9% 17.2% 183.7% 221.0% 304.8% 316.1%
</TABLE>
* For the two month period ended February 29, 1996. Total return and portfolio
turnover rate are not annualized.
** Calculated on an annualized basis.
---------------------
PROSPECTUS PAGE I-8
<PAGE> 12
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 and Municipal 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 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. These investment practices involve risks that are
different in some respects from those associated with similar funds that do not
use them. (See "Implementation of Policies and Risks" 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 $25 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 and Municipal 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.")
---------------------
PROSPECTUS PAGE I-9
<PAGE> 13
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 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. 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.)
----------------------
PROSPECTUS PAGE I-10
<PAGE> 14
COMPARING THE FUNDS
The following summary is intended to help distinguish the Funds and help you
determine their suitability for your investments.
<TABLE>
<CAPTION>
AVERAGE CREDIT INCOME DEGREE OF SHARE-
FUND MATURITY QUALITY POTENTIAL PRICE FLUCTUATION
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
HERITAGE 90 days Two highest Low Stable, but not
MONEY or less guaranteed
- ----------------------------------------------------------------------------
MUNICIPAL 90 days Two highest Low Stable, but not
MONEY or less guaranteed
- ----------------------------------------------------------------------------
MUNICIPAL 1 year or At least 90% Low to Very low
ADVANTAGE less investment moderate
grade*
- ----------------------------------------------------------------------------
ADVANTAGE 1 year or At least 75% Low to Very low
less 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' Statement of Additional Information ("SAI"). Those
restrictions, each Fund's investment objective, and any other investment
policies identified as "fundamental" cannot be changed without shareholder
approval. To further guide investment activities, each Fund has also instituted
a number of non-fundamental operating policies, which are described 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.
----------------------
PROSPECTUS PAGE I-11
<PAGE> 15
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 standards required
or permitted by Rule 2a-7 under the Investment Company Act of 1940 (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 thirteen months 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 MUNICIPAL MONEY MARKET FUND
The Municipal Money 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 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
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PROSPECTUS PAGE I-12
<PAGE> 16
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 thirteen months or
less; and
(iii) buys only U.S. dollar-denominated obligations that present minimal
credit risks 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 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
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PROSPECTUS PAGE I-13
<PAGE> 17
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%, but
expects to invest at least 95% of its net assets in investment-grade debt
obligations, 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.")
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.
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
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PROSPECTUS PAGE I-14
<PAGE> 18
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.")
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 and Municipal 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
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<PAGE> 19
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 average 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. The Heritage Money and Municipal Money Funds will calculate average
portfolio maturity in accordance with Rule 2a-7 under the 1940 Act.
A Fund's average "effective portfolio maturity" will be calculated in nearly
the same manner as average portfolio maturity, which is explained above.
However, for the purpose of calculating average effective portfolio maturity, a
security that is subject to redemption at the option of the issuer on a
particular date (the "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
effective portfolio maturity when the Advisor reasonably anticipates, based upon
information available to it, that the issuer will exercise its right to redeem
the security. The Advisor may base its conclusion on such factors as the
interest rate paid on the security compared to prevailing market rates, the
amount of cash available to the issuer of the security, events affecting the
issuer of the security, and other appropriate factors that may compel or make it
advantageous for the issuer to redeem a security prior to its stated maturity.
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
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PROSPECTUS PAGE I-16
<PAGE> 20
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 Investors Service, Inc., Fitch Investors Service, Inc., Duff & Phelps
Rating Co., Thomson BankWatch, Inc. and IBCA, Inc. "Appendix - Ratings of Debt
Obligations" presents a summary of the ratings of these organizations. 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 (See "Implementation of Policies and Risks - Debt
Obligations" below);
- - 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
and Municipal 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
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PROSPECTUS PAGE I-17
<PAGE> 21
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 recovery upon a default in the payment of principal and
interest on its holdings. As a result of the associated risks, successful
investments in high-yield, high-risk, securities will be more dependent on the
Advisor's credit analysis than generally would be the case with investments in
investment-grade securities.
It is uncertain how the high-yield market will perform during a prolonged
period of rising interest rates. A prolonged economic downturn or a prolonged
period of rising interest rates could adversely affect the market for these
securities, increase their volatility, and reduce their value and liquidity. In
addition, lower-quality securities tend to be less liquid than higher-quality
debt securities because the market for them is not as broad or active. If market
quotations are not available, these securities will be valued in accordance with
procedures established by a Fund's Board of Directors. Judgment may, therefore,
play a greater role in valuing these securities. The lack of a liquid secondary
market may have an adverse effect on market price and a Fund's ability to sell
particular securities.
See the Appendix for information concerning the credit quality of the
Municipal Advantage and Advantage Funds' investments throughout the fiscal
periods ended February 28, 1997.
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<PAGE> 22
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 Funds' SAI.
DEBT OBLIGATIONS
The Heritage Money Fund limits its 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 (in amounts in excess of the insurance coverage (currently $100,000
per account) provided by the Federal Deposit Insurance Corporation); (iii)
commercial paper (including variable-amount master demand notes); (iv)
repurchase agreements; (v) loan interests; (vi) foreign debt obligations issued
by foreign issuers traded either in foreign markets or in domestic markets
through depositary receipts; (vii) convertible securities - debt obligations of
corporations convertible into or exchangeable for equity securities or debt
obligations that carry with them the right to acquire equity securities, as
evidenced by warrants attached to such securities, or acquired as part of units
of the securities; (viii) preferred stocks - securities that represent an
ownership interest in a corporation and that give the owner a prior claim over
common stock on the company's earnings or assets; (ix) 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.
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PROSPECTUS PAGE I-19
<PAGE> 23
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 the
following:
- - the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, and the Government
National Mortgage Association, including GNMA pass-through certificates, whose
securities are supported by the full faith and credit of the United States;
- - the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association, the Interamerican Development Bank,
and International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
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.
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PROSPECTUS PAGE I-20
<PAGE> 24
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 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.
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
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PROSPECTUS PAGE I-21
<PAGE> 25
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
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PROSPECTUS PAGE I-22
<PAGE> 26
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 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 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 Fund will limit its 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
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PROSPECTUS PAGE I-23
<PAGE> 27
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance-of-payments positions. Many foreign securities may
be less liquid and their prices more volatile than comparable U.S. securities.
Although the Funds generally invest only in securities that are regularly traded
on recognized exchanges or in over-the-counter markets, from time to time
foreign securities may be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign investing, such as custody
charges and brokerage costs, may be higher than those attributable to domestic
investing.
Because the Advantage Fund invests 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
circumstances, deem repurchase agreements collateralized by U.S. government
securities to be investments in U.S. government securities.
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PROSPECTUS PAGE I-24
<PAGE> 28
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, over-the-counter (OTC) options (including caps, floors, collars, and
options on forward and swap contracts) and exchange-traded options on futures.
Diverse types of derivatives may be created by combining options or forward
contracts in different ways, and by applying these structures to a wide range of
underlying assets.
An option is a contract in which the "holder" (the buyer) pays a certain
amount (the "premium") to the "writer" (the seller) to obtain the right, but not
the obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time. The
holder pays the premium at inception and has no further financial obligation.
The holder of an option-based derivative generally will benefit from favorable
movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses due to changes in the value of the
underlying asset.
A forward is a sales contract between a buyer (holding the "long" position)
and a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed future
date and the seller agrees to deliver the asset. The seller hopes that the
market price on the delivery date is less than the agreed upon price, while the
buyer hopes for the contrary. The change in value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset.
Derivative instruments may include (i) options; (ii) futures; (iii) options
on futures; (iv) short sales against the box, in which a Fund sells a security
it owns for delivery at a future date; (v) swaps, in which two parties agree to
exchange a series of cash flows in the future, such as interest-rate payments;
(vi) interest-rate caps, under which, in return for a premium, one party agrees
to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; (vii) interest-rate floors, under which, in return for
a
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PROSPECTUS PAGE I-25
<PAGE> 29
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 in OTC transactions between private
parties. OTC transactions are subject to additional risks, such as the credit
risk of the counterparty to the instrument and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. Derivative instruments may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
instrument in relation to the underlying asset may be magnified. When required
by SEC guidelines, a Fund will set aside permissible liquid assets in a
segregated account to secure its obligations under the derivative.
The successful use of derivatives by a Fund is dependent upon a variety of
factors, particularly the Advisor's ability to correctly anticipate trends in
the underlying asset. In a hedging transaction, if the Advisor incorrectly
anticipates trends in the underlying asset, a Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between a Fund's derivative transactions and the instruments being hedged. To
the extent that the Fund is engaging in derivative transactions for risk
management, the Fund's successful use of such transactions is more dependent
upon the Advisor's ability to correctly anticipate such trends, since losses in
these transactions may not be offset in gains in the Fund's portfolio or in
lower purchase prices for assets it intends to acquire. The Advisor's prediction
of trends in underlying assets may prove to be inaccurate, which could result in
substantial losses to a Fund.
In addition to the derivative instruments and strategies described above, the
Advisor expects to discover additional derivative instruments and other hedging
or risk management 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
Each Fund may invest without limitation in securities purchased on a when-
issued or delayed-delivery basis. Although the payment and interest terms of
these securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date,
generally within 45 days. Purchasing when-issued securities allows a Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when a Fund purchases a when-issued security, it immediately assumes the risk of
ownership, including the risk of price fluctuation.
The greater a Fund's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of a Fund.
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PROSPECTUS PAGE I-26
<PAGE> 30
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although a Fund may be
able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless, after entering into the commitment, a sale appears desirable for
investment reasons. When required by SEC guidelines, a Fund will set aside
permissible liquid assets in a segregated account to secure its outstanding
commitments for when-issued securities.
ILLIQUID SECURITIES
The Advantage and Municipal Advantage Funds may each invest up to 15% of
their net assets in illiquid securities. The Heritage Money and Municipal 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
and avoid a certain excise tax, the Funds may be required to distribute a
portion of such discount and income and may be required to dispose of other
portfolio securities, which may occur in periods of adverse market prices, in
order to generate cash to meet these distribution requirements.
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PROSPECTUS PAGE I-27
<PAGE> 31
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into mortgage dollar rolls, in which the Fund would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would be compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the initial
sale. The Fund also could be compensated through the receipt of fee income
equivalent to a lower forward price. 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
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PROSPECTUS PAGE I-28
<PAGE> 32
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.
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, the "Strong
Money Funds"). The Strong Money Funds seek current income, a stable share price
of $1.00, and daily liquidity. All money market instruments
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PROSPECTUS PAGE I-29
<PAGE> 33
can change in value when interest rates or an issuer's creditworthiness change
dramatically. The Strong Money Funds cannot guarantee that they will always be
able to maintain a stable net asset value of $1.00 per share.
PORTFOLIO TURNOVER
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 the "Advisory Agreements") with Strong Capital Management, Inc.
(the "Advisor"). Except for the management fee arrangements, the Advisory
Agreements are substantially identical. Under the terms of these agreements, the
Advisor manages each Fund's investments and business affairs subject to the
supervision of each Fund's Board of Directors.
ADVISOR. The Advisor began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and profit-sharing
plans, as well as mutual funds, several of which are funding vehicles for
variable insurance products. As of May 31, 1997, the Advisor had over $25
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 and Municipal Money
Funds, .50%; and Municipal Advantage and Advantage Funds, .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
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PROSPECTUS PAGE I-30
<PAGE> 34
or absorption will temporarily lower a Fund's overall expense ratio and increase
a Fund's overall return to investors.
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.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the four Strong Cash Management Funds.
STRONG HERITAGE 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 bachelor's degree 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.
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 bachelor's degree from Brigham Young University in 1972
and his master's degree from Northwestern University in 1973. 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 earned his
M.B.A. in Finance at Washington University in St. Louis, Missouri in 1989.
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PROSPECTUS PAGE I-31
<PAGE> 35
His undergraduate degree, awarded in 1987, is from the University of
Minnesota-Morris. Mr. Koch is also a Chartered Financial Analyst. Mr. Koch has
managed or co-managed the Strong Advantage Fund since 1991.
LYLE J. FITTERER. Mr. Fitterer joined the Advisor in 1989 after receiving his
bachelor's degree in Accounting 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 Fund is a 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., and the
Advantage Fund 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.
SHAREHOLDER PRIVILEGES. The shareholders of each Fund may benefit from the
privileges described in the "Shareholder Manual" (see page II-1).
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PROSPECTUS PAGE I-32
<PAGE> 36
However, each Fund reserves the right, at any time and without prior notice, to
suspend, limit, modify, or terminate any of these privileges or their use in any
manner by any person or class.
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. Unless you choose otherwise,
all your dividends and capital gains distributions will be automatically
reinvested in additional Fund shares. Or, you may elect to have all your
dividends and capital gain distributions from a Fund automatically invested in
additional shares of another Strong Fund. Shares are purchased at the net asset
value determined on the payment date. If you request in writing that your
dividends and other distributions be paid in cash, a Fund will credit your bank
account by Electronic Funds Transfer ("EFT") or issue a check to you within five
business days of the payment date. You may change your election at any time by
calling or writing Strong Funds. Strong Funds must receive any such change 7
days (15 days for EFT) prior to a dividend or capital gain distribution payment
date in order for the change to be effective for that payment.
The policy of each Fund is to pay dividends from net investment income
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 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.
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
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PROSPECTUS PAGE I-33
<PAGE> 37
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 Fund shares may result in taxable gain
or loss to you, depending upon whether the redemption proceeds payable to you
are more or less than your adjusted cost basis for the redeemed shares. Similar
tax consequences generally will result from an exchange of shares of the Fund
for shares of another Strong Fund. If you purchase shares of one of these Funds
within thirty days before or after redeeming shares of the same Fund at a loss,
a portion or all of that loss will not be deductible and will increase the cost
basis of the newly purchased shares. 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." Moreover, 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 will be paid with the redemption
proceeds.
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
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PROSPECTUS PAGE I-34
<PAGE> 38
rate of 31% (backup withholding) from all taxable dividends (in the case of the
Heritage Money and Municipal 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 Internal
Revenue Code and, if so qualified, will not be liable for federal income tax on
earnings and gains distributed to its shareholders in a timely manner.
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effects on the Funds and investors therein. See
the SAI for a further discussion. There may be other federal, state, or local
tax considerations applicable to a particular investor. You are therefore urged
to consult your own tax adviser.
PERFORMANCE INFORMATION
Each Fund may advertise a variety of types of performance information,
including "yield," "average annual total return," "total return," and
"cumulative total return." The Heritage Money and Municipal 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 and Municipal 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.
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<PAGE> 39
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.
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<PAGE> 40
This page has been left blank intentionally.
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<PAGE> 41
SHAREHOLDER MANUAL
<TABLE>
<S> <C>
HOW TO BUY SHARES...................... II-1
DETERMINING YOUR SHARE PRICE........... II-5
HOW TO SELL SHARES..................... II-6
SHAREHOLDER SERVICES................... II-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
Strong 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.
Whether you are opening a new account or adding to an existing one, Strong
provides you with several methods to buy Fund shares.
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<PAGE> 42
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO OPEN A NEW ACCOUNT
- ----------------------------------------------------------------------------
MAIL BY CHECK
- Complete and sign the application. Make your check
or money order payable to "Strong Funds."
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to Strong Funds, 900 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- Call 1-800-368-3863 for instructions on
establishing an account with an exchange by mail.
- ----------------------------------------------------------------------------
TELEPHONE BY EXCHANGE
- Call 1-800-368-3863 to establish a new account by
1-800-368-3863 exchanging funds from an existing Strong Funds
24 HOURS A DAY, account.
7 DAYS A WEEK - Sign up for telephone exchange services when you
open your account. To add the telephone exchange
option to your account, call 1-800-368-3863 for a
Telephone Exchange Form.
- Please note that your accounts must be identically
registered and that you must exchange enough into the
new account to meet the minimum initial investment.
Or use Strong DirectSM, Strong Funds' automated
telephone response system. Call 1-800-368-7550.
- ----------------------------------------------------------------------------
IN PERSON - Stop by our Investor Center in Menomonee Falls,
Wisconsin.
Call 1-800-368-3863 for hours and directions.
- The Investor Center can only accept checks or money
orders.
- ----------------------------------------------------------------------------
WIRE Call 1-800-368-3863 for instructions on opening an
account by
wire.
- ----------------------------------------------------------------------------
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM."(1)
- If you sign up for Strong's Automatic Investment
Plan when you open your account and contribute
monthly, Strong Funds will waive the Fund's minimum
initial investment (see chart on page II-4).
- Complete the Automatic Investment Plan section on
the account application.
- Mail to the address indicated on the application.
- ----------------------------------------------------------------------------
BROKER-DEALER - You may purchase shares in a Fund through a
broker-dealer
or other institution that may charge a transaction
fee.
- Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account
from the broker-dealer.
</TABLE>
----------------------
PROSPECTUS PAGE II-2
<PAGE> 43
- ------------------------------------------------------------------------------
TO ADD TO AN EXISTING ACCOUNT
- --------------------------------------------------------------------------------
BY CHECK
- - Complete an Additional Investment Form provided at the bottom of your account
statement, or write a note indicating your fund account number and
registration. Make your check or money order payable to "Strong Funds."
- - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
using an express delivery service, send to Strong Funds, 900 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- - Call 1-800-368-3863 for instructions on exchanging by mail.
- --------------------------------------------------------------------------------
BY EXCHANGE
- - Add to an account by exchanging funds from another Strong Funds account.
- - Sign up for telephone exchange services when you open your account. To add the
telephone exchange option to your account, call 1-800-368-3863 for a Telephone
Exchange Form.
- - Please note that the accounts must be identically registered and that the
minimum exchange is $50(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
Telephone Purchase Form.
Or use Strong DirectSM, Strong Funds' automated telephone response system. Call
1-800-368-7550.
- --------------------------------------------------------------------------------
- - Stop by our Investor Center in Menomonee Falls, Wisconsin. Call 1-800-368-3863
for hours and directions.
- - The Investor Center can only accept checks or money orders.
- --------------------------------------------------------------------------------
Call 1-800-368-3863 for instructions on adding to an account by wire.
- --------------------------------------------------------------------------------
USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS. Sign up for these services
when you open your account, or call 1-800-368-3863 for instructions on how to
add them to your existing account.
- - AUTOMATIC INVESTMENT PLAN. Make regular, systematic investments (minimum
$50)(1) into your Strong Funds account from your bank checking or NOW account.
Complete the Automatic Investment Plan section on the account application.
- - AUTOMATIC EXCHANGE PLAN. Make regular, systematic exchanges (minimum $50)(3)
from one 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 additional 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.
----------------------
PROSPECTUS PAGE II-3
<PAGE> 44
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- - Please make all checks or money orders payable to "Strong Funds."
- - We cannot accept third-party checks or checks drawn on banks outside the U.S.
- - You will be charged a $20 service fee for each check, wire, or Electronic
Funds Transfer ("EFT") purchase that is returned unpaid, and you will be
responsible for any resulting losses suffered by a Fund.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - A Fund reserves the right to decline to accept your purchase order upon
receipt for any reason.
- - Minimum Investment Requirements:
To open a regular account......................$2,500 (Heritage Money - $25,000)
To open an IRA or one-person SEP account.........$250 (Heritage Money - $25,000)
To open an UGMA/UTMA account.....................$250 (Heritage Money - $25,000)
To add to an existing account......................$50 (Heritage Money - $1,000)
For Heritage Money and Advantage Funds Only:
To open a SIMPLE Plan, 401(k), SEP-IRA,
Keogh, Profit Sharing or
Money Purchase Pension, 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 provides
administrative services......................................No Minimum
(Heritage Money - $25,000)
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 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.
----------------------
PROSPECTUS PAGE II-4
<PAGE> 45
- - 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. It is expected that accounts will be valued in
the last week of each calendar quarter. 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 will
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 and will be subject to a
20% withholding tax.
- 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
----------------------
PROSPECTUS PAGE II-5
<PAGE> 46
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 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 and Municipal 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 account balance is
$100,000 or more at the time of the transaction, 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 Municipal Money,
Municipal Advantage, and Advantage Funds.
----------------------
PROSPECTUS PAGE II-6
<PAGE> 47
To redeem shares, you may use any of the methods described in the following
chart. However, if you are selling shares in a retirement account, please call
1-800-368-3863 for instructions. Please note that there is a $10.00 fee for
closing an IRA or other retirement account or for transferring assets to another
custodian. For your protection, certain requests may require a signature
guarantee. (See "Special Situations -- Signature Guarantees.")
----------------------
PROSPECTUS PAGE II-7
<PAGE> 48
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
TO SELL SHARES
- ----------------------------------------------------------------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
($3 fee for - Write a "letter of instruction" that includes the
Heritage following information: your account number, the dollar
Money Fund) amount or number of shares you wish to redeem, each
For your protection owner's name, your street address, and the signature of
certain redemption each owner as it appears on the account.
requests may - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin
require a signature 53201. If you're using an express delivery service, send
guarantee. See to 900 Heritage Reserve, Menomonee Falls, Wisconsin
"Special Situations 53051.
- - Signature FOR TRUST ACCOUNTS
Guarantees." - Same as above. Please ensure that all trustees sign the
letter of instruction.
FOR OTHER REGISTRATIONS
- Call 1-800-368-3863 for instructions.
- ----------------------------------------------------------------------------
TELEPHONE
($3 fee for Sign up for telephone redemption services when you open
Heritage your account by checking the "Yes" box in the appropriate
Money Fund) section of the account application. To add the telephone
redemption option to your account, call 1-800-368-3863 for
1-800-368-3863 a Telephone Redemption Form.
24 HOURS A DAY, Once the telephone redemption option is in place, you may
7 DAYS A WEEK sell shares(1) by phone and arrange to receive the proceeds
in one of three ways:
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 is charged.)
- If you wish to redeem shares in the Heritage Money 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 is 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.
You may also use Strong Direct (SM), Strong Funds'
automated telephone response system. Call 1-800-368-7550.
- ----------------------------------------------------------------------------
CHECK WRITING
($3 per check fee Sign up for the free (except with respect to the Heritage
for Heritage Money Fund) check-writing privilege when you open your
Money Fund) account. To add check writing to an existing account or to
order additional checks, call 1-800-368-3863.
- Please keep in mind that all check redemptions must be
for a minimum of $500(1) and that you cannot write a check
to close an account.
- ----------------------------------------------------------------------------
AUTOMATICALLY
($3 fee per with- You can set up automatic withdrawals from your account at
drawal for Heritage regular intervals. To establish the Systematic Withdrawal
Money Fund) Plan, request a form by calling 1-800-368-3863.
- ----------------------------------------------------------------------------
BROKER-DEALER
(varies by You may also redeem shares through broker-dealers or others
institution) who may charge a commission or other transaction fee.
</TABLE>
(1) The minimum amount for the Heritage Money Fund is $1,000.
----------------------
PROSPECTUS PAGE II-8
<PAGE> 49
WHAT YOU SHOULD KNOW ABOUT SELLING SHARES
- - If you have recently purchased shares, please be aware that your redemption
request may not be honored until the purchase check has cleared your bank,
which generally occurs within ten calendar days.
- - You will be charged a $10 service fee for a stop-payment and replacement of a
redemption or dividend check.
- - The right of redemption may be suspended during any period in which (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined by the
SEC exists, making disposal of portfolio securities or valuation of net assets
of a Fund not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must endorse
the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - 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
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.
----------------------
PROSPECTUS PAGE II-9
<PAGE> 50
WHAT YOU SHOULD KNOW ABOUT TELEPHONE REDEMPTIONS
- - The Funds reserve the right to refuse a telephone redemption if they believe
it advisable to do so.
- - Once you place your telephone redemption request, it cannot be canceled or
modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Funds and their transfer
agent employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. The Funds may incur liability if they do not follow
these procedures.
- - Because of increased telephone volume, you may experience difficulty in
implementing a telephone redemption during periods of dramatic economic or
market changes.
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus, or e-mail us at [email protected].
STRONG DIRECTSM AUTOMATED TELEPHONE SYSTEM. Also available 24 hours a day,
the Strong DirectSM automated response system enables you to use a touch-tone
phone to hear fund quotes and returns on any Strong Fund. You may also confirm
account balances, hear records of recent transactions and dividend activity
(1-800-368-5550), and perform purchases, exchanges or redemptions among your
existing Strong accounts (1-800-368-7550). You may also perform an exchange to
open a new Strong account provided that your account has the telephone exchange
option. Please note that your accounts must be identically registered and you
must exchange enough into the new account to meet the minimum initial
investment. Your account information is protected by a personal code that you
establish.
STRONG NETDIRECT(SM). Available 24 hours a day from your personal computer,
Strong netDirect(SM) allows you to use the Internet to access your Strong Funds
account information. You may access specific account history, view current
account balances, obtain recent dividend activity, and perform purchases,
exchanges, or redemptions among your existing Strong accounts.
To register for netDirect, please visit our website at http://www.
strong-funds.com. Your account information is protected by a personal password
-----------------------
PROSPECTUS PAGE II-10
<PAGE> 51
and Internet encryption technology. For more information on this service, please
call 1-800-359-3379 or e-mail us at [email protected].
STATEMENTS AND REPORTS. At a minimum, each Fund will confirm all transactions
for your account on a quarterly basis. We recommend that you file each quarterly
statement -- and, especially, each calendar year-end statement -- with your
other important financial papers, since you may need to refer to them at a later
date for tax purposes. Should you need additional copies of previous statements,
you may order confirmation statements for the current and preceding year at no
charge. Statements for earlier years are available for $10 each. Call
1-800-368-3863 to order past statements.
Each year, you will also receive a statement confirming the tax status of any
distributions paid to you, as well as a semi-annual report and an annual report
containing audited financial statements.
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
More complete information regarding each Fund's investment policies and
services is contained in its SAI, which you may request by calling or writing
Strong Funds at the phone number and address on the cover of this Prospectus.
CHANGING YOUR ACCOUNT INFORMATION. So that you continue receiving your Strong
correspondence, including any dividend checks and statements, please notify us
in writing as soon as possible if your address changes. You may use the
Additional Investment Form at the bottom of your confirmation statement, or
simply write us a letter of instruction that contains the following information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to 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 or by telephone. By establishing the
telephone exchange service, you authorize the Fund and its agents to act upon
your instruction by telephone to exchange shares from any account you
-----------------------
PROSPECTUS PAGE II-11
<PAGE> 52
specify. For tax purposes, an exchange is considered a sale and a purchase of
Fund shares. Please obtain and read the appropriate prospectus before investing
in any of the Strong Funds. Since an excessive number of exchanges may be
detrimental to the Funds, each Fund reserves the right to discontinue the
exchange privilege of any shareholder 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 Heritage Money Fund may charge a $3.00 redemption fee per check
written unless your account has a balance of $100,000 or more at the time of the
transaction. 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 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.
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
-----------------------
PROSPECTUS PAGE II-12
<PAGE> 53
$1,000) are made automatically from your payroll check into your existing Fund
account. By enrolling in the Plan, you authorize your employer or its agents to
deposit a specified amount from your payroll check into the Fund's bank account.
In most cases, your Fund account will be credited the day after the amount is
received by the Fund's bank. In order to participate in the Plan, your employer
must have direct deposit capabilities through the Automated Clearing House
available to its employees. The Plan may be used for other direct deposits, such
as social security checks, military allotments, and annuity payments.
To establish a 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.
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) in the first account and at least the minimum
initial investment in the second account. Exchanges may be made on any day or
days of your choice. If the amount remaining in the first account is less than
the exchange amount you requested, then the remaining amount will be exchanged.
At such time as the first account has a zero balance, your participation in the
Plan will be terminated. You may also terminate the Plan at any time by calling
or writing to the Fund. Once participation in the Plan has been terminated for
any reason, to reinstate the Plan you must do so in writing; simply investing
additional funds will not reinstate the Plan. The Heritage Money Fund charges a
$3.00 fee for each exchange. However, this fee is waived if your account balance
at the time of the transaction 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
-----------------------
PROSPECTUS PAGE II-13
<PAGE> 54
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.
RETIREMENT PLAN SERVICES
We offer a wide variety of retirement plans for individuals and institutions,
including large and small businesses. For information on 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 (SIMPLES, SEP plans, Keoghs,
403(b)(7) plans, pension and profit sharing plans), 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
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, 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.
-----------------------
PROSPECTUS PAGE II-14
<PAGE> 55
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 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
existing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $25,000;
- - when you request to redeem or redeposit shares that have been issued in
certificate form;
- - if you open an account and later decide that you want certificates;
- - when you request that redemption proceeds be sent to a different name or
address than is registered on your account;
- - if you add/change your name or add/remove an owner on your account; and
- - if you add/change the beneficiary on your transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor
institution, as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms, and others. PLEASE NOTE THAT A
NOTARY PUBLIC STAMP OR SEAL IS NOT ACCEPTABLE.
-----------------------
PROSPECTUS PAGE II-15
<PAGE> 56
This page has been left blank intentionally.
-----------------------
PROSPECTUS PAGE II-16
<PAGE> 57
APPENDIX
RATINGS OF DEBT OBLIGATIONS:
<TABLE>
<CAPTION>
Standard & Poor's Moody's Investor Fitch Investors Duff & Phelps IBCA, Thomson
Definition Ratings Group Services, Inc. Service, Inc. Rating Co. Inc. BankWatch, Inc.
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Highest quality AAA Aaa AAA AAA AAA AAA
High quality AA Aa AA AA AA AA
Upper medium grade A A A A A A
Medium grade BBB Baa BBB BBB BBB BBB
Low grade BB Ba BB BB BB BB
Speculative B B B B B B
Submarginal CCC, CC, C Caa, Ca CCC, CC, C CCC CCC, CC CCC, CC
Probably in
default D C DDD, DD, D DD C D
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
----------------------
PROSPECTUS PAGE A-1
<PAGE> 58
ASSET COMPOSITION
For the fiscal year ended February 28, 1997, 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
------------------------------------- -------------------------------------
Advisor's Assessment Advisor's Assessment
Percentage of of Percentage of of
Rating Investments* Unrated Securities Investments* Unrated Securities
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA 15.7% .2% 18.8% 0.1%
AA 9.6 .2 27.7 0.4
A 18.0 1.5 17.1 2.5
BBB 29.0 2.2 16.2 15.2
BB 21.9 1.7 1.0 1.0
B -- -- -- --
CCC -- -- -- --
CC -- -- -- --
C -- -- -- --
D -- -- -- --
Unrated 5.8 19.2
Total 100% 5.8% 100.0% 19.2%
- ----------------------------------------------------------------------------------------------------
</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).
----------------------
PROSPECTUS PAGE A-2
<PAGE> 59
STATEMENT OF ADDITIONAL INFORMATION
STRONG HERITAGE MONEY FUND
STRONG MUNICIPAL MONEY MARKET FUND
STRONG MUNICIPAL ADVANTAGE FUND
STRONG ADVANTAGE FUND
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
This Statement of Additional Information is not a Prospectus and should be
read in conjunction with the Prospectus of Strong Advantage Fund, Inc. (the
"Advantage Fund"); Strong Heritage Money Fund (the "Heritage Money Fund"),
which is a series of Strong Heritage Reserve Series, Inc.; and Strong Municipal
Money Market Fund (the "Municipal Money Fund") and Strong Municipal Advantage
Fund (the "Municipal Advantage Fund"), both of which are series of Strong
Municipal Funds, Inc. (individually, a "Fund" and collectively, the "Funds")
dated July 1, 1997. Requests for copies of the Prospectus should be made by
calling one of the numbers listed above. Financial statements for the Funds
appearing in the Annual Report for each such Fund, which accompany this
Statement of Additional Information, are incorporated herein by reference.
This Statement of Additional Information is dated July 1, 1997.
<PAGE> 60
STRONG CASH MANAGEMENT FUNDS
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
Foreign Investment Companies...................................... 16
Foreign Securities................................................ 16
High-Yield (High-Risk) Securities................................. 17
Illiquid Securities............................................... 18
Lending of Portfolio Securities................................... 19
Loan Interests.................................................... 20
Maturity.......................................................... 21
Mortgage- and Asset-Backed Securities............................. 21
Mortgage Dollar Rolls and Reverse Repurchase Agreements........... 22
Municipal Obligations............................................. 23
Repurchase Agreements............................................. 23
Rule 2a-7: Maturity, Quality, and Diversification Restrictions... 23
Sector Concentration.............................................. 25
Short Sales....................................................... 25
Taxable Securities................................................ 25
Temporary Defensive Position...................................... 25
Variable- or Floating-Rate Securities............................. 25
Warrants.......................................................... 26
When-Issued Securities............................................ 27
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities............... 27
DIRECTORS AND OFFICERS OF THE FUNDS................................. 27
PRINCIPAL SHAREHOLDERS.............................................. 31
INVESTMENT ADVISOR AND DISTRIBUTOR.................................. 31
PORTFOLIO TRANSACTIONS AND BROKERAGE................................ 34
CUSTODIAN........................................................... 37
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT........................ 37
TAXES............................................................... 38
DETERMINATION OF NET ASSET VALUE.................................... 41
ADDITIONAL SHAREHOLDER INFORMATION.................................. 41
FUND ORGANIZATION................................................... 43
SHAREHOLDER MEETINGS................................................ 43
PERFORMANCE INFORMATION............................................. 44
GENERAL INFORMATION................................................. 52
PORTFOLIO MANAGEMENT................................................ 55
INDEPENDENT ACCOUNTANTS............................................. 57
LEGAL COUNSEL....................................................... 57
FINANCIAL STATEMENTS................................................ 57
APPENDIX........................................................... A-1
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated July 1, 1997 and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Funds.
This Statement of Additional Information does not constitute an offer to sell
securities.
<PAGE> 61
INVESTMENT RESTRICTIONS
The investment objective of the Heritage Money Fund is to seek current
income, a stable share price and daily liquidity. The investment objective of
the Municipal Money Fund is to seek federally tax-exempt current income, a
stable share price and daily liquidity. The investment objective of the
Advantage Fund is to seek current income with a very low degree of share-price
fluctuation. The investment objective of the Municipal Advantage Fund is to
seek federally tax-exempt current income with a very low degree of share-price
fluctuation. The Funds' investment objectives and policies are described in
detail in the Prospectus under the caption "Investment Objectives and
Policies." The following are the Funds' fundamental investment limitations
which cannot be changed without shareholder approval.
Each Fund:
1. May not with respect to 75% of its total assets, purchase the securities
of any issuer (except securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities) if, as a result, (i) more
than 5% of the Fund's total assets would be invested in the securities of
that issuer, or (ii) the Fund would hold more than 10% of the outstanding
voting securities of that issuer.
2. May (i) borrow money from banks and (ii) make other investments or engage
in other transactions permissible under the Investment Company Act of 1940
(the "1940 Act") which may involve a borrowing, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the value of the
Fund's total assets (including the amount borrowed), less the Fund's
liabilities (other than borrowings), except that the Fund may borrow up to
an additional 5% of its total assets (not including the amount borrowed)
from a bank for temporary or emergency purposes (but not for leverage or
the purchase of investments). The Fund may also borrow money from the
other Strong Funds or other persons to the extent permitted by applicable
law.
3. May not issue senior securities, except as permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and
sale of portfolio securities.
5. May not purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent the Fund from purchasing or selling options, futures contracts, or
other derivative instruments, or from investing in securities or other
instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's total
assets would be lent to other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
7. May not purchase the securities of any issuer if, as a result, more than
25% of the Fund's total assets would be invested in the securities of
issuers, the principal business activities of which are in the same
industry. With respect to the Heritage Money Fund only, this limitation
shall not limit the Fund's purchases of obligations issued by domestic
banks.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit
the Fund from purchasing or selling securities or other instruments backed
by real estate or of issuers engaged in real estate activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objective, policies, and restrictions as the Fund.
-3-
<PAGE> 62
Municipal Money and Municipal Advantage Funds. In addition to the common
fundamental investment limitations described above, the Municipal Money and
Municipal Advantage Funds may not, under normal market conditions, invest less
than 80% of their respective net assets in municipal securities.
The following are the Funds' non-fundamental operating policies which may
be changed by the Board of Directors of each Fund without shareholder approval.
Each Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, or
unless it covers such short sale as required by the current rules and
positions of the Securities and Exchange Commission or its staff, and
provided that transactions in options, futures contracts, options on
futures contracts, or other derivative instruments are not deemed to
constitute selling securities short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts,
options on futures contracts, or other derivative instruments shall not
constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% (10% with respect to the Heritage Money, and Municipal Money
Funds) 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 (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when
bank borrowings exceed 5% of its total assets.
8. Make any loans other than loans of portfolio securities, except through
(i) purchases of debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
Heritage Money and Municipal Money Funds. In addition to the common
non-fundamental restrictions described above, the Heritage Money and Municipal
Money Funds may not 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.
Except for the fundamental investment limitations listed above and each
Fund's investment objective, the other investment policies described in the
Prospectus and this Statement of Additional Information are not fundamental and
may be changed with approval of a Fund's Board of Directors. Unless noted
otherwise, if a percentage restriction is adhered to at the time of investment,
a later increase or decrease in percentage resulting from a change in a Fund's
assets (i.e., due to cash inflows or redemptions) or in market value of the
investment or a Fund's assets will not constitute a violation of that
restriction.
-4-
<PAGE> 63
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds'
investment objectives, policies and techniques that are described in detail in
the Prospectus under the captions "Investment Objectives and Policies" and
"Implementation of Policies and Risks."
ASSET-BACKED DEBT OBLIGATIONS
(HERITAGE FUND)
The Fund may invest in 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. 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 the Fund purchases these debt obligations 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 debt obligations 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 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.
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
(ALL FUNDS)
A Fund may borrow money from banks and make other investments or engage in
other transactions permissible under the 1940 Act which may be considered a
borrowing (such as mortgage dollar rolls and reverse repurchase agreements) as
-5-
<PAGE> 64
discussed under "Investment Restrictions." However, a Fund may not purchase
securities when bank borrowings exceed 5% of a Fund's total assets. Presently,
the Funds only intend to borrow from banks for temporary or emergency purposes.
The Advantage and Municipal Advantage Funds have established a
line-of-credit (LOC) with certain banks by which they may borrow funds for
temporary or emergency purposes. A borrowing is presumed to be for temporary
or emergency purposes if it is repaid by a Fund within sixty days and is not
extended or renewed. The Funds intend to use the LOC to meet large or
unexpected redemptions that would otherwise force a Fund to liquidate
securities under circumstances which are unfavorable to a Fund's remaining
shareholders. The Funds pay a commitment fee to the banks for the LOC.
CONVERTIBLE SECURITIES
(ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
A Fund may invest in convertible securities, which are bonds, debentures,
notes, preferred stocks, or other securities that may be converted into or
exchanged for a specified amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest normally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted, or exchanged. Convertible
securities have unique investment characteristics in that they generally (i)
have higher yields than common stocks, but lower yields than comparable
non-convertible securities, (ii) are less subject to fluctuation in value than
the underlying stock since they have fixed income characteristics, and (iii)
provide the potential for capital appreciation if the market price of the
underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value,
if converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as
interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. Generally, the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of
the underlying common stock approaches or exceeds the conversion price, the
price of the convertible security will be increasingly influenced by its
conversion value. A convertible security generally will sell at a premium over
its conversion value by the extent to which investors place value on the right
to acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
a Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
DEPOSITARY RECEIPTS
(ADVANTAGE FUND)
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 evidencing a similar arrangement. For purposes of a Fund's
investment policies, ADRs and EDRs are deemed to have the same classification
as the underlying securities they represent, except that ADRs and EDRs shall be
treated as indirect foreign investments. Thus, an ADR or EDR representing
ownership of common stock will be treated as common stock. ADR and EDR
depositary receipts do not eliminate all of the risks associated with directly
investing in the securities of foreign issuers.
-6-
<PAGE> 65
ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without participation
by (or even necessarily the acquiescence of) the issuer of the deposited
securities, although typically the depositary requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities.
The depositary usually charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into U.S. dollars, the
disposition of non-cash distributions, and the performance of other services.
The depositary of an unsponsored facility frequently is under no obligation to
pass through voting rights to ADR holders in respect of the deposited
securities. In addition, an unsponsored facility is generally not obligated to
distribute communications received from the issuer of the deposited securities
or to disclose material information about such issuer in the U.S. and thus
there may not be a correlation between such information and the market value of
the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary, and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
DERIVATIVE INSTRUMENTS
(ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
IN GENERAL. A Fund may use derivative instruments for any lawful purpose
consistent with the Fund's investment objective such as hedging or managing
risk. Derivative instruments are commonly defined to include securities or
contracts whose values depend on (or "derive" from) the value of one or more
other assets, such as securities, currencies, or commodities. These "other
assets" are commonly referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Options and forward
contracts are considered to be the basic "building blocks" of derivatives. For
example, forward-based derivatives include forward contracts, swap contracts,
as well as exchange-traded futures. Option-based derivatives include privately
negotiated, over-the-counter (OTC) options (including caps, floors, collars,
and options on forward and swap contracts) and exchange-traded options on
futures. Diverse types of derivatives may be created by combining options or
forward contracts in different ways, and by applying these structures to a wide
range of underlying assets.
An option is a contract in which the "holder" (the buyer) pays a certain
amount (the "premium") to the "writer" (the seller) to obtain the right, but
not the obligation, to buy from the writer (in a "call") or sell to the writer
(in a "put") a specific asset at an agreed upon price at or before a certain
time. The holder pays the premium at inception and has no further financial
obligation. The holder of an option-based derivative generally will benefit
from favorable movements in the price of the underlying asset but is not
exposed to corresponding losses due to adverse movements in the value of the
underlying asset. The writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset.
A forward is a sales contract between a buyer (holding the "long"
position) and a seller (holding the "short" position) for an asset with
delivery deferred until a future date. The buyer agrees to pay a fixed price
at the agreed future date and the seller agrees to deliver the asset. The
seller hopes that the market price on the delivery date is less than the agreed
upon price, while the buyer hopes for the contrary. The change in value of a
forward-based derivative generally is roughly proportional to the change in
value of the underlying asset.
HEDGING. A Fund may use derivative instruments to protect against
possible adverse changes in the market value of securities held in, or are
anticipated to be held in, the Fund's portfolio. Derivatives may also be used
by a Fund to "lock-in" the
-7-
<PAGE> 66
Fund's realized but unrecognized gains in the value of its portfolio
securities. Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce the opportunity for gain by offsetting the positive effect of
favorable price movements in the hedged investments.
MANAGING RISK. A Fund may also use derivative instruments to manage the
risks of the Fund's portfolio. Risk management strategies include, but are not
limited to, facilitating the sale of portfolio securities, managing the
effective maturity or duration of debt obligations in a Fund's portfolio,
establishing a position in the derivatives markets as a substitute for buying
or selling certain securities, or creating or altering exposure to certain
asset classes, such as equity, debt, and foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way for a Fund to invest than "traditional" securities
(i.e., stocks or bonds) would.
EXCHANGE OR OTC DERIVATIVES. Derivative instruments may be
exchange-traded or traded in OTC transactions between private parties.
Exchange-traded derivatives are standardized options and futures contracts
traded in an auction on the floor of a regulated exchange. Exchange contracts
are generally very liquid. The exchange clearinghouse is the counterparty of
every contract. Thus, each holder of an exchange contract bears the credit
risk of the clearinghouse (and has the benefit of its financial strength)
rather than that of a particular counterparty. Over-the-counter transactions
are subject to additional risks, such as the credit risk of the counterparty to
the instrument and are less liquid than exchange-traded derivatives since they
often can only be closed out with the other party to the transaction.
RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments
involves risks and special considerations as described below. Risks pertaining
to particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as the risk
of the underlying assets, namely that the value of the underlying asset may go
up or down. Adverse movements in the value of an underlying asset can expose a
Fund to losses. Derivative instruments may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly Strong
Capital Management, Inc.'s (the "Advisor") ability to predict movements of the
securities, currencies, and commodity markets, which requires different skills
than predicting changes in the prices of individual securities. There can be
no assurance that any particular strategy adopted will succeed. The Advisor's
decision to engage in a derivative instrument will reflect the Advisor's
judgment that the derivative transaction will provide value to the Fund and its
shareholders and is consistent with the Fund's objectives, investment
limitations, and operating policies. In making such a judgment, the Advisor
will analyze the benefits and risks of the derivative transaction and weigh
them in the context of the Fund's entire portfolio and investment objective.
(2) CREDIT RISK. A Fund will be subject to the risk that a loss may be
sustained by the Fund as a result of the failure of a counterparty to comply
with the terms of a derivative instrument. The counterparty risk for
exchange-traded derivative instruments is generally less than for
privately-negotiated or OTC derivative instruments, since generally a clearing
agency, which is the issuer or counterparty to each exchange-traded instrument,
provides a guarantee of performance. For privately-negotiated instruments,
there is no similar clearing agency guarantee. In all transactions, a Fund
will bear the risk that the counterparty will default, and this could result in
a loss of the expected benefit of the derivative transaction and possibly other
losses to the Fund. A Fund will enter into transactions in derivative
instruments only with counterparties that the Advisor reasonably believes are
capable of performing under the contract.
(3) CORRELATION RISK. When a derivative transaction is used to completely
hedge another position, changes in the market value of the combined position
(the derivative instrument plus the position being hedged) result from an
imperfect correlation between the price movements of the two instruments. With
a perfect hedge, the value of the combined position remains unchanged for any
change in the price of the underlying asset. With an imperfect hedge, the
values of the derivative instrument and its hedge are not perfectly correlated.
Correlation risk is the risk that there might be imperfect correlation, or
even no correlation, between price movements of an instrument and price
movements of investments being hedged. For example, if the value of a
derivative instruments used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investments, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded. The
effectiveness of
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hedges using instruments on indices will depend, in part, on the degree of
correlation between price movements in the index and price movements in the
investments being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity risk.
Liquidity risk is the risk that a derivative instrument cannot be sold, closed
out, or replaced quickly at or very close to its fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. A Fund might be required by applicable
regulatory requirement to maintain assets as "cover," maintain segregated
accounts, and/or make margin payments when it takes positions in derivative
instruments involving obligations to third parties (i.e., instruments other
than purchased options). If a Fund was unable to close out its positions in
such instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired, matured, or was
closed out. The requirements might impair a Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable
to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. A Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any derivatives position can
be sold or closed out at a time and price that is favorable to a Fund.
(5) LEGAL RISK. Legal risk is the risk of loss caused by the legal
unenforcibility of a party's obligations under the derivative. While a party
seeking price certainty agrees to surrender the potential upside in exchange
for downside protection, the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a counterparty that has
lost money in a derivative transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative products.
(6) SYSTEMIC OR "INTERCONNECTION" RISK. Interconnection risk is the risk
that a disruption in the financial markets will cause difficulties for all
market participants. In other words, a disruption in one market will spill
over into other markets, perhaps creating a chain reaction. Much of the OTC
derivatives market takes place among the OTC dealers themselves, thus creating
a large interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create losses
at other dealers and destabilize the entire market for OTC derivative
instruments.
GENERAL LIMITATIONS. The use of derivative instruments is subject to
applicable regulations of the Securities and Exchange Commission (the "SEC"),
the several options and futures exchanges upon which they may be traded, the
Commodity Futures Trading Commission ("CFTC"), and various state regulatory
authorities. In addition, a Fund's ability to use derivative instruments may
be limited by certain tax considerations. For a discussion of the federal
income tax treatment of a Fund's derivative instruments, see "Taxes -
Derivative Instruments."
Each Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets. In
accordance with Rule 4.5 of the regulations under the Commodity Exchange Act
(the "CEA"), the notice of eligibility for a Fund includes representations that
the Fund will use futures contracts and related options solely for bona fide
hedging purposes within the meaning of CFTC regulations, provided that the Fund
may hold other positions in futures contracts and related options that do not
qualify as a bona fide hedging position if the aggregate initial margin
deposits and premiums required to establish these positions, less the amount by
which any such futures contracts and related options positions are "in the
money," do not exceed 5% of the Fund's net assets. Adherence to these
guidelines does not limit a Fund's risk to 5% of the Fund's assets.
The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging a Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of a Fund's assets, as defined under the 1940 Act, the SEC
has stated that a Fund may use coverage or the segregation of a Fund's assets.
To the extent required by SEC guidelines, a Fund will not enter into any such
transactions unless it owns either: (i) an offsetting ("covered") position in
securities, options, futures, or derivative instruments; or (ii) cash or liquid
securities positions with a value sufficient at all times to cover its
potential obligations to the extent that the position is not "covered".
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The Funds will also set aside cash and/or appropriate liquid assets in a
segregated custodial account if required to do so by the SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be
sold while the derivative position is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a Fund's
assets to segregated accounts could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
In some cases a Fund may be required to maintain or limit exposure to a
specified percentage of its assets to a particular asset class. In such cases,
when a Fund uses a derivative instrument to increase or decrease exposure to an
asset class and is required by applicable SEC guidelines to set aside liquid
assets in a segregated account to secure its obligations under the derivative
instruments, the Advisor may, where reasonable in light of the circumstances,
measure compliance with the applicable percentage by reference to the nature of
the economic exposure created through the use of the derivative instrument and
not by reference to the nature of the exposure arising from the liquid assets
set aside in the segregated account (unless another interpretation is specified
by applicable regulatory requirements).
OPTIONS. A Fund may use options for any lawful purpose consistent with
the Fund's investment objective such as hedging or managing risk. An option is
a contract in which the "holder" (the buyer) pays a certain amount (the
"premium") to the "writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price (the "strike price" or
"exercise price") at or before a certain time (the "expiration date"). The
holder pays the premium at inception and has no further financial obligation.
The holder of an option will benefit from favorable movements in the price of
the underlying asset but is not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The writer of an option will
receive fees or premiums but is exposed to losses due to changes in the value
of the underlying asset. A Fund may buy or write (sell) put and call options
on assets, such as securities, currencies, commodities, and indices of debt and
equity securities ("underlying assets") and enter into closing transactions
with respect to such options to terminate an existing position. Options used
by the Funds may include European, American, and Bermuda style options. If an
option is exercisable only at maturity, it is a "European" option; if it is
also exercisable prior to maturity, it is an "American" option. If it is
exercisable only at certain times, it is a "Bermuda" option.
Each Fund may purchase (buy) and write (sell) put and call options
underlying assets and enter into closing transactions with respect to such
options to terminate an existing position. The purchase of call options serves
as a long hedge, and the purchase of put options serves as a short hedge.
Writing put or call options can enable a Fund to enhance income by reason of
the premiums paid by the purchaser of such options. Writing call options
serves as a limited short hedge because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the security appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Fund will be obligated to sell the security at less than its
market value or will be obligated to purchase the security at a price greater
than that at which the security must be sold under the option. All or a
portion of any assets used as cover for OTC options written by a Fund would be
considered illiquid to the extent described under "Investment Policies and
Techniques -- Illiquid Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the Fund
will be obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions.
A Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit a Fund to realize the
profit or limit the loss on an option position prior to its exercise or
expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between a Fund and the other party to the
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transaction ("counter party") (usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when a Fund purchases or writes an OTC
option, it relies on the counter party to make or take delivery of the
underlying investment upon exercise of the option. Failure by the counter
party to do so would result in the loss of any premium paid by the Fund as well
as the loss of any expected benefit of the transaction.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counter party, or by a
transaction in the secondary market if any such market exists. Although each
Fund will enter into OTC options only with counter parties that are expected to
be capable of entering into closing transactions with the Funds, there is no
assurance that the Funds will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the counter
party, a Fund might be unable to close out an OTC option position at any time
prior to its expiration. If a Fund were unable to effect a closing transaction
for an option it had purchased, it would have to exercise the option to realize
any profit.
The Funds may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except the index options
may serve as a hedge against overall fluctuations in the securities market in
general.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
SPREAD TRANSACTIONS. A Fund may use spread transactions for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk. A Fund may purchase covered spread options from securities
dealers. Such covered spread options are not presently exchange-listed or
exchange-traded. The purchase of a spread option gives a Fund the right to
put, or sell, a security that it owns at a fixed dollar spread or fixed yield
spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to a Fund in purchasing covered spread
options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used to
protect a Fund against adverse changes in prevailing credit quality spreads,
i.e., the yield spread between high quality and lower quality securities. Such
protection is only provided during the life of the spread option.
FUTURES CONTRACTS. A Fund may use futures contracts for any lawful
purpose consistent with the Fund's investment objective such as hedging or
managing risk. A Fund may enter into futures contracts, including interest
rate, index, and currency futures. Each Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve
as a long hedge, and the sale of futures or the purchase of put options thereon
can serve as a short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options in securities. The Funds' hedging may include
purchases of futures as an offset against the effect of expected increases in
currency exchange rates and securities prices and sales of futures as an offset
against the effect of expected declines in currency exchange rates and
securities prices. The Funds may also write put options on futures contracts
while at the same time purchasing call options on the same futures contracts in
order to create synthetically a long futures contract position. Such options
would have the same strike prices and expiration dates. The Funds will engage
in this strategy only when the Advisor believes it is more advantageous to the
Funds than is purchasing the futures contract.
To the extent required by regulatory authorities, the Funds only enter
into futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce a Fund's exposure to market, currency, or interest rate fluctuations, a
Fund may be able to hedge its exposure more effectively and perhaps at a lower
cost through using futures contracts.
An interest rate futures contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (e.g., debt security) or currency for a specified price at
a designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
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cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index futures
contract was originally written. Transaction costs are incurred when a futures
contract is bought or sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as the case may be, of the
instrument, the currency or by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out prior to delivery by
entering into an offsetting transaction in a matching futures contract.
Although the value of an index might be a function of the value of certain
specified securities, no physical delivery of those securities is made. If the
offsetting purchase price is less than the original sale price, a Fund realizes
a gain; if it is more, a Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, a Fund realizes a gain; if
it is less, a Fund realizes a loss. The transaction costs must also be
included in these calculations. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is not able to
enter into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, a Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash
and/or other appropriate liquid assets in an amount generally equal to 10% or
less of the contract value. Margin must also be deposited when writing a call
or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to a Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If a Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous. Purchasers and sellers of futures positions
and options on futures can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument identical to the instrument
held or written. Positions in futures and options on futures may be closed
only on an exchange or board of trade that provides a secondary market. The
Funds intend to enter into futures transactions only on exchanges or boards of
trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or option on a futures contract can
vary from the previous day's settlement price; once that limit is reached, no
trades may be made that day at a price beyond the limit. Daily price limits do
not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be
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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 Advantage 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 its 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 portfolio investments. In general, if the currency in
which a portfolio investment is denominated appreciates against the U.S.
dollar, the dollar value of the security will increase. Conversely, a decline
in the exchange rate of the currency would adversely affect the value of the
portfolio investment expressed in U.S. dollars.
For example, the 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.
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.
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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.
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
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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 their respective
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 Advantage and Municipal Advantage Funds may enter
into interest rate, securities index, commodity, or security and currency
exchange rate swap agreements for any lawful purpose consistent with each
Fund's investment objective, such as for the purpose of attempting to obtain or
preserve a particular desired return or spread at a lower cost to the Fund than
if the Fund had invested directly in an instrument that yielded that desired
return or spread. A Fund also may enter into swaps in order to protect against
an increase in the price of, or the currency exchange rate applicable to,
securities that the Fund anticipates purchasing at a later date. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to several years. In a standard
"swap" transaction, two parties agree to exchange the returns (or differentials
in rates of return) earned or realized on particular predetermined investments
or instruments. The gross returns to be exchanged or "swapped" between the
parties are calculated with respect to a "notional amount," i.e., the return on
or increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Swap agreements may include interest rate
caps, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates exceed a specified rate, or
"cap;" interest rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall
below a specified level, or "floor;" and interest rate collars, under which a
party sells a
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cap and purchases a floor, or vice versa, in an attempt to protect itself
against interest rate movements exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by a Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, a Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's obligation under a swap agreement will be accrued daily (offset
against amounts owed to the Fund) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, or liquid high grade debt obligations.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend, in part, on the Advisor's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Swap agreements may be considered to
be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to
be received under a swap agreement in the event of the default or bankruptcy of
a swap agreement counterparty. Certain restrictions imposed on the Funds by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is largely unregulated.
The Funds will enter swap agreements only with counterparties that the
Advisor reasonably believes are capable of performing under the swap
agreements. If there is a default by the other party to such a transaction, a
Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In addition to the
derivative instruments and strategies described above and in the Funds'
Prospectus, the Advisor expects to discover additional derivative instruments
and other hedging or risk management techniques. The Advisor may utilize these
new derivative instruments and techniques to the extent that they are
consistent with a Fund's investment objective and permitted by the Fund's
investment limitations, operating policies, and applicable regulatory
authorities.
FOREIGN INVESTMENT COMPANIES
(ADVANTAGE FUND)
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.
FOREIGN SECURITIES
(ADVANTAGE FUND)
Investing in foreign securities involves a series of risks not present in
investing in U.S. securities. Many of the foreign securities held by the Fund
will not be registered with the Securities and Exchange Commission (the "SEC"),
nor will the foreign issuers be subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by the 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
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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 United States and foreign countries, however, may
reduce or eliminate the amount of foreign tax to which the Fund would be
subject.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have failed to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return is earned thereon.
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.
HIGH-YIELD (HIGH-RISK) SECURITIES
(ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
IN GENERAL. The Advantage Fund may invest up to 25% of its net assets and
the Municipal Advantage Fund may invest up to 10% of its net assets in
non-investment grade debt obligations rated in the fifth highest rating
category (e.g. BB by S&P) or comparable unrated securities. Securities rated BB
are considered the least speculative of non-investment grade obligations.
Lower-quality securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to the Appendix for
a discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated security market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such
conditions could severely disrupt the market for and adversely affect the value
of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower-quality and comparable unrated securities also tend to
be more sensitive to economic conditions than are higher-rated securities. As
a result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, a Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so
will a Fund's net asset value. If a Fund experiences unexpected net
redemptions in such a market, it
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may be forced to liquidate a portion of its portfolio securities without regard
to their investment merits. Due to the limited liquidity of lower-quality and
comparable unrated securities (discussed below), a Fund may be forced to
liquidate these securities at a substantial discount. Any such liquidation
would force a Fund to sell the more liquid portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, a Fund may have
to replace the securities with a lower yielding security, which would result in
a lower return for a Fund.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully reflect the true risks
of an investment. In addition, credit rating agencies may or may not make
timely changes in a rating to reflect changes in the economy or in the
condition of the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in lower-quality and comparable unrated
obligations will be more dependent on the Advisor's credit analysis than would
be the case with investments in investment-grade debt obligations. The Advisor
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Advisor continually monitors the investments in
each Fund's portfolio and carefully evaluates whether to dispose of or to
retain lower-quality and comparable unrated securities whose credit ratings or
credit quality may have changed.
LIQUIDITY AND VALUATION. A Fund may have difficulty disposing of certain
lower-quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets
in all lower-quality and comparable unrated securities, there is no established
retail secondary market for many of these securities. The Funds anticipate
that such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist,
it is generally not as liquid as the secondary market for higher-rated
securities. The lack of a liquid secondary market may have an adverse impact
on the market price of the security. As a result, a Fund's asset value and
ability to dispose of particular securities, when necessary to meet the Fund's
liquidity needs or in response to a specific economic event, may be impacted.
The lack of a liquid secondary market for certain securities may also make it
more difficult for a Fund to obtain accurate market quotations for purposes of
valuing the Fund's portfolio. Market quotations are generally available on
many lower-quality and comparable unrated issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. During periods of thin trading, the spread between bid and
asked prices is likely to increase significantly. In addition, adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
LEGISLATION. Legislation may be adopted, from time to time designed to
limit the use of certain lower-quality and comparable unrated securities by
certain issuers. It is anticipated that if legislation is enacted or proposed,
it could have a material affect on the value of these securities and the
existence of a secondary trading market for the securities.
ILLIQUID SECURITIES
(ALL FUNDS)
The Funds may invest in illiquid securities (i.e., securities that are not
readily marketable). However, a Fund will not acquire illiquid securities if,
as a result, they would comprise more than 15%, or with respect to the Heritage
Money and Municipal Money Funds, 10%, of the value of the Fund's net assets (or
such other amounts as may be permitted under the 1940 Act). However, as a
matter of internal policy, the Advisor intends to limit each Fund's investments
in illiquid securities to 10% of its net assets.
The Board of Directors of each Fund, or its delegate, has the ultimate
authority to determine, to the extent permissible under the federal securities
laws, which securities are illiquid for purposes of this limitation. Certain
securities exempt from registration or issued in transactions exempt from
registration under the Securities Act of 1933, as amended (the "Securities
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Act"), such as securities that may be resold to institutional investors under
Rule 144A under the Securities Act and Section 4(2) commercial paper, may be
considered liquid under guidelines adopted by the Funds' Board of Directors.
The Board of Directors of each Fund has delegated to the Advisor the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. The
Board of Directors has directed the Advisor to look to such factors as (i) the
frequency of trades or quotes for a security, (ii) the number of dealers
willing to purchase or sell the security and number of potential buyers, (iii)
the willingness of dealers to undertake to make a market in the security, (iv)
the nature of the security and nature of the marketplace trades, such as the
time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer, (v) the likelihood that the security's marketability
will be maintained throughout the anticipated holding period, and (vi) any
other relevant factors. The Advisor may determine 4(2) commercial paper to be
liquid if (i) the 4(2) commercial paper is not traded flat or in default as to
principal and interest, (ii) the 4(2) commercial paper is rated in one of the
two highest rating categories by at least two nationally rated statistical
rating organizations ("NRSRO"), or if only one NRSRO rates the security, by
that NRSRO, or is determined by the Advisor to be of equivalent quality, and
(iii) the Advisor considers the trading market for the specific security taking
into account all relevant factors. With respect to the Advantage and Municipal
Advantage Funds' foreign holdings, a foreign security may be considered liquid
by the Advisor (despite its restricted nature under the Securities Act) if the
security can be freely traded in a foreign securities market and all the facts
and circumstances support a finding of liquidity.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced 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, a Fund should be in a position where more than 15%
of the value of its net assets are invested in illiquid securities, including
restricted securities which are not readily marketable (except for 144A
Securities and 4(2) commercial paper deemed to be liquid by the Advisor), the
Fund will take such steps as is deemed advisable, if any, to protect liquidity.
Each Fund may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC
options written by the Fund. The assets used as cover for OTC options written
by the Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES
(ALL FUNDS)
Each Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. Although the Funds are authorized to lend, the Funds do not
presently intend to engage in lending. In determining whether to lend
securities to a particular broker-dealer or institutional investor, the Advisor
will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Funds will retain authority to terminate any loans at any time. The Funds may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Funds
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Funds will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when retaining such
rights is considered to be in a Fund's interest.
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LOAN INTERESTS
(ADVANTAGE FUND)
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 (the "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 (the "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 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 Funds 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 (the "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
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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.
MATURITY
(ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
The Fund's average effective 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 (the "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
effective portfolio maturity when the Advisor reasonably anticipates, based
upon information available to it, that the issuer will exercise its right to
redeem the security. The average effective portfolio maturity of the Fund is
dollar-weighted based upon the market value of the Fund's securities at the
time of the calculation.
MORTGAGE- AND ASSET-BACKED SECURITIES
(ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
Mortgage-backed securities represent direct or indirect participations in,
or are secured by and payable from, mortgage loans secured by real property,
and include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any mortgage- and asset-backed security is
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional debt
securities. Among the principal differences are that interest and principal
payments are made more frequently on mortgage-and asset-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if 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
a Fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates
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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.
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.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
(ALL FUNDS)
The Funds may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, a
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing. (See "Borrowing".) When required by guidelines of the
SEC, a Fund will set aside permissible liquid assets in a segregated account to
secure its obligations to repurchase the security.
Each Fund may also enter into mortgage dollar rolls, in which the Fund
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While a Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. At the time the Fund would
enter into a mortgage dollar roll, it would set aside permissible liquid assets
in a segregated account to secure its obligation for the forward commitment to
buy mortgage-backed securities. Mortgage dollar roll transactions may be
considered a borrowing by the Funds. (See "Borrowing".)
The mortgage dollar rolls and reverse repurchase agreements entered into
by the Funds may be used as arbitrage transactions in which a Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar roll or reverse repurchase agreements. Since a Fund
will receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities or repurchase agreements will be high quality
and will mature on or before the settlement date of the mortgage dollar roll or
reverse repurchase agreement, the Advisor believes that such arbitrage
transactions do not present the risks to the Funds that are associated with
other types of leverage.
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MUNICIPAL OBLIGATIONS
(ADVANTAGE FUND)
General obligation bonds are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of interest and principal.
Revenue bonds are payable only from the revenues derived from a project or
facility or from the proceeds of a specified revenue source. Industrial
development bonds are generally revenue bonds secured by payments from and the
credit of private users. Municipal notes are issued to meet the short-term
funding requirements of state, regional, and local governments. Municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax and revenue anticipation notes, construction loan
notes, short-term discount notes, tax-exempt commercial paper, demand notes,
and similar instruments. Municipal obligations include obligations, the
interest on which is exempt from federal income tax, that may become available
in the future as long as the Board of Directors of the Fund determines that an
investment in any such type of obligation is consistent with 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
(ALL FUNDS)
Each Fund may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement, a Fund buys a security at one
price, and at the time of sale, the seller agrees to repurchase the obligation
at a mutually agreed upon time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. The Advisor will monitor, on an ongoing
basis, the value of the underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued interest. Repurchase
agreements could involve certain risks in the event of a default or insolvency
of the other party to the agreement, including possible delays or restrictions
upon a Fund's ability to dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the Advisor reviews the
creditworthiness of the banks and non-bank dealers with which the Funds enter
into repurchase agreements to evaluate those risks. A Fund may, under certain
circumstances, deem repurchase agreements collateralized by U.S. government
securities to be investments in U.S. government securities.
RULE 2A-7: MATURITY, QUALITY, AND DIVERSIFICATION RESTRICTIONS
(HERITAGE MONEY AND MUNICIPAL MONEY FUNDS)
The Funds are subject to certain maturity restrictions pursuant to Rule
2a-7 under the 1940 Act 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, these Funds will (i) maintain a dollar weighted average portfolio
maturity of 90 days or less, and (ii) will purchase securities with a remaining
maturity of no more than 13 months (397 calendar days). Further, the Funds
will limit their 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 Funds will follow the requirements of Rule 2a-7.
Under Rule 2a-7, the maturity of portfolio instruments is calculated as
indicated below.
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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 a 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 Funds are subject to certain credit quality restrictions pursuant to
Rule 2a-7 under the 1940 Act. A Fund will invest at least 95% of its assets in
instruments determined to present minimal credit risks and, at the time of
acquisition, are (i) obligations issued or guaranteed by the U.S. government,
its agencies, or instrumentalities; (ii) 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; (iii) 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 (iv) unrated (other
than the type described in (iii)) but determined by the Board of Directors of a
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 (i) rated by the required
rating agencies in one of the two highest rating categories for short-term debt
obligations; (ii) 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 (iii) unrated
(other than described in (ii)) but determined by the Board of Directors of a
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 a 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, a Fund is subject to certain
diversification restrictions pursuant to Rule 2a-7 under the 1940 Act, which
include (i) 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 (ii) the Fund will not invest more than 5%
of the Fund's total 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. These diversification restrictions are not currently applicable to the
Municipal Money Fund. However, the SEC has adopted amendments to Rule 2a-7
that will become effective October 3, 1996,
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which impose such restrictions on tax-exempt money market funds, such as the
Municipal Money Fund. To the extent these amendments limit the universe of
permitted investments, they may lower the Municipal Money Fund's yield
potential.
As used herein, all capitalized but undefined terms shall have the meaning
such terms have in Rule 2a-7.
SECTOR CONCENTRATION
(MUNICIPAL MONEY AND MUNICIPAL ADVANTAGE FUNDS)
From time to time, each 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. Each 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.
SHORT SALES
(ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
Each Fund may sell securities short against the box to hedge unrealized
gains on portfolio securities or if it covers such short sale with liquid
assets as required by the current rules and positions of the Securities and
Exchange Commission or its staff. Selling securities short against the box
involves selling a security that a Fund owns or has the right to acquire, for
delivery at a specified date in the future. If a Fund sells securities short
against the box, it may protect unrealized gains, but will lose the opportunity
to profit on such securities if the price rises.
TAXABLE SECURITIES
(MUNICIPAL MONEY AND MUNICIPAL ADVANTAGE FUNDS)
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:
(i) obligations issued or guaranteed, as to principal and interest, by the
United States government, its agencies, or instrumentalities; (ii) 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; (iii) corporate obligations, including
preferred stock and commercial paper, with equivalent credit quality to the
municipal securities in which the Fund may invest; and (iv) 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 a 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.
TEMPORARY DEFENSIVE POSITION
(ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
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, including U.S. government securities,
commercial paper, banker's acceptances, certificates of deposit, and time
deposits.
VARIABLE- OR FLOATING-RATE SECURITIES
(ALL FUNDS)
The Funds may invest in securities which offer a variable- or
floating-rate of interest. Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate
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securities generally provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable- or floating-rate securities is ordinarily determined by reference to
or is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate,
the rate of return on commercial paper or bank certificates of deposit, an
index of short-term interest rates, or some other objective measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on 7 days notice; in
other cases, the demand feature is exercisable at any time on 30 days notice or
on similar notice at intervals of not more than one year. Some securities
which do not have variable or floating interest rates may be accompanied by
puts producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, each Fund may consider that instrument's maturity to be shorter than its
stated maturity.
Variable-rate demand notes include master demand notes which are
obligations that permit a Fund to invest fluctuating amounts, which may change
daily without penalty, pursuant to direct arrangements between a Fund, as
lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded. There generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, a Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and, if not so rated, the Funds may
invest in them only if the Advisor determines that at the time of investment
the obligations are of comparable quality to the other obligations in which the
Funds may invest. The Advisor, on behalf of the Funds, will consider on an
ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in the Funds' portfolio.
Each Fund will not invest more than 15% of its net assets in variable- and
floating-rate demand obligations that are not readily marketable (a variable-
or floating-rate demand obligation that may be disposed of on not more than
seven days notice will be deemed readily marketable and will not be subject to
this limitation). (See "Illiquid Securities" and "Investment Restrictions.")
In addition, each variable- or floating-rate obligation must meet the credit
quality requirements applicable to all the Fund's investments at the time of
purchase. When determining whether such an obligation meets a Fund's credit
quality requirements, the Fund may look to the credit quality of the financial
guarantor providing a letter of credit or other credit support arrangement.
In determining a Fund's weighted average portfolio maturity, a Fund will
consider a floating or variable rate security to have a maturity equal to its
stated maturity (or redemption date if it has been called for redemption),
except that it may consider (i) variable rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest rate,
unless subject to a demand feature, (ii) variable rate securities subject to a
demand feature to have a remaining maturity equal to the longer of (a) the next
readjustment in the interest rate or (b) the period remaining until the
principal can be recovered through demand, and (iii) floating rate securities
subject to a demand feature to have a maturity equal to the period remaining
until the principal can be recovered through demand. Variable and floating
rate securities generally are subject to less principal fluctuation than
securities without these attributes since the securities usually trade at
amortized cost following the readjustment in the interest rate.
WARRANTS
(ADVANTAGE FUND)
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
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do not represent any rights in the assets of the issuer. As a result, warrants
may be considered to have more speculative characteristics than certain other
types of investments. In addition, the value of a warrant does not necessarily
change with the value of the underlying securities, and a warrant ceases to
have value if it is not exercised prior to its expiration date.
WHEN-ISSUED SECURITIES
(ALL FUNDS)
Each Fund may purchase securities on a "when-issued" basis. The price of
debt obligations purchased on a when-issued basis, which may be expressed in
yield terms, generally is fixed at the time the commitment to purchase is made,
but delivery and payment for the securities take place at a later date.
Normally, the settlement date occurs within 45 days of the purchase although in
some cases settlement may take longer. During the period between the purchase
and settlement, no payment is made by a Fund to the issuer and no interest on
the debt obligations accrues to the Fund. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Fund's other assets. While when-issued securities may be sold prior to the
settlement date, the Funds intend to purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons. At the time a Fund makes the commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the value of the
security in determining its net asset value. The Funds do not believe that
their net asset value will be adversely affected by purchases of securities on
a when-issued basis.
To the extent required by the SEC, the Funds will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date. When the time comes to pay for when-issued
securities, a Fund will meet its obligations from then-available cash flow,
sale of the securities held in the separate account, described above, sale of
other securities or, although it would not normally expect to do so, from the
sale of the when-issued securities themselves (which may have a market value
greater or less than the Fund's payment obligation).
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
(ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
The Funds may invest in zero-coupon, step-coupon, and pay-in-kind
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon securities are sold at a deep
discount to their face value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because such securities do not pay current
cash income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, federal
income tax law requires the holders of zero-coupon, step-coupon, and
pay-in-kind securities to include in income each year the portion of the
original issue discount (or deemed discount) and other non-cash income on such
securities accruing that year. In order to continue to qualify as a "regulated
investment company" under the Internal Revenue Code and avoid a certain excise
tax, each Fund may be required to distribute a portion of such discount and
income and may be required to dispose of other portfolio securities, which may
occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
DIRECTORS AND OFFICERS OF THE FUNDS
Directors and officers of the Funds, together with information as to their
principal business occupations during the last five years, and other
information are shown below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an asterisk (*). Each
officer and director holds the same position with the 25 registered open-end
management investment companies consisting of 41 mutual funds (the "Strong
Funds"). The Strong Funds, in the aggregate, pays each Director who is not a
director, officer, or employee of the Advisor, or any affiliated company (a
"disinterested director") an annual fee of $50,000, plus $100 per Board meeting
for each Strong Fund. In addition, each disinterested director is reimbursed
by the Strong Funds for travel and other expenses incurred in connection with
attendance at such meetings. Other officers and directors of the Strong Funds
receive no compensation or expense reimbursement from the Strong Funds.
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*RICHARD S. STRONG (DOB 5/12/42), Chairman of the Board and Director of the
Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the
Advisor, which he founded in 1974. Since August 1985, Mr. Strong has been a
Security Analyst and Portfolio Manager of the Advisor. In October 1991, Mr.
Strong also became the Chairman of the Advisor. Mr. Strong is a Director of
the Advisor. Mr. Strong has been in the investment management business since
1967. Mr. Strong has served the Funds as follows:
DIRECTOR - Heritage Money Fund (since May 1995); Municipal Money Fund
(since October 1986); Municipal Advantage Fund (since November 1995); and
Advantage Fund (since November 1988).
CHAIRMAN - Heritage Money Fund (since May 1995); Municipal Money Fund
(since October 1986); Municipal Advantage Fund (since November 1995); and
Advantage Fund (since November 1988).
MARVIN E. NEVINS (DOB 7/9/18), Director of the Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of Wisconsin
Centrifugal Inc., a foundry. From July 1983 to December 1986, he was Chairman
of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins is a
former Chairman of the Wisconsin Association of Manufacturers & Commerce. He
was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin. Mr. Nevins has served
the Funds as follows:
DIRECTOR - Heritage Money Fund (since May 1995); Municipal Money Fund
(since October 1986); Municipal Advantage Fund (since November 1995); and
Advantage Fund (since November 1988).
WILLIE D. DAVIS (DOB 7/24/34), Director of the Funds.
Mr. Davis has been Director of Alliance Bank since 1980, Sara Lee
Corporation (a food/consumer products company) since 1983, KMart Corporation (a
discount consumer products company) since 1985, YMCA Metropolitan - Los Angeles
since 1985, Dow Chemical Company since 1988, MGM Grand, Inc. (an
entertainment/hotel company) since 1990, WICOR, Inc. (a utility company) since
1990, Johnson Controls, Inc. (an industrial company) since 1992, L.A. Gear (a
footwear/sportswear company) since 1992, and Rally's Hamburger, Inc. since
1994. Mr. Davis has been a trustee of the University of Chicago since 1980,
Marquette University since 1988, and Occidental College since 1990. Since
1977, Mr. Davis has been President and Chief Executive Officer of All Pro
Broadcasting, Inc. Mr. Davis was a Director of the Fireman's Fund (an
insurance company) from 1975 until 1990. Mr. Davis has served the Funds as
follows:
DIRECTOR - Heritage Money Fund (since May 1995); Municipal Money Fund
(since July 1994); Municipal Advantage Fund (since November 1995); and
Advantage Funds (since July 1994).
*JOHN DRAGISIC (DOB 11/26/40), President and Director of the Funds.
Mr. Dragisic has been President of the Advisor since October 1995, and a
Director of the Advisor since July 1994. Mr. Dragisic served as Vice Chairman
of the Advisor from July 1994 until October 1995. Mr. Dragisic was the
President and Chief Executive Officer of Grunau Company, Inc. (a mechanical
contracting and engineering firm), Milwaukee, Wisconsin from 1987 until July
1994. From 1981 to 1987, he was an Executive Vice President with Grunau
Company, Inc. From 1969 until 1973, Mr. Dragisic worked for the InterAmerican
Development Bank. Mr. Dragisic received his Ph.D. in Economics in 1971 from
the University of Wisconsin - Madison and his B.A. degree in Economics in 1962
from Lake Forest College. Mr. Dragisic has served the Funds as follows:
DIRECTOR - Heritage Money Fund (since May 1995); Municipal Money Fund
(since April 1995); Municipal Advantage Fund (since November 1995); and
Advantage Fund (since April 1995).
VICE CHAIRMAN - Heritage Money Fund (May 1995 until October 1995);
Municipal Money Fund (July 1994 until October 1995); and Advantage Fund
(July 1994 until October 1995).
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PRESIDENT - Heritage Money Fund (since October 1995); Municipal Money
Fund (since October 1995); Municipal Advantage Fund (since October 1995);
and Advantage Fund (since October 1995).
STANLEY KRITZIK (DOB 1/9/30), Director of the Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since 1962, a
Director of Aurora Health Care since 1987, and Health Network Ventures, Inc.
since 1992. Mr. Kritzik has served the Funds as follows:
DIRECTOR - Heritage Money Fund (since May 1995); Municipal Money Fund
(since April 1995); Municipal Advantage Fund (since November 1995); and
Advantage Fund (since April 1995).
WILLIAM F. VOGT (DOB 7/19/47), Director of the Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc. since
1990. From 1982 until 1990, he served as Executive Director of University
Physicians of the University of Colorado. Mr. Vogt is the Past President of
the Medical Group Management Association and a Fellow of the American College
of Medical Practice Executives. Mr. Vogt has served the Funds as follows:
DIRECTOR - Heritage Money Fund (since May 1995); Municipal Money Fund
(since April 1995); Municipal Advantage Fund (since November 1995); and
Advantage Fund (since April 1995).
LAWRENCE A. TOTSKY (DOB 5/6/59), C.P.A., Vice President of the Funds.
Mr. Totsky has been Senior Vice President of the Advisor since September
1994. Mr. Totsky served as Vice President of the Advisor from December 1992 to
September 1994. Mr. Totsky acted as the Advisor's Manager of Shareholder
Accounting and Compliance from June 1987 to June 1991 when he was named
Director of Mutual Fund Administration. Mr. Totsky has served the Funds as
follows:
VICE PRESIDENT - Heritage Money Fund (since May 1995); Municipal Money
(since May 1993); Municipal Advantage Fund (since November 1995); and
Advantage Funds (since May 1993).
THOMAS P. LEMKE (DOB 7/30/54), Vice President of the Funds.
Mr. Lemke has been Senior Vice President, Secretary, and General Counsel
of the Advisor since September 1994. For two years prior to joining the
Advisor, Mr. Lemke acted as Resident Counsel for Funds Management at J.P.
Morgan & Co., Inc. From February 1989 until April 1992, Mr. Lemke acted as
Associate General Counsel to Sanford C. Bernstein Co., Inc. For two years
prior to that, Mr. Lemke was Of Counsel at the Washington, D.C. law firm of Tew
Jorden & Schulte, a successor of Finley, Kumble & Wagner. From August 1979
until December 1986, Mr. Lemke worked at the Securities and Exchange
Commission, most notably as the Chief Counsel to the Division of Investment
Management (November 1984 - December 1986), and as Special Counsel to the
Office of Insurance Products, Division of Investment Management (April 1982 -
October 1984). Mr. Lemke has served the Funds as follows:
VICE PRESIDENT - Heritage Money Fund (since May 1995); Municipal Money
Fund (since October 1994); Municipal Advantage Fund (since November
1995); and Advantage Fund (since October 1994).
STEPHEN J. SHENKENBERG (DOB 6/14/58), Vice President and Secretary of the
Funds.
Mr. Shenkenberg has been Deputy General Counsel to the Advisor since
November 1996. From December 1992 until November 1996, Mr. Shenkenberg acted
as Associate Counsel to the Advisor. From June 1987 until December 1992, Mr.
Shenkenberg was an attorney for Godfrey & Kahn, S.C., a Milwaukee law firm.
Mr. Shenkenberg has served the Funds as follows:
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<PAGE> 88
VICE PRESIDENT - Heritage Money Fund (since April 1996); Municipal Money
Fund (since April 1996); Municipal Advantage Fund (since April 1996); and
Advantage Fund (since April 1996).
SECRETARY - Heritage Money Fund (since October 1996); Municipal Money
Fund (since October 1996); Municipal Advantage Fund (since October 1996);
and Advantage Fund (since October 1996).
JOHN S. WEITZER (DOB 10/31/67), Vice President of the Funds.
Mr. Weitzer has been an Associate Counsel to the Advisor since July 1993.
Mr. Weitzer has served the Funds as follows:
VICE PRESIDENT - Heritage Money Fund (since January 1996); Municipal
Money Fund (since May 1994); Municipal Advantage Fund (since November
1995); and Advantage Fund (since May 1994).
JOHN A. FLANAGAN (DOB 6/5/46), Treasurer of the 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.
Mr. Flanagan has served the Funds as follows:
TREASURER - Heritage Money Fund (since April 1997); Municipal Money Fund
(since April 1997); Municipal Advantage Fund (since April 1997); and
Advantage Fund (since April 1997).
Except for Messrs. Nevins, Davis, Kritzik and Vogt, the address of all of
the above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 34108. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301. Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 2830 East Third Avenue, Denver, Colorado
80206.
In addition to the positions listed above, the following individuals also
hold the following positions with Strong Holdings, Inc. ("Holdings"), a
Wisconsin corporation and subsidiary of the Advisor; Strong Funds Distributors,
Inc., the Fund's underwriter ("Distributors"), Heritage Reserve Development
Corporation ("Heritage"), and Strong Service Corporation ("SSC"), each of which
is a Wisconsin corporation and subsidiary of Holdings; Fussville Real Estate
Holdings L.L.C. ("Real Estate Holdings") and Sherwood Development L.L.C.
("Sherwood"), each of which is a Wisconsin Limited Liability Company and
subsidiary of the Advisor and Heritage; and Fussville Development L.L.C.
("Fussville Development"), a Wisconsin Limited Liability Company and subsidiary
of the Advisor and Real Estate Holdings:
RICHARD S. STRONG:
CHAIRMAN AND A DIRECTOR - Holdings and Distributors (since October 1993);
Heritage (since January 1994); and SSC (since November 1995).
CHAIRMAN AND A MEMBER OF THE MANAGING BOARD - Real Estate Holdings and
Fussville Development (since December 1995 and February 1994,
respectively); and Sherwood (since October 1994).
JOHN DRAGISIC:
PRESIDENT AND A DIRECTOR - Holdings (since December 1995 and July 1994,
respectively); Distributors (since September 1996 and July 1994,
respectively); Heritage (since May 1994 and August 1994, respectively);
and SSC (since November 1995).
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<PAGE> 89
VICE CHAIRMAN AND A MEMBER OF THE MANAGING BOARD - Real Estate Holdings
and Fussville Development (since December 1995 and August 1994,
respectively); and Sherwood (since October 1994).
THOMAS P. LEMKE:
VICE PRESIDENT - Holdings, Heritage, Real Estate Holdings, and Fussville
Development (since December 1995); Distributors (since October 1996);
Sherwood (since October 1994); and SSC (since November 1995).
STEPHEN J. SHENKENBERG:
VICE PRESIDENT AND SECRETARY - Distributors (since December 1995).
SECRETARY - Holdings, Heritage, Fussville Development, Real Estate
Holdings, and Sherwood (since December 1995); and SSC (since November
1995).
As of May 31, 1997, the officers and directors of the Fund in the
aggregate beneficially owned less than 1% of the Fund's then outstanding
shares.
PRINCIPAL SHAREHOLDERS
As of May 31, 1997, no one of record or are known by the Fund to own of
record or beneficially, more than 5% of the listed Fund's outstanding shares:
INVESTMENT ADVISOR AND DISTRIBUTOR
The Advisor to the Funds is Strong Capital Management, Inc. Mr. Richard
S. Strong controls the Advisor. Mr. Strong is the Chairman and a director of
the Advisor, Mr. Dragisic is the President and a director of the Advisor, Mr.
Totsky is a Senior Vice President of the Advisor, Mr. Lemke is a Senior Vice
President, Secretary, and General Counsel of the Advisor, Mr. Flanagan is a
Senior Vice President of the Advisor, Mr. Shenkenberg is Vice President,
Assistant Secretary, and Deputy General Counsel of the Advisor, and Mr. Weitzer
is an Associate Counsel of the Advisor. A brief description of each Fund's
investment advisory agreement ("Advisory Agreement") is set forth in the
Prospectus under "About the Funds - Management."
The Advisory Agreements for the Municipal Money and Advantage Funds, each
of which is dated May 1, 1995, were last approved by shareholders of each Fund
at the annual meeting of shareholders held on April 13, 1995. In addition, the
Heritage Money Fund's Advisory Agreement, dated June 23, 1995, was last
approved by the initial shareholder of such Fund on June 29, 1995, and the
Municipal Advantage Fund's Advisory Agreement, dated November 29, 1995, was
last approved by the initial shareholder of such Fund on November 29, 1995
(both the Heritage Money and Municipal Advantage Funds' Advisory Agreements
will remain in effect for a period of two years after initial approval) (the
Advisory Agreements for the Funds are hereinafter collectively referred to as
the "Advisory Agreements"). Each Advisory Agreement is required to be approved
annually by either the Board of Directors of the Fund or by vote of a majority
of the Fund's outstanding voting securities, as defined in the 1940 Act (in the
case of the Advisory Agreements for the Heritage Money and Municipal Advantage
Funds, such yearly approval requirements will not commence until the initial
two year term of each Agreement expires). In either case, each annual renewal
must be approved by the vote of a majority of the Fund's directors who are not
parties to the Advisory Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval. Each
Advisory Agreement is terminable, without penalty, on 60 days' written notice
by the Board of Directors of the Fund, by vote of a majority of the Fund's
outstanding voting securities, or by the Advisor. In addition, an Advisory
Agreement will terminate automatically in the event of its assignment.
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<PAGE> 90
Under the terms of each Advisory Agreement, the Advisor manages the Fund's
investments subject to the supervision of the Fund's Board of Directors. The
Advisor is responsible for investment decisions and supplies investment
research and portfolio management. At its expense, the Advisor provides office
space and all necessary office facilities, equipment and personnel for
servicing the investments of the Fund. The Advisor places all orders for the
purchase and sale of the Fund's portfolio securities at the Fund's expense.
Except for expenses assumed by the Advisor, as set forth above, or by the
Distributor, as described below with respect to the distribution of a Fund's
shares, each Fund is responsible for all its other expenses, including, without
limitation, interest charges, taxes, brokerage commissions and similar
expenses; organizational expenses; expenses of issue, sale, repurchase or
redemption of shares; expenses of registering or qualifying shares for sale
with the states and the SEC; expenses for printing and distributing of
Prospectuses and quarterly and semi-annual financial statements to existing
shareholders; charges of custodians, transfer agent fees (including the
printing and mailing of reports and notices to shareholders), registrars,
auditing and legal services, clerical services related to recordkeeping and
shareholder relations, printing of stock certificates; and fees for directors
who are not "interested persons" of the Advisor.
As compensation for its services, each Fund pays to the Advisor monthly
management fees at the following annual rates: Heritage Money and Municipal
Money Funds: .50% of average daily net assets; and Advantage and Municipal
Advantage Funds: .60% of average daily net assets. (See "Shareholder Manual -
Determining Your Share Price" in the Prospectus.) From time to time, the
Advisor may voluntarily waive all or a portion of its management fee for a
Fund. The organizational expenses of the Heritage Money and Municipal Advantage
Funds, which were $92,657 and $82,660, respectively, were advanced by the
Advisor and will be reimbursed by the Funds over a period of not more than 60
months from the Fund's date of inception.
The following table sets forth certain information concerning management
fees for each Fund that has completed a fiscal year:
<TABLE>
<CAPTION>
Management Fee
Incurred Management Fee Management Fee
by Fund Waiver Paid by Fund
-------------- -------------- --------------
<S> <C> <C> <C>
Heritage Money Fund
1996 $7,586,904 $6,800,327 $ 786,576
Municipal Money Fund
1994 $6,638,362 $ 186,998 $6,451,364
1995 6,526,085 0 6,526,085
1996 8,729,286 0 8,729,286
Municipal Advantage Fund
1996 $2,321,942 $2,287,263 $ 34,679
Advantage Fund
1994 $3,981,369 $ 0 $3,981,369
1995 5,383,923 0 5,383,923
1996 7,395,454 0 7,395,454
</TABLE>
Each Advisory Agreement requires the Advisor to reimburse a Fund in the
event that the expenses and charges payable by the Fund in any fiscal year,
including the management fee but excluding taxes, interest, brokerage
commissions, and similar fees and to the extent permitted extraordinary
expenses, exceed two percent (2%) of the average net asset value of the Fund
for such year, as determined by valuations made as of the close of each
business day of the year. Reimbursement of expenses in excess of the
applicable limitation will be made on a monthly basis and will be paid to the
Fund by reduction of the Advisor's fee, subject to later adjustment, month by
month, for the remainder of the Fund's fiscal year. The Advisor may from time
to time voluntarily absorb expenses for a Fund in addition to the reimbursement
of expenses in excess of application limitations.
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<PAGE> 91
On July 12, 1994, the Securities and Exchange Commission (the "SEC") filed
an administrative action (the "Order") against the Advisor, Mr. Strong, and
another employee of the Advisor in connection with conduct that occurred
between 1987 and early 1990. In re Strong/Corneliuson Capital Management, Inc.,
et al. Admin. Proc. File No. 3-8411. The proceeding was settled by consent
without admitting or denying the allegations in the Order. The Order found that
the Advisor and Mr. Strong aided and abetted violations of Section 17(a) of the
1940 Act by effecting trades between mutual funds, and between mutual funds and
Harbour Investments Ltd. ("Harbour"), without complying with the exemptive
provisions of SEC Rule 17a-7 or otherwise obtaining an exemption. It further
found that the Advisor violated, and Mr. Strong aided and abetted violations
of, the disclosure provisions of the 1940 Act and the Investment Advisers Act
of 1940 by misrepresenting the Advisor's policy on personal trading and by
failing to disclose trading by Harbour, an entity in which principals of the
Advisor owned between 18 and 25 percent of the voting stock. As part of the
settlement, the respondents agreed to a censure and a cease and desist order
and the Advisor agreed to various undertakings, including adoption of certain
procedures and a limitation for six months on accepting certain types of new
advisory clients.
On June 6, 1996, the Department of Labor (the "DOL") filed an action
against the Advisor for equitable relief alleging violations of the Employee
Retirement Income Security Act of 1974 ("ERISA") in connection with cross
trades that occurred between 1987 and late 1989 involving certain pension
accounts managed by the Advisor. Contemporaneous with this filing, the
Advisor, without admitting or denying the DOL's allegations, agreed to the
entry of a consent judgment resolving all matters relating to the allegations.
Reich v. Strong Capital Management, Inc., (U.S.D.C. E.D. WI) (the "Consent
Judgment"). Under the terms of the Consent Judgment, the Advisor agreed to
reimburse the affected accounts a total of $5.9 million. The settlement did
not have any material impact on the Advisor's financial position or operations.
The Fund and the Advisor have adopted a Code of Ethics (the "Code") which
governs the personal trading activities of all "Access Persons" of the Advisor.
Access Persons include every director and officer of the Advisor and the
investment companies managed by the Advisor, including the Funds, as well as
certain employees of the Advisor who have access to information relating to the
purchase or sale of securities by the Advisor on behalf of accounts managed by
it. The Code is based upon the principal that such Access Persons have a
fiduciary duty to place the interests of the 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 Funds) to, among other things, preclear their securities
transactions (with limited exceptions, such as transactions in shares of mutual
funds, direct obligations of the U.S. government, and certain options on
broad-based securities market indexes) and to execute such transactions through
the Advisor's trading department. The Code, which applies to all Access Persons
(other than Access Persons who are independent directors of the investment
companies managed by the Advisor, including the Funds), includes a ban on
acquiring any securities in an initial public offering, other than a new
offering of a registered open-end investment company, and a prohibition from
profiting on short-term trading in securities. In addition, no Access Person
may purchase or sell any security which, is contemporaneously being purchased
or sold, or to the knowledge of the Access Person, is being considered for
purchase or sale, by the Advisor on behalf of any mutual fund or other account
managed by it. Finally, the Code provides for trading "black out" periods of
seven calendar days during which time Access Persons who are portfolio managers
may not trade in securities which have been purchased or sold by any mutual
fund or other account managed by the portfolio manager.
From time to time the Advisor votes the shares owned by the Funds according
to its Statement of General Proxy Voting Policy ("Proxy Voting Policy"). The
general principal of the Proxy Voting Policy is to vote any beneficial interest
in an equity security prudently and solely in the best long-term economic
interest of the Fund and its beneficiaries considering all relevant factors and
without undue influence from individuals or groups who may have an economic
interest in the outcome of a proxy vote. Shareholders may obtain a copy of the
Proxy Voting Policy upon request from the Advisor.
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
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<PAGE> 92
dispose of securities or interests therein for an account that are or may be
deemed to be inconsistent with the actions taken by such persons.
Under Distribution Agreements with the Municipal Money and Advantage Funds
dated December 1, 1993, the Heritage Money Fund dated June 23, 1995, and the
Municipal Advantage Fund dated November 29, 1995 (collectively, the
"Distribution Agreements"), Strong Funds Distributors, Inc. ("Distributor")
acts as underwriter of each Fund's shares. The Distribution Agreements provide
that the Distributor will use its best efforts to distribute each Fund's
shares. Since the Funds are "no-load" funds, no sales commissions are charged
on the purchase of Fund shares. Each Distribution Agreement further provides
that the Distributor will bear the costs of printing Prospectuses and
shareholder reports which are used for selling purposes, as well as advertising
and any other costs attributable to the distribution of a Fund's shares. The
Distributor is an indirect subsidiary of the Advisor and controlled by the
Advisor and Richard S. Strong. The Distribution Agreements are subject to the
same termination and renewal provisions as are described above with respect to
the Advisory Agreements.
From time to time, the Distributor may hold in-house sales incentive
programs for its associated persons under which these persons may receive
non-cash compensation awards in connection with the sale and distribution of a
Fund's shares. These awards may include items such as, but not limited to,
gifts, merchandise, gift certificates, and payment of travel expenses, meals
and lodging. As required by the National Association of Securities Dealers,
Inc. proposed rule amendments in this area, any in-house sales incentive
program will be multi-product oriented, i.e., any incentive will be based on an
associated person's gross production of all securities within a product type
and will not be based on the sales of shares of any specifically designated
mutual fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities for
the Funds and for the placement of the Funds' portfolio business and the
negotiation of the commissions to be paid on such transactions. It is the
policy of the Advisor to seek the best execution at the best security price
available with respect to each transaction, in light of the overall quality of
brokerage and research services provided to the Advisor or the Funds. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained using a broker. The best price to the Funds means the best net price
without regard to the mix between purchase or sale price and commissions. 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.
The Advisor has adopted procedures that provide generally for the Advisor
to seek to bunch orders for the purchase or sale of the same security for the
Fund, other mutual funds managed by the Advisor, and other advisory clients
(collectively, the "client accounts"). The Advisor will bunch orders when it
deems it to be appropriate and in the best interests of the client accounts.
When a bunched order is filled in its entirety, each participating client
account will participate at the average share price for the bunched order on
the same business day, and transaction costs shall be shared pro rata based on
each client's participation in the bunched order. When a bunched order is only
partially filled, the securities purchased will be allocated on a pro rata
basis to each client account participating in the bunched order based upon the
initial amount requested for the account, subject to certain exceptions, and
each participating account will participate at the average share price for the
bunched order on the same business day.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment advisor, under certain circumstances, to cause an account
to pay a broker or dealer a commission for effecting a transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting the transaction in recognition of the value of the brokerage and
research services provided by the broker or dealer. Brokerage and research
services include (a) furnishing advice as to the value of securities, the
advisability of investing, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
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<PAGE> 93
In carrying out the provisions of the Advisory Agreements, the Advisor may
cause the Funds to pay a broker, which provides brokerage and research services
to the Advisor, a commission for effecting a securities transaction in excess
of the amount another broker would have charged for effecting the transaction.
The Advisor believes it is important to its investment decision-making process
to have access to independent research. The Advisory Agreements provide that
such higher commissions will not be paid by a Fund unless (a) the Advisor
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Advisor's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion; (b) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal laws, and the
Advisory Agreement; and (c) in the opinion of the Advisor, the total
commissions paid by a Fund will be reasonable in relation to the benefits to
the Fund over the long term. The investment management fees paid by the Funds
under the Advisory Agreements are not reduced as a result of the Advisor's
receipt of research services.
Generally, research services provided by brokers may include information
on the economy, industries, groups of securities, individual companies,
statistical information, accounting and tax law interpretations, political
developments, legal developments affecting portfolio securities, technical
market action, pricing and appraisal services, credit analysis, risk
measurement analysis, performance analysis, and analysis of corporate
responsibility issues. Such research services are received primarily in the
form of written reports, telephone contacts, and personal meetings with
security analysts. In addition, such research services may be provided in the
form of access to various computer-generated data, computer hardware and
software, and meetings arranged with corporate and industry spokespersons,
economists, academicians, and government representatives. In some cases,
research services are generated by third parties but are provided to the
Advisor by or through brokers. Such brokers may pay for all or a portion of
computer hardware and software costs relating to the pricing of securities.
Where the Advisor itself receives both administrative benefits and
research and brokerage services from the services provided by brokers, it makes
a good faith allocation between the administrative benefits and the research
and brokerage services, and will pay for any administrative benefits with cash.
In making good faith allocations of costs between administrative benefits and
research and brokerage services, a conflict of interest may exist by reason of
the Advisor's allocation of the costs of such benefits and services between
those that primarily benefit the Advisor and those that primarily benefit the
Funds and other advisory clients.
From time to time, the Advisor may purchase new issues of securities for a
Fund in a fixed price offering. In these situations, the seller may be a member
of the selling group that will, in addition to selling the securities to the
Funds and other advisory clients, provide the Advisor with research. The
National Association of Securities Dealers has adopted rules expressly
permitting these types of arrangements under certain circumstances. Generally,
the seller will provide research "credits" in these situations at a rate that
is higher than that which is available for typical secondary market
transactions. These arrangements may not fall within the safe harbor of Section
28(e).
Each year, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Funds and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e), the
Advisor allocates brokerage to those firms, provided that their brokerage and
research services were satisfactory to the Advisor and their execution
capabilities were compatible with the Advisor's policy of seeking best
execution at the best security price available, as discussed above. In no case
will the Advisor make binding commitments as to the level of brokerage
commissions it will allocate to a broker, nor will it commit to pay cash if any
informal targets are not met. The Advisor anticipates it will continue to
enter into such brokerage arrangements.
The Advisor may direct the purchase of securities on behalf of the Funds
and other advisory clients in secondary market transactions, in public
offerings directly from an underwriter, or in privately negotiated transactions
with an issuer. When the Advisor believes the circumstances so warrant,
securities purchased in public offerings may be resold shortly after
acquisition in the immediate aftermarket for the security in order to take
advantage of price appreciation from the public
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<PAGE> 94
offering price or for other reasons. Short-term trading of securities acquired
in public offerings, or otherwise, may result in higher portfolio turnover and
associated brokerage expenses.
The Advisor places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Advisor. Research services
furnished by firms through which the Funds effect their securities transactions
may be used by the Advisor in servicing all of its accounts; not all of such
services may be used by the Advisor in connection with the Funds. In the
opinion of the Advisor, it is not possible to measure separately the benefits
from research services to each of the accounts (including the Funds) managed by
the Advisor. Because the volume and nature of the trading activities of the
accounts are not uniform, the amount of commissions in excess of those charged
by another broker paid by each account for brokerage and research services will
vary. However, in the opinion of the Advisor, such costs to the Funds will not
be disproportionate to the benefits received by the Funds on a continuing
basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Funds and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Funds. In
making such allocations between a Fund and other advisory accounts, the main
factors considered by the Advisor are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending
the investment.
Where consistent with a client's investment objectives, investment
restrictions, and risk tolerance, the Advisor may purchase securities sold in
underwritten public offerings for client accounts, commonly referred to as
"deal" securities. The Advisor has adopted deal allocation procedures (the
"procedures"), summarized below, that reflect the Advisor's overriding policy
that deal securities must be allocated among participating client accounts in a
fair and equitable manner and that deal securities may not be allocated in a
manner that unfairly discriminates in favor of certain clients or types of
clients.
The procedures provide that, in determining which client accounts a
portfolio manager team will seek to have purchase deal securities, the team
will consider all relevant factors including, but not limited to, the nature,
size, and expected allocation to the Advisor of deal securities; the size of
the account(s); the accounts' investment objectives and restrictions; the risk
tolerance of the client; the client's tolerance for possibly higher portfolio
turnover; the amount of commissions generated by the account during the past
year; and the number of other deals the client has participated in during the
past year.
Where more than one of the Advisor's portfolio manager teams seeks to
have client accounts participate in a deal and the amount of deal securities
allocated to the Advisor by the underwriting syndicate is less than the
aggregate amount ordered by the Advisor (a "reduced allocation"), the deal
securities will be allocated among the portfolio manager teams based on all
relevant factors. The primary factor shall be assets under management,
although other factors that may be considered in the allocation decision
include, but are not limited to, the nature, size, and expected allocation of
the deal; the amount of brokerage commissions or other amounts generated by the
respective participating portfolio manager teams; and which portfolio manager
team is primarily responsible for the Advisor receiving securities in the deal.
Based on the relevant factors, the Advisor has established general allocation
percentages for its portfolio manager teams, and these percentages are reviewed
on a regular basis to determine whether asset growth or other factors make it
appropriate to use different general allocation percentages for reduced
allocations.
When a portfolio manager team receives a reduced allocation of deal
securities, the portfolio manager team will allocate the reduced allocation
among client accounts in accordance with the allocation percentages set forth
in the team's initial allocation instructions for the deal securities, except
where this would result in a de minimis allocation to any client account. On a
regular basis, the Advisor reviews the allocation of deal securities to ensure
that they have been allocated in a fair and equitable manner that does not
unfairly discriminate in favor of certain clients or types of clients.
Heritage Money Fund Brokerage Commissions
------------------- ---------------------
1996 $ 0
Municipal Money Fund
--------------------
1994 $ 0
1995 $ 0
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<PAGE> 95
1996 $ 0
Municipal Advantage Fund
------------------------
1996 $ 12,642
Advantage Fund
--------------
1994 $ 4,000
1995 $ 471,848(1)
1996 $ 127,430
(1) 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.
As of February 28, 1997, the Advantage and Heritage Money Funds had
acquired securities of its regular brokers or dealers (as defined in Rule 10b-1
under the 1940 Act) or their parents in the following amounts:
<TABLE>
<CAPTION>
Regular Broker or Dealer or Parent Issuer Value of Securities Owned as of February 28, 1997
----------------------------------------- -------------------------------------------------
<S> <C>
Salomon, Inc. $14,669,000 (Advantage)
First Boston Corporation N.Y. 248,000 (Heritage Money)
Lehman Brothers Holdings, Inc. 15,436,000 (Heritage Money)
Paine Webber 30,000,000 (Heritage Money)
Salomon Brothers, Inc. 30,574,000 (Heritage Money)
</TABLE>
CUSTODIAN
As custodian of each Fund's assets, Firstar Trust Company, P.O. Box 701,
Milwaukee, Wisconsin 53201, has custody of all securities and cash of the
Funds, delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by the officers of the Funds. With respect to the
Heritage Money Fund only, the custodian has entered into a sub-custodial
arrangement with Bankers Trust Company ("BTC") pursuant to which BTC may
retain custody of certain of the Heritage Money Fund's dollar-denominated
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
Funds.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
The Advisor acts as transfer agent and dividend-disbursing agent for the
Funds. The Advisor is compensated based on an annual fee per open account of
$32.50 for the Heritage Money and Municipal Money Funds, and $31.50 for the
Advantage and Municipal Advantage Funds, plus out-of-pocket expenses, such as
postage and printing expenses in connection with shareholder communications.
The Advisor also receives an annual fee per closed account of $4.20 from each
Fund. The fees received and the services provided as transfer agent and
dividend disbursing agent are in addition to those received and provided by the
Advisor under the Advisory Agreement. In addition, the Advisor provides
certain printing and mailing services for the Funds, such as printing and
mailing of shareholder account statements, checks, and tax forms.
The following table sets forth certain information concerning amounts paid
by the Funds for transfer agency and dividend disbursing and printing and
mailing services for each Fund that has completed a fiscal year:
Transfer Agency and Dividend Disbursement
Services Charges Incurred
---------------------------------------------------------
Per Printing and Amounts Net Amount
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<PAGE> 96
<TABLE>
<CAPTION>
Account Out-of-Pocket Mailing Waived By Paid By
Fund Charges Expenses Services Advisor Fund
- ------ ----------- ------------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Heritage Money Fund
1996 $ 354,819 $453,008 $ 9,070 $ 816,897 $ 0
Municipal Money Fund
1994 $ 867,886 $530,206 $ 33,624 $ 0 $ 1,431,716
1995 864,872 484,927 28,572 0 1,378,371
1996 920,594 755,631 25,882 0 1,702,107
Municipal Advantage Fund
1996 $ 146,569 $ 49,738 $ 3,424 $ 199,731 $ 0
Advantage Fund
1994 $ 898,713 $178,059 $ 22,392 $ 0 $ 1,099,164
1995 1,419,225 158,634 23,771 0 1,601,630
1996 1,760,983 216,305 27,756 0 2,005,044
</TABLE>
From time to time the Funds, directly or indirectly through arrangements
with the Advisor, and/or the Advisor may pay amounts to third parties that
provide administrative services relating to the Funds to persons who
beneficially own interests in the Funds, such as participants in 401(k) plans.
These services may include, among other things, sub-accounting services,
transfer agent type activities, answering inquiries relating to the Funds,
transmitting, on behalf of the Funds, proxy statements, annual reports, updated
Prospectuses, other communications regarding the Funds, and related services as
the Funds or beneficial owners may reasonably request. In such cases, the
Funds will not pay fees based on the number of beneficial owners at a rate that
is greater than the rate the Funds are currently paying the Advisor for
providing these services to Fund shareholders.
TAXES
GENERAL
As indicated under "About the Funds - Distributions and Taxes" in the
Prospectus, each Fund intends to continue to qualify annually for treatment as
a regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). This qualification does not involve government
supervision of the Funds' management practices or policies.
In order to qualify for treatment as a RIC under the Code, the Heritage
Money and Advantage Funds, must each distribute to their respective
shareholders for each taxable year at least 90% of their respective 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) and the Municipal Money and Municipal Advantage Funds
must each distribute to their respective shareholders at least 90% of the sum
of their respective investment company taxable income plus net interest income
excludable from gross income under section 103(a) of the Code ("Distribution
Requirement"). In addition, each Fund must meet several additional
requirements, which 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 any, or other income (including gains
from options, futures, or forward currency contracts, if any), derived with
respect to its business of investing in securities or these currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, or options or
futures (other than those on foreign currencies, if any), or foreign currencies
(or options, futures, or forward contracts thereon), if any, that are not
directly related to the Fund's principal business of investing in securities
(or options and futures with respect to securities) that were held for less
than three months ("30% Limitation"); (3) at the close of each quarter of a
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
-38-
<PAGE> 97
voting securities; and (4) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer. From time to time the Advisor may find it necessary to
make certain types of investments for the purpose of ensuring that the Fund
continues to qualify for treatment as a RIC under the Code.
Dividends paid by the Municipal Money and Municipal Advantage Funds will
qualify as "exempt-interest dividends," as defined in the Prospectus, and thus
will be excludable from gross income by their respective shareholders, if the
Funds satisfy the requirement that, at the close of each quarter of their
respective taxable years, at least 50% of the value of their respective total
assets consists of securities the interest on which is excludable from gross
income under section 103(a); each Fund intends to continue to satisfy this
requirement. The aggregate dividends excludable from a Fund's shareholders'
gross income may not exceed the Fund's net tax-exempt income. The
shareholders' treatment of dividends from the Municipal Money and Municipal
Advantage Funds under local and state income tax laws may differ from the
treatment thereof under the Code.
With respect to the Municipal Money and Municipal Advantage Funds, if Fund
shares are sold at a loss after being held for six months or less, the loss
will be disallowed to the extent of any exempt-interest dividends received on
those shares. Any portion of such a loss that is not disallowed will be
treated as long-term, instead of short-term, capital loss to the extent of any
capital gain distributions received on those shares. Whereas, with respect to
the Treasury Money, Heritage Money, and Advantage Funds, if Fund shares are
sold at a loss after being held for six months or less, the loss will simply be
treated as long-term, instead of short-term, capital loss to the extent of any
capital gain distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
FOREIGN TRANSACTIONS (HERITAGE MONEY AND ADVANTAGE FUNDS)
Interest and dividends received by the Heritage Money and Advantage Funds
may be subject to income, withholding, or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield on their respective
securities. Tax conventions between certain countries and the United States
may reduce or eliminate these foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
Each Fund maintains its accounts and calculates its income in U.S.
dollars. In general, gain or loss (1) from the disposition of foreign
currencies and forward currency contracts, (2) from the disposition of
foreign-currency-denominated debt securities that are attributable to
fluctuations in exchange rates between the date the securities are acquired and
their disposition date, and (3) attributable to fluctuations in exchange rates
between the time a Fund accrues interest or other receivables or expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects those receivables or pays those liabilities, will be treated
as ordinary income or loss. A foreign-currency-denominated debt security
acquired by a Fund may bear interest at a high normal rate that takes into
account expected decreases in the value of the principal amount of the security
due to anticipated currency devaluations; in that case, the Fund would be
required to include the interest in income as it accrues but generally would
realize a currency loss with respect to the principal only when the principal
was received (through disposition or upon maturity).
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<PAGE> 98
DERIVATIVE INSTRUMENTS (ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Advantage and
Municipal Advantage Funds realize in connection therewith. Gains from the
disposition of foreign currencies (except certain gains therefrom that may be
executed by future regulations), and income from transactions in options,
futures, and forward currency contracts derived by a Fund with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options and futures (other than those on foreign currencies)
will be subject to the 30% Limitation if they are held for less than three
months. Income from the disposition of foreign currencies, and options,
futures, and forward contracts on foreign currencies that are not directly
related to a Fund's principal business of investing in securities (or options
and futures with respect to securities) also will be subject to the 30%
Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
30% Limitation. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. The Funds
intend that, when they engage in hedging strategies, the hedging transactions
will qualify for this treatment, but at the present time it is not clear
whether this treatment will be available for all of the Funds' hedging
transactions. To the extent this treatment is not available or is not elected
by a Fund, it may be forced to defer the closing out of certain options,
futures, or forward currency contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Fund to continue to qualify as a
RIC.
For federal income tax purposes, each Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on options,
futures, or forward currency contracts that are subject to section 1256 of the
Code ("Section 1256 Contracts") and are held by the Fund as of the end of the
year, as well as gains and losses on Section 1256 Contracts actually realized
during the year. Except for Section 1256 Contracts that are part of a "mixed
straddle" and with respect to which a Fund makes a certain election, any gain
or loss recognized with respect to Section 1256 Contracts is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Section 1256 Contract. Unrealized
gains on Section 1256 Contracts that have been held by a Fund for less than
three months as of the end of its taxable year, and that are recognized for
federal income tax purposes as described above, will not be considered gains on
investments held for less than three months for purposes of the 30% Limitation.
INVESTMENTS IN CERTAIN MUNICIPAL SECURITIES (MUNICIPAL MONEY AND MUNICIPAL
ADVANTAGE FUNDS)
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 a 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 advisers before purchasing shares of
the Municipal Money and Municipal Advantage Funds 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 Municipal Money and Municipal Advantage Funds may each 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 a 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
-40-
<PAGE> 99
as above, a Fund may elect to include market discount in its gross income
currently, for each taxable year to which it is attributable.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES (ADVANTAGE AND MUNICIPAL
ADVANTAGE FUNDS)
The Advantage and Municipal Advantage Funds may acquire zero-coupon,
step-coupon, or other securities issued with original issue discount. As the
holder of those securities, a Fund must take into account or include in its
income (with respect to taxable securities) the original issue discount that
accrues on the securities during the taxable year, even if the Fund receives no
corresponding payment on the securities during the year. Similarly, a Fund
must take into account or include in its gross income (with respect to taxable
securities) securities it receives as "interest" on pay-in-kind securities.
Because a Fund annually must distribute substantially all of its investment
company taxable income, including any tax-exempt original issue discount and
other non-cash income, to satisfy the Distribution Requirement, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those
distributions may be made from the proceeds on sales of portfolio securities,
if necessary. A Fund may realize capital gains or losses from those sales,
which would increase or decrease its investment company taxable income or net
capital gain, or both. In addition, any such gains may be realized on the
disposition of securities held for less than three months. Because of the 30%
Limitation, any such gains would reduce a Fund's ability to sell other
securities, or certain options, or futures, or forward currency contracts,
held for less that three months that it might wish to sell in the ordinary
course of its portfolio management.
The foregoing federal tax discussion as well as the tax discussion
contained within the Prospectus under "About the Funds - Distributions and
Taxes" is intended to provide you with an overview of the impact of federal
income tax provisions on each Fund or its shareholders. These tax provisions
are subject to change by legislative or administrative action at the federal,
state, or local level, and any changes may be applied retroactively. Any such
action that limits or restricts a Fund's current ability to pass-through
earnings without taxation at the Fund level, or otherwise materially changes a
Fund's tax treatment, could adversely affect the value of a shareholder's
investment in a Fund. Because each Fund's taxes are a complex matter, you
should consult your tax adviser for more detailed information concerning the
taxation of a Fund and the federal, state, and local tax consequences to
shareholders of an investment in a Fund.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "Shareholder Manual -
Determining Your Share Price," the net asset value of each Fund will be
determined as of the close of trading on each day the New York Stock Exchange
(the "NYSE") is open for trading. The NYSE is open for trading Monday through
Friday except New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the
NYSE will not be open for trading on the preceding Friday, and when any such
holiday falls on a Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or yearly accounting period.
The Heritage Money and Municipal Money Funds value their 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 a
Fund's $1.00 per share net asset value, or if there were any other deviation
which the Board of Directors of the particular Fund 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 EXCHANGE AND REDEMPTION PRIVILEGES
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<PAGE> 100
The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds may not be liable for losses
due to unauthorized or fraudulent instructions. Such procedures include but are
not limited to requiring a form of personal identification prior to acting on
instructions received by telephone, providing written confirmations of such
transactions to the address of record, and tape recording telephone
instructions.
DOLLAR COST AVERAGING
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan, all discussed in the Funds' Prospectus under the
heading "Shareholder Manual - How to Buy Shares," are methods of implementing
DOLLAR COST AVERAGING. Dollar cost averaging is an investment strategy that
involves investing a fixed amount of money at regular time intervals. By
always investing the same set amount, you will be purchasing more shares when
the price is low and fewer shares when the price is high. Ultimately, by using
this principle in conjunction with fluctuations in share price, your average
cost per share may be less than your average transaction price. A program of
regular investment cannot ensure a profit or protect against a loss during
declining markets. Since such a program involves continuous investment
regardless of fluctuating share values, you should consider your ability to
continue the program through periods of both low and high share-price levels.
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<PAGE> 101
REDEMPTION-IN-KIND
The Funds have elected to be governed by Rule 18f-1 under the 1940 Act,
which obligates each Fund to redeem shares in cash, with respect to any one
shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the
assets of the Fund. If the Advisor determines that existing conditions make
cash payments undesirable, redemption payments may be made in whole or in part
in securities or other financial assets, valued for this purpose as they are
valued in computing the NAV for the Fund's shares ( a "redemption-in-kind").
Shareholders receiving securities or other financial assets in a
redemption-in-kind may realize a gain or loss for tax purposes, and will incur
any costs of sale, as well as the associated inconveniences. If you expect to
make a redemption in excess of the lesser of $250,000 or 1% of the Fund's
assets during any 90-day period and would like to avoid any possibility of
being paid with securities in-kind, you may do so by providing Strong Funds
with an unconditional instruction to redeem at least 15 calendar days prior to
the date on which the redemption transaction is to occur, specifying the dollar
amount or number of 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.
RETIREMENT PLANS
Individual Retirement Account (IRA): Everyone under age 70 1/2 with earned
income may contribute to a tax-deferred IRA. The Strong Funds offer a prototype
plan for you to establish your own IRA. You are allowed to contribute up to the
lesser of $2,000 or 100% of your earned income each year to your IRA (or up to
$4,000 between your IRA and your non-working spouses' IRA). Under certain
circumstances, your contribution will be deductible.
Direct Rollover IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or Code section
403(b) plan distribution directly into an IRA. The distribution must be
eligible for rollover. The amount of your Direct Rollover IRA contribution
will not be included in your taxable income for the year.
Simplified Employee Pension Plan (SEP-IRA): A SEP-IRA plan allows an employer
to make deductible contributions to separate IRA accounts established for each
eligible employee.
Salary Reduction Simplified Employee Pension Plan (SAR SEP-IRA): A SAR SEP-IRA
plan is a type of SEP-IRA plan in which an employer may allow employees to
defer part of their salaries and contribute to an IRA account. These deferrals
help lower the employees' taxable income. Please note that you may no longer
open new SAR SEP-IRA plans (since December 31, 1996). However, employers with
SAR SEP-IRA plans that were established prior to January 31, 1997 may still
open accounts for new employees.
Simplified Incentive Match Plan for Employees (SIMPLE-IRA): A SIMPLE-IRA plan
is a retirement savings plan that allows employees to contribute a percentage
of their compensation, up to $6,000, on a pre-tax basis, to a SIMPLE-IRA
account. The employer is required to make annual contributions to eligible
employees' accounts. All contributions grow tax-deferred.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans,
money purchase pension plans, and paired plans (a combination of a
profit-sharing plan and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
403(b)(7) Plan: A tax-sheltered custodial account designed to qualify under
section 403(b)(7) of the Code is available for use by employees of certain
educational, non-profit, hospital, and charitable organizations.
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<PAGE> 102
RIGHT OF SET-OFF
To the extent not prohibited by law, the Fund, any other Strong Fund, and
the Advisor each has the right to set-off against a shareholder's account
balance with a Strong Fund, and redeem from such account, any debt the
shareholder may owe any of these entities. This right applies even if the
account is not identically registered.
FUND ORGANIZATION
Each Corporation was organized on the following dates and currently has
the following authorized shares of capital stock:
<TABLE>
<CAPTION>
Incorporation Date Series Authorized Par
Corporation Date Created Shares Value ($)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strong Heritage Reserve Series, Inc. 06/02/89 Indefinite .00001
- Strong Heritage Money Fund 05/11/95 Indefinite .00001
Strong Municipal Funds, Inc. (1) 07/28/86 Indefinite .00001
- Strong Municipal Money Market Fund 07/28/86 Indefinite .00001
- 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 Advantage Fund is a Wisconsin corporation that is authorized to offer
separate series of shares representing interests in separate portfolios of
securities, each with differing investment objectives. The Municipal Money and
Municipal Advantage Funds are series of common stock of Strong Municipal Funds,
Inc., a Wisconsin corporation that is authorized to offer separate series of
shares representing interests in separate portfolios of securities, each with
differing objectives. The Heritage Money Fund is a series of common stock of
Strong Heritage Reserve Series, Inc., a Wisconsin corporation that is
authorized to offer separate series of shares representing interests in
separate portfolios of securities, each with differing objectives. The shares
in any one portfolio may, in turn, be offered in separate classes, each with
differing preferences, limitations or relative rights. However, the Articles
of Incorporation for each of the Corporations provides that if additional
classes of shares are issued by a Corporation, such new classes of shares may
not affect the preferences, limitations or relative rights of the Corporation's
outstanding shares. In addition, the Board of Directors of each Corporation is
authorized to allocate assets, liabilities, income and expenses to each series
and class. Classes within a series may have different expense arrangements
than other classes of the same series and, accordingly, the net asset value of
shares within a series may differ. Finally, all holders of shares of a
Corporation may vote on each matter presented to shareholders for action except
with respect to any matter which affects only one or more series or class, in
which case only the shares of the affected series or class are entitled to
vote. Fractional shares have the same rights proportionately as do full shares.
Shares of the Corporation have no preemptive, conversion, or subscription
rights. If a Corporation issues additional series, the assets belonging to
each series of shares will be held separately by the custodian, and in effect
each series will be a separate fund.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered investment
companies, or series thereof, such as the Funds, to operate without an annual
meeting of shareholders under specified circumstances if an annual meeting is
not required by the 1940 Act. The Funds have adopted the appropriate
provisions in their Bylaws and may, at their discretion, not hold an annual
meeting in any year in which the election of directors is not required to be
acted on by shareholders under the 1940 Act.
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Each Fund's Bylaws allow for a director to be removed by its shareholders
with or without cause, only at a meeting called for the purpose of removing the
director. Upon the written request of the holders of shares entitled to not
less than ten percent (10%) of all the votes entitled to be cast at such
meeting, the Secretary of a Fund shall promptly call a special meeting of
shareholders for the purpose of voting upon the question of removal of any
director. The Secretary of a Fund shall inform such shareholders of the
reasonable estimated costs of preparing and mailing the notice of the meeting,
and upon payment to the Fund of such costs, the Fund shall give not less than
ten nor more than sixty days notice of the special meeting.
PERFORMANCE INFORMATION
As described in the "About the Funds - Performance Information" section of
the Funds' Prospectus, each Fund's historical performance or return may be
shown in the form of "yield," "average annual total return," "total return,"
and "cumulative total return." In addition, the Heritage Money and Municipal
Money Funds' performance may be shown in the form of "effective yield," and the
Municipal Money and Municipal Advantage Funds' performance may be shown in the
form of "equivalent taxable yield." From time to time, the Advisor may agree
to waive or reduce its management fee and to absorb certain operating expenses
for a Fund. All performance and returns noted herein are historical and do not
represent the future performance of a Fund.
YIELD
The Advantage and Municipal Advantage Funds' yield is computed in
accordance with a standardized method prescribed by rules of the SEC. Under
that method, the current yield quotation for a Fund is based on a one month or
30-day period. The yield is computed by dividing the net investment income per
share earned during the 30-day or one month period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD = 2[(a-b+1)6-1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the 30-day period ended February 28, 1997, the Advantage and Municipal
Advantage Funds' yield were 6.34%, and 4.75%, respectively. During this
period, the Advisor absorbed expenses of .08% and waived management fees of
.54% for the Municipal Advantage Fund. Without this absorption and waiver, the
Municipal Advantage Fund's yield would have been 4.13%. In computing yield,
the Funds follow certain standardized accounting practice specified by SEC
rules. These practices are not necessarily consistent with those that the
Funds use to prepare annual and interim financial statements in conformity with
generally accepted accounting principles.
CURRENT YIELD
The Heritage Money and Municipal Money Funds' current yield quotations are
based on a seven-day period 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. For the seven-day period ended February 28, 1997,
the Heritage Money Fund's current yield was 5.41% and the Municipal Money
Fund's current yield was 3.23%. During this period, the Advisor absorbed
expenses of .08% and waived management fees of .39% for the Heritage Money
Fund. Without this absorption and waiver, the Heritage Money Fund's current
yield would have been 4.94%.
EFFECTIVE YIELD
-45-
<PAGE> 104
The Heritage Money and Municipal Money Funds' effective yield is
determined by taking the base period return (computed as described above) and
calculating the effect of assumed compounding. The formula for the effective
yield is: (base period return + 1)(365/7) - 1. For the seven-day period ended
February 28, 1997, the Heritage Money Fund's effective yield was 5.56% and the
Municipal Money Fund's effective yield was 3.28%. Without the absorption and
waiver noted above, the Heritage Money Fund's effective yield would have been
5.06%.
TAX-EQUIVALENT YIELD
The tax-equivalent yield for the Municipal Money and Municipal Advantage
Funds' is computed by dividing that portion of a 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. Based upon a marginal
federal income tax rate of 31.0% and the Municipal Money and Municipal
Advantage Funds' yields computed as described above, such Funds' 7-day tax
equivalent yields (period ended February 28, 1997) were 4.68%, and 6.88%,
respectively. For additional information concerning tax-exempt yields, see
"Tax-Exempt versus Taxable Yield" below.
DISTRIBUTION RATE
The distribution rate is computed, according to a non-standardized
formula, by dividing the total amount of actual distributions per share paid by
a 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 a 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, a
Fund's distribution rate may be substantially different than its yield. Both a
Fund's yield and distribution rate will fluctuate.
AVERAGE ANNUAL TOTAL RETURN
The Funds' average annual total return quotation is computed in accordance
with a standardized method prescribed by rules of the SEC. The average annual
total return for a Fund for a specific period is found by first taking a
hypothetical $10,000 investment ("initial investment") in the Fund's shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The redeemable value is then divided by
the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period. Average annual
total return figures for various periods are set forth in the table below.
TOTAL RETURN
Calculation of each Fund's total return is not subject to a standardized
formula. Total return performance for a specific period is calculated by first
taking an investment (assumed below to be $10,000) ("initial investment") in a
Fund's shares on the first day of the period and computing the "ending value"
of that investment at the end of the period. The total return percentage is
then determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
return figures for various periods are set forth in the table below.
CUMULATIVE TOTAL RETURN
Calculation of each Fund's cumulative total return is not subject to a
standardized formula and represents the simple change in value of our
investment over a stated period and may be quoted as a percentage or as a
dollar amount. Total returns and cumulative total returns may be broken down
into their components of income and capital (including capital gains and
changes in share price) in order to illustrate the relationship between these
factors and their contributions to total return.
-46-
<PAGE> 105
A Fund's performance figures are based upon historical results and do not
represent future results. Each Fund's shares are sold at net asset value per
share. The Advantage and Municipal Advantage Funds' returns and net asset
values will fluctuate and shares are redeemable at the then current net asset
value of each Fund, which may be more or less than original cost. In addition,
although the Heritage Money and Municipal Money Funds seek to maintain a stable
net asset value of $1.00, there is no assurance that any such Fund will be able
to do so. As a result, the yield for these Funds will fluctuate. An
investment in the Heritage Money and Municipal Money Funds is neither insured
nor guaranteed by the U.S. government. Factors affecting a Fund's performance
include general market conditions, operating expenses and investment
management. Any additional fees charged by a dealer or other financial
services firm would reduce the returns described in this section.
The figures below show performance information for various periods ended
February 28, 1997. No adjustment has been made for taxes, if any, payable on
dividends. Securities prices fluctuated during these periods.
<TABLE>
<CAPTION>
ADVANTAGE FUND
--------------
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 February 28, Percentage Percentage
Investment 1997 Increase Increase
------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $18,330 83.31% 7.61%
Five Years 10,000 13,792 37.92 6.64
One Year 10,000 10,697 6.97 6.97
____________________
(1) Commenced operations on November 25, 1988.
</TABLE>
MUNICIPAL ADVANTAGE FUND
- ------------------------
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 February 28, Percentage Percentage
Investment 1997 Increase Increase
---------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $10,662 6.63% 5.27%
One Year 10,000 10,511 5.12 5.12
_______________________
(1) Commenced operations on November 30, 1995.
</TABLE>
HERITAGE MONEY FUND
- -------------------
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 February 28, Percentage Percentage
Investment 1997 Increase Increase
--------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $10,999 9.99% 5.85%
One Year 10,000 10,569 5.70 5.70
_______________________
(1) Commenced operations on July 29, 1995.
</TABLE>
-47-
<PAGE> 106
MUNICIPAL MONEY MARKET FUND
- ---------------------------
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 February 28, Percentage Percentage
Investment 1997 Increase Increase
-----------------------------------------------------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $15,530 55.30% 4.34%
Ten Years 10,000 15,322 53.22 4.36
Five Years 10,000 11,751 17.52 3.28
One Year 10,000 10,352 3.52 3.52
_______________________
(1) Commenced operations on October 23, 1986.
</TABLE>
The Advantage, Municipal Advantage, Heritage Money and Municipal Money
Market Funds' total return for the three months ending May 31, 1997 were 1.44%,
1.00%, 1.37% and 0.89% respectively.
TAX-EXEMPT VERSUS TAXABLE YIELD. 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 1997 federal tax rates (in
effect as of January 1, 1997).
TAXABLE EQUIVALENT YIELD
<TABLE>
<CAPTION>
A TAX-FREE YIELD OF:
1997 Taxable Income Levels* 4% 5% 6% 7% 8%
Single Married Filing Marginal IS EQUIVALENT TO A TAXABLE YIELD OF:
Jointly Tax Rate
<S> <C> <C> <C> <C> <C> <C> <C>
under 24,650 under 41,200 15% 4.71% 5.88% 7.06% 8.24% 9.41%
24,650-59,750 41,200-99,600 28% 5.56% 6.94% 8.33% 9.72% 11.11%
59,750-124,650 99,600-151,750 31% 5.80% 7.25% 8.70% 10.14% 11.59%
124,650-271,050 151,750-271,050 36% 6.25% 7.81% 9.38% 10.94% 12.50%
over 271,050 over 271,050 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.
COMPARISONS
(1) U.S. TREASURY BILLS, NOTES, OR BONDS
Investors may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds, which are issued by the U.S. government because
such investments represent alternative income producing products. Treasury
obligations are issued in selected denominations. Rates of Treasury
obligations are fixed at the time of issuance and payment of principal and
interest is backed by the full faith and credit of the United States Treasury.
The market value of such instruments will generally fluctuate inversely with
interest rates prior to maturity and will equal par value at maturity.
Generally, the values of obligations with shorter maturities will fluctuate
less than those with longer maturities.
-48-
<PAGE> 107
(2) CERTIFICATES OF DEPOSIT
Investors may want to compare a Fund's performance to that of certificates
of deposit offered by banks and other depositary institutions. Certificates of
deposit, which are taxable income producing products, may offer fixed or
variable interest rates and principal is guaranteed and may be insured.
Withdrawal of the deposits prior to maturity normally will be subject to a
penalty. Rates offered by banks and other depositary institutions are subject
to change at any time specified by the issuing institution.
(3) MONEY MARKET FUNDS
Investors may also want to compare performance of a Fund to that of money
market funds. Money market fund yields will fluctuate and an investment in
money market fund shares is neither insured nor guaranteed by the U.S.
government, but share values usually remain stable.
(4) LIPPER ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT RANKING
ORGANIZATIONS
From time to time, in marketing and other fund literature, a Fund's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds, with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value,
with all income and capital gain dividends reinvested. Such calculations do
not include the effect of any sales charges imposed by other funds. A Fund
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings. A Fund's performance may also be compared to
the average performance of its Lipper category. Lipper also issues a monthly
yield analysis for fixed income funds.
(5) MORNINGSTAR, INC.
A Fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc. which rates funds on the basis of historical
risk and total return. Morningstar's ratings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for 3, 5, and 10
year periods. Ratings are not absolute and do not represent future results.
(6) IBC/DONOGHUE, INC. (TREASURY MONEY, HERITAGE MONEY AND MUNICIPAL MONEY
FUNDS ONLY)
IBC/Donoghue, Inc. is an independently operated financial newsletter
publishing firm specializing in the statistical analysis of the trends in the
money market mutual fund industry. From time to time, in marketing and other
fund literature, IBC/Donoghue, Inc. data may be quoted or compared to the
Treasury Money, Heritage Money and Municipal Money Funds' performance.
IBC/Donoghue, Inc. provides current (7 and 30 day yields) and historical
performance (1, 3, and 5 year returns), rankings and category averages for over
1,100 money market mutual funds.
(7) INDIVIDUAL MUNICIPAL BONDS (MUNICIPAL ADVANTAGE FUND ONLY)
The Municipal Advantage Fund may compare and contrast in advertising the
relative advantages of investing in a mutual fund versus an individual
municipal bond. Unlike municipal bond mutual funds, individual municipal bonds
offer a stated rate of interest and, if held to maturity, repayment of
principal. Although some individual municipal bonds might offer a higher
return, they may not offer the reduced risk of a mutual fund which invests in
many different securities. The initial investment requirements and sales
charges of many municipal bond mutual funds are lower than the purchase cost of
individual municipal bonds, which are generally issued in $5,000 denominations
and are subject to direct brokerage costs.
(8) INDEPENDENT SOURCES
Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning a Fund, including reprints of, or selections
from, editorials or articles about a Fund, especially those with similar
objectives. Sources for Fund performance information and articles about a Fund
may include publications such as Money, Forbes, Kiplinger's, Smart Money,
Financial World, Business Week, U.S. News and World Report, The Wall Street
Journal, Barron's, and a variety of investment newsletters.
(9) VARIOUS BANK PRODUCTS (EXCEPT ADVANTAGE AND MUNICIPAL ADVANTAGE FUNDS)
Each of the Heritage Money and Municipal Money 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,
-49-
<PAGE> 108
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 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 each Fund are redeemable at the net asset value (normally, $1.00 per share)
next determined after a request is received, without charge (with the exception
of a $3.00 redemption fee charged by the Heritage Money Fund under certain
circumstances).
(10) INDICES
The Funds may compare their performance to a wide variety of indices.
There are differences and similarities between the investments which a Fund may
purchase and the investments measured by the indices. The market prices and
yields of taxable and tax-exempt bonds will fluctuate. There are important
differences among the various investments included in the indices that should
be considered in reviewing this information.
(11) 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.
(12) STRONG FAMILY OF FUNDS
The Strong Family of Funds offers a comprehensive range of conservative to
aggressive investment options. Members of the Strong Family and their
investment objectives are listed below.
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVE
<S> <C>
Strong Money Market Fund Current income, a stable share price, and daily liquidity.
Strong Heritage Money Fund Current income, a stable share price, and daily liquidity.
Strong Municipal Money Market Federally tax-exempt current income, a stable share-price, and daily
Fund liquidity.
Strong Municipal Advantage Fund Federally tax-exempt current income with a very low degree of
share-price fluctuation.
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
</TABLE>
-50-
<PAGE> 109
<TABLE>
<S> <C>
Strong Short-Term Municipal Total return by investing for a high level of federally tax-exempt
Bond Fund current income with a low degree of share-price fluctuation.
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low
degree of share-price fluctuation.
Strong Short-Term Global Bond Total return by investing for a high level of income with a low degree
Fund of share-price fluctuation.
Strong Short-Term High Yield Total return by investing for a high level of current income with a
Bond Fund moderate degree of share-price fluctuation.
Strong Government Securities Total return by investing for a high level of current income with a
Fund moderate degree of share-price fluctuation.
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
Strong Corporate Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
Strong High-Yield Municipal Total return by investing for a high level of federally tax-exempt
Bond Fund current income.
Strong High-Yield Bond Fund Total return by investing for a high level of current income and
capital growth.
Strong International Bond Fund High total return by investing for both income and capital appreciation.
Strong Asset Allocation Fund High total return consistent with reasonable risk over the long term.
Strong Equity Income Fund Total return by investing for both income and capital growth.
Strong American Utilities Fund Total return by investing for both income and capital growth.
Strong Blue Chip 100 Fund Total return by investing for both income and capital growth.
Strong Total Return Fund High total return by investing for capital growth and income.
Strong Growth and Income Fund High total return by investing for capital growth and income.
Strong 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 Value Fund Long-term capital appreciation principally through investment in common
stocks and other equity securities. Current income is a secondary
objective.
Strong Value Fund Capital growth.
Strong Opportunity Fund Capital growth.
Strong Mid Cap Fund Capital growth.
Strong Common Stock 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 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 or Subadvisor to several management
investment companies, some of which fund variable annuity separate accounts of
certain insurance companies.
Each Fund may from time to time be compared to the other funds in the
Strong Family of Funds based on a risk/reward spectrum. In general, the amount
of risk associated with any investment product is commensurate with that
product's potential level of reward. The Strong Funds risk/reward continuum or
any Fund's position on the continuum may be described or diagrammed in
marketing materials. The Strong Funds risk/reward continuum positions the risk
and reward potential of each Strong Fund relative to the other Strong Funds,
but is not intended to position any Strong Fund relative to other mutual funds
or investment products. Marketing materials may also discuss the relationship
between risk and reward as it relates to an individual investor's portfolio.
-51-
<PAGE> 110
(13) TYING TIME FRAMES TO YOUR GOALS
There are many issues to consider as you make your investment decisions,
including analyzing your risk tolerance, investing experience, and asset
allocations. You should start to organize your investments by learning to link
your many financial goals to specific time frames. Then you can begin to
identify the appropriate types of investments to help meet your goals. As a
general rule of thumb, the longer your time horizon, the more price fluctuation
you will be able to tolerate in pursuit of higher returns. For that reason,
many people with longer-term goals select stocks or long-term bonds, and many
people with nearer-term goals match those up with for instance, short-term
bonds. The Advisor developed the following suggested holding periods to help
our investors set realistic expectations for both the risk and reward potential
of our funds. (See table below.) Of course, time is just one element to
consider when making your investment decision.
STRONG FUNDS SUGGESTED MINIMUM HOLDING PERIODS
<TABLE>
<CAPTION>
UNDER 1 YEAR 1 TO 2 YEARS 4 TO 7 YEARS 5 OR MORE YEARS
- -------------------- ----------------------------- ---------------------------- ------------------------
<S> <C> <C> <C>
Money Market Fund Advantage Fund Government Securities Fund Index 500 Fund
Heritage Money Fund **2Municipal Advantage Fund Municipal Bond Fund Total Return Fund
Municipal Money Market Fund Corporate Bond Fund Opportunity Fund
2 TO 4 YEARS International Bond Fund Growth Fund
------------ High-Yield Municipal Bond Common Stock Fund*
Short-Term Bond Fund Asset Allocation Fund Discovery Fund
Short-Term Municipal Bond American Utilities Fund International Stock Fund
Short-Term Global Bond Fund High-Yield Bond Fund Asia Pacific Fund
Short-Term High Yield Bond Equity Income Fund Value Fund
Fund Blue Chip 100 Fund Small Cap Fund
Growth and Income Fund
Mid Cap Fund
Schafer Value Fund
Growth 20 Fund
</TABLE>
* This Fund is closed to new investors, except the Fund may continue to offer
its shares through certain 401(k) plans and similar company-sponsored
retirement plans.
ADDITIONAL FUND INFORMATION
(1) 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.
(2) PORTFOLIO CHARACTERISTICS
In order to present a more complete picture of a Fund's portfolio,
marketing materials may include various actual or estimated portfolio
characteristics, including but not limited to median market capitalizations,
earnings per share, alphas, betas, price/earnings ratios, returns on equity,
dividend yields, capitalization ranges, growth rates, price/book ratios, top
holdings, sector breakdowns, asset allocations, quality breakdowns, and
breakdowns by geographic region.
-52-
<PAGE> 111
(3) MEASURES OF VOLATILITY AND RELATIVE PERFORMANCE
Occasionally statistics may be used to specify Fund volatility or risk.
The general premise is that greater volatility connotes greater risk undertaken
in achieving performance. Measures of volatility or risk are generally used to
compare a Fund's net asset value or performance relative to a market index.
One measure of volatility is beta. Beta is the volatility of a fund relative
to the total market as represented by the Standard & Poor's 500 Stock Index. A
beta of more than 1.00 indicates volatility greater than the market, and a beta
of less than 1.00 indicates volatility less than the market. Another measure
of volatility or risk is standard deviation. Standard deviation is a
statistical tool that measures the degree to which a fund's performance has
varied from its average performance during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of E(x - x )2
i m
----------
n-1
where E = "the sum of",
x = each individual return during the time period,
i
x = the average return over the time period, and
m
n = the number of individual returns during the time period.
Statistics may also be used to discuss a Fund's relative performance. One
such measure is alpha. Alpha measures the actual return of a fund compared to
the expected return of a fund given its risk (as measured by beta). The
expected return is based on how the market as a whole performed, and how the
particular fund has historically performed against the market. Specifically,
alpha is the actual return less the expected return. The expected return is
computed by multiplying the advance or decline in a market representation by
the fund's beta. A positive alpha quantifies the value that the fund manager
has added, and a negative alpha quantifies the value that the fund manager has
lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor, owned
by professionals active in its management. Recognizing that investors are the
focus of its business, the Advisor strives for excellence both in investment
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires specialized
skills and processes for each asset class and style. Therefore, the Advisor
believes that active management should produce greater returns than a passively
managed index. The Advisor has brought together a group of top-flight
investment professionals with diverse product expertise, and each concentrates
on their investment specialty. The Advisor believes that people are the firm's
most important asset. For this reason, continuity of professionals is critical
to the firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their impact
on the Funds may be used in advertisements and sales materials. Such factors
that may impact the Funds include, but are not limited to, changes in interest
rates, political developments, the competitive environment, consumer behavior,
industry trends, technological advances, macroeconomic trends, and the supply
and demand of various financial instruments. In addition, marketing materials
may cite the portfolio management's views or interpretations of such factors.
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EIGHT BASIC PRINCIPLES FOR SUCCESSFUL MUTUAL FUND INVESTING
These common sense rules are followed by many successful investors. They
make sense for beginners, too. If you have a question on these principles, or
would like to discuss them with us, please contact us at 1-800-368-3863.
1. Have a plan - even a simple plan can help you take control of your
financial future. Review your plan once a year, or if your circumstances
change.
2. Start investing as soon as possible. Make time a valuable ally. Let it
put the power of compounding to work for you, while helping to reduce your
potential investment risk.
3. Diversify your portfolio. By investing in different asset classes -
stocks, bonds, and cash - you help protect against poor performance in one
type of investment while including investments most likely to help you
achieve your important goals.
4. Invest regularly. Investing is a process, not a one-time event. By
investing regularly over the long term, you reduce the impact of
short-term market gyrations, and you attend to your long-term plan before
you are 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.
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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.
STRONG CASH MANAGEMENT APPROACH
Many investors overlook the importance of managing the "cash" portion of
their portfolios. Often they leave large amounts of cash in low-yielding
accounts for extended periods of time. There is, however, a smarter way to
think about investing these assets. This approach - known as cash management -
has long been used by private banking institutions. Now, this approach is
available to a wider range of investors to provide investors potentially higher
yields for their cash savings. Our Guide to Effective Cash Management
(described below) is designed to help you get more from the "cash" portion of
your portfolio.
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FOUR STEPS TO MANAGING CASH MORE EFFECTIVELY
1. DIVIDE YOUR CASH INTO TWO GROUPS. The first step toward managing your cash
effectively is to think of it as two separate groups:
CURRENT CASH: The portion you generally put aside for regular
transactions - goals less than one year away - and to cover routine
expenditures.
PORTFOLIO CASH: The portion you invest for extended periods - for goals
between one and two years away - to cover unforeseen emergencies, or as a
permanent, conservative position in your portfolio.
2. CONSIDER YOUR CASH INVESTMENT OPTIONS.
"CONVENIENCE" MONEY FUNDS. Many investors keep current cash and
portfolio cash in "convenience" money funds, which typically require low minimum
initial investments, offer an array of services (such as free check-writing),
but are relatively low-yielding. However, there are other options:
"Higher-yielding specialized money funds" designed to offer more income
potential than "convenience" money funds. To pursue higher yields, they often
require larger initial investments and impose transaction charges. In
addition, investors in the top tax brackets can pursue higher after-tax yields
by investing in a municipal money fund.
"Ultra-short bond funds" - investments with average effective maturities
of typically one year or less - are designed to PROVIDE HIGHER YIELDS than
money funds. To pursue higher yields, these funds may invest in lower quality
bonds and maintain slightly longer average effective maturities. Unlike money
funds, the SHARE PRICE OF AN ULTRA-SHORT BOND FUND WILL VARY.
3. ALLOCATE YOUR CASH BASED ON HOW YOU INTEND TO USE IT.
The key to managing your cash effectively is to allocate it according to
how you intend to use it. Certainly, it's wise to keep your current cash in a
fund that allows you to draw on it without penalty. But you can supplement
that current cash position with potentially higher-yielding short-term
investments that enable you to earn more income on your portfolio cash.
4. CONSIDER MUNICIPAL INVESTING.
You may be able to further enhance the return potential of your cash by
investing in a municipal fund. Because these funds invest in municipal
securities, the income they earn is exempt from federal income tax. Even if
you're taxed at a lower rate, the difference in income may be dramatic when
taxes don't take a bite out of your earnings.
PORTFOLIO MANAGEMENT
Each portfolio manager works with a team of analysts, traders, and
administrative personnel. From time to time, marketing materials may discuss
various members of the team, including their education, investment experience,
and other credentials.
The Advisor believes that actively managing each Fund's portfolio and
adjusting the average portfolio maturity according to the Advisor's interest
rate outlook is the best way to achieve the Funds' objectives. This policy is
based on a fundamental belief that economic and financial conditions create
favorable and unfavorable investment periods (or seasons) and that these
different seasons require different investment approaches. Through its active
management approach, the Advisor seeks to avoid or reduce any negative change
in a Fund's net asset value per share during the periods of falling bond
prices.
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HERITAGE MONEY FUND
The Advisor's investment philosophy 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.
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.
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<PAGE> 116
- - 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 certified public accountants for the Funds,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC.
LEGAL COUNSEL
Godfrey & Kahn, S.C., 780 North Water Street, Milwaukee, Wisconsin 53202,
acts as outside legal counsel for the Funds.
FINANCIAL STATEMENTS
The Annual Reports that are attached hereto contain the following audited
financial information for the Funds:
(a) Schedule of Investments in Securities.
(b) Statement of Operations.
(c) Statement of Assets and Liabilities.
(d) Statement of Changes in Net Assets.
(e) Notes to Financial Statements.
(f) Financial Highlights.
(g) Report of Independent Accountants.
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APPENDIX
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or based on
other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default capacity and willingness of
the obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of,
the obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
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B Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grade period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
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Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond and preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt or preferred issue in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guaranties unless otherwise indicated.
Bonds and preferred stock carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds and preferred stock considered to be investment grade
and of the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and/or dividends and repay principal,
which is unlikely to be affected by reasonably foreseeable events.
AA Bonds and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds
and preferred stock rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of the issuers is generally rated 'F-1+'.
A Bonds and preferred stock considered to be investment grade
and of high credit quality. The obligor's ability to pay interest
and/or dividends and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic
conditions and circumstances than debt or preferred securities with
higher ratings.
BBB Bonds and preferred stock considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay
interest or dividends and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these securities
and, therefore, impair timely payment. The likelihood that the
ratings of these bonds or preferred will fall below investment grade
is higher than for securities with higher ratings.
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Fitch speculative grade bond or preferred stock ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings ('BB' to 'C') represent Fitch's assessment of the likelihood of
timely payment of principal and interest or dividends in accordance with the
terms of obligation for issues not in default. For defaulted bonds or
preferred stock, the rating ('DDD' to 'D') is an assessment of the ultimate
recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer or possible recovery value in
bankruptcy, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's future financial strength.
Bonds or preferred stock that have the same rating are of similar but not
necessarily identical credit quality since the rating categories cannot fully
reflect the differences in the degrees of credit risk.
BB Bonds or preferred stock are considered speculative. The
obligor's ability to pay interest or dividends and repay principal
may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
B Bonds or preferred stock are considered highly speculative.
While bonds in this class are currently meeting debt service
requirements or paying dividends, the probability of continued
timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue.
CCC Bonds or preferred stock have certain identifiable
characteristics that, if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business and
economic environment.
CC Bonds or preferred stock are minimally protected. Default
in payment of interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal or suspension of preferred stock dividends is imminent.
DDD, DD,
and D Bonds are in default on interest and/or principal payments
or preferred stock dividends are suspended. Such securities are
extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery of
these securities, and 'D' represents the lowest potential for
recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important
to the analysis of a company's operating and financial constraints. From time
to time, Duff & Phelps Credit Rating Co. places issuers or security classes on
Rating Watch. The Rating Watch Status results from a need to notify investors
and the issuer that there are conditions present leading us to re-evaluate the
current rating(s). A listing on Rating Watch, however, does not mean a rating
change is inevitable. The Rating Watch Status can either be resolved quickly
or over a longer period of time, depending on the reasons surrounding the
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placement on Rating Watch. The "up" designation means a rating may be
upgraded; the "down" designation means a rating may be downgraded, and the
uncertain designation means a rating may be raised or lowered.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities. Structured finance issues, including real estate,
asset-backed and mortgage-backed financings, use this same rating scale with
minor modification in the definitions. Thus, an investor can compare the
credit quality of investment alternatives across industries and structural
types. A "Cash Flow Rating" (as noted for specific ratings) addresses the
likelihood that aggregate principal and interest will equal or exceed the rated
amount under appropriate stress conditions.
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
BBB+ Below-average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according to
BB- industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be met
B when due. Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty exists as to
timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend arrearages.
</TABLE>
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IBCA LONG-TERM DEBT RATINGS
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk, albeit not very significantly.
A - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
BB - Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists,
but is susceptible over time to adverse changes in business, economic or
financial conditions.
B - Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
CCC - Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on favorable
business, economic or financial conditions.
CC - Obligations which are highly speculative or which have a high risk of
default.
C - Obligations which are currently in default.
NOTES: "+" or "-" may be appended to a rating below AAA to denote relative
status within major rating categories. Ratings of BB and below are assigned
where it is considered that speculative characteristics are present.
THOMSON BANKWATCH LONG-TERM DEBT RATINGS
Long-Term Debt Ratings assigned by Thomson BankWatch also weigh heavily
government ownership and support. The quality of both the company's management
and franchise are of even greater importance in the Long-Term Debt Rating
decisions. Long-Term Debt Ratings look out over a cycle and are not adjusted
frequently for what we believe are short-term performance aberrations.
Long-Term Debt Ratings can be restricted to local currency debt - ratings
will be identified by the designation LC. In addition, Long-Term Debt Ratings
may include a plus (+) or minus (-) to indicate where within the category the
issue is placed. BankWatch Long-Term Debt Ratings are based on the following
scale:
INVESTMENT GRADE
AAA (LC-AAA) - Indicates that the ability to repay principal and interest
on a timely basis is extremely high.
AA (LC-AA) - Indicates a very strong ability to repay principal and
interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
A-6
<PAGE> 123
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 COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
STANDARD & POOR'S NOTE RATINGS
A-7
<PAGE> 124
An S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating.
The following criteria will be used in making the assessment:
- Amortization schedule - the larger the final maturity
relative to other maturities, the more likely the issue is to be
treated as a note.
- Source of payment - the more the issue depends on the market
for its refinancing, the more likely it is to be treated as a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: (i) leading
market positions in well-established industries, (ii) high rates of return on
funds employed, (iii) conservative capitalization structure with moderate
reliance on debt and ample asset protection, (iv) broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and (v)
well established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
A-8
<PAGE> 125
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree
than issues rated 'F-1+'.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the margin
of safety is not as great as for issues assigned 'F-1+' and 'F-1'
ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
used by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those
differences.
From time to time, Duff & Phelps places issuers or security classes on
Rating Watch. The Rating Watch status results from a need to notify investors
and the issuer that there are conditions present leading us to re-evaluate the
current rating(s). A listing on Rating Watch, however, does not mean a rating
change is inevitable.
The Rating Watch status can either be resolved quickly or over a longer
period of time, depending on the reasons surrounding the placement on Rating
Watch. The "up" designation means a rating may be upgraded; the "down"
designation means a rating may be downgraded, and the "uncertain" designation
means a rating may be raised or lowered.
RATING SCALE: DEFINITION
------------ ----------
A-9
<PAGE> 126
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
The TBW Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. TBW
Short-Term Ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".
TBW-3 The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA SHORT-TERM RATINGS
IBCA Short-Term Ratings assess the borrowing characteristics of banks and
corporations, and the capacity for timely repayment of debt obligations. The
Short-Term Ratings relate to debt which has a maturity of less than one year.
A-10
<PAGE> 127
A1 Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating of
A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely repayment.
B Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
C Obligations for which there is a high risk of default or which are
currently in default.
A-11
<PAGE> 128
STRONG MUNICIPAL FUNDS, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (all included or incorporated by reference in
Parts A&B):
Schedules of Investments in Securities
Statements of Operations
Statements of Assets and Liabilities
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
Incorporated by reference to the Annual Report to Shareholders of
the Strong Municipal Money Market Fund and Strong Municipal
Advantage Fund dated February 28, 1997, pursuant to Rule 411 under
the Securities Act of 1933. (File Nos. 33-7603 and 811-4770)
(b) Exhibits
(1) Articles of Incorporation dated July 31, 1996
(2) Bylaws(2)
(3) Inapplicable
(4) Specimen Stock Certificate(2)
(5) Investment Advisory Agreement(2)
(6) Distribution Agreement(2)
(7) Inapplicable
(8) Custody Agreement(2)
(9) Shareholder Servicing Agent Agreement(2)
(10) Inapplicable
(11) Consent of Auditor
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16) Computation of Performance Figures
(17) Financial Data Schedule
(19) Power of Attorney dated June 26, 1997
(20) Letter of Representation
(21.1) Code of Ethics for Access Persons dated October 18, 1996
(21.2) Code of Ethics for Non-Access Persons dated
October 18, 1996
- ----------------------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 10
to the Registration Statement on Form N-1A of Registrant filed on or
about April 20, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A of Registrant filed on or
about November 17, 1995.
C-1
<PAGE> 129
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, 1997
------------------------------------- ------------------------
Common Stock, $.00001 par value:
Strong Municipal Advantage Fund 6,192
Strong Municipal Money Market Fund 25,486
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 $80,000,000, subject to
certain deductions. Pursuant to the authority of the Wisconsin Business
Corporation Law, Article VII of Registrant's Bylaws provides as follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01. Mandatory Indemnification. The Corporation shall
indemnify, to the full extent permitted by the WBCL, as in effect from
time to time, the persons described in Sections 180.0850 through 180.0859
(or any successor provisions) of the WBCL or other provisions of the law
of the State of Wisconsin relating to indemnification of directors and
officers, as in effect from time to time. The indemnification afforded
such persons by this section shall not be exclusive of other rights to
which they may be entitled as a matter of law.
SECTION 7.02. Permissive Supplementary Benefits. The Corporation
may, but shall not be required to, supplement the right of
indemnification under Section 7.01 by (a) the purchase of insurance on
behalf of any one or more of such persons, whether or not the Corporation
would be obligated to indemnify such person under Section 7.01; (b)
individual or group indemnification agreements with any one or more of
such persons; and (c) advances for related expenses of such a person.
SECTION 7.03. Amendment. This Article VII may be amended or
repealed only by a vote of the shareholders and not by a vote of the
Board of Directors.
SECTION 7.04. Investment Company Act. In no event shall the
Corporation indemnify any person hereunder in contravention of any
provision of the Investment Company Act.
Item 28. Business and Other Connections of Investment Advisor
The information contained under "About the Funds - Management" in the
Prospectus and under "Directors and Officers of the Funds" and "Investment
Advisor and Distributor" in the Statement of Additional Information is hereby
incorporated by reference pursuant to Rule 411 under the Securities Act of
1933.
Item 29. Principal Underwriters
(a) Strong Funds Distributors, Inc., principal underwriter for
Registrant, also serves as principal underwriter for Strong Advantage Fund,
Inc.; Strong Asia Pacific Fund, Inc.; Strong Asset Allocation Fund, Inc.; Strong
Common Stock Fund, Inc.; Strong 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
C-2
<PAGE> 130
Funds, Inc.; Strong Insured Municipal Bond Fund, Inc.; Strong International
Bond Fund, Inc.; Strong International Stock Fund, Inc.; Strong Money Market
Fund, Inc.; Strong Municipal Bond Fund, Inc.; Strong Opportunity Fund, Inc.;
Strong Schafer Value Fund, Inc.; Strong Short-Term Bond Fund, Inc.; Strong
Short-Term Global Bond Fund, Inc.; Strong Short-Term Municipal Bond Fund, Inc.;
Strong Special Fund II, Inc.; Strong Total Return Fund, Inc.; and Strong
Variable Insurance Funds, Inc.
(b) The information contained under "About the Funds - Management"
in the Prospectus and under "Directors and Officers of the Funds" and
"Investment Advisor 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
(a) Inapplicable.
(b) Inapplicable.
(c) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered, upon request and without charge, a copy of each Fund's
latest annual report to shareholders.
C-3
<PAGE> 131
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. 14 to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933, and has duly caused this Post-Effective Amendment No. 14 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Village of Menomonee Falls, and State of Wisconsin on
the 26th day of June, 1997.
STRONG MUNICIPAL FUNDS, INC.
(Registrant)
BY: /s/John Dragisic
------------------------
John Dragisic, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
Name Title Date
- -------------------- ------------------------------------------- -------------
President (Principal Executive Officer)
/s/John Dragisic and a Director June 26, 1997
- --------------------
John Dragisic
/s/Richard S. Strong Chairman of the Board and a Director June 26, 1997
- --------------------
Richard S. Strong
Treasurer (Principal Financial and
/s/John A. Flanagan Accounting Officer) June 26, 1997
- --------------------
John A. Flanagan
- -------------------- Director June 26, 1997
Marvin E. Nevins*
- -------------------- Director June 26, 1997
Willie D. Davis*
- -------------------- Director June 26, 1997
William F. Vogt*
- -------------------- Director June 26, 1997
Stanley Kritzik*
* John S. Weitzer signs this document pursuant to powers of attorney filed
with this Post-Effective Amendment No. 14 to the Registration Statement on
Form N-1A.
BY: /s/John S. Weitzer
-----------------------
John S. Weitzer
<PAGE> 132
EXHIBIT INDEX
EDGAR
Exhibit No. Exhibit Exhibit No.
- ----------- ------- -----------
(1) Articles of Incorporation EX-99.B1
(11) Consent of Auditor EX-99.B11
(16) Computation of Performance Figures EX-99.B16
(17) Financial Data Schedule EX-27.1 (Municipal Money)
EX-27.2 (Municipal Advantage)
(19) Power of Attorney EX-99.B19
(20) Letter of Representation EX-99.B20
(21.1) Code of Ethics for Access Persons EX-99.B21.1
(21.2) Code of Ethics for Non-Access Persons EX-99.B21.2
<PAGE> 1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF STRONG MUNICIPAL FUNDS, INC.
These Amended and Restated Articles of Incorporation shall supersede
and replace the heretofore existing Articles of Incorporation of Strong
Municipal Funds, Inc., as amended to date, a corporation organized under
Chapter 180 of the Wisconsin Statutes:
ARTICLE I
The name of the corporation (hereinafter, the "Corporation") is:
Strong Municipal Funds, Inc.
ARTICLE II
The period of existence of the Corporation shall be perpetual.
ARTICLE III
The purpose for which the Corporation is organized is, without
limitation, to act as a registered management investment company under 15 USC
80a-1 to 80a-64, as amended from time to time (the "Investment Company Act"),
and for any other purposes for which corporations may be organized under
Chapter 180 of the Wisconsin Statutes, as amended from time to time (the
"WBCL").
ARTICLE IV
A. The Corporation shall have the authority to issue an indefinite
number of shares of Common Stock with a par value of $.00001 per share.
Subject to the following paragraph the authorized shares are classified as
follows:
Class Authorized Number of Shares
----- ---------------------------
Strong Municipal Money Market Fund Indefinite
Strong Municipal Advantage Fund Indefinite
B. The Board of Directors is authorized to classify or to reclassify
(i.e., into classes and series of classes), from time to time, any unissued
shares of the Corporation by setting, changing, or eliminating the
distinguishing designation and the preferences, limitations, and relative
rights, in whole or in part, to the fullest extent permissible under the WBCL.
Unless otherwise provided by the Board of Directors prior to the
issuance of shares, the shares of any and all classes and series shall be
subject to the following:
1. The Board of Directors may redesignate a class or series whether or
not shares of such class or series are issued and outstanding, provided that
such redesignation does not affect the preferences, limitations, and relative
rights, in whole or in part, of such class or series.
<PAGE> 2
2. The assets and liabilities and the income and expenses for each
class shall be attributable to that class. The assets and liabilities and the
income and expenses of each series within a class shall be determined
separately and, accordingly, the net asset value of shares may vary from series
to series within a class. The income or gain and the expense or liabilities of
the Corporation shall be allocated to each class or series as determined by or
under the direction of the Board of Directors.
3. Shares of each class or series shall be entitled to such
dividends or distributions, in shares or in cash or both, as may be declared
from time to time by the Board of Directors with respect to such class or
series. Dividends or distributions shall be paid on shares of a class or series
only out of the assets belonging to that class or series.
4. Any shares redeemed by the Corporation shall be deemed to be
canceled and restored to the status of authorized but unissued shares of the
particular class or series.
5. In the event of the liquidation or dissolution of the
Corporation, the holders of a class or series shall be entitled to receive, as
a class or series, out of the assets of the Corporation available for
distribution to shareholders, the assets belonging to that class or series less
the liabilities allocated to that class or series. The assets so distributable
to the holders of a class or series shall be distributed among such holders in
proportion to the number of shares of that class or series held by them and
recorded on the books of the Corporation. In the event that there are any
assets available for distribution that are not attributable to any particular
class or series, such assets shall be allocated to all classes or series in
proportion to the net asset value of the respective class or series.
6. All holders of shares shall vote as a single class and series
except with respect to any matter which affects only one or more series or
class of shares, in which case only the holders of shares of the class or series
affected shall be entitled to vote.
7. For purposes of the Corporation's Registration Statement filed
with the Securities and Exchange Commission under the Securities Act of 1933
and the Investment Company Act of 1940, including all prospectuses and
Statements of Additional Information, and other reports filed under the
Investment Company Act of 1940, references therein to "classes" of the
Corporation's common stock shall mean "series", as used in these Articles of
Incorporation and the WBCL, and references therein to "series" shall mean
"classes", as used in these Articles of Incorporation and the WBCL.
C. The Corporation may issue fractional shares. Any fractional shares shall
carry proportionately all the rights of whole shares, including, without
limitation, the right to vote and the rights to receive dividends and
distributions.
D. The Board of Directors of the Corporation may authorize the insurance and
sale of any class or series of shares from time to time in such amount and on
such terms and conditions, for such purposes and for such amounts or kind of
consideration as the Board of Directors shall determine, subject to any limits
required by then applicable law. Nothing in this paragraph shall be construed
in any way as limiting the Board of Directors authority to issue the
Corporation's shares in connection with a share dividend under the WBCL.
E. Subject to the suspension of the right of redemption or postponement of
the date of payment or satisfaction upon redemption in accordance with the
Investment Company Act, each holder of any class or series of the Common Stock
of the Corporation, upon request and after complying with the redemption
procedures established by or under the supervision of the Board of Directors,
shall be entitled to require the Corporation to redeem out of legally available
funds all or any part of the Common Stock standing in the name of such holder
on the books of the Corporation at the net asset value (as determined in
accordance with the Investment Company Act) of such shares less any applicable
redemption fee). Any such redeemed shares shall be canceled and restored to the
status of authorized but unissued shares.
2
<PAGE> 3
F. The Board of Directors may authorize the Corporation, at its option
and to the extent permitted by and in accordance with the Investment Company
Act, to redeem any shares of Common Stock of any class or series of the
Corporation owned by any shareholder under circumstances deemed appropriate by
the Board of Directors in its sole discretion from time to time, including
without limitation the failure to maintain ownership of a specified minimum
number or value of shares of Common Stock of any class or series of the
Corporation, at the net asset value (as determined in accordance with the
Investment Company Act) of such shares (less any applicable redemption fee).
G. The Board of Directors of the Corporation may, upon reasonable
notice to the holders of Common Stock of any class or series of the
Corporation, impose a fee for the redemption of shares, such fee to be not in
excess of the amount set forth in the Corporation's then existing Bylaws and to
apply in the case of such redemptions and under such terms and conditions as
the Board of Directors shall determine. The Board of Directors shall have the
authority to rescind imposition of any such fee in its discretion and to
reimpose the redemption fee from time to time upon reasonable notice.
H. No holder of the Common Stock of any class or series of the
Corporation shall, as such holder, have any right to purchase or subscribe for
any share of the Common Stock of any class or series of the Corporation which
it may issue or sell other than such right, if any, as the Board of Directors,
in its sole discretion, may determine.
I. With respect to any class or series, the Board of Directors may
adopt provisions to seek to maintain a stable net asset value per share.
Without limiting the foregoing, the Board of Directors may determine that the
net asset value per share of any class or series should be maintained at a
designated constant value and may establish procedures, not inconsistent with
applicable law, to accomplish that result. Such procedures may include a
requirement, in the event of a net loss with respect to the particular class or
series from time to time, for automatic pro rata capital contributions from each
shareholder of that class or series in amounts sufficient to maintain the
designated constant share value.
ARTICLE V
The number of directors shall be fixed by the Bylaws of Corporation.
ARTICLE VI
The Corporation reserves the right to enter into, from time to time,
investment advisory agreements providing for the management and supervision of
the investments of the Corporation, the furnishing of advice to the Corporation
with respect to the desirability of investing in, purchasing or selling
securities or other assets and the furnishing of clerical and administrative
services to the Corporation. Such agreements shall contain such other terms,
provisions and conditions as the Board of Directors of the Corporation may deem
advisable and as are permitted by the Investment Company Act.
The Corporation may, without limitation, designate distributors,
custodians, transfer agents, registrars and/or disbursing agents for the
stock and assets of the Corporation and employ and fix the powers, rights,
duties, responsibilities and compensation of each such distributor, custodian,
transfer agent, registrar and/or disbursing agent.
ARTICLE VII
If the Board of Directors redesignate the outstanding Common Stock in
accordance with paragraph A of Article IV the Board of Directors shall
designate the corporation with a generic name that is consistent with the name
of the first series and any subsequent series.
3
<PAGE> 4
ARTICLE VIII
The registered office of the Corporation is located at 100 Heritage
Reserve, in the Village of Menomonee Falls, Waukesha County, Wisconsin 53051
and the name of the registered agent at such address is Thomas P. Lemke.
This instrument was drafted by:
John S. Weitzer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
4
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Strong Municipal Funds, Inc.
We consent to the incorporation by reference in Post-Effective Amendment No. 14
to the Registration Statement of Strong Municipal Funds, Inc. on Form N-1A of
our reports dated April 2, 1997 on our audits of the financial statements
and financial highlights of Strong Municipal Money Market Fund and Strong
Municipal Advantage Fund (each a series of Strong Municipal Funds, Inc.),
which reports are included in the Annual Report to Shareholders for the year
ended February 28, 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.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
June 26, 1997
<PAGE> 1
Strong Municipal Money Market Fund
EXHIBIT 16
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. CURRENT YIELD: 7 days ended February 28, 1997
A. Formula
Current Yield = Base Period Return x (365/7)
B. Calculation
3.23% = .000619452 x (365/7)
II. EFFECTIVE YIELD: 7 days ended February 28, 1997
A. Formula
Effective Yield = [(Base Period Return + 1)(365/7)]- 1
B. Calculation
3.28% = [(.000619452 + 1)(365/7)]- 1
<PAGE> 2
Strong Municipal Advantage Fund
EXHIBIT 16
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. CURRENT ANNUALIZED YIELD: 30 days ended February 28, 1997
A. Formula
a-b
YIELD = 2[(------- + 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.
d= the maximum offering price per share on the last day of
the period.
B. Calculation
2,485,082.15 - 31,140.21
YIELD = 2[(------------------------ + 1)(6)- 1]
125,066,743.198 x 5.01
YIELD = 4.75%
II. AVERAGE ANNUAL TOTAL RETURN
A. Formula
-----
P(1 + T)(n) = ERV or T =\(n)/ERV/P - 1
Where: P = a hypothetical initial payment of $10,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $10,000 payment made
at the beginning of the stated periods at the end of the stated
periods.
B. Calculation
-----
T = \(n)/ERV/P - 1
1. One-year period 2-29-96 through 2-28-97
-------------
5.12% = \(1)/10,512/10,000 - 1
2. Since inception 11-30-95 through 2-28-97
-------------
5.27% = \(1.25)/10,663/10,000 - 1
III. TOTAL RETURN
A. Formula
EV-IV
-----
IV = TR
Where: EV = Value at the end of the periods, including reinvestment of all
dividends and capital gain distributions
IV = Initial value of a hypothetical investment at the net asset value
TR = Total Return
B. Calculation
EV-IV
-----
IV = TR
One-year period ended February 28, 1997
10,512 - 10,000
---------------
10,000 = 5.12%
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000798169
<NAME> STRONG MUNICIPAL FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> STRONG MUNICIPAL MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 1,884,306
<INVESTMENTS-AT-VALUE> 1,884,306
<RECEIVABLES> 41,551
<ASSETS-OTHER> 655
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,926,512
<PAYABLE-FOR-SECURITIES> 26,550
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,065
<TOTAL-LIABILITIES> 31,615
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,894,897
<SHARES-COMMON-STOCK> 1,894,897
<SHARES-COMMON-PRIOR> 1,608,905
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,894,897
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 71,488
<OTHER-INCOME> 0
<EXPENSES-NET> (11,179)
<NET-INVESTMENT-INCOME> 60,309
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 60,309
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (60,309)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,223,480
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 56,751
<NET-CHANGE-IN-ASSETS> 285,992
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,729
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,179
<AVERAGE-NET-ASSETS> 1,740,986
<PER-SHARE-NAV-BEGIN> 1
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1
<EXPENSE-RATIO> 0.6
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000798169
<NAME> STRONG MUNICIPAL FUNDS, INC.
<SERIES>
<NUMBER> 2
<NAME> STRONG MUNICIPAL ADVANTAGE FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 638426
<INVESTMENTS-AT-VALUE> 640932
<RECEIVABLES> 8506
<ASSETS-OTHER> 430
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 649868
<PAYABLE-FOR-SECURITIES> 3025
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2580
<TOTAL-LIABILITIES> 5605
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 643381
<SHARES-COMMON-STOCK> 128604
<SHARES-COMMON-PRIOR> 26453
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1,624)
<ACCUM-APPREC-OR-DEPREC> 2,506
<NET-ASSETS> 644263
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19390
<OTHER-INCOME> 0
<EXPENSES-NET> (34)
<NET-INVESTMENT-INCOME> 19356
<REALIZED-GAINS-CURRENT> (1,624)
<APPREC-INCREASE-CURRENT> 2656
<NET-CHANGE-FROM-OPS> 20388
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,356)
<DISTRIBUTIONS-OF-GAINS> (1)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 172620
<NUMBER-OF-SHARES-REDEEMED> (73,479)
<SHARES-REINVESTED> 3010
<NET-CHANGE-IN-ASSETS> 511770
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2322
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2818
<AVERAGE-NET-ASSETS> 385658
<PER-SHARE-NAV-BEGIN> 5.01
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.25)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 5.01
<EXPENSE-RATIO> 0.0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE> 1
STRONG MUNICIPAL FUNDS, INC.
(Registrant)
POWER OF ATTORNEY
Each person whose signature appears below, constitutes and appoints
John Dragisic, Thomas P. Lemke, Lawrence A. Totsky, Stephen J. Shankenberg, and
John S. Weitzer, and each of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign this Registration
Statement on Form N-1A, and any and all amendments thereto, and to file the
same, with all exhibits, and any other documents in connection therewith, with
the Securities and Exchange Commission and any other regulatory body granting
unto said attorney-in-fact and agent, full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes, as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
President of the Board (Principal Executive
Officer and acting Principal Financial and
/s/ John Dragisic Accounting Officer) and a Director June 26, 1997
- ---------------------
John Dragisic
/s/ Richard S. Strong Chairman of the Board and a Director June 26, 1997
- ---------------------
Richard S. Strong
/s/ Marvin E. Nevins Director June 26, 1997
- ---------------------
Marvin E. Nevins
/s/ Willie D. Davis Director June 26, 1997
- ---------------------
Willie D. Davis
/s/ William F. Vogt Director June 26, 1997
- ---------------------
William F. Vogt
/s/ Stanley Kritzik Director June 26, 1997
- ---------------------
Stanley Kritzik
</TABLE>
<PAGE> 1
Exhibit 20
GODFREY & KAHN, S.C.
ATTORNEYS AT LAW
780 North Water Street
Milwaukee, Wisconsin 53202
Phone (414)273-3500 Fax (414)273-5198
June 26, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Strong Municipal Funds, Inc.
----------------------------
Gentlemen:
We represent Strong Municipal Funds, Inc. (the "Company"), in connection
with its filing of Post-Effective Amendment No. 14 (the "Post-Effective
Amendment") to the Company's Registration Statement (Registration
Nos. 33-7603; 811-4770) 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
<PAGE> 1
EXHIBIT 99.B21.1
CODE OF ETHICS
FOR ACCESS PERSONS OF
THE STRONG FAMILY OF MUTUAL FUNDS,
STRONG CAPITAL MANAGEMENT, INC.,
AND STRONG FUNDS DISTRIBUTORS, INC.
[STRONG FUNDS LOGO]
STRONG CAPITAL MANAGEMENT, INC.
October 18, 1996
<PAGE> 2
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
Table of Contents
I. INTRODUCTION ..............................................................1
A. Fiduciary Duty ............................................................1
1. Place the interests of Advisory Clients first .............................1
2. Avoid taking inappropriate advantage of their position ....................1
3. Conduct all Personal Securities Transactions in full compliance with
this Code including both the preclearance and reporting requirements ......1
B. Appendices to the Code ....................................................2
1. Definitions ...............................................................2
2. Contact Persons ...........................................................2
3. Disclosure of Personal Holdings in Securities .............................2
4. Acknowledgment of Receipt of Code of Ethics and Limited Power of Attorney..2
5. Preclearance Request for Access Persons ...................................2
6. Annual Code of Ethics Questionnaire .......................................2
7. List of Broad-Based Indices ...............................................2
8. Form Letter to Broker or Bank .............................................2
9. Gift Policy ...............................................................2
C. Application of the Code to Independent Fund Directors .....................2
D. Application of the Code to Funds Subadvised by SCM ........................2
II. PERSONAL SECURITIES TRANSACTIONS ..........................................2
A. Annual Disclosure of Personal Holdings by Access Persons ..................2
B. Preclearance Requirements for Access Persons ..............................3
1. General Requirement .......................................................3
2. Transactions Exempt from Preclearance Requirements ........................3
a. Mutual Funds ..............................................................3
b. No Knowledge ..............................................................3
c. Certain Corporate Actions .................................................3
d. Rights ....................................................................3
e. Miscellaneous .............................................................3
3. Application to Commodities, Futures, Options on Futures and Options
on Broad-Based Indices ....................................................4
C. Preclearance Requests .....................................................4
1. Trade Authorization Request Forms .........................................4
2. Review of Form ............................................................4
3. Access Person Designees ...................................................4
D. Prohibited Transactions ...................................................5
1. Prohibited Securities Transactions ........................................5
i
<PAGE> 3
a. Initial Public Offerings ..................................................5
b. Pending Buy or Sell Orders ................................................5
c. Seven Day Blackout ........................................................5
d. Intention to Buy or Sell for Advisory Client ..............................5
e. 60-Day Blackout ...........................................................6
2. Always Prohibited Securities Transactions .................................6
a. Inside Information ........................................................6
b. Market Manipulation .......................................................6
c. Large Positions in Non-Strong Funds .......................................6
d. Others ....................................................................6
3. Private Placements ........................................................6
4. No Explanation Required for Refusals ......................................6
E. Execution of Personal Securities Transactions .............................7
F. Length of Trade Authorization Approval ....................................7
G. Trade Reporting Requirements ..............................................7
1. Reporting Requirement .....................................................7
2. Disclaimers ...............................................................8
3. Quarterly Review ..........................................................8
4. Availability of Reports ...................................................8
5. Record Retention ..........................................................8
III. FIDUCIARY DUTIES ........................................................9
A. Confidentiality ...........................................................9
B. Gifts .....................................................................9
1. Accepting Gifts ...........................................................9
2. Solicitation of Gifts .....................................................9
3. Giving Gifts ..............................................................9
C. Payments to Advisory Clients ..............................................9
D. Corporate Opportunities ...................................................9
E. Undue Influence ...........................................................9
F. Service as a Director ....................................................10
G. Involvement in Criminal Matters or Investment-Related Civil Proceedings ..10
IV. COMPLIANCE WITH THIS CODE OF ETHICS .....................................10
A. Code of Ethics Review Committee ..........................................10
1. Membership, Voting, and Quorum ...........................................10
2. Investigating Violations of the Code .....................................10
3. Annual Reports ...........................................................11
B. Remedies .................................................................11
1. Sanctions ................................................................11
2. Sole Authority ...........................................................11
3. Review ...................................................................11
C. Exceptions to the Code ...................................................12
D. Compliance Certification .................................................12
E. Inquiries Regarding the Code .............................................12
ii
<PAGE> 4
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
Table of Appendices
Appendix 1 (Definitions) ....................................................13
Appendix 2 (Contact Persons) ................................................16
Appendix 3 (Disclosure of Personal Holdings in Securities)...................17
Appendix 4 (Acknowledgment of Receipt of Code of Ethics and
Limited Power of Attorney) .................................................18
Appendix 5 (Preclearance Request for Access Persons) ........................19
Appendix 6 (Annual Code of Ethics Questionnaire) ............................20
Appendix 7 (List of Broad-Based Indices) ....................................23
Appendix 8 (Form Letter to Broker or Bank) ..................................24
Appendix 9 (Gift Policy) ....................................................25
iii
<PAGE> 5
CODE OF ETHICS
For Access Persons of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
Dated October 18, 1996
I. INTRODUCTION
A. Fiduciary Duty. This Code of Ethics is based upon the principle that
directors, officers, and employees of Strong Capital Management, Inc. ("SCM"),
Strong Funds Distributors, Inc. ("the Distributor"), and the Strong Family of
Mutual Funds ("the Strong Funds") have a fiduciary duty to place the interests
of clients ahead of their own. The Code applies to all Access Persons and
focuses principally on preclearance and reporting of personal transactions in
securities. Capitalized words are defined in Appendix 1. Access Persons must
avoid activities, interests, and relationships that might interfere with making
decisions in the best interests of the Advisory Clients of SCM.
As fiduciaries, Access Persons must at all times:
1. Place the interests of Advisory Clients first. Access Persons
must scrupulously avoid serving their own personal interests ahead of the
interests of the Advisory Clients of SCM. An Access Person may not
induce or cause an Advisory Client to take action, or not to take action,
for personal benefit, rather than for the benefit of the Advisory Client.
For example, an Access Person would violate this Code by causing an
Advisory Client to purchase a Security he or she owned for the purpose of
increasing the price of that Security.
2. Avoid taking inappropriate advantage of their position. The
receipt of investment opportunities, perquisites, or gifts from persons
seeking business with the Strong Funds, SCM, the Distributor, or their
clients could call into question the exercise of an Access Person's
independent judgment. Access persons may not, for example, use their
knowledge of portfolio transactions to profit by the market effect of
such transactions.
3. Conduct all Personal Securities Transactions in full compliance
with this Code including both the preclearance and reporting
requirements.
Doubtful situations should be resolved in favor of Advisory Clients.
Technical compliance with the Code's procedures will not automatically insulate
from scrutiny any trades that indicate an abuse of fiduciary duties.
1
<PAGE> 6
B. Appendices to the Code. The appendices to this Code are attached
hereto and are a part of the Code, and include the following:
1. Definitions--capitalized words as defined in the Code--(Appendix
1),
2. Contact Persons, including the Preclearance Officer designees,
and the Code of Ethics Review Committee (Appendix 2),
3. Disclosure of Personal Holdings in Securities (Appendix 3),
4. Acknowledgment of Receipt of Code of Ethics and Limited Power of
Attorney (Appendix 4),
5. Preclearance Request for Access Persons (Appendix 5),
6. Annual Code of Ethics Questionnaire (Appendix 6),
7. List of Broad-Based Indices (Appendix 7),
8. Form Letter to Broker or Bank (Appendix 8), and
9. Gift Policy (Appendix 9).
C. Application of the Code to Independent Fund Directors. This Code
applies to Independent Fund Directors, and requires Independent Fund Directors
and their Immediate Families to report Securities Transactions to the
Compliance Department in accordance with Section II.G. However, provisions of
the Code requiring the disclosure of personal holdings (Section II.A.),
preclearance of trades (Section II.B.), prohibited transactions (II.D.1.),
private placements (Section II.D.3.), restrictions on serving as a director of
a publicly-traded company (Section III.F.), and receipt of gifts (Section
III.B.) do not apply to Independent Fund Directors.
D. Application of the Code to Funds Subadvised by SCM. This Code does
not apply to the directors, officers, and general partners of Funds for which
SCM serves as a subadviser.
II. PERSONAL SECURITIES TRANSACTIONS
A. Annual Disclosure of Personal Holdings by Access Persons. Upon
designation as an Access Person, and thereafter on an annual basis, all Access
Persons must disclose on the Disclosure of Personal Holdings In Securities Form
(Appendix 3) (or a substantially similar form) all Securities in which they
have a Beneficial Interest and all Securities in non-client accounts for which
they make investment decisions (previously reported holdings need not be
reported). This provision does not apply to Independent Fund Directors.
2
<PAGE> 7
B. Preclearance Requirements for Access Persons.
1. General Requirement. Except for the transactions set forth in
Section II.B.2., all Securities Transactions in which an Access Person or
a member of his or her Immediate Family has a Beneficial Interest must be
precleared with the Preclearance Officer or his designee. This provision
does not apply to transactions of Independent Fund Directors and their
Immediate Families.
2. Transactions Exempt from Preclearance Requirements. The
following Securities Transactions are exempt from the preclearance
requirements set forth in Section II.B.1. of this Code:
a. Mutual Funds. Securities issued by any registered open-end
investment companies (including but not limited to the Strong
Funds);
b. No Knowledge. Securities Transactions where neither SCM,
the Access Person nor an Immediate Family member knows of the
transaction before it is completed (for example, Securities
Transactions effected for an Access Person by a trustee of a blind
trust or discretionary trades involving an investment partnership
or investment club in which the Access Person is neither consulted
nor advised of the trade before it is executed);
c. Certain Corporate Actions. Any acquisition of Securities
through stock dividends, dividend reinvestments, stock splits,
reverse stock splits, mergers, consolidations, spin-offs, or other
similar corporate reorganizations or distributions generally
applicable to all holders of the same class of Securities;
d. Rights. Any acquisition of Securities through the exercise
of rights issued by an issuer pro rata to all holders of a class of
its Securities, to the extent the rights were acquired in the
issue; and
e. Miscellaneous. Any transaction in the following: (1)
bankers acceptances, (2) bank certificates of deposit ("CDs"), (3)
commercial paper, (4) repurchase agreements, (5) Securities that
are direct obligations of the U.S. government, (6) equity
securities held in dividend reinvestment plans ("DRIPs"), (7)
Securities of the employer of a member of the Access Person's
Immediate Family if such securities are beneficially owned through
participation by the Immediate Family member in a Profit Sharing
plan, 401(k) plan, ESOP, or other similar plan, and (8) other
Securities as may from time to time be designated in writing by the
Code of Ethics Review Committee on the grounds that the risk of
abuse is minimal or non-existent.
THE SECURITIES TRANSACTIONS LISTED ABOVE ARE NOT EXEMPT FROM THE
REPORTING REQUIREMENTS SET FORTH IN SECTION II.G.
3
<PAGE> 8
3. Application to Commodities, Futures, Options on Futures and
Options on Broad-Based Indices. Commodities, futures (including currency
futures and futures on securities comprising part of a broad-based,
publicly traded market based index of stocks), options on futures,
options on currencies, and options on certain indices designated by the
Compliance Department as broad-based are not subject to the preclearance,
seven day black out, 60-day profit disgorgement, and prohibited
transaction provisions of Section II.D.I of the Code, but are subject to
transaction reporting. The options on indices designated by the
Compliance Department as broad-based may be changed from time to time and
are listed in Appendix 7. The options on indices that are not designated
as broad-based are subject to the preclearance, seven-day blackout,
60-day profit disgorgement, prohibited transaction, and reporting
provisions of the Code.
C. Preclearance Requests.
1. Trade Authorization Request Forms. Prior to entering an order
for a Securities Transaction that requires preclearance, the Access
Person must complete, IN WRITING, a Preclearance Request For Access
Persons Form as set forth in Appendix 5 and submit the completed form to
the Preclearance Officer (or his designee). The Preclearance Request For
Access Persons Form requires Access Persons to provide certain
information and to make certain representations. Proposed Securities
Transactions of the Preclearance Officer that require preclearance must
be submitted to his designee.
2. Review of Form. After receiving the completed Preclearance
Request For Access Persons Form, the Preclearance Officer (or his
designee) will (a) review the information set forth in the form, (b)
independently confirm whether the Securities are held by any Funds or
other accounts managed by SCM and whether there are any unexecuted orders
to purchase or sell the Securities by any Fund or accounts managed by
SCM, and (c) as soon as reasonably practicable, determine whether to
clear the proposed Securities Transaction. The authorization, date, and
time of the authorization must be reflected on the Preclearance Request
For Access Persons Form. The Preclearance Officer (or his designee) will
keep one copy of the completed form for the Compliance Department, send
one copy to the Access Person seeking authorization, and send the third
copy to the Trading Department, which will cause the transaction to be
executed.
No order for a securities transaction for which preclearance
authorization is sought may be placed prior to the receipt of written
authorization of the transaction by the preclearance officer (or his
designee). Verbal approvals are not permitted.
3. Access Person Designees. If an Access Person is away from SCM's
principal office and desires to effect a personal Securities Transaction
prior to his or her return, such Access Person may designate an
individual at SCM to complete and submit
4
<PAGE> 9
for preclearance on his or her behalf a Preclearance Request for Access
Persons Form provided the following requirements are satisfied:
a. The Access Person communicates the details of the trade and
affirms the accuracy of the representations and warranties
contained on the Form directly to such designated person; and
b. The designated person completes the Preclearance Request
For Access Persons Form on behalf of the Access Person in
accordance with the requirements of the Code and then executes the
Access Person Designee Certification contained in the Form. The
Access Person does not need to sign the Form so long as the
foregoing certification is provided.
D. Prohibited Transactions.
1. Prohibited Securities Transactions. The following Securities
Transactions for accounts in which an Access Person or a member of his or
her Immediate Family have a Beneficial Interest, to the extent they
require preclearance under Section II.B. above, are prohibited and will
not be authorized by the Preclearance Officer (or his designee) absent
exceptional circumstances:
a. Initial Public Offerings. Any purchase of Securities in an
initial public offering (other than a new offering of a registered
open-end investment company);
b. Pending Buy or Sell Orders. Any purchase or sale of
Securities on any day during which any Advisory Client has a
pending "buy" or "sell" order in the same Security (or Equivalent
Security) until that order is executed or withdrawn;
c. Seven Day Blackout. Purchases or sales of Securities by a
Portfolio Manager within seven calendar days of a purchase or sale
of the same Securities (or Equivalent Securities) by an Advisory
Client managed by that Portfolio Manager, unless the purchase or
sale is a Program Trade. For example, if a Fund trades in a
Security on day one, day eight is the first day the Portfolio
Manager may trade that Security for an account in which he or she
has a beneficial interest;
d. Intention to Buy or Sell for Advisory Client. Purchases or
sales of Securities at a time when that Access Person intends, or
knows of another's intention, to purchase or sell that Security (or
an Equivalent Security) on behalf of an Advisory Client. This
prohibition applies whether the Securities Transaction is in the
same (e.g., two purchases) or the opposite (a purchase and sale)
direction of the transaction of the Advisory Client; and
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<PAGE> 10
e. 60-Day Blackout. (1) Purchases of a Security in which an
Access Person acquires a Beneficial Interest within 60 days of the
sale of the Security (or an Equivalent Security) in which the same
Access Person had a Beneficial Interest, and (2) sales of a
Security in which an Access Person had a Beneficial Interest within
60 days of the purchase of the Security (or an Equivalent Security)
in which the same Access Person has a Beneficial Interest, unless,
in each case, the Access Person agrees to give up all profits on
the transaction to a charitable organization specified in
accordance with Section IV.B.1.
2. Always Prohibited Securities Transactions. The following
Securities Transactions are prohibited and will not be authorized under
any circumstances:
a. Inside Information. Any transaction in a Security while in
possession of material nonpublic information regarding the Security
or the issuer of the Security;
b. Market Manipulation. Transactions intended to raise,
lower, or maintain the price of any Security or to create a false
appearance of active trading;
c. Large Positions in Non-Strong Funds. Transactions in a
registered investment company (other than the Strong Funds) which
result in the Access Person owning five percent or more of any
class of securities in such investment company; and
d. Others. Any other transactions deemed by the Preclearance
Officer (or his designee) to involve a conflict of interest,
possible diversion of corporate opportunity, or an appearance of
impropriety.
3. Private Placements. Acquisitions of Beneficial Interests in
Securities in a private placement by an Access Person is strongly
discouraged. The Preclearance Officer (or his designee) will give
permission only after considering, among other facts, whether the
investment opportunity should be reserved for Advisory Clients and
whether the opportunity is being offered to an Access Person by virtue of
his or her position as an Access Person. Access Persons who have been
authorized to acquire and have acquired securities in a private placement
are required to disclose that investment to the Compliance Department
when they play a part in any subsequent consideration of an investment in
the issuer by an Advisory Client and the decision to purchase securities
of the issuer by an Advisory Client must be independently authorized by a
Portfolio Manager with no personal interest in the issuer. This
provision does not apply to Independent Fund Directors.
4. No Explanation Required for Refusals. In some cases, the
Preclearance Officer (or his designee) may refuse to authorize a
Securities Transaction for a reason that
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<PAGE> 11
is confidential. The Preclearance Officer is not required to give an
explanation for refusing to authorize any Securities Transaction.
E. Execution of Personal Securities Transactions. Unless an exception
is provided in writing by the Compliance Department, all transactions in
Securities subject to the preclearance requirements for which an Access Person
or a member of his or her Immediate Family has a Beneficial Interest shall be
executed by the Trading Department. IN ALL INSTANCES, THE TRADING DEPARTMENT
MUST GIVE PRIORITY TO CLIENT TRADES OVER ACCESS PERSON TRADES.
F. Length of Trade Authorization Approval. The authorization provided
by the Preclearance Officer (or his designee) is effective until the earlier of
(1) its revocation, (2) the close of business on the second trading day after
the authorization is granted (for example, if authorization is provided on a
Monday, it is effective until the close of business on Wednesday), or (3) the
Access Person learns that the information in the Trade Authorization Request
Form is not accurate. If the order for the Securities Transaction is not
placed within that period, a new advance authorization must be obtained before
the Securities Transaction is placed. If the Securities Transaction is placed
but has not been executed within two trading days after the day the
authorization is granted (as, for example, in the case of a limit order or a
not held order), no new authorization is necessary unless the person placing
the original order for the Securities Transaction amends it in any way.
G. Trade Reporting Requirements.
1. Reporting Requirement. EVERY ACCESS PERSON AND MEMBERS OF HIS OR
HER IMMEDIATE FAMILY (INCLUDING INDEPENDENT FUND DIRECTORS AND THEIR
IMMEDIATE FAMILIES) MUST ARRANGE FOR THE COMPLIANCE DEPARTMENT TO RECEIVE
DIRECTLY FROM ANY BROKER, DEALER, OR BANK THAT EFFECTS ANY SECURITIES
TRANSACTION, DUPLICATE COPIES OF EACH CONFIRMATION FOR EACH SUCH
TRANSACTION AND PERIODIC STATEMENTS FOR EACH BROKERAGE ACCOUNT IN WHICH
SUCH ACCESS PERSON HAS A BENEFICIAL INTEREST. Attached hereto as
Appendix 8 is a form letter that may be used to request such documents
from such entities. An Access Person must arrange to have duplicate
confirmations and periodic statements sent within 30 days of the sooner
of (1) designation as an Access Person, or (2) the establishment of the
account at the broker, dealer or bank. If the Access Person is unable to
arrange for the above, the Access Person must immediately notify the
Compliance Department. THE FOREGOING DOES NOT APPLY TO TRANSACTIONS AND
HOLDINGS IN (1) OPEN-END INVESTMENT COMPANIES INCLUDING BUT NOT LIMITED
TO THE STRONG FUNDS, (2) BANK CERTIFICATES OF DEPOSIT ("CDS"), (3)
EQUITY SECURITIES HELD IN DIVIDEND REINVESTMENT PLANS ("DRIPS"), OR (4)
SECURITIES OF THE EMPLOYER OF A MEMBER OF THE ACCESS PERSON'S IMMEDIATE
FAMILY IF SUCH SECURITIES ARE BENEFICIALLY OWNED THROUGH PARTICIPATION BY
THE IMMEDIATE FAMILY MEMBER IN A PROFIT SHARING PLAN, 401(K) PLAN, ESOP,
OR OTHER SIMILAR PLAN.
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<PAGE> 12
2. Disclaimers. Any report of a Securities Transaction for the
benefit of a person other than the individual in whose account the
transaction is placed may contain a statement that the report should not
be construed as an admission by the person making the report that he or
she has any direct or indirect beneficial ownership in the Security to
which the report relates.
3. Quarterly Review. At least quarterly, for Securities
Transactions requiring preclearance under this Code, the Preclearance
Officer (or his designee) shall compare the confirmations and periodic
statements provided pursuant to Section II.G.1. above, to the approved
Trade Authorization Request Forms. Such review shall include:
a. Whether the Securities Transaction complied with this Code;
b. Whether the Securities Transaction was authorized in
advance of its placement;
c. Whether the Securities Transaction was executed within two
full trading days of when it was authorized;
d. Whether any Fund or accounts managed by SCM owned the
Securities at the time of the Securities Transaction, and;
e. Whether any Fund or separate accounts managed by SCM
purchased or sold the Securities in the Securities Transaction
within at least 10 days of the Securities Transaction.
4. Availability of Reports. All information supplied pursuant to
this Code will be available for inspection by the Boards of Directors of
SCM and SFDI, the Board of Directors of each Strong Fund, the Code of
Ethics Review Committee, the Compliance Department, the Access Person's
department manager (or designee), any party to which any investigation is
referred by any of the foregoing, the SEC, any self-regulatory
organization of which the Strong Funds, SCM or the Distributor is a
member, and any state securities commission, as well as any attorney or
agent of the foregoing, the Strong Funds, SCM, or the Distributor.
5. Record Retention. SCM shall keep and maintain for at least six
years records of the procedures it follows in connection with the
preclearance and reporting requirements of this Code and, for each
Securities Transaction, the information relied on by the Preclearance
Officer (or his designee) in authorizing the Securities Transaction and
making the post-Securities Transaction determination of Section II.G.3.
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<PAGE> 13
III. FIDUCIARY DUTIES
A. Confidentiality. Access Persons are prohibited from revealing
information relating to the investment intentions, activities or portfolios of
Advisory Clients except to persons whose responsibilities require knowledge of
the information.
B. Gifts. The following provisions on gifts apply only to employees of
SCM and the Distributor.
1. Accepting Gifts. On occasion, because of their position with
SCM, the Distributor, or the Strong Funds, employees may be offered, or
may receive without notice, gifts from clients, brokers, vendors, or
other persons not affiliated with such entities. Acceptance of
extraordinary or extravagant gifts is not permissible. Any such gifts
must be declined or returned in order to protect the reputation and
integrity of SCM, the Distributor, and the Strong Funds. Gifts of a
nominal value (i.e., gifts whose reasonable value is no more than $100 a
year), and customary business meals, entertainment (e.g., sporting
events), and promotional items (e.g., pens, mugs, T-shirts) may be
accepted. Please see the Gift Policy Reminder memorandum dated December
1, 1994 (Appendix 9) for additional information.
If an employee receives any gift that might be prohibited under this
Code, the employee must inform the Compliance Department.
2. Solicitation of Gifts. Employees of SCM or the Distributor may
not solicit gifts or gratuities.
3. Giving Gifts. Employees of SCM or the Distributor may not give
any gift with a value in excess of $100 per year to persons associated
with securities or financial organizations, including exchanges, other
member organizations, commodity firms, news media, or clients of the
firm. Please see the Gift Policy Reminder memorandum dated December 1,
1994 (Appendix 9) for additional information.
C. Payments to Advisory Clients. Access Persons may not make any payments
to Advisory Clients in order to resolve any type of Advisory Client complaint.
All such matters must be handled by the Legal Department.
D. Corporate Opportunities. Access Persons may not take personal
advantage of any opportunity properly belonging to any Advisory Client, SCM, or
the Distributor. This includes, but is not limited to, acquiring Securities
for one's own account that would otherwise be acquired for an Advisory Client.
E. Undue Influence. Access Persons may not cause or attempt to cause any
Advisory Client to purchase, sell, or hold any Security in a manner calculated
to create any personal benefit to the Access Person. If an Access Person or
Immediate Family Member stands
9
<PAGE> 14
to materially benefit from an investment decision for an Advisory
Client that the Access Person is recommending or participating in, the Access
Person must disclose to those persons with authority to make investment
decisions for the Advisory Client (or to the Compliance Department if the
Access Person in question is a person with authority to make investment
decisions for the Advisory Client), any Beneficial Interest that the Access
Person (or Immediate Family) has in that Security or an Equivalent Security, or
in the issuer thereof, where the decision could create a material benefit to
the Access Person (or Immediate Family) or the appearance of impropriety. The
person to whom the Access Person reports the interest, in consultation with the
Compliance Department, must determine whether the Access Person will be
restricted in making investment decisions.
F. Service as a Director. No Access Person, other than an Independent
Fund Director, may serve on the board of directors of a publicly-held company
not affiliated with SCM, the Distributor, or the Strong Funds absent prior
written authorization by the Code of Ethics Review Committee. This
authorization will rarely, if ever, be granted and, if granted, will normally
require that the affected Access Person be isolated, through "Chinese Wall" or
other procedures, from those making investment decisions related to the issuer
on whose board the Access Person sits.
G. Involvement in Criminal Matters or Investment-Related Civil
Proceedings. Each Access Person must notify the Compliance Department, as soon
as reasonably practical, if arrested, arraigned, indicted, or pleads no contest
to, any criminal offense (other than minor traffic violations), or if named as
a defendant in any Investment-Related civil proceedings, or any administrative
or disciplinary action.
IV. COMPLIANCE WITH THIS CODE OF ETHICS
A. Code of Ethics Review Committee.
1. Membership, Voting, and Quorum. The Code of Ethics Review
Committee shall initially consist of the General Counsel, President, and
Chief Financial Officer of SCM. The Committee shall vote by majority
vote with two members serving as a quorum. Vacancies may be filled and,
in the case of extended absences or periods of unavailability, alternates
may be selected, by the majority vote of the remaining members of the
Committee; provided, however, in the event that the General Counsel is
unavailable, at least one member of the Committee shall also be a member
of the Compliance Department.
2. Investigating Violations of the Code. The General Counsel or his
or her designee is responsible for investigating any suspected violation
of the Code and shall report the results of each investigation to the
Code of Ethics Review Committee. The Code of Ethics Review Committee is
responsible for reviewing the results of any investigation of any
reported or suspected violation of the Code. Any material violation of
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<PAGE> 15
the Code by an employee of SCM or the Distributor for which significant
remedial action was taken will be reported to the Boards of Directors of
the Strong Funds not later than the next regularly scheduled quarterly
Board meeting.
3. Annual Reports. The Code of Ethics Review Committee will review
the Code at least once a year, in light of legal and business
developments and experience in implementing the Code, and will prepare an
annual report to the Boards of Directors of SCM, the Distributor, and
each Strong Fund that:
a. Summarizes existing procedures concerning personal
investing and any changes in the procedures made during the past
year;
b. Identifies any violation requiring significant remedial
action during the past year, and
c. Identifies any recommended changes in existing restrictions
or procedures based on its experience under the Code, evolving
industry practices, or developments in applicable laws or
regulations.
B. Remedies.
1. Sanctions. If the Code of Ethics Review Committee determines
that an Access Person has committed a violation of the Code, the
Committee may impose sanctions and take other actions as it deems
appropriate, including a letter of caution or warning, suspension of
personal trading rights, suspension of employment (with or without
compensation), fine, civil referral to the SEC, criminal referral, and
termination of the employment of the violator for cause. The Code of
Ethics Review Committee may also require the Access Person to reverse the
trade(s) in question and forfeit any profit or absorb any loss derived
therefrom. The amount of profit shall be calculated by the Code of
Ethics Review Committee and shall be forwarded to a charitable
organization. No member of the Code of Ethics Review Committee may review
his or her own transaction.
2. Sole Authority. The Code of Ethics Review Committee has sole
authority, subject to the review set forth in Section IV.B.3. below, to
determine the remedy for any violation of the Code, including appropriate
disposition of any moneys forfeited pursuant to this provision. Failure
to promptly abide by a directive to reverse a trade or forfeit profits
may result in the imposition of additional sanctions.
3. Review. Whenever the Code of Ethics Review Committee determines
that an Access Person has committed a violation of this Code that merits
significant remedial action, it will report promptly to the Boards of
Directors of SCM and/or the Distributor (as appropriate), and no less
frequently than the quarterly meeting to the Boards of Directors of the
applicable Strong Funds, information relating to the investigation of the
violation, including any sanctions imposed. The Boards of Directors of
SCM, the
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<PAGE> 16
Distributor, and the Strong Funds may modify such sanctions as they deem
appropriate. Such Boards shall have access to all information considered
by the Code of Ethics Review Committee in relation to the case. The Code
of Ethics Review Committee may determine whether to delay the imposition
of any sanctions pending review by the applicable Boards of Directors.
C. Exceptions to the Code. Although exceptions to the Code will rarely,
if ever, be granted, the General Counsel of SCM may grant exceptions to the
requirements of the Code on a case by case basis if he finds that the proposed
conduct involves negligible opportunity for abuse. All material exceptions
must be in writing and must be reported as soon as practicable to the Code of
Ethics Review Committee and to the Boards of Directors of the SCM Funds at
their next regularly scheduled meeting after the exception is granted.
D. Compliance Certification. At least annually, all Access Persons will
be required to certify on the Annual Code of Ethics Questionnaire set forth in
Appendix 6 or on a document substantially in the form of Appendix 6 that they
have complied with the Code in all respects.
E. Inquiries Regarding the Code. The Compliance Department will answer
any questions about this Code or any other compliance-related matters.
October 18, 1996
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Appendix 1
DEFINITIONS
"Access Person" means (1) every director, officer, and general partner of
SCM, the Distributor and the Strong Funds; (2) every employee of SCM and the
Distributor who, in connection with his or her regular functions, makes,
participates in, or obtains information regarding the purchase or sale of a
security by an Advisory Client's account; (3) every employee of SCM and the
Distributor who is involved in making purchase or sale recommendations for an
Advisory Client's account; (4) every employee of SCM and the Distributor who
obtains information concerning such recommendations prior to their
dissemination, and (5) such agents of SCM, the Distributor, or the Funds as the
Compliance Department shall designate who may be deemed an Access Person if
they were an employee of the foregoing. Any uncertainty as to whether an
individual is an Access Person should be brought to the attention of the
Compliance Department. Such questions will be resolved in accordance with, and
this definition shall be subject to, the definition of "Access Person" found in
Rule 17j-1(e)(1) promulgated under the Investment Company Act of 1940.
"Advisory Client" means any client (including both investment companies
and managed accounts) for which SCM serves as an investment adviser or
subadviser, renders investment advice, or makes investment decisions.
"Beneficial Interest" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise,
to profit, or share in any profit derived from, a transaction in the subject
Securities. An Access Person is deemed to have a Beneficial Interest in
Securities owned by members of his or her Immediate Family. Common examples of
Beneficial Interest include joint accounts, spousal accounts, UTMA accounts,
partnerships, trusts, and controlling interests in corporations. Any
uncertainty as to whether an Access Person has a Beneficial Interest in a
Security should be brought to the attention of the Compliance Department. Such
questions will be resolved by reference to the principles set forth in the
definition of "beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated
under the Securities Exchange Act of 1934.
"Code" means this Code of Ethics.
"Compliance Department" means the designated persons in the SCM Legal
Department listed on Appendix 2, as such Appendix shall be amended from time to
time.
"The Distributor" means Strong Funds Distributors, Inc.
"Equivalent Security" means any Security issued by the same entity as the
issuer of a subject Security that is convertible into the equity Security of
the issuer. Examples include options, rights, stock appreciation rights,
warrants, and convertible bonds.
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<PAGE> 18
"Fund" means an investment company registered under the Investment Company
Act of 1940 (or a portfolio or series thereof, as the case may be) for which
SCM serves as an adviser or subadviser.
"Immediate Family" of an Access Person means any of the following persons
who reside in the same household as the Access Person:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the General Counsel determines could
lead to the possible conflicts of interest, diversions of corporate
opportunity, or appearances of impropriety which this Code is intended to
prevent.
"Independent Fund Director" means an independent director of an investment
company for which SCM serves as the advisor.
"Legal Department" means the SCM Legal Department.
"Portfolio Manager" means a person who has or shares principal day-to-day
responsibility for managing the portfolio of an Advisory Client.
"Preclearance Officer" means the person designated as the Preclearance
Officer in Appendix 2 hereof.
"Program Trade" means where a Portfolio Manager directs a trader to do
trades in, at a minimum, 25-30% of the Securities in an account. Program
Trades, generally, arise in three situations: (1) cash or other assets are
being added to an account and the Portfolio Manager instructs the trader that
new securities are to be bought in a manner that maintains the account's
existing allocations; (2) cash is being withdrawn from an account and the
Portfolio Manager instructs the trader that securities are to be sold in a
manner that maintains the account's current securities allocations; and (3) a
new account is established and the Portfolio Manager instructs the trader to
buy specific securities in the same allocation percentages as are held by other
client accounts.
"SEC" means the Securities and Exchange Commission.
"Security" includes stock, notes, bonds, debentures, and other evidences
of indebtedness (including loan participations and assignments), limited
partnership interests, investment contracts, and all derivative instruments of
the foregoing, such as options and warrants. Security
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<PAGE> 19
does not include futures, options on futures, or options on currencies, but the
purchase and sale of such instruments are nevertheless subject to the reporting
requirements of the Code.
"Securities Transaction" means a purchase or sale of Securities in which
an Access Person or a members of his or her Immediate Family has or acquires a
Beneficial Interest.
"SCM" means Strong Capital Management, Inc.
"Strong Funds" means the investment companies comprising the Strong Family
of Mutual Funds.
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Appendix 2
CONTACT PERSONS
PRECLEARANCE OFFICER
1. Thomas P. Lemke, General Counsel of SCM
DESIGNEES OF PRECLEARANCE OFFICER
1. Jeffrey C. Nellessen
2. Stephen J. Shenkenberg
COMPLIANCE DEPARTMENT
1. Thomas P. Lemke
2. Jeffrey C. Nellessen
3. Stephen J. Shenkenberg
4. Jeffery A. Arnson
5. Donna J. Lelinski
CODE OF ETHICS REVIEW COMMITTEE
1. John Dragisic, President of SCM
2. Chief Financial Officer of SCM
3. Thomas P. Lemke, General Counsel of SCM
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Appendix 3
PERSONAL HOLDINGS IN SECURITIES
In accordance with Section II.A. of the Code of Ethics, please provide a
list of all Securities (other than open-end investment companies) in which each
Access Person has a Beneficial Interest, including those in accounts of the
Immediate Family of the Access Person and all Securities in non-client accounts
for which the Access Person makes investment decisions.
(1) Name of Access Person: _________________________
(2) If different than (1), name of the person
in whose name the account is held: _________________________
(3) Relationship of (2) to (1): _________________________
(4) Broker at which Account is maintained: _________________________
(5) Account Number: _________________________
(6) Contact person at Broker and phone number _________________________
(7) For each account, attach the most recent account statement listing
Securities in that account. If the Access Person owns Beneficial
Interests in Securities that are not listed in an attached account
statement, list them below:
Name of Security Quantity Value Custodian
---------------- -------- ----- ---------
1. ____________________________________________________________________________
2. ____________________________________________________________________________
3. ____________________________________________________________________________
4. ____________________________________________________________________________
5. ____________________________________________________________________________
6. ____________________________________________________________________________
(ATTACH SEPARATE SHEET IF NECESSARY.)
I certify that this form and the attached statements (if any) constitute
all of the Securities in which I have a Beneficial Interest, including those
held in accounts of my Immediate Family.
________________________
Access Person Signature
Dated: _____________ ________________________
Print Name
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Appendix 4
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
AND LIMITED POWER OF ATTORNEY
I acknowledge that I have received the Code of Ethics dated October 18,
1996, and represent that:
1. In accordance with Section II.A. of the Code of Ethics, I
will fully disclose the Securities holdings in which I have, or a
member of my Immediate Family has, a Beneficial Interest.*
2. In accordance with Section II.B.1. of the Code of Ethics,
I will obtain prior authorization for all Securities Transactions
in which I have, or a member of my Immediate Family has, a
Beneficial Interest except for transactions exempt from
preclearance under Section II.B. 2. of the Code of Ethics.*
3. In accordance with Section II.G.1 of the Code of Ethics, I
will report all Securities Transactions in which I have, or a
member of my Immediate Family has, a Beneficial Interest, except
for transactions exempt from reporting under Section II.G.1. of
the Code of Ethics.
4. I will comply with the Code of Ethics in all other
respects.
5. I agree to disgorge and forfeit any profits on prohibited
transactions in accordance with the requirements of the Code.*
I hereby appoint Strong Capital Management, Inc. as my attorney-in-fact
for the purpose of placing orders for and on my behalf to buy, sell, tender,
exchange, covert, and otherwise effectuate transactions in any and all stocks,
bonds, options, and other securities. I agree that Strong Capital Management,
Inc. shall not be liable for the consequences of any errors made by the
executing brokers in connection with such transactions.*
__________________________
Access Person Signature
__________________________
Print Name
Dated: __________
* Representations (1), (2) and (5) and the Limited Power of Attorney do
not apply to Independent Fund Directors.
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Ctrl. No:_________________________ Appendix 5
STRONG CAPITAL MANAGEMENT, INC.
PRECLEARANCE REQUEST FOR ACCESS PERSONS
1. Name of Access Person (and trading entity, if different): __________________
2. Name and symbol of Security: _______________________________________________
3. Maximum quantity to be purchased or sold: __________________________________
4. Name and phone number of broker to effect transaction: _____________________
<TABLE>
<S> <C> <C> <C>
5. Check if applicable: Purchase ____ Market Order ____
Sale ____ Limit Order ____ (Limit Order Price: ___________)
Not Held Order ____
</TABLE>
6. In connection with the foregoing transaction, I hereby make the foregoing
representations and warranties:
(a) I do not possess any material nonpublic information regarding the
Security or the issuer of the Security.
(b) To my knowledge:
(1) The Securities or "equivalent" securities (i.e., securities
issued by the same issuer) [ ARE / ARE NOT ] (circle one) held by
any investment companies or other accounts managed by SCM;
(2) There are no outstanding purchase or sell orders for this
Security (or any equivalent security) by any investment companies or
other accounts managed by SCM; and
(3) None of the Securities (or equivalent securities) are actively
being considered for purchase or sale by any investment companies or
other accounts managed by SCM.
(c) The Securities are not being acquired in an initial public offering.
(d) The Securities are not being acquired in a private placement or, if
they are, I have reviewed Section II.D.3. of the Code and have attached
hereto a written explanation of such transaction.
(e) If I am a Portfolio Manager, none of the accounts I manage purchased
or sold these Securities (or equivalent securities) within the past
seven calendar days and I do not expect any such client accounts to
purchase or sell these Securities (or equivalent securities) within
seven calendar days of my purchase or sale.
(f) If I am purchasing these Securities, I have not directly or
indirectly (through any member of my Immediate Family, any account in
which I have a Beneficial Interest or otherwise) sold these Securities
(or equivalent securities) in the prior 60 days.
(g) If I am selling these Securities, I have not directly or indirectly
(through any member of my Immediate Family, any account in which I have
a beneficial Interest or otherwise) purchased these Securities (or
equivalent securities) in the prior 60 days.
(h) I have read the SCM Code of Ethics within the prior 12 months and
believe that the proposed trade fully complies with the requirements of
the Code.
______________________________ ______________________________
Access Person Print Name
CERTIFICATION OF ACCESS PERSON DESIGNEE
The undersigned hereby certifies that the above Access Person (a) directly
instructed me to complete this Form on his or her behalf, (b) to the best of my
knowledge, was out of the office at the time of such instruction and has not
returned, and (c) confirmed to me that the representations and warranties
contained in this form are accurate.
________________________________ ______________________________
Access Person Designee Print Name
AUTHORIZATION
Authorized By: _____________________ Date: _____________ Time: _____________
PLACEMENT
Trader:____________________ Date:___________ Time:_____________ Qty:_________
EXECUTION
Trader:____________________ Date:___________ Time:_____________
Qty:____________ Price:________________________
(Original to Compliance Department, Yellow copy to Trading
Department, Pink copy to Access Person)
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<PAGE> 24
Confidential Appendix 6
ANNUAL CODE OF ETHICS QUESTIONNAIRE (1)
For ACCESS PERSONS of
The Strong Family of Mutual Funds,
Strong Capital Management, Inc.,
and Strong Funds Distributors, Inc.
September 18, 1996
Associate: ____________________________
I. Introduction
Access Persons (2) are required to answer all of the questions below for the
year September 1, 1995, through August 31, 1996, and then sign and return the
questionnaire by FRIDAY, SEPTEMBER 27 to Jeff Nellessen in the Legal
Department. ANSWERS OF "NO" TO ANY OF THE QUESTIONS MUST BE EXPLAINED ON THE
"ATTACHMENT" ON PAGE 3. All information provided is kept confidential to the
maximum extent possible. If you have any questions, please contact Jeff
Nellessen at extension 3514.
II. Annual certification of compliance with the Code of Ethics
A. Have you, in accordance with Section II.B.1. of the Code of Ethics,
obtained preclearance for all Securities (3) Transactions in which you
have, or a member of your Immediate Family has, a Beneficial Interest,
except for transactions exempt from preclearance under Section II.B.2.
of the Code of Ethics? (If there have been no Securities Transactions,
circle "Yes".)
YES NO (CIRCLE ONE)
B. Have you, in accordance with Section II.G.1. of the Code of Ethics,
reported all Securities Transactions in which you have, or a member of
your Immediate Family has, a Beneficial Interest, except for
transactions exempt from reporting under Section II.G.1. of the Code of
Ethics? In particular, have you arranged for the Legal Department to
receive directly from your broker duplicate transaction confirmations
and duplicate periodic statements for each brokerage account in which
you have, or a member of your Immediate Family has, a Beneficial
Interest? (4) (If there are no brokerage accounts, circle "Yes".)
YES NO (CIRCLE ONE)
- -------------------------
1 All definitions used in this questionnaire have the same meaning as those in
the Code of Ethics.
2 Independent Fund Directors of the Strong Funds must complete a separate
questionnaire.
3 Security, as defined, does NOT include open-end investment companies,
including the Strong Funds.
4 Please contact Jeff Nellessen (extension 3514) if you are uncertain as to
what confirmations and statements you have arranged for the Legal Department to
receive.
20
<PAGE> 25
C. Have you complied with the Code of Ethics in all other respects,
including the gift policy (Section III.B.)?
YES NO (CIRCLE ONE)
LIST ON THE ATTACHMENT ALL REPORTABLE5 GIFTS6 GIVEN OR RECEIVED FOR THE
YEAR SEPTEMBER 1, 1995, THROUGH AUGUST 31, 1996, NOTING THE MONTH,
"COUNTERPARTY," GIFT DESCRIPTION, AND ESTIMATED VALUE. IF NONE, SO STATE.
III. Annual certification of compliance with Insider Trading Policy
Have you complied in all respects with the Insider Trading Policy (dated
October 20, 1995)?
YES NO (CIRCLE ONE)
IV. Disclosure of directorships statement
A. I am not, nor is any member of my Immediate Family, a director and/or
an officer of any for-profit, privately held companies.7 (If you are
NOT, answer YES.)
YES NO (CIRCLE ONE)
If "NO", please list on the Attachment each company for which you are, or
a member of your Immediate Family is, a director.
B. If the response to A. is "NO", is there a reasonable expectation that
any of the companies for which you are, or a member of your Immediate
Family is, a director and/or an officer, will go public or be acquired
within the next 12 months?
YES NO (CIRCLE ONE)
(If the answer is "YES", please be prepared to discuss this matter with a
member of the Legal Department in the near future.)
ANSWERS OF "NO" TO ANY OF THE ABOVE QUESTIONS MUST BE EXPLAINED ON THE
"ATTACHMENT" ON PAGE 3.
I hereby represent that, to the best of my knowledge, the foregoing responses
are true and complete. I understand that any untrue or incomplete response may
be subject to disciplinary action by the firm.
___________________________________
Access Person Signature
Dated: _________________________
Print Name ________________________
____________________________
5 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
6 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
7 Per Section III.F. of the Code of Ethics, no Access Person, other than an
Independent Fund Director, may serve on the board of directors of a publicly
held company.
21
<PAGE> 26
ATTACHMENT TO
ANNUAL CODE OF ETHICS QUESTIONNAIRE
(to explain all "NO" answers and to list reportable(8) gifts(9) )
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
GIFTS(8),(9) for the year September 1, 1995, through August 31, 1996.
(If NONE, so state):
Month Gift Giver / Receiver Gift Description Estimated Value
----- --------------------- ---------------- ---------------
1. _____________________________________________________________________________
2. _____________________________________________________________________________
3. _____________________________________________________________________________
4. _____________________________________________________________________________
5. _____________________________________________________________________________
6. _____________________________________________________________________________
7. _____________________________________________________________________________
8. _____________________________________________________________________________
9. _____________________________________________________________________________
10._____________________________________________________________________________
(CONTINUE ON AN ADDITIONAL SHEET IF NECESSARY.)
__________________
8 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
9 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
22
<PAGE> 27
Appendix 7
LIST OF BROAD-BASED INDICES
Listed below are the broad-based indices as designated by the Compliance
Department. See Section II.B.3. for additional information.
- -------------------------------------------------
DESCRIPTION OF OPTION SYMBOL EXCHANGE
- -------------------------------------------------
Computer Technology XCI AMEX
- -------------------------------------------------
Eurotop 100 ERT AMEX
- -------------------------------------------------
Hong Kong Option Index HKO AMEX
- -------------------------------------------------
Inter@ctive Wk. Internet Index INX CBOE
- -------------------------------------------------
Japan Index JPN AMEX
- -------------------------------------------------
Major Market Index * XMI AMEX
- -------------------------------------------------
Morgan Stanley High Tech Index MSH AMEX
- -------------------------------------------------
NASDAQ-100 NDX CBOE
- -------------------------------------------------
Pacific High Tech Index XPI PSE
- -------------------------------------------------
Russell 2000 * RUT CBOE
- -------------------------------------------------
Semiconductor Sector SOX PHLX
- -------------------------------------------------
S & P 100 * OEX CBOE
- -------------------------------------------------
S & P 500 * SPX CBOE
- -------------------------------------------------
Technology Index TXX CBOE
- -------------------------------------------------
Value Line Index * VLE PHLX
- -------------------------------------------------
Wilshire Small Cap Index WSX PSE
- -------------------------------------------------
- -------------------------------------------------
* Includes LEAPS.
- -------------------------------------------------
23
<PAGE> 28
Appendix 8
FORM LETTER TO BROKER OR BANK
[DATE]
<Broker Name>
<Broker Address>
<Broker City, State and Zip>
Subject: Account Number_____________________
Account Registration_______________
Dear ____________:
Strong Capital Management, Inc. ("SCM"), my employer, is a registered
investment adviser as well as the indirect parent of an NASD member firm. The
Code of Ethics of SCM requires that I have certain personal securities
transactions placed on my behalf by the trading desk of SCM. Accordingly,
please send me the necessary forms or instructions that you will require in
order to enable the securities traders of SCM to place orders on my behalf.
In addition, you are requested to send duplicate confirmations of individual
transactions as well as duplicate periodic statements for the referenced
account to SCM. Please address the confirmations and statements directly to:
Confidential
Chief Compliance Officer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Your cooperation is most appreciated. If you have any questions regarding these
requests, please contact me or Mr. Jeffrey C. Nellessen of Strong at (414)
359-3400.
Sincerely,
<Name of Access Person>
Copy: Mr. Jeffrey C. Nellessen
24
<PAGE> 29
Appendix 9
GIFT POLICY
MEMORANDUM
TO: All Associates
FROM: Thomas P. Lemke
DATE: December 1, 1994
SUBJECT: Gift Policy Reminder
With the Holiday season upon us, I wanted to remind you of our firm's gift
policy, which covers both GIVING GIFTS TO and ACCEPTING GIFTS FROM clients,
brokers, persons with whom we do business, or others (collectively, "vendors").
It is based on the applicable requirements of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. ("NASD") and is included
as part of the firm's Codes of Ethics.
Under our policy, associates may not give gifts to or accept gifts from
vendors with a value in excess of $100 per person per year and must report to
the firm annually if they accept certain types of gifts. The NASD defines a
"gift" to include any kind of gratuity. Since giving or receiving any gifts in
a business setting may give rise to an appearance of impropriety or may raise a
potential conflict of interest, we are relying on your professional attitude
and good judgment to ensure that our policy is observed to the fullest extent
possible. The discussion below is designed to assist you in this regard.
If you have any questions about the appropriateness of any gift, contact
Legal.
1. GIFTS GIVEN BY ASSOCIATES
Under applicable NASD rules, an associate may not give any gift with a
value in excess of $100 per year to any person associated with a securities or
financial organization, including exchanges, broker-dealers, commodity firms,
the news media, or clients of the firm. Please note, however, that the firm
may not take a tax deduction for any gift with a value exceeding $25.
This memorandum is not intended to authorize any associate to give a gift
to a vendor -- appropriate supervisory approval must be obtained before giving
any gifts.
2. GIFTS ACCEPTED BY ASSOCIATES
On occasion, because of their position within the firm, associates may
be offered, or may receive without notice, gifts from vendors. Associates may
not accept any gift or form of entertainment from vendors (e.g., tickets to the
theater or a sporting event where the vendor does not
25
<PAGE> 30
accompany the associate) other than gifts of NOMINAL VALUE, which the
NASD defines as under $100 in total from any vendor in any year (managers may,
if they deem it appropriate for their department, adopt a lower dollar
ceiling). Any gift accepted by an associate must be reported to the firm,
subject to certain exceptions (see heading 4 below). In addition, note that
our gift policy does not apply to normal and customary business entertainment
or to personal gifts (see heading 3 below).
Associates may not accept a gift of cash or a cash equivalent (e.g., gift
certificates) in ANY amount, and under no circumstances may an associate
solicit a gift from a vendor.
Associates may wish to have gifts from vendors donated to charity,
particularly where it might be awkward or impolite for an associate to decline
a gift not permitted by our policy. In such case, the gift should be forwarded
to Mary Beitzel in Legal, who will arrange for it to be donated to charity.
Similarly, associates may wish to suggest to vendors that, in lieu of an annual
gift, the vendors make a donation to charity. In either situation discussed
in this paragraph, an associate would not need to report the gift to the firm
(see heading 4 below).
3. EXCLUSION FOR BUSINESS ENTERTAINMENT/PERSONAL GIFTS
Our gift policy does not apply to normal and customary business meals and
entertainment with vendors. For example, if an associate has a business meal
and attends a sporting event or show with a vendor, that activity would not be
subject to our gift policy, provided the vendor is present. If, on the other
hand, a vendor gives an associate tickets to a sporting event and the associate
attends the event without the vendor also being present, the tickets would be
subject to the dollar limitation and reporting requirements of our gift policy.
Under no circumstances may associates accept business entertainment that is
extraordinary or extravagant in nature.
In addition, our gift policy does not apply to usual and customary gifts
given to or received from vendors based on a personal relationship (e.g., gifts
between an associate and a vendor where the vendor is a family member or
personal friend).
4. REPORTING
The NASD requires gifts to be reported to the firm. Except as noted
below, associates must report annually all gifts given to or accepted from
vendors (Legal will distribute the appropriate reporting form to associates).
Associates are NOT required to report the following: (i) usual and
customary promotional items given to or received from vendors (e.g., hats,
pens, T-shirts, and similar items marked with a firm's logo), (ii) items
donated to charity through Mary Beitzel in Legal, or (iii) food items consumed
on the firm's premises (e.g., candy, popcorn, etc.).
26
<PAGE> 1
EXHIBIT 99.B21.2
CODE OF ETHICS
FOR NON-ACCESS PERSONS OF
STRONG CAPITAL MANAGEMENT, INC.,
STRONG FUNDS DISTRIBUTORS, INC., AND
HERITAGE RESERVE DEVELOPMENT
CORPORATION, INC.
[STRONG FUNDS LOGO]
STRONG CAPITAL MANAGEMENT, INC.
October 18, 1996
<PAGE> 2
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
Table of Contents
I. INTRODUCTION .............................................................1
A. Fiduciary Duty ...........................................................1
1. Place the interests of clients first .....................................1
2. Avoid taking inappropriate advantage of their position ...................1
3. Conduct all personal Securities Transactions in full compliance with this
Code including the reporting requirements ....................................1
B. Appendices to the Code ...................................................1
1. Definitions ..............................................................1
2. Acknowledgment of Receipt of Code of Ethics ..............................2
3. Annual Code of Ethics Questionnaire ......................................2
4. Form Letter to Broker or Bank ............................................2
5. Gift Policy ..............................................................2
II. TRADE REPORTING REQUIREMENTS .............................................2
A. Reporting Requirement ....................................................2
B. Disclaimers ..............................................................2
C. Availability of Reports ..................................................2
D. Record Retention .........................................................2
III. FIDUCIARY DUTIES .......................................................3
A. Confidentiality ..........................................................3
B. Gifts To or From Employees ...............................................3
1. Accepting Gifts ..........................................................3
2. Solicatation of Gifts ....................................................3
3. Giving Gifts .............................................................3
C. Payments to Advisory Clients or Shareholders .............................3
D. Corporate Opportunities ..................................................3
E. Service as a Director ....................................................3
F. Involvement in Criminal Matters or Investment-Related Civil Proceedings ..4
IV. COMPLIANCE WITH THIS CODE OF ETHICS .....................................4
A. Code of Ethics Review Committee ..........................................4
1. Membership, Voting, and Quorum ...........................................4
2. Investigating Violations of the Code .....................................4
B. Remedies .................................................................4
C. Compliance Certification .................................................4
D. Inquiries Regarding the Code .............................................4
i
<PAGE> 3
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
Table of Appendices
Appendix 1 (Definitions).................................................... 5
Appendix 2 (Acknowledgment of Receipt of Code of Ethics) ................... 7
Appendix 3 (Annual Code of Ethics Questionnaire) ........................... 8
Appendix 4 (Form Letter to Broker or Bank) .................................11
Appendix 5 (Gift Policy)....................................................12
ii
<PAGE> 4
CODE OF ETHICS
For Non-Access Persons of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc., and
Heritage Reserve Development Corporation, Inc.
Dated October 18, 1996
I. INTRODUCTION
A. Fiduciary Duty. This Code of Ethics is based upon the principle that
employees of Strong Capital Management, Inc. ("SCM"), Strong Funds
Distributors, Inc. ("the Distributor"), Heritage Reserve Development
Corporation, Inc. ("HRDC"), and such other affiliated entities of the foregoing
that may from time to time adopt this Code (each of which is individually
referred to herein as a "Company") have a fiduciary duty to place the interests
of clients ahead of their own. Employees must avoid activities, interests, and
relationships that might interfere with making decisions in the best interests
of each Company and its clients.
As fiduciaries, employees must at all times:
1. Place the interests of clients first. Employees must
scrupulously avoid serving their own personal interests ahead of the
interests of the clients of each Company. An employee may not induce or
cause a client to take action, or not to take action, for personal
benefit, rather than for the benefit of the client.
2. Avoid taking inappropriate advantage of their position. The
receipt of investment opportunities, perquisites, or gifts from persons
seeking business with the Strong Funds, any of the Companies, or their
clients could call into question the exercise of an employee's
independent judgment. Employees may not, for example, use their
knowledge of portfolio transactions to profit by the market effect of
such transactions.
3. Conduct all personal Securities Transactions in full compliance
with this Code including the reporting requirements.
Doubtful situations should be resolved in favor of clients and each
Company. Technical compliance with the Code's procedures will not
automatically insulate from scrutiny any personal Securities Transactions that
indicate an abuse of fiduciary duties.
B. Appendices to the Code. The appendices to this Code, including the
definitions set forth in Appendix 1, are attached to and are a part of the
Code. The appendices include the following:
1. Definitions (capitalized terms in the Code are defined in
Appendix 1),
1
<PAGE> 5
2. Acknowledgment of Receipt of Code of Ethics (Appendix 2),
3. Annual Code of Ethics Questionnaire (Appendix 3),
4. Form Letter to Broker or Bank (Appendix 4), and
5. Gift Policy (Appendix 5)
II. TRADE REPORTING REQUIREMENTS
A. Reporting Requirement. EVERY EMPLOYEE AND MEMBERS OF HIS OR HER
IMMEDIATE FAMILY MUST ARRANGE FOR THE COMPLIANCE DEPARTMENT TO RECEIVE DIRECTLY
FROM ANY BROKER, DEALER, OR BANK THAT EFFECTS ANY SECURITIES TRANSACTION, A
DUPLICATE COPY OF EACH CONFIRMATION FOR EACH SUCH TRANSACTION AND PERIODIC
STATEMENTS FOR EACH BROKERAGE ACCOUNT IN WHICH SUCH EMPLOYEE HAS A BENEFICIAL
INTEREST. Attached hereto as Appendix 4 is a form letter that may be used to
request such documents from such entities. An employee must arrange to have
duplicate confirmations and periodic statements sent within 30 days. If unable
to make such arrangements, the employee must immediately notify the Compliance
Department. THE FOREGOING DOES NOT APPLY TO TRANSACTIONS AND HOLDINGS IN (1)
MUTUAL FUNDS (INCLUDING BUT NOT LIMITED TO THE STRONG FUNDS), (2) BANK
CERTIFICATES OF DEPOSIT ("CDS"), (3) EQUITY SECURITIES HELD IN DIVIDEND
REINVESTMENT PLANS ("DRIPS"), OR (4) SECURITIES OF THE EMPLOYER OF A MEMBER OF
THE EMPLOYEE'S IMMEDIATE FAMILY IF SUCH SECURITIES ARE BENEFICIALLY OWNED
THROUGH PARTICIPATION BY THE IMMEDIATE FAMILY MEMBER IN A PROFIT SHARING PLAN,
401(K) PLAN, ESOP, OR OTHER SIMILAR PLAN.
B. Disclaimers. Any employee who files a report of a Securities
Transaction for the benefit of a person other than the employee may include in
such report a statement that the report should not be construed as an admission
by the employee making the report that he or she has any direct or indirect
beneficial ownership in the Security to which the report relates.
C. Availability of Reports. All information supplied pursuant to this
Code will be available for inspection by the Boards of Directors of SCM and
SFDI, the Board of Directors of each Strong Fund, the Code of Ethics Review
Committee, the Compliance Department, the employees department manager (or
designee), any party to which any investigation is referred by any of the
foregoing, the SEC, any self-regulatory organization of which the Strong Funds,
SCM, or the Distributor is a member, any state securities commission, as well
as any attorney or agent of the foregoing, the Strong Funds, SCM, or the
Distributor.
D. Record Retention. The Company shall keep and maintain for at least six
years records of the procedures it follows in connection with the reporting
requirements of this Code.
2
<PAGE> 6
III. FIDUCIARY DUTIES
A. Confidentiality. Employees are prohibited from revealing information
relating to the investment intentions, activities, or portfolios of Advisory
Clients except to persons whose responsibilities require knowledge of the
information.
B. Gifts To or From Employees.
1. Accepting Gifts. On occasion, because of their relationship with
the Company and its affiliates, employees thereof may be offered, or may
receive without notice, gifts from clients, brokers, vendors, or other
persons not affiliated with the Company. Acceptance of extraordinary or
extravagant gifts is not permissible. Any such gifts must be declined or
returned in order to protect the reputation and integrity of the Company.
Gifts of a nominal value (i.e., gifts whose reasonable value is no more
than $100 a year), and customary business meals, entertainment (e.g.,
sporting events), and promotional items (e.g., pens, mugs, T-shirts) may
be accepted. Please see the Gift Policy Reminder memorandum dated
December 1, 1994 (Appendix 5) for additional information.
If an employee receives any gift that might be prohibited under this
Code, the employee must inform the Compliance Department immediately.
2. Solicitation of Gifts. Employees may not solicit gifts or
gratuities from clients, brokers, vendors, or other persons with which
the Company has a relationship.
3. Giving Gifts. Employees may not give any gift with a value in
excess of $100 per year to persons associated with securities or
financial organizations, including exchanges, other member organizations,
commodity firms, news media, or clients of the Company. Please see the
Gift Policy Reminder memorandum dated December 1, 1994 (Appendix 5) for
additional information.
C. Payments to Advisory Clients or Shareholders. Employees may not make
any payments to Advisory Clients or Shareholders in order to resolve any type
of Advisory Client or Shareholder complaint. All such matters must be handled
by the Legal Department.
D. Corporate Opportunities. Employees may not take personal advantage of
any opportunity properly belonging to any client or Company.
E. Service as a Director. No employee may serve on the board of directors
of a publicly-held company not affiliated with a Company or the Strong Funds
absent prior written authorization by the Code of Ethics Review Committee.
This authorization will rarely, if ever, be granted and, if granted, will
normally require that the affected employee be isolated, through "Chinese Wall"
or other procedures, from those making investment decisions related to the
issuer on whose board the employee sits.
3
<PAGE> 7
F. Involvement in Criminal Matters or Investment-Related Civil
Proceedings. Each Non-Access Person must notify the Compliance Department, as
soon as reasonably practical, if arrested, arraigned, indicted, or pleads no
contest to, any criminal offense (other than minor traffic violations), or if
named as a defendant in any Investment-Related civil proceedings, or any
administrative or disciplinary action.
IV. COMPLIANCE WITH THIS CODE OF ETHICS
A. Code of Ethics Review Committee.
1. Membership, Voting, and Quorum. The Code of Ethics Review
Committee shall initially consist of the General Counsel, President, and
Chief Financial Officer of SCM. The Committee shall vote by majority
vote with two members serving as a quorum. Vacancies may be filled and,
in the case of extended absences or periods of unavailability, alternates
may be selected, by the majority vote of the remaining members of the
Committee; provided, however, in the event that the General Counsel is
unavailable, at least one member of the Committee shall also be a member
of the Compliance Department.
2. Investigating Violations of the Code. The General Counsel or his
or her designee is responsible for investigating any suspected violation
of the Code and shall report the results of each investigation to the
Code of Ethics Review Committee. The Code of Ethics Review Committee is
responsible for reviewing the results of any investigation of any
reported or suspected violation of the Code.
B. Remedies. If the Code of Ethics Review Committee determines that an
employee has committed a violation of the Code, the Committee may impose
sanctions and take other actions as it deems appropriate, including, but not
limited to, suspension of employment (with or without compensation) and
termination of the employment of the violator for cause. The Code of Ethics
Review Committee may also require the employee to reverse the trade(s) in
question and forfeit any profit or absorb any loss derived therefrom. Any
profit shall be forwarded to a charitable organization.
C. Compliance Certification. At least annually, all employees will be
required to certify on the Annual Code of Ethics Questionnaire set forth in
Appendix 2 or on a document substantially in the form of Appendix 2 that they
have complied with the Code in all respects.
D. Inquiries Regarding the Code. The Compliance Department will answer
any questions about this Code or any other compliance-related matters.
October 18, 1996
4
<PAGE> 8
Appendix 1
DEFINITIONS
"Advisory Client" means any client (including both investment companies
and managed accounts) for which SCM serves as an investment adviser or
subadviser, renders investment advice, or makes investment decisions.
"Beneficial Interest" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise,
to profit, or share in any profit derived from, a transaction in the subject
Securities. An employee is deemed to have a Beneficial Interest in Securities
owned by members of his or her Immediate Family. Common examples of Beneficial
Interest include joint accounts, spousal accounts, UTMA accounts, partnerships,
trusts, and controlling interests in corporations. Any uncertainty as to
whether an employee has a Beneficial Interest in a Security should be brought
to the attention of the Compliance Department. Such questions will be resolved
in accordance with, and this definition shall be subject to, the definition of
"beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated under the
Securities Exchange Act of 1934.
"Company" means "SCM", "the Distributor", "HRDC", and such other
affiliated entities of the foregoing that may from time to time adopt this
Code.
"Code" means this Code of Ethics.
"Compliance Department" means the designated persons in the Strong Legal
Department.
"Distributor" means Strong Funds Distributors, Inc.
"HRDC" means Heritage Reserve Development Corporation, Inc.
"Immediate Family" of an employee means any of the following persons who
reside in the same household as the employee:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the General Counsel determines could
lead to the possible conflicts of interest, diversions of corporate
opportunity, or appearances of impropriety which this Code is intended to
prevent.
"Legal Department" means the SCM Legal Department.
5
<PAGE> 9
"SEC" means the Securities and Exchange Commission.
"Security" includes stock, notes, bonds, debentures, and other evidences
of indebtedness (including loan participations and assignments), limited
partnership interests, investment contracts, and all derivative instruments of
the foregoing, such as options and warrants. Security does not include
futures, options on futures, or options on currencies, but the purchase and
sale of such instruments are nevertheless subject to the reporting requirements
of the Code.
"Securities Transaction" means a purchase or sale of Securities in which
an employee or a members of his or her Immediate Family has or acquires a
Beneficial Interest.
"Shareholder" means a shareholder in any of the Strong Funds.
"SCM" means Strong Capital Management, Inc.
"Strong Funds" means the investment companies comprising the Strong Family
of Mutual Funds.
6
<PAGE> 10
Appendix 2
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
I acknowledge that I have received and read the Code of Ethics dated
October 18, 1996, and represent that:
1. I will report all Securities Transactions in which I have, or a
member of my Immediate Family has, a Beneficial Interest, except for
transactions and holdings in (1) mutual funds (including but not limited
to the Strong Funds), (2) bank certificates of deposit ("CDs"), (3)
equity securities held in dividend reinvestment plans ("DRIPs"), or (4)
securities of the employer of a member of the employee's Immediate Family
if such securities are beneficially owned through participation by the
Immediate Family member in a Profit Sharing plan, 401(k) plan, ESOP, or
other similar plan.
2. I will comply with the Code of Ethics in all other respects.
_________________________________
Employee Signature
_________________________________
Print Name
Dated: ________________________________
7
<PAGE> 11
Confidential Appendix 3
ANNUAL CODE OF ETHICS QUESTIONNAIRE (1)
For NON-ACCESS PERSONS (2) of
Strong Capital Management, Inc.,
Strong Funds Distributors, Inc.,
and Heritage Reserve Development Corporation.
September 18, 1996
Associate: ____________________________
I. Introduction
Non-Access Persons are required to answer all of the questions below for the
year September 1, 1995, through August 31, 1996, sign the questionnaire and
return it to the Legal Department (an intra-office mail slip is copied on the
back of the last page) by FRIDAY, SEPTEMBER 27. ANSWERS OF "NO" TO ANY OF
THE QUESTIONS MUST BE EXPLAINED ON THE "ATTACHMENT" ON PAGE 3. If you have
any questions, please contact Jeffery Arnson (x3590) or Donna Lelinski
(x3362) in the Legal Department.
II. Annual certification of compliance with the Code of Ethics
A. Have you, in accordance with Section II.A. of the Code of Ethics,
reported all Securities Transactions in which you have, or a member of
your Immediate Family has, a Beneficial Interest, except for
transactions in mutual funds (including the Strong Funds), dividend
reinvestment plans ("DRIPs"), and certificates of deposit (CDs"). (If
there are no brokerage accounts, circle "Yes".)
YES NO (CIRCLE ONE)
B. Have you complied with the Code of Ethics in all other respects,
including the gift policy (Section III.B.)?
YES NO (CIRCLE ONE)
LIST ON THE ATTACHMENT ALL REPORTABLE (3) GIFTS (4) GIVEN OR RECEIVED FOR
THE YEAR SEPTEMBER 1, 1995, THROUGH AUGUST 31, 1996, NOTING THE MONTH,
"COUNTERPARTY," GIFT DESCRIPTION, AND ESTIMATED VALUE. IF NONE, SO STATE.
________________________
1 All definitions used in this questionnaire have the same meaning as those in
the Code of Ethics.
2 Access Persons must complete a separate questionnaire.
3 Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
4 Entertainment -- i.e., a meal or activity with the vendor present -- does not
have to be reported.
8
<PAGE> 12
III. Annual certification of compliance with Insider Trading Policy
Have you complied in all respects with the Insider Trading Policy (dated
October 20, 1995)?
YES NO (CIRCLE ONE)
IV. Disclosure of directorships statement
A. I am not, nor is any member of my Immediate Family, a director and/or
an officer of any for-profit, privately held companies.(5) (If you are
NOT, answer YES.)
YES NO (CIRCLE ONE)
If "NO", please list on the Attachment each company for which you are,
or a member of your Immediate Family is, a director.
B. If the response to A. is "NO", is there a reasonable expectation that
any of the companies for which you are, or a member of your Immediate
Family is, a director and/or an officer, will go public or be acquired
within the next 12 months?
YES NO (CIRCLE ONE)
(If the answer is "YES", please be prepared to discuss this matter
with a member of the Legal Department in the near future.)
**********************
ANSWERS OF "NO" TO ANY OF THE ABOVE QUESTIONS MUST BE
EXPLAINED ON THE "ATTACHMENT" ON PAGE 3.
**********************
I hereby represent that, to the best of my knowledge, the foregoing responses
are true and complete. I understand that any untrue or incomplete response may
be subject to disciplinary action by the firm.
_____________________________
Non-Access Person Signature
Dated: ________________ _____________________________
Print Name
_________________________
(5) Per Section III.E. of the Code of Ethics, no associate may serve on the
board of directors of a publicly held company.
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<PAGE> 13
ATTACHMENT TO
ANNUAL CODE OF ETHICS QUESTIONNAIRE
(to explain all "NO" answers and to list reportable(6) gifts(7) )
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
______________GIFTS(6),(7) for the year September 1, 1995, through August 31,
1996. (If NONE, so state):
Month Gift Giver / Receiver Gift Description Estimated Value
----- --------------------- ---------------- ---------------
1. _____________________________________________________________________________
2. _____________________________________________________________________________
3. _____________________________________________________________________________
4. _____________________________________________________________________________
5. _____________________________________________________________________________
6. _____________________________________________________________________________
7. _____________________________________________________________________________
8. _____________________________________________________________________________
9. _____________________________________________________________________________
10._____________________________________________________________________________
(CONTINUE ON AN ADDITIONAL SHEET IF NECESSARY.)
___________________________
(6) Associates are NOT required to report the following: (i) usual and customary
promotional items given to or received from vendors, (ii) items donated to
charity (through Mary Beitzel in Legal), or (iii) food items consumed on the
premises.
(7) Entertainment -- i.e., a meal or activity with the vendor present -- does
not have to be reported.
10
<PAGE> 14
Appendix 4
FORM LETTER TO BROKER OR BANK
[DATE]
<Broker Name>
<Broker Address>
<Broker City, State and Zip>
Subject: Account Number____________________
Account Registration______________
Dear ____________:
Please send duplicate confirmations of individual transactions as well as
duplicate periodic statements for the referenced account to:
Confidential
------------
Chief Compliance Officer
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Your cooperation is most appreciated. If you have any questions regarding this
request, please contact me or the Compliance Department of Strong Capital
Management at (414) 359-3400.
Sincerely,
<Name of Employee>
copy: Chief Compliance Officer
Strong Capital Management, Inc.
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<PAGE> 15
Appendix 5
GIFT POLICY
MEMORANDUM
----------
TO: All Associates
FROM: Thomas P. Lemke
DATE: December 1, 1994
SUBJECT: Gift Policy Reminder
With the Holiday season upon us, I wanted to remind you of our firm's gift
policy, which covers both GIVING GIFTS TO and ACCEPTING GIFTS FROM clients,
brokers, persons with whom we do business, or others (collectively, "vendors").
It is based on the applicable requirements of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. ("NASD") and is included
as part of the firm's Codes of Ethics.
Under our policy, associates may not give gifts to or accept gifts from
vendors with a value in excess of $100 per person per year and must report to
the firm annually if they accept certain types of gifts. The NASD defines a
"gift" to include any kind of gratuity. Since giving or receiving any gifts in
a business setting may give rise to an appearance of impropriety or may raise a
potential conflict of interest, we are relying on your professional attitude
and good judgment to ensure that our policy is observed to the fullest extent
possible. The discussion below is designed to assist you in this regard.
If you have any questions about the appropriateness of any gift, contact
Legal.
1. GIFTS GIVEN BY ASSOCIATES
Under applicable NASD rules, an associate may not give any gift with a
value in excess of $100 per year to any person associated with a securities or
financial organization, including exchanges, broker-dealers, commodity firms,
the news media, or clients of the firm. Please note, however, that the firm
may not take a tax deduction for any gift with a value exceeding $25.
This memorandum is not intended to authorize any associate to give a gift
to a vendor -- appropriate supervisory approval must be obtained before giving
any gifts.
2. GIFTS ACCEPTED BY ASSOCIATES
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<PAGE> 16
On occasion, because of their position within the firm, associates may
be offered, or may receive without notice, gifts from vendors. Associates may
not accept any gift or form of entertainment from vendors (e.g., tickets to the
theater or a sporting event where the vendor does not accompany the associate)
other than gifts of NOMINAL VALUE, which the NASD defines as under $100 in
total from any vendor in any year (managers may, if they deem it appropriate
for their department, adopt a lower dollar ceiling). Any gift accepted by an
associate must be reported to the firm, subject to certain exceptions (see
heading 4 below). In addition, note that our gift policy does not apply to
normal and customary business entertainment or to personal gifts (see heading 3
below).
Associates may not accept a gift of cash or a cash equivalent (e.g., gift
certificates) in ANY amount, and under no circumstances may an associate
solicit a gift from a vendor.
Associates may wish to have gifts from vendors donated to charity,
particularly where it might be awkward or impolite for an associate to decline
a gift not permitted by our policy. In such case, the gift should be forwarded
to Mary Beitzel in Legal, who will arrange for it to be donated to charity.
Similarly, associates may wish to suggest to vendors that, in lieu of an annual
gift, the vendors make a donation to charity. In either situation discussed
in this paragraph, an associate would not need to report the gift to the firm
(see heading 4 below).
3. EXCLUSION FOR BUSINESS ENTERTAINMENT/PERSONAL GIFTS
Our gift policy does not apply to normal and customary business meals and
entertainment with vendors. For example, if an associate has a business meal
and attends a sporting event or show with a vendor, that activity would not be
subject to our gift policy, provided the vendor is present. If, on the other
hand, a vendor gives an associate tickets to a sporting event and the associate
attends the event without the vendor also being present, the tickets would be
subject to the dollar limitation and reporting requirements of our gift policy.
Under no circumstances may associates accept business entertainment that is
extraordinary or extravagant in nature.
In addition, our gift policy does not apply to usual and customary gifts
given to or received from vendors based on a personal relationship (e.g., gifts
between an associate and a vendor where the vendor is a family member or
personal friend).
4. REPORTING
The NASD requires gifts to be reported to the firm. Except as noted
below, associates must report annually all gifts given to or accepted from
vendors (Legal will distribute the appropriate reporting form to associates).
Associates are NOT required to report the following: (i) usual and
customary promotional items given to or received from vendors (e.g., hats,
pens, T-shirts, and similar items marked with a firm's logo), (ii) items
donated to charity through Mary Beitzel in Legal, or (iii) food items consumed
on the firm's premises (e.g., candy, popcorn, etc.).
13
