<PAGE> 1
As filed with the Securities and Exchange Commission on or about
February 24, 1995
Securities Act Registration No. 33-7604
Investment Company Act Registration No. 811-4769
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ______ [ ]
Post-Effective Amendment No. 9 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 10 [X]
(Check appropriate box or boxes)
STRONG MUNICIPAL BOND FUND, INC.
(Exact Name of Registrant as Specified in Charter)
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
THOMAS P. LEMKE
STRONG CAPITAL MANAGEMENT, INC.
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Name and Address of Agent for Service)
Copies to
SCOTT A. MOEHRKE
GODFREY & KAHN, S.C.
780 NORTH WATER STREET
MILWAUKEE, WISCONSIN 53202
Registrant has registered an indefinite amount of securities pursuant
to Rule 24f-2 under the Securities Act of 1933; the Registrant's Rule 24f-2
Notice for the fiscal year ended December 31, 1994 was filed on or about
January 27, 1995.
It is proposed that this filing will become effective (check
appropriate box).
[ ] immediately upon filing pursuant to paragraph (b) of
Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of
Rule 485
[X] on May 1, 1995 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 BOND FUND, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
--------------------- -----------------------------------
<S> <C> <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 Municipal Income 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; Common Investment Policies
and Techniques; Investment Policies and Techniques
14. Management of the Fund Directors and Officers of the Funds
15. Control Persons and Principal Holders of Securities Principal Shareholder; Directors and Officers of
the Funds; Investment Advisor and Distributor
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
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
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
--------------------- -----------------------------------
<S> <C> <C>
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Included in Prospectus under the heading About the
Funds - Organization and in the Statement of
Additional Information under the heading
Shareholder Meetings
19. Purchase, Redemption and Pricing of Securities Being Included in Prospectus under the headings:
Offered Shareholder Manual - How to Buy Shares, -
Determining Your Share Price, - How to Sell Shares,
- Shareholder Services; and in the Statement of
Additional information under the headings:
Shareholder Services; 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 Registrant's Annual Report.
** Complete answer to Item is contained in Registrant's Prospectus.
<PAGE> 4
<PAGE> 1
Dated May 1, 1995
STRONG MUNICIPAL INCOME FUNDS
STRONG MUNICIPAL MONEY MARKET FUND, INC. STRONG FUNDS
STRONG SHORT-TERM MUNICIPAL BOND FUND, INC. P.O. Box 2936
STRONG INSURED MUNICIPAL BOND FUND, INC. Milwaukee, Wisconsin 53201
STRONG MUNICIPAL BOND FUND, INC. Telephone: (414) 359-1400
STRONG HIGH-YIELD MUNICIPAL BOND FUND, INC. Toll-Free: (800) 368-3863
Device for the Hearing-Impaired:
(800) 999-2780
The Strong Family of Funds ("Strong Funds") is a family of twenty-four
separately incorporated, diversified and non-diversified, open-end management
investment companies, commonly called mutual funds. All of the Strong Funds are
no-load funds. There are no sales charges, redemption fees, or 12b-1 fees. The
Strong Funds include growth funds, growth and income funds, income funds,
municipal income funds, and money market funds, some of which are described in
other prospectuses. The Strong Municipal Income Funds are described in this
Prospectus.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
This Prospectus contains information you should consider before investing.
Please read it carefully and keep it for future reference. A Statement of
Additional Information for the Funds dated May 1, 1995, which contains further
information and is incorporated by reference into this Prospectus, 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.
AN INVESTMENT IN THE STRONG MUNICIPAL MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE IT WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. THE STRONG
INSURED MUNICIPAL BOND FUND'S SHARES ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR PRIVATE INSURER. THE FUND WILL, HOWEVER, INVEST AT LEAST
65% OF ITS ASSETS IN MUNICIPAL BONDS THAT ARE INSURED AS TO THE TIMELY PAYMENT
OF PRINCIPAL AND INTEREST. THE ADEQUACY OF THIS INSURANCE WILL BE DEPENDENT
UPON THE FINANCIAL CONDITION OF THE INSURANCE COMPANY ISSUING SUCH INSURANCE.
THE STRONG HIGH-YIELD MUNICIPAL BOND FUND MAY INVEST UP TO 100% OF ITS NET
ASSETS IN LOWER-RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS." BONDS OF THIS TYPE
ARE SUBJECT TO A GREATER RISK WITH REGARD TO PAYMENT OF INTEREST AND RETURN OF
PRINCIPAL THAN ARE HIGHER-RATED BONDS. INVESTORS SHOULD CAREFULLY CONSIDER THE
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. (SEE THE PROSPECTUS SECTION
ENTITLED "FUNDAMENTALS OF FIXED INCOME INVESTING -- HIGH-YIELD, HIGH RISK
BONDS.")
<PAGE> 2
STRONG MUNICIPAL INCOME FUNDS
Strong Municipal Money Market Fund, Inc., Strong Short-Term Municipal Bond
Fund, Inc., Strong Insured Municipal Bond Fund, Inc., Strong Municipal Bond
Fund, Inc., and Strong High-Yield Municipal Bond Fund, Inc. (collectively, the
"Funds" or the "Municipal Income Funds" and individually sometimes referred to
as a "Fund") are separately incorporated, diversified, open-end management
investment companies.
STRONG MUNICIPAL MONEY MARKET FUND (the "Money Fund") seeks federally
tax-exempt current income, a stable share price, and daily liquidity. The Fund
invests in high-quality, short-term municipal bonds that present minimal credit
risk.
STRONG SHORT-TERM MUNICIPAL BOND FUND (the "Short-Term Fund") seeks total
return by investing for a high level of federally tax-exempt current income
with a low degree of share-price fluctuation. The Fund invests primarily in
short- and intermediate- term, investment-grade municipal bonds and maintains a
dollar-weighted average portfolio maturity of one to three years.
STRONG INSURED MUNICIPAL BOND FUND (the "Insured Fund") seeks total return by
investing for a high level of federally tax-exempt current income with a
moderate degree of share-price fluctuation. The Insured Fund invests primarily
in long-term, high-quality municipal bonds that are insured for the timely
payment of principal and interest.
STRONG MUNICIPAL BOND FUND (the "Bond Fund") seeks total return by investing
for a high level of federally tax-exempt current income with a moderate degree
of share-price fluctuation. The Fund invests primarily in long-term,
investment-grade municipal bonds.
STRONG HIGH-YIELD MUNICIPAL BOND FUND (the "High-Yield Fund") seeks total
return by investing for a high level of federally tax-exempt current income.
The Fund invests primarily in long-term, medium- and lower-quality municipal
bonds.
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . 0
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . 0
In General . . . . . . . . . . . . . . . . . . . . . . . 0
Strong Municipal Money Market Fund . . . . . . . . . . . 0
Strong Short-Term Municipal Bond Fund . . . . . . . . . 0
Strong Insured Municipal Bond Fund . . . . . . . . . . . 0
Strong Municipal Bond Fund . . . . . . . . . . . . . . . 0
Strong High-Yield Municipal Bond Fund . . . . . . . . . 0
FUNDAMENTALS OF FIXED INCOME INVESTING . . . . . . . . . . . . . . . . . 0
IMPLEMENTATION OF POLICIES AND RISKS . . . . . . . . . . . . . . . . . . 0
ABOUT THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
SHAREHOLDER MANUAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
__________________________
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the Statement
of Additional Information, and if given or made, such information or
representations may not be relied upon as having been authorized by the Strong
Municipal Income 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.
<PAGE> 4
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Funds, will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchase . . . . . . . . . NONE
Sales Load Imposed on Reinvested Dividends . . . NONE
Deferred Sales Load . . . . . . . . . . . . . . NONE
Redemption Fees . . . . . . . . . . . . . . . . NONE
Exchange Fees . . . . . . . . . . . . . . . . . NONE
</TABLE>
There are certain charges associated with certain services offered by the
Funds. Purchases and redemptions may also be made through broker-dealers or
others who may charge a commission or other transaction fee for their services.
(See "Shareholder Manual -- How to Buy Shares" and "-- How to Sell Shares.")
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER 12B-1 OPERATING
FUND FEES EXPENSES FEES EXPENSES
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money .50% .__% NONE .__%
Short-Term .50 .__ NONE .__
Insured .50 .__ NONE .__
Bond .60 .__ NONE .__
High-Yield .60 .__ NONE .00*
- -----------------------------------------------------------------------------
</TABLE>
* The Advisor has agreed to voluntarily waive its management fee and absorb the
High-Yield Fund's operating expenses through June 30, 1995. Otherwise, the
Fund's Total Operating Expenses would have been ____%.
I-4
<PAGE> 5
From time to time the Funds' investment advisor, Strong Capital Management,
Inc. (the "Advisor"), may voluntarily waive its management fee and/or absorb
certain expenses for any of the Funds. During 1994, the Advisor voluntarily
waived all or a portion of its management fee and absorbed certain expenses for
the ___________ Funds. (See "Financial Highlights.") The expenses specified in
the table above have been restated for the fiscal year ended December 31, 1994,
to include such management fees and/or expenses. The actual total operating
expenses incurred for the year ended December 31, 1994, for the ______________
Funds after voluntary waivers and absorptions were .__%, .__%, and .__%,
respectively. For additional information concerning fees and expenses, see
"About the Funds -- Management."
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)
------------------------------------
1 3 5 10
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Fund $ $ $ $
Short-Term Fund
Insured Fund
Bond Fund
High-Yield Fund
</TABLE>
The Example is based on the "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.
I-5
<PAGE> 6
FINANCIAL HIGHLIGHTS
The following annual Financial Highlights for each of the Strong Municipal
Income Funds has been audited by Coopers & Lybrand L.L.P., independent
certified public accountants. Their report for the fiscal year ended December
31, 1994, is included in the Annual Report of the Municipal Income Funds that
is contained in the Funds' Statement of Additional Information. The Financial
Highlights for the Funds should be read in conjunction with each Fund's annual
financial statements and related notes included in the Funds' Annual Report.
Additional information about each Fund's performance is contained in the Funds'
Annual Report, which may be obtained without charge by calling or writing
Strong Funds.
I-6
<PAGE> 7
STRONG MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.03 0.05 0.06
Net Realized and Unrealized Gains
on Investments -- -- -- --
----------- ---------- ---------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 0.02 0.03 0.05 0.06
LESS DISTRIBUTIONS
Dividends from Net Investment Income(2) (0.02) (0.03) (0.05) (0.06)
Distributions from Net Realized Gains -- -- -- --
----------- ---------- ---------- ----------- -----------
TOTAL DISTRIBUTIONS (0.02) (0.03) (0.05) (0.06)
----------- ---------- ---------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== ========== ========== =========== ===========
Total Return +2.5% +3.4% +5.2% +6.1%
Net Assets, End of Period (In Thousands) $1,172,560 $1,105,491 $ 782,482 $ 218,205
Ratio of Expenses to Average Net Assets(3) 0.7% 0.7% 0.7% 0.8%
Ratio of Net Investment Income to
Average Net Assets 2.5% 3.3% 5.0% 6.0%
</TABLE>
<TABLE>
<CAPTION>
1989 1988 1987 1986(1)
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.06 0.05 0.05 0.01
Net Realized and Unrealized Gains
on Investments -- -- -- --
---------- ---------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 0.06 0.05 0.05 0.01
LESS DISTRIBUTIONS
Dividends from Net Investment Income(2) (0.06) (0.05) (0.05) (0.01)
Distributions from Net Realized Gains -- -- -- --
---------- ---------- ----------- -----------
TOTAL DISTRIBUTIONS (0.06) (0.05) (0.05) (0.01)
---------- ---------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ===========
Total Return +6.1% +5.2% +4.7% +0.7%*
Net Assets, End of Period (In Thousands) $ 73,802 $ 77,465 $ 59,085 $ 2,401
Ratio of Expenses to Average Net Assets(3) 0.9% 0.8% 0.6% 0.5%**
Ratio of Net Investment Income to
Average Net Assets 5.9% 5.0% 4.7% 3.7%**
</TABLE>
Please see the Notes to the Financial Highlights on page I-9.
I-7
<PAGE> 8
STRONG SHORT-TERM MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
1994 1993 1992(1)
----------------- ----------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $ 10.20 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.44 0.48
Net Realized and Unrealized Gains
on Investments 0.23 0.22
----------------- ----------------- ----------------
TOTAL FROM INVESTMENT OPERATIONS 0.67 0.70
LESS DISTRIBUTIONS
Dividends from Net Investment Income(2) (0.44) (0.48)
Distributions from Net Realized Gains (0.07) (0.02)
----------------- ----------------- -----------------
TOTAL DISTRIBUTIONS (0.51) (0.50)
NET ASSET VALUE, END OF PERIOD $ $ 10.36 $ 10.20
================= ================= ==================
Total Return +6.8% +7.2%
Net Assets, End of Period (In Thousands) $ $ 216,180 $ 110,816
Ratio of Expenses to Average Net Assets(4) 0.6% 0.2%
Ratio of Net Investment Income to
Average Net Assets 4.2% 4.9%
Portfolio Turnover Rate 141.5% 139.9%
</TABLE>
STRONG INSURED MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
1994 1993 1992 1991(1)
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $ 10.82 $ 10.28 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.56 0.62 0.06
Net Realized and Unrealized Gains
on Investments 0.80 0.68 0.28
---------- ----------- ---------- ------------
TOTAL FROM INVESTMENT OPERATIONS 1.36 1.30 0.34
LESS DISTRIBUTIONS
Dividends from Net Investment Income(2) (0.56) (0.62) (0.06)
Distributions from Net Realized Gains (0.16) (0.14) --
---------- ----------- ---------- ------------
TOTAL DISTRIBUTIONS (0.72) (0.76) (0.06)
---------- ----------- ---------- ------------
NET ASSET VALUE, END OF PERIOD $ $ 11.46 $ 10.82 $ 10.28
========== =========== ========== ============
Total Return +12.8% +13.1% +3.4%*
Net Assets, End of Period (In Thousands) $ $ 61,213 $ 21,367 $ 1,308
Ratio of Expenses to Average Net Assets(5) 0.6% 0.2% 0.5%**
Ratio of Net Investment Income to
Average Net Assets 4.9% 5.8% 5.6%**
Portfolio Turnover Rate 110.7% 289.6% 238.9%**
</TABLE>
STRONG MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
----------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $ 10.00 $ 9.76 $ 9.22 $ 9.47
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.58 0.65 0.65 0.66
Net Realized and Unrealized Gains
(Losses) on Investments 0.57 0.50 0.54 (0.25)
----------- ----------- ---------- ---------- --------
TOTAL FROM INVESTMENT OPERATIONS 1.15 1.15 1.19 0.41
LESS DISTRIBUTIONS
Dividends from Net Investment Income(2) (0.58) (0.65) (0.65) (0.66)
Distributions from Net Realized Gains (0.32) (0.26) -- --
----------- ----------- ---------- ---------- --------
TOTAL DISTRIBUTIONS (0.90) (0.91) (0.65) (0.66)
----------- ----------- ---------- ---------- --------
NET ASSET VALUE, END OF PERIOD $ $ 10.25 $ 10.00 $ 9.76 $ 9.22
=========== =========== ========== ========== ========
Total Return +11.8% +12.2% +13.4% +4.6%
Net Assets, End of Period (In Thousands) $ $ 398,911 $ 289,751 $ 115,230 $ 31,560
Ratio of Expenses to Average Net Assets(6) 0.7% 0.1% 0.1% 0.3%
Ratio of Net Investment Income to
Average Net Assets 5.6% 6.4% 6.9% 7.2%
Portfolio Turnover Rate 156.7% 324.0% 465.2% 586.0%
</TABLE>
<TABLE>
<CAPTION>
1989 1988 1987 1986(1)
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.35 $ 9.16 $ 10.01 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.52 0.49 0.67 0.12
Net Realized and Unrealized Gains
(Losses) on Investments 0.12 0.19 (0.85) 0.01
----------- ----------- ---------- ------------
TOTAL FROM INVESTMENT OPERATIONS 0.64 0.68 (0.18) 0.13
LESS DISTRIBUTIONS
Dividends from Net Investment Income(2) (0.52) (0.49) (0.67) (0.12)
Distributions from Net Realized Gains -- -- -- --
----------- ----------- ---------- ------------
TOTAL DISTRIBUTIONS (0.52) (0.49) (0.67) (0.12)
----------- ----------- ---------- ------------
NET ASSET VALUE, END OF PERIOD $ 9.47 $ 9.35 $ 9.16 $ 10.01
=========== =========== ========== ============
Total Return +7.1% +7.6% -1.8% +1.3%*
Net Assets, End of Period (In Thousands) $ 18,735 $ 18,275 $ 19,070 $ 2,212
Ratio of Expenses to Average Net Assets(6) 1.7% 1.3% 1.0% 0.4%**
Ratio of Net Investment Income to
Average Net Assets 5.6% 5.3% 7.0% 6.4%**
Portfolio Turnover Rate 243.3% 343.6% 284.0% 116.1%**
</TABLE>
Please see the Notes to the Financial Highlights on page I-9.
I-8
<PAGE> 9
STRONG HIGH-YIELD MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
OCTOBER 1, 1993 (INCEPTION)
1994 to December 31, 1993
--------------- ---------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.16
Net Realized and Unrealized Gains
on Investments 0.10
--------------- ---------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.26
LESS DISTRIBUTIONS
Dividends from Net Investment $ (0.16)
Income(2) --------------- ---------------------------
TOTAL DISTRIBUTIONS $ (0.16)
--------------- ---------------------------
NET ASSET VALUE, END OF PERIOD $ $ 10.10
=============== ===========================
Total Return $ +2.7%*
Net Assets, End of Period $20,839,997
Ratio of Expenses to Average Net Assets(7) 0.0%**
Ratio of Net Investment Income to
Average Net Assets 6.8%**
Portfolio Turnover Rate 111.1%**
</TABLE>
Notes:
(1) Respective inception dates are October 23, 1986 for the Money Fund and
Bond Fund; December 31, 1991 for the Short-Term Fund, November 25, 1991
for the Insured Fund.
(2) Tax-exempt for regular federal income tax purposes.
(3) From inception of the Money Fund through January 1992, the Advisor
voluntarily waived its advisory fee during certain periods. If these
fees had not been waived, the ratio of expenses to average net assets
would have been 1.0% for 1987. (The effect for 1986, 1989, 1990, 1991,
and 1992 was negligible.)
(4) Since inception of the Short-Term Fund, the Advisor voluntarily waived
all or a portion of its advisory fee during certain periods. The Advisor
also voluntarily absorbed certain other expenses. Without these waivers
and absorptions, the ratio of expenses to average net assets would have
been 0.8% and 0.7% for 1992 and 1993, respectively.
(5) Since inception of the Insured Fund, the Advisor voluntarily waived all
or a portion of its advisory fee during certain periods. The Advisor
also voluntarily absorbed certain other expenses. Without these waivers
and absorptions, the ratio of expenses to average net assets would have
been 1.0%, 1.1%, and 0.9% for 1991, 1992 and 1993, respectively.
(6) Since inception of the Bond Fund, the Advisor has waived all or a portion
of its advisory fee during certain periods. The Advisor also voluntarily
absorbed certain other expenses. Without these waivers and absorptions,
the ratio of expenses to average net assets would have been 1.0%, 1.3%,
1.4%, 1.8%, 1.5%, 1.1%, 0.9%, and 0.8% for 1986, 1987, 1988, 1989, 1990,
1991, 1992, and 1993, respectively.
(7) Since inception of the High-Yield Fund, the Advisor voluntarily waived
its advisory fee and absorbed all other expenses. Without these waivers
and absorptions, the ratio of expenses to average net assets would have
been 1.1% for each period.
* Total return is not annualized.
** Calculated on an annualized basis.
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HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Within its distinct investment objective and policies, each Fund seeks to
provide income exempt from federal income tax consistent with maturity,
quality, and other standards as set forth under "Investment Objectives and
Policies."
IMPLEMENTATION OF POLICIES AND RISKS
With the exception of the Money Fund, the Funds may engage in derivative
transactions including options, futures, and options on futures transactions
within specified limits. Each Fund may also invest in repurchase agreements,
when-issued securities, and illiquid securities and may engage in reverse
repurchase agreements and mortgage dollar roll transactions. The High-Yield
Fund may invest up to 100% of its 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 "Fundamentals of Fixed
Income Investing -- High-Yield, High-Risk Bonds" and "Implementation of
Policies and Risks.")
MANAGEMENT
The Advisor, Strong Capital Management, Inc., serves as investment advisor to
the Funds. The Advisor provides investment management services for mutual funds
and other investment portfolios representing assets of over $10 billion. (See
"About the Funds -- Management.")
PURCHASE AND REDEMPTION OF SHARES
You may purchase or redeem shares of a Fund at net asset value. There are no
redemption or 12b-1 charges. The Money Fund seeks to maintain a stable net
asset value of $1.00 per share. The net asset value of the Short-Term, Insured,
Bond, and High-Yield Funds changes daily with the value of each Fund's
portfolio. You can locate the net asset value for a Fund in newspaper listings
of mutual fund prices under the "Strong Funds" heading. (See "Shareholder
Manual -- How to Buy Shares" and " -- How to Sell Shares.")
SHAREHOLDER SERVICES
Strong shareholder benefits include: telephone purchase, exchange, and
redemption privileges; professional representatives available 24 hours a day;
automatic investment, automatic dividend reinvestment, payroll direct deposit,
automatic exchange and systematic withdrawal plans; free check writing; and a
no-minimum investment program. (See "Shareholder Manual -- Shareholder
Services.")
DIVIDENDS AND DISTRIBUTIONS
The policy of each Fund is to distribute substantially all net investment
income monthly and distribute any net realized capital gains annually. (See
"About the Funds -- Distributions and Taxes.")
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<PAGE> 11
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 Municipal
Income 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 bonds carry higher yields and greater price
volatility than shorter-term bonds. Similarly, bonds 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 principals and risks associated with fixed-income
securities.)
COMPARING THE FUNDS
The following chart is intended to distinguish the Funds and help you determine
their suitability for your investments:
<TABLE>
<CAPTION>
DEGREE OF
AVERAGE CREDIT INCOME SHARE-PRICE
FUND MATURITY RANGE QUALITY POTENTIAL FLUCTUATION
<S> <C> <C> <C> <C>
Money Fund 90 days or less Highest Low Stable, but not
guaranteed
Short-Term 1 to 3 years High and Low to Low
Fund Medium Moderate
Insured 15 to 25 years* Highest Moderate to Moderate
Fund High
Bond Fund 15 to 25 years* High and Moderate to Moderate
Medium High
High-Yield 15 to 25 years* Medium and High Moderate
Fund Low
</TABLE>
* Expected Range
The Strong Municipal Income Funds are designed for investors whose income-tax
levels enable them to benefit from tax-exempt income. In general, the Funds are
not appropriate investments for tax-deferred retirement plans, such as
Individual Retirement Accounts. THE INSURED FUND, THE BOND FUND, AND THE
HIGH-YIELD FUND ALL EMPLOY A LONG-TERM INVESTMENT APPROACH; THEREFORE,
INVESTORS SHOULD NOT RELY ON THOSE FUNDS FOR THEIR SHORT-TERM FINANCIAL NEEDS.
Each Fund has adopted certain fundamental investment restrictions that are set
forth in the Statement of Additional Information ("SAI"). Those restrictions, a
Fund's investment objective, and any other investment policies identified as
"fundamental" in this prospectus or the SAI 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.
As a fundamental policy, each Fund will invest at least 80% of its net assets
in municipal bonds under normal market conditions. (See "Implementation of
Policies and Risks -- Municipal Bonds.") Generally, municipal bonds are those
whose interest is exempt from federal income tax. Each Fund may invest, without
limitation, in municipal bonds whose
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<PAGE> 12
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 each Fund's distributions may not be exempt from federal income tax.
Accordingly, a Fund's net return may be lower for those taxpayers. (Consult with
your tax advisor to determine whether you are subject to the AMT, and see "About
the Funds -- Distributions and Taxes" for more information.) When the Advisor
determines that market conditions warrant a temporary defensive position, the
Funds may invest up to 100% of their respective total assets in cash and
short-term fixed income securities, including without limitation, U.S.
government securities, commercial paper, banker's acceptances, certificates of
deposits, and time deposits.
STRONG MUNICIPAL MONEY MARKET FUND
The 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 regular federal
income taxes with no anticipated fluctuations in principal. Because the Fund
strives 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 bonds, can change in value
when interest rates or an issuer's creditworthiness changes significantly.
Therefore, although its share price has remained constant in the past, THE FUND
CANNOT GUARANTEE THAT IT WILL ALWAYS BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE. Unlike a bank account or certificate of deposit, an
investment in the Fund is neither insured nor guaranteed by the U.S.
government.
The Money Fund invests in a diversified portfolio of high-quality, short-term
municipal bonds. (See "Implementation of Policies and Risks -- Municipal
Bonds.") The Fund restricts its investments to instruments that meet certain
maturity and quality standards required or permitted by Rule 2a-7 under the
Investment Company Act of 1940 (the "1940 Act") for tax-exempt money market
funds. Accordingly, the Fund:
- - limits its dollar-weighted average portfolio maturity to ninety days or
less;
- - buys only bonds with remaining maturities of thirteen months or less; and
- - buys only U.S. dollar-denominated bonds 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 nationally recognized statistical rating
organization or "NRSRO" or are unrated and determined by the Advisor to be
of comparable quality. (See "Fundamentals of Fixed-Income Investing --
Credit Quality.")
STRONG SHORT-TERM MUNICIPAL BOND FUND
The Short-Term Fund seeks total return by investing for a high level of
federally tax-exempt current income with a low degree of share-price
fluctuation.
The Fund is designed for investors who are willing to accept some fluctuation
in principal in order to pursue a higher level of income than is generally
available from tax-exempt money market securities.
The Fund invests primarily in investment-grade municipal bonds and maintains a
dollar-weighted average portfolio maturity of one to three years. Although
there are no
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<PAGE> 13
maturity restrictions for the individual bonds in the portfolio,
it is anticipated that the Fund will emphasize investments in short- and
intermediate-term bonds.
The Fund will invest at least 80% of its total assets in investment-grade
bonds, which range from those in the highest rating category to those rated
medium-quality (e.g., bonds rated BBB by Standard & Poor's Rating Group
("S&P")).
The Fund may also invest up to 20% of its total assets in non-investment-grade
bonds (e.g., those rated C and higher by S&P) and other high-yield, high-risk
bonds. (See "Fundamentals of Fixed-Income Investing -- High-Yield, High-Risk
Bonds.")
STRONG INSURED MUNICIPAL BOND FUND
The Insured Fund seeks total return by investing for a high level of federally
tax-exempt current income with a moderate degree of share-price fluctuation.
The Fund is designed for long-term investors who want to pursue higher income
than shorter-term municipal bonds generally provide, who are willing to accept
the fluctuation in principal associated with longer-term bonds, and who seek to
minimize credit risk. Given the insurance and credit-quality restrictions
described below, the Fund may not yield as high a level of income as funds that
invest in uninsured or lower-quality bonds.
The Insured Fund invests primarily in long-term, high-quality bonds that are
insured for the timely payment of principal and interest. While there are no
maturity restrictions for the Fund's bonds, it is anticipated that the Fund
will maintain a dollar-weighted average portfolio maturity of between 15 and 25
years.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in bonds that are insured for the timely payment of principal and
interest by an insurer determined by the Advisor to have high claims-paying
ability (generally, only those carrying the highest credit rating). INSURANCE,
HOWEVER, DOES NOT GUARANTEE EITHER THE PRICE OF AN INDIVIDUAL BOND OR THE SHARE
PRICE OF THE FUND ITSELF. (See "Implementation of Policies and Risks --
Insurance.")
The Fund may also invest up to 35% of its total assets in uninsured municipal
bonds, provided they are, at the time of purchase, rated in the highest rating
category by any NRSRO (e.g., bonds rated AAA by S&P) or, if unrated, are
determined by the Advisor to be of comparable quality.
STRONG MUNICIPAL BOND FUND
The Bond Fund seeks total return by investing for a high level of tax-exempt
current income with a moderate degree of share-price fluctuation.
The Fund is designed for long-term investors who want to pursue higher income
than shorter-term municipal bonds generally provide and who are willing to
accept the fluctuation in principal associated with longer-term bonds. While
there are no maturity restrictions for the Fund's bonds, it is anticipated
that the Fund will maintain a dollar-weighted average portfolio maturity
of between 15 and 25 years.
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<PAGE> 14
The Fund invests at least 95% of its total assets in investment-grade municipal
bonds, which range from those in the highest rating category to those rated
medium-quality (e.g., bonds rated BBB or higher by S&P). The Fund may also
invest up to 5% of its total assets in non-investment-grade bonds and other
high-yield, high-risk bonds (e.g., bonds rated as low as C by S&P). (See
"Fundamentals of Fixed-Income Investing.")
STRONG HIGH-YIELD MUNICIPAL BOND FUND
The High-Yield Fund seeks total return by investing for a high level of
federally tax-exempt current income.
The Fund is designed for long-term investors who want to pursue higher income
than higher-quality municipal bonds generally provide and who are willing to
accept the risk of principal fluctuation associated with longer-term, medium-
and lower-quality bonds. Although the Advisor attempts to manage risk through
portfolio diversification, extensive credit analysis, and attention to trends
in the economy, geographic areas, industries, and financial markets, such
efforts cannot eliminate all risk.
The Fund invests in a diversified portfolio of bonds consisting primarily of
long-term, medium- and lower-quality municipal bonds. While there are no
maturity restrictions for the Fund's bonds, it is anticipated that the Fund
will maintain a dollar-weighted average portfolio maturity of ten years or
more.
Medium-quality bonds are those rated in the fourth highest category (e.g., bonds
rated BBB by S&P) or bonds determined by the Advisor to be of comparable
quality. Medium-quality bonds, although considered investment-grade, may have
some speculative characteristics. Lower-quality bonds, also commonly referred to
as "non-investment-grade" bonds or "junk bonds," are those rated below the
fourth highest category (e.g., bonds rated as low as C by S&P) or bonds of
comparable quality. The Fund also may invest in bonds that are in default, but
such bonds are not expected to exceed 10% of the Fund's total assets. The Fund
may also invest without limitation in higher-quality bonds. Under normal market
conditions, however, the Fund is unlikely to emphasize higher-quality bonds,
since generally they offer lower yields than medium and lower-quality bonds
with similar maturities. (See "Fundamentals of Fixed Income Investing" for
further information on the risks associated with investing in medium- and lower-
quality bonds.)
FUNDAMENTALS OF FIXED-INCOME INVESTING
Issuers of fixed-income securities 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
municipal bonds (usually intermediate- and long-term bonds) have provisions
that allow the issuer to redeem or "call" a bond before its maturity. Issuers
are most likely to call such bonds during periods of falling interest rates. As
a result, a Fund may be required to invest the unanticipated proceeds of the
called security at lower interest rates, which may cause the Fund's income to
decline.
While the net asset value of each Fund (other than the Money Fund) is expected
to fluctuate, the Advisor actively manages each Fund's portfolio and adjusts
its average maturity according to the interest rate outlook while seeking to
avoid or reduce any negative change in a Fund's net asset value. The Money Fund
seeks to maintain a stable net asset value of $1.00 per share.
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<PAGE> 15
PRICE VOLATILITY. The market value of debt obligations, including municipal
bonds, is affected by changes in prevailing interest rates. The market value of
a debt obligation generally reacts inversely to interest-rate changes, meaning,
when prevailing interest rates decline, a bond's price usually rises, and when
prevailing interest rates rise, a bond'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. Commercial paper is generally considered the shortest form of
debt security. Municipal notes, whose original maturities are two years or
less, are considered short-term obligations. The term "bond" generally refers
to bonds with maturities longer than two years. Bonds with maturities of three
years or less are considered short-term, bonds with maturities between three
and seven years are considered intermediate-term, and bonds with maturities
greater than seven years are considered long-term.
CREDIT QUALITY. The values of bonds may also be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment
of interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings.
In conducting its credit research and analysis, the Advisor considers both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings
compiled by a number of NRSROs. "Appendix A -- Ratings of Bonds" presents the
ratings of three well-known rating organizations: Moody's Investors Services,
Inc., Standard & Poor's Ratings Group, and Fitch Investors Service, Inc.
INVESTMENT-GRADE BONDS. The range of bonds from the highest- through the
medium-quality categories are commonly referred to as "investment- grade"
bonds. With respect to the Municipal Income Funds, investment-grade bonds
include the following:
<TABLE>
<S> <C>
- - U.S. government bonds (See "Types of Portfolio Securities -- Government
Securities" below);
- - commercial paper rated in one of the three highest rating categories (e.g.,
A-3 or higher by S&P);
- - short-term notes rated in one of the three highest rating categories (e.g.,
SP-3 or higher by S&P);
- - bonds rated in one of the four highest rating categories (e.g., rated BBB
or higher by S&P); and
- - unrated bonds determined by the Advisor to be of comparable quality.
</TABLE>
Investment-grade bonds are generally believed to have relatively low degrees of
credit risk. However, medium-quality bonds, while considered investment-grade,
may have some speculative characteristics, since their issuers' capacity for
repayment may be more vulnerable to adverse economic conditions or changing
circumstances than that of higher-rated issuers.
Generally, quality policies are applied at the time of purchase of a security.
These policies do not prohibit a Fund from retaining a security whose credit
quality is downgraded after
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<PAGE> 16
purchase. The Advisor will, however, monitor the
credit quality of any such security to consider what action, if any, the Fund
should take consistent with its investment objective.
HIGH-YIELD, HIGH-RISK BONDS. High-yield, high-risk bonds, also referred to as
"junk bonds," are those bonds rated lower than investment-grade and unrated
bonds of comparable quality. Although they generally offer higher yields than
investment-grade bonds with similar maturities, lower-quality bonds involve
greater risks, including the possibility of default or bankruptcy. In general,
they are regarded to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal. Other potential risks associated
with investing in high-yield bonds include:
<TABLE>
<S> <C>
- - 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 bonds; and
- - adverse publicity and changing investor perceptions about these bonds.
</TABLE>
As with any other asset in a Fund's portfolio, any reduction in the value of
such bonds 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
bonds 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 bonds will be more dependent on the Advisor's credit
analysis than generally would be the case with investments in investment-grade
bonds.
The market for high-yield, high-risk bonds initially grew during a period of
economic expansion and has experienced mixed results thereafter. 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 bonds,
increase their volatility, and reduce their value and liquidity. In addition,
lower-quality bonds tend to be less liquid than higher-quality bonds because
the market for them is not as broad or active. If market quotations are not
available, these bonds 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 bonds.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to certain
restrictions described below), the Funds may invest in some or all of the
following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below.
Presently, the Funds do not intend to engage in cross-trading. A more complete
discussion of certain of these securities and investment techniques and the
associated risks is presented in the Funds' SAI.
MUNICIPAL BONDS
Municipal bonds 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
bonds generally include debt obligations issued to obtain funds for various
public purposes. Certain types of municipal
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<PAGE> 17
bonds are issued in whole or in part to obtain funding for privately operated
facilities or projects. Municipal bonds are generally classified as general
obligation bonds, revenue bonds, industrial development bonds, notes, and
municipal lease obligations.
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements
of state, regional, and local governments. Municipal notes include tax
anticipation notes, bond anticipation notes, revenue anticipation notes, tax
and revenue anticipation notes, construction loan notes, short-term discount
notes, tax-exempt commercial paper, demand notes, and similar instruments.
Municipal bonds include obligations, the interest on which is exempt from
regular 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.
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. Each 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 debt
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 bonds 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. The Money Fund will not invest more than 10% of its net assets
in municipal leases that are not readily marketable. The Short-Term, Insured,
Bond, and High-Yield Funds may invest up to 15% of their respective net assets
in such bonds. (Municipal leases 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" below.)
Each Fund's investments in municipal bonds may include mortgage-backed municipal
bonds, 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 bonds, 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. 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.
In addition, a certain level of prepayments can be expected, regardless of the
interest rate environment.
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<PAGE> 18
PARTICIPATION INTERESTS
A participation interest gives a Fund an undivided interest in a municipal
security in the proportion that the Fund's participation interest bears to the
principal amount of the security. 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 bonds will be tax-exempt to the Fund. 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
bonds in which the Fund may invest. The High-Yield Fund will limit its
investments to 10% of its net assets in non-investment grade participation
interests, including participation interests that are not readily marketable.
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.
The Money Fund will not invest more than 10% of its net assets in participation
interests that are not readily marketable (a participation interest subject to
a demand feature that may be exercised on not more than seven days notice will
be deemed readily marketable and will not be subject to this limitation.) The
Short-Term, Insured, and Bond Funds may invest up to 15% of their respective
net assets in participation interests that are not readily marketable. (See
"Illiquid Securities" below.)
ILLIQUID SECURITIES
The Short-Term, Insured, Bond, and High-Yield Funds will not invest in illiquid
securities if, as a result of such investments, more than 15% of a Fund's net
assets (taken at market value at the time of each investment) would be invested
in illiquid securities. The Money Fund will not invest in illiquid securities
if, as a result of such investments, more than 10% of the Money Fund's net
assets would be invested in such securities. 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. See the
Funds' Statement of Additional Information for further information.
STANDBY COMMITMENTS
Each Fund may acquire standby commitments from brokers, dealers, or banks with
respect to securities in its portfolio in order to facilitate portfolio
liquidity. The High-Yield Fund will limit its acquisition of standby
commitments to 10% of the securities in its portfolio. 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.
INSURANCE (INSURED FUND)
While insurance is intended to reduce financial risk, the cost of such
insurance (from higher purchase prices of portfolio securities or the payment
of insurance premiums) will result in lower yields on the municipal bonds so
insured. Such insurance will be either Issue Insurance or Mutual Fund
Insurance.
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<PAGE> 19
Issue Insurance is generally purchased by the issuer or underwriter of the
municipal security, is non-cancelable, and is effective as long as the
securities are unpaid and the insurer remains in business. Mutual Fund Insurance
may be purchased from insurance companies that guarantee the timely payment of
interest and principal when due on certain of a fund's municipal bonds that are
designated as eligible. Mutual Fund Insurance may terminate upon a fund's sale
of the insured bonds or it may be extended to enhance the marketability of the
insured bonds. Mutual Fund Insurance insurers generally may not withdraw
coverage of insured bonds unless a fund fails to pay the premiums when due, but
they may refuse to insure additional bonds purchased by a fund after the
effective date of a notice to that effect. The Insured Fund may acquire bonds
insured by the seller or other third party and the insurance would continue for
the Fund's benefit. The Insured Fund anticipates that under normal conditions
all or substantially all of its insured Municipal bonds will be subject to Issue
Insurance. The Fund, however, reserves the right to purchase Mutual Fund
Insurance if the Advisor determines it advisable to do so.
The Fund's insured municipal bonds will be insured by insurers determined to
have a high claims-paying ability by or under the authority of the Fund's Board
of Directors. Currently, the following insurers are considered to have a high
claims-paying ability: Municipal Bond Investors Assurance Corporation, Capital
Guaranty Insurance Company, Financial Guaranty Insurance Company, AMBAC
Indemnity Corporation, Financial Security Assurance Inc., Connie Lee Insurance
Company, and Capital Markets Assurance Corporation, all of which have a
claims-paying ability rating of "AAA" by S&P. Additional insurers may be added
without further notification if such insurers' claims-paying ability is
determined to be high by or under the authority of the Fund's Board of
Directors. Municipal bonds subject to Issue Insurance, if rated, will generally
carry the same credit rating as the insurer, and municipal bonds subject to
Mutual Fund Insurance are generally considered to have a credit quality
equivalent to the claims-paying ability rating of the insurer. The Fund may
invest more than 25% of its assets in municipal bonds insured by the same
insurance company.
WHEN-ISSUED SECURITIES
Each Fund may invest without limitation in securities purchased on a
when-issued or delayed delivery basis ("When-Issued Securities"). Although the
payment and interest terms of these securities are established at the time the
purchaser enters into the commitment, these securities may be delivered and
paid for at a future date, generally within 45 days. Purchasing When-Issued
Securities allows a Fund to lock in a fixed price or yield on a security it
intends to purchase. However, when a Fund purchases a When-Issued Security, it
immediately assumes the risk of ownership, including the risk of price
fluctuation until the settlement date.
The greater a Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund, with
respect to the Short-Term, Insured, Bond, and High-Yield Funds, or the greater
the possibility of deviation from the targeted $1.00 share price with respect
to the Money Fund. Purchasing When-Issued Securities may involve the additional
risk that the yield available in the market when the delivery occurs may be
higher 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. Each Fund will segregate and maintain cash, cash
equivalents, or other high-quality, liquid debt securities in an amount at
least equal to the amount of outstanding commitments for When-Issued Securities
at all times.
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<PAGE> 20
SECTOR CONCENTRATION
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.
DERIVATIVE INSTRUMENTS
Derivative transactions may be used by the Short-Term, Insured, Bond, and
High-Yield Funds for any lawful purpose, including hedging, risk management, or
enhancing returns, but not for speculation. Derivative instruments are
securities or agreements whose value is derived from the value of some
underlying asset, including without limitation, securities, reference indexes,
or commodities. Options, futures, and options on futures transactions are
considered derivative transactions. Derivative instruments or agreements
generally have characteristics similar to forward contracts (under which one
party is obligated to buy and the other party is obligated to sell an
underlying asset at a specific price on a specific date) or option contracts
(under which the holder of the option has the right but not the obligation to
buy or sell an underlying asset at a specified date). Accordingly, the change
in value of a forward-based derivative is generally related to the change in
value of the underlying asset. Option-based derivative instruments generally
will increase in value from favorable fluctuations in the value of the
underlying asset and decrease in value from unfavorable fluctuations in the
value of the underlying asset. Derivative transactions may include elements of
leverage and, accordingly, the fluctuation of the value of the derivative
transaction in relation to the underlying asset may be magnified. The purchaser
of an option-based derivative will generally pay a premium in connection with
entering into such position and the seller of an option-based derivative will
generally receive a premium in connection with such position. In addition to
options, futures, and options on futures transactions, derivative transactions
may include swaps (an agreement by two parties to exchange a series of cash
flows in the future, such as interest rate payments), interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or "cap," and
interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor".
Derivative transactions may be exchange traded or over-the-counter transactions
between private parties. Over-the-counter transactions are subject to the
credit risk of the counterparty to the instrument and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. When required by the SEC, a Fund will set aside
permissible liquid assets in a segregated account to secure its obligations
under derivative transactions. In order to maintain its required cover for a
derivative transaction, the Fund may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
The successful use of derivative transactions by a Fund is dependent upon the
Advisor's ability to correctly anticipate trends in the underlying asset. To
the extent that a Fund is engaging in derivative transactions otherwise than
for hedging purposes, the Fund's successful use of such transactions is more
dependent upon the Advisor's ability to correctly anticipate such trends, since
losses in these transactions may not be offset in gains in the Fund's portfolio
or in lower purchase prices for assets it intends to acquire.
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<PAGE> 21
The Advisor's prediction of trends in underlying assets may prove to be
inaccurate, which could result in substantial losses to a Fund. Hedging
transactions are also subject to risks. If the Advisor incorrectly anticipates
trends in the underlying asset, a Fund may be in a worse position than if no
hedging had occurred. In addition, there may be imperfect correlation between a
Fund's derivative transactions and the instruments being hedged.
In connection with its futures and options on futures transactions, the Funds
are subject to certain restrictions on such transactions under the Commodity
Exchange Act and, accordingly, a Fund will use futures and options on futures
transactions solely for bona fide hedging transactions (within the meaning of
the Commodity Exchange Act). However, a Fund may, in addition to bona fide
hedging transactions, use futures and options on futures transactions if the
aggregate initial margin and premiums required to establish such positions,
less the amount by which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed 5% of the Fund's
net assets. In addition, the Funds follow certain other restrictions concerning
their options, futures, and options on futures transactions and, accordingly,
(i) the aggregate value of securities underlying call options on securities
written by a Fund or obligations underlying put options on securities written
by a Fund determined as of the date the options are written will not exceed 50%
of a Fund's net assets; (ii) the aggregate premiums paid on all options
purchased by a Fund and which are being held will not exceed 20% of a Fund's
net assets; (iii) the Fund will not purchase put or call options, other than
hedging positions, if, as a result thereof, more than 5% of its total assets
would be so invested; and (iv) the aggregate margin deposits required on all
futures and options on futures transactions being held will not exceed 5% of a
Fund's total assets.
For additional information concerning each Fund's derivative transactions and
associated risks, see the Funds' SAI.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
If the Advisor determines it consistent with the Fund's investment objective,
the Insured and Bond Funds may invest without limitation, and the Short-Term
and High-Yield Funds may invest up to 5% and 10%, respectively, of their total
assets in zero-coupon, step-coupon, and pay-in-kind securities. These
securities are bonds 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 certain
pay-in-kind securities to report as interest each year the portion of the
original discount (or deemed discount) on such securities accruing that year.
In order to qualify as a "regulated investment company" under the Internal
Revenue Code, each Fund may be required to distribute a portion of such
discount 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.
PORTFOLIO TURNOVER
With the exception of the Money Fund, each Fund's historical portfolio turnover
rates are listed under "Financial Highlights." The annual portfolio turnover
rate indicates changes in a Fund's portfolio. The turnover rate may vary from
year to year, as well as within a year. It may also be affected by sales of
portfolio securities necessary to meet cash requirements for redemption of
shares. High turnover in any year will result in the payment by a Fund of above
average amounts of transaction costs and could result in the payment by
shareholders of above average amounts of taxes on realized investment gains.
The annual portfolio turnover rate for the Short-Term Fund is expected to
exceed 100%,
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<PAGE> 22
but generally not exceed 200%. The annual portfolio turnover rates
for the Insured and Bond Funds are expected to be between 200% and 300%. The
annual portfolio turnover rate for the High-Yield Fund generally is not
expected to exceed 300%.
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 advisory 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. The Advisor also acts as investment advisor for each of
the mutual funds within the Strong Family of Funds. As of March 31, 1995, the
Advisor had over $10 billion under management. 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 advisory
fee based on a percentage of each Fund's average daily net asset value. The
annual rates are as follows: Money, Short-Term, and Insured Funds, .50%; and
Bond and High-Yield 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 or absorption will temporarily lower
a Fund's overall expense ratio and increase a Fund's overall return to
investors. Except for expenses assumed by the Advisor or Strong Funds
Distributors, Inc., each Fund is responsible for all its other expenses.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Strong Municipal Income Funds.
STRONG MUNICIPAL MONEY MARKET FUND
STEVEN D. HARROP. A Chartered Financial Analyst, Mr. Harrop has managed the
Strong Municipal Money Market Fund since he 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.
STRONG SHORT-TERM MUNICIPAL BOND FUND
THOMAS J. CONLIN. Mr. Conlin has co-managed the Fund since January 1995. Since
he joined the Advisor in October 1991, Mr. Conlin, a Chartered Financial
Analyst and Certified Investment Counselor, has co-managed the Strong Municipal
Bond and the Strong Insured Municipal Bond Funds. He has also co-managed the
Strong High-Yield
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<PAGE> 23
Municipal Bond Fund since its inception in 1993. Previously,
Mr. Conlin was employed by Chicago-based Stein Roe & Farnham, where he
co-managed, with Mary-Kay H. Bourbulas, two tax-exempt funds. He attended
Indiana University, where he earned his M.B.A. in 1978, and Illinois State
University, where he received his bachelor's degree in 1976.
GREG D. WINSTON. Mr. Winston has co-managed the Fund since January 1995. Since
he joined the advisor in January 1988, he has served in a variety of positions,
including Municipal Income Research Analyst and Trader. Mr. Winston received
his B.B.A. in Finance and Marketing in 1987 from the University of
Wisconsin-Madison.
STRONG MUNICIPAL BOND FUND
STRONG INSURED MUNICIPAL BOND FUND
STRONG HIGH-YIELD MUNICIPAL BOND FUND
THOMAS J. CONLIN. Mr. Conlin co-manages the Funds. Information regarding Mr.
Conlin is set forth above under "Strong Short-Term Municipal Bond Fund."
MARY-KAY H. BOURBULAS. Prior to joining the Advisor as a portfolio manager in
October 1991, Ms. Bourbulas was employed by Stein Roe & Farnham, where she
co-managed, with Thomas J. Conlin, two tax-exempt funds. Ms. Bourbulas received
her bachelor's degree from Northwestern University in 1989. She has co-managed
the Strong Municipal Bond Fund and the Strong Insured Municipal Bond Fund since
she joined the Advisor, and has co-managed the Strong High-Yield Municipal
Bond Fund since its inception in 1993.
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor 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., an indirect subsidiary of the Advisor, acts as
distributor of the shares of the Funds.
ORGANIZATION
SHAREHOLDER RIGHTS. Each Fund is a Wisconsin corporation that is authorized to
issue shares of common stock and series and classes of series of shares of
common stock. Each share of the Funds has one vote, and all shares participate
equally in dividends and other capital gains distributions by the respective
Fund and in the residual assets of the respective Fund in the event of
liquidation. Certificates will be issued for shares held in your account only
upon your written request. You will, however, have full shareholder rights
whether or not you request certificates. Generally, the Funds will not hold an
annual meeting of shareholders unless required by the 1940 Act. Shareholders
have certain rights, including the right to call a meeting upon a vote of 10%
of a Fund's outstanding shares for the purpose of voting to remove one or more
directors or to transact any other business. The 1940 Act requires each Fund to
assist the shareholders in calling such a meeting.
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<PAGE> 24
SHAREHOLDER PRIVILEGES. The shareholders of each Fund may benefit from the
privileges described in the "Shareholder Manual" (see page II-1). However, each
Fund reserves the right, at any time and without prior notice, to suspend,
limit, modify, or terminate any of these privileges or their use in any manner
by any person or class.
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND DISTRIBUTIONS. You may elect to have all your
dividends and capital gains distributions from a Fund automatically reinvested
in additional fund shares or in shares of another Strong Fund at the net asset
value determined on the dividend or capital gains distribution payment date. If
you request in writing that your dividends and other distributions be paid in
cash, the Fund will credit your bank account by Electronic Funds Transfer
("EFT") or issue a check to you within five business days of the reinvestment
date. You may change your election at any time by calling or writing the Strong
Funds. Strong Funds must receive any such change 7 days (15 days for EFT) prior
to a dividend or capital gains distribution payment date in order for the
change to be effective for that payment.
Each Fund distributes substantially all of its net investment income monthly
and net realized gains annually. The Funds accrue dividends on each day on
which a Fund's net asset value is calculated. Income earned on weekends,
holidays, and other days on which net asset value is not calculated will be
declared as a dividend on the day on which a Fund's net asset value was most
recently calculated.
TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS. Dividends derived from the interest
earned on municipal bonds constitute "exempt-interest dividends" and are
generally not subject to regular federal income tax. However, the Funds may
invest in municipal bonds whose interest may be a tax- preference item for
individual taxpayers subject to the Alternative Minimum Tax ("AMT").
Exempt-interest dividends distributed to corporate shareholders may also be
subject to the AMT, depending on the corporation's tax status. Distributions by
the Funds may subject you to state and local taxes on the distributions,
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. Distributions paid by a Fund from net realized
long-term capital gains, whether received in cash or reinvested in additional
shares, are taxable as long-term capital gains. The capital gain holding period
is determined by the length of time a Fund has held the instrument and not the
length of time you have held shares in the Fund.
If a Fund's dividends exceed its investment company taxable income (consisting
generally of net investment income and net short-term capital gain in any
year), all or a portion of those dividends may be treated as a return of
capital to shareholders for tax purposes.
If you are receiving social security benefits, tax-exempt income (including
exempt-interest dividends received from the Funds) will be included in the
calculation that determines whether a portion of your benefits will be subject
to federal income tax. All or a portion of the interest on borrowings incurred
to purchase or carry shares of a Fund may not be deductible for federal income
tax purposes.
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<PAGE> 25
YEAR-END TAX REPORTING. After the end of each calendar year, you will receive a
statement (Form 1099) of the federal income tax status of all dividends and
other distributions paid (or deemed paid) during the year.
SHARES SOLD OR EXCHANGED. Your redemption of Fund shares may result in taxable
gain or loss to you, depending upon whether the redemption proceeds payable to
you are more or less than your adjusted cost basis for the redeemed shares.
Similar tax consequences generally will result from an exchange of Fund shares
for shares of another Strong Fund. If you purchase shares of a Fund within
thirty days before or after redeeming shares of the same Fund at a loss, a
portion or all of that loss will not be deductible and will increase the cost
basis of the newly purchased shares. If you redeem all the shares in your
account at any time during a month, dividends credited to the account since the
beginning of the dividend period through the day of redemption will be paid with
the redemption proceeds.
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. To do
so, each Fund distributes substantially all of its net investment income
monthly and net realized capital gains (after using any available capital loss
carryover) annually.
PERFORMANCE INFORMATION
Each Fund may advertise "yield," "equivalent taxable yield," "average annual
total return," "total return," and "cumulative total return." The Money Fund
may also advertise "effective yield." Each of these figures is based upon
historical results and is not necessarily representative of 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
Money Fund's yield and effective yield are measures of the net investment
income per share earned by the 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 Money Fund's yield because effective yield assumes
that the net investment income earned by the Fund will be reinvested. The
Short-Term, Insured, Bond, and High-Yield Funds' yield is a measure of the net
investment income per share earned by a Fund over a specific one-month period
and is shown as a percentage of the net asset value of the Fund's shares at the
end of the period. Equivalent taxable yield represents the amount a taxable
investment would need to generate to equal a Fund's yield for an investor at
stated tax rates.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund assuming
the reinvestment of all dividends and distributions. Total return figures are
not annualized and simply represent the aggregate change of a Fund's
investments over a specified period of time.
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<PAGE> 26
SHAREHOLDER MANUAL
HOW TO BUY SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . II-00
DETERMINING YOUR SHARE PRICE . . . . . . . . . . . . . . . . . . . . . II-00
HOW TO SELL SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . II-00
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . II-00
REGULAR INVESTMENT PLANS . . . . . . . . . . . . . . . . . . . . . . . II-00
SPECIAL SITUATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . II-00
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 Short-Term,
Insured, Bond, and High-Yield 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 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.
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C> <C>
TO OPEN A NEW ACCOUNT TO ADD TO AN EXISTING ACCOUNT
MAIL BY CHECK BY CHECK
- Complete and sign the application. Make your check or - Complete an Additional Investment Form provided
money order payable to "The Strong Funds." at the bottom of your account statement, or
write a note indicating your fund account number.
Make your check or money order payable to "The
- Mail to The Strong Funds, P.O. Box 2936, Milwaukee, Strong Funds."
Wisconsin 53201. If you're using an express delivery
service, send to The Strong Funds, 100 Heritage Reserve, - Mail to The Strong Funds, P.O. Box 2936, Milwaukee,
Menomonee Falls, Wisconsin 53051. Wisconsin 53201. If you're using an express
delivery service, send to The Strong Funds,
BY EXCHANGE 100 Heritage Reserve, Menomonee Falls, Wisconsin
- Call 1-800-368-3863 for instructions on establishing 53051.
an account with an exchange by mail.
BY EXCHANGE
- Call 1-800-368-3863 for instructions on exchanging
by mail.
TELEPHONE BY EXCHANGE BY EXCHANGE
- Call 1-800-368-3863 to establish a new account by - Add to an account by exchanging funds from
1-800-368-3863 exchanging funds from an existing Strong Funds account. another Strong Funds account.
24 HOURS A DAY, - Sign up for telephone exchange services when you open - Sign up for telephone exchange services when
7 DAYS A WEEK your account. To add the telephone exchange option to you open your account. To add the telephone
your account, call 1-800-368-3863 for a Telephone exchange option to your account, call
Exchange Form. 1-800-368-3863 for a Telephone Exchange Form.
- Please note that your account must be identically - Please note that the accounts must be
registered and that you must exchange enough into identically registered and that the minimum
the new account to meet the minimum initial investment. exchange is $50 or the balance of your
account, whichever is less.
BY TELEPHONE PURCHASE
- Complete the Request for Telephone Purchase Form
at the back of this Prospectus to make additional
investments from $50 to $25,000 into your Strong
Fund account by telephone.
IN PERSON Stop by our Investor Center in Menomonee Falls, Stop by our Investor Center in Menomonee Falls,
Wisconsin. Call 1-800-368-3863 for hours and directions. Wisconsin. Call 1-800-368-3863 for hours and
directions.
The Investor Center can only accept checks or money The Investor Center can only accept checks or money
orders. orders.
WIRE Call 1-800-368-3863 for instructions on opening an Call 1-800-368-3863 for instructions on adding
account by wire. to an account by wire.
</TABLE>
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<PAGE> 28
<TABLE>
<S> <C> <C>
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM." USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS.
- If you sign up for Strong's Automatic Investment Sign up for these services when you open your
Plan when you open your account, Strong Funds account, or call 1-800-368-3863 for instructions
will waive the Fund's minimum initial investment on how to add them to your existing account.
(see chart below).
- AUTOMATIC INVESTMENT PLAN. Make regular,
- Complete both the Automatic Investment Plan systematic investments (minimum $50) into your
application at the back of this Prospectus and Strong Funds account from your bank checking or
the new account application. NOW Account. We've included an application at
the back of this Prospectus.
- AUTOMATIC EXCHANGE PLAN. Make regular,
systematic exchanges (minimum $50) from
one Strong Funds account to another. Call
1-800-368-3863 for an application.
- Mail to the address indicated on the application. - PAYROLL DIRECT DEPOSIT. Have a specified amount
(minimum $50) regularly deducted from your pay-
check, 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 gains
distributions will be automatically reinvested in
additional Fund shares. Or, you may elect to have
your dividends and capital gains distributions
automatically invested in shares of another Strong
Fund.
BROKER-DEALER - You may purchase shares in a Fund through a - You may purchase additional shares in a Fund
broker-dealer or other institution that may through a broker-dealer or other institution that
charge a transaction fee. may charge a transaction fee.
- Strong Funds may only accept requests to purchase - Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account additional shares into a broker-dealer street name
from the broker-dealer. account from the broker-dealer.
</TABLE>
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<PAGE> 29
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- Please make all checks or money orders payable to "The
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
losses suffered by a Fund as a result.
- Further documentation may be requested from corporations,
executors, administrators, trustees, guardians, agents, or
attorneys-in-fact.
- A Fund may decline to accept your purchase order upon
receipt when, in the judgment of the Advisor, it would not
be in the best interests of the existing shareholders.
- The exchange privileges are available in all 50 states
because all the Strong Funds intend to continue to qualify
their shares for sale in all 50 states.
- Minimum Investment Requirements:
<TABLE>
<S> <C>
To open a regular account $2,500
To open an UGMA/UTMA account $250
To add to an existing account $50
</TABLE>
The Funds offer a No-Minimum Investment Program that
waives the minimum initial investment requirements for
investors who participate in the Strong Automatic
Investment Plan (described on page II-10). 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, or if, after
you reach a Fund's minimum, you reduce your balance to
less than $500), 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.
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES THROUGH A BROKER-DEALER
- If you purchase shares through a program of services
offered or administered by a broker-dealer, financial
institution, or other service provider, you should read
the program materials, including information relating to
fees, in connection with a Fund's Prospectus. Certain
features of a Fund may not be available or may be modified
in connection with the program of services provided.
- Certain broker-dealers, financial institutions, or
other service providers that have entered into an
agreement with the Distributor may enter purchase orders
on behalf of their customers by phone, with payment to
follow within several days as specified in the agreement.
The Funds may effect such purchase orders at the net
asset value next determined after receipt of the
telephone purchase order. It is the responsibility
II-4
<PAGE> 30
of the broker-dealer, financial institution, or other
service provider to place the order with the Funds on a
timely basis. If payment is not received within the time
specified in the agreement, the broker-dealer, financial
institution, or other service provider could be held liable
for any resulting fees or losses.
DETERMINING YOUR SHARE PRICE
Generally, when you make any purchases, sales, or exchanges,
the price of your shares will be the net asset value ("NAV")
next determined after Strong Funds receives your request in
proper form. If Strong Funds receives such request prior to
the close of the New York Stock Exchange (the "Exchange") on a
day on which the Exchange is open, your share price will be
the NAV determined that day. The NAV for each Fund is normally
determined as of 3:00 p.m. Central Time ("CT") each day the
Exchange is open. The Funds reserve the right to change the
time at which purchases, redemptions, and exchanges are priced
if the Exchange closes at a time other than 3:00 p.m. CT or if
an emergency exists. Each Fund's NAV is calculated by taking
the fair value of a Fund's total assets, subtracting all its
liabilities, and dividing by the total number of shares
outstanding. Expenses are accrued and applied daily when
determining the net asset value.
With respect to the Short-Term, Insured, Bond, and High-Yield
Funds, municipal securities are valued at fair value as
determined by a pricing service that is designated by the
Funds' Board of Directors. The pricing service generally
values securities at the average of the most recent bid and
asked prices and also may look to such factors as market
transactions among institutional investors and dealer
quotations for similar securities. The other debt securities
are valued at the last sales price on the national securities
exchange or NASDAQ on which such securities are primarily
traded; however, securities traded on NASDAQ for which there
were no transactions on a given day or securities not listed
on an exchange or NASDAQ are valued at the average of the most
recent bid and asked prices. Any taxable 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 of a Fund having
remaining maturities of 60 days or less when purchased are
valued by the amortized cost method when the Board of
Directors determines that the fair value of such securities is
their amortized cost, unless circumstances dictate otherwise.
The securities in the portfolio of the Money Fund 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 net asset value of this Fund 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
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 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 the
Fund. Once your redemption request is received in proper form,
Strong will normally mail you the proceeds the next business
day and, in any event, no later than seven days thereafter.
II-5
<PAGE> 31
To redeem shares, you may use any of the methods described in
the chart below. For your protection, certain requests may
require a signature guarantee.
II-6
<PAGE> 32
<TABLE>
<CAPTION>
TO SELL SHARES
<S> <C>
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA
ACCOUNTS
Write a "letter of instruction" that includes the
following information: your account number, the
dollar amount or number of shares you wish to
redeem, each owner's name, your street address, and
the signature of each owner as it appears on the
account.
Mail to The Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express
delivery service, send to 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
FOR TRUST ACCOUNTS
Same as above. Please ensure that all trustees sign
the letter of instruction.
FOR OTHER REGISTRATIONS
- Call 1-800-368-3863 for instructions.
TELEPHONE Sign up for telephone redemption services when you
open your account by checking the "Yes" box in the
1-800-368-3863 appropriate section of the account application. To
add the telephone redemption option to your
account, call 1-800-368-3863 for a Telephone
24 HOURS A DAY, Redemption Form.
7 DAYS A WEEK
Once the telephone redemption option is in place,
you may sell shares ($500 minimum) by phone and
arrange to receive the proceeds in one of three
ways.
TO RECEIVE A CHECK BY MAIL
At no charge, we will mail a check to the address
to which your account is registered.
TO DEPOSIT BY EFT
At no charge, we will transmit the proceeds by
Electronic Funds Transfer (EFT) to a pre-authorized
bank account. Usually, the funds will arrive at
your bank two banking days after we process your
redemption.
TO DEPOSIT BY WIRE
For a $10 fee, we will transmit the proceeds by
wire to a pre-authorized bank account. Usually, the
funds will arrive at your bank the next banking day
after we process your redemption.
</TABLE>
II-7
<PAGE> 33
<TABLE>
<S> <C>
CHECK WRITING Sign up for the free check-writing privileges when
you open your 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 and that you cannot write
a check to close an account.
AUTOMATICALLY You can set up automatic withdrawals from your
account at regular intervals. To establish the
Systematic Withdrawal Plan, request a form by
calling 1-800-368-3863.
BROKER-DEALER You may also redeem shares through broker-dealers
or others who may charge a commission or other
transaction fee.
</TABLE>
WHAT YOU SHOULD KNOW ABOUT SELLING SHARES
- - If you have recently purchased shares, please be aware that your
redemption request may not be honored until the purchase check
has cleared your bank, which generally occurs within ten calendar days.
- - The right of redemption may be suspended during any period when (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined
by the SEC exists, making disposal of portfolio securities or valuation
of net assets of a Fund not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must
submit the certificates with your redemption request. Each registered owner
must endorse the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
WHAT YOU SHOULD KNOW ABOUT TELEPHONE REDEMPTIONS
- - The Funds reserve the right to refuse a telephone redemption if they
believe it advisable to do so.
- - Once you place your telephone redemption request, it cannot be
canceled or modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Funds and their
transfer agent employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds may incur liability if
they do not follow these procedures.
- - Because of increased telephone volume, you may experience difficulty
in implementing a telephone redemption during periods of dramatic
economic or market changes.
SHAREHOLDER SERVICES
II-8
<PAGE> 34
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 the Strong Funds at the address on the
cover of this Prospectus.
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 the Statement of Additional Information, which you may
request by calling or writing the Strong Funds at the phone number and address
on the cover of this Prospectus.
CHANGING YOUR ACCOUNT INFORMATION. So that you continue receiving your Strong
correspondence, including any dividend checks and statements, please notify us
in writing as soon as possible if your address changes. You may use the
Additional Investment Form at the bottom of your confirmation statement, or
simply write us a letter of instruction that contains the following
information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to your accounts' registrations -- such as adding or removing a joint
owner, changing an owner's name, or changing the type of your account -- must
also be submitted in writing. Please call 1-800-368-3863 for instructions. For
your protection, some requests may require a signature guarantee.
II-9
<PAGE> 35
TRANSACTION SERVICES
FREE EXCHANGE PRIVILEGE. You may exchange shares between identically registered
Strong Funds accounts, either in writing or by telephone. By establishing the
telephone exchange services, you authorize the Fund and its agents to act upon
your instruction by telephone to redeem or exchange shares from any account you
specify. Please obtain and read the appropriate Prospectus before investing in
any of the Strong Funds. Since an excessive number of exchanges may be
detrimental to the Funds, each Fund reserves the right to discontinue the
exchange privilege of any shareholder who makes more than five exchanges in a
year or three exchanges in a calendar quarter.
FREE CHECK-WRITING PRIVILEGES. You may also redeem shares by check in amounts
of $500 or more. There is no charge for this privilege. Redemption by check
cannot be honored if share certificates are outstanding and would need to be
liquidated to honor the check. Checks are supplied free of charge, and
additional checks will be sent to you upon your 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 the 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
instruction (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
The Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan, all discussed below, are methods of implementing
DOLLAR COST AVERAGING. Dollar cost averaging is an investment strategy that
involves investing a fixed amount of money at a regular time interval. 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 the average transaction price. A program of
regular investment cannot ensure a profit or protect against a loss during
declining markets. Since such a program involves continuous investment
regardless of fluctuating share values, you should consider your ability to
continue the program through periods of both low and high share-price levels.
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in a Fund from your bank checking or NOW
account. You may choose to make investments on any day of the month in amounts
of $50 or more. You can set up the Automatic Investment Plan with any financial
institution that is a member of the Automated Clearing House. Because each Fund
has the right to close an investor's account for failure to reach the minimum
initial investment, please consider your ability to continue this Plan until
you reach the minimum initial investment. Such closing may occur in periods of
declining share prices. To establish the Plan, complete the application at the
back of this Prospectus, or call 1-800-368-3863.
PAYROLL DIRECT DEPOSIT PLAN. Once you meet a Fund's minimum initial investment
requirement, you may purchase additional Fund shares through the Payroll Direct
Deposit Plan. Through this Plan, periodic investments (minimum $50) are made
automatically
II-10
<PAGE> 36
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 Automated Clearing House available to its
employees. The Plan may be used for other direct deposits, such as social
security checks, military allotments, and annuity payments.
To establish a Direct Deposit for your account, call 1-800-368-3863 to obtain
an Authorization for Payroll Direct Deposit to a Strong Funds Account form.
Once the Plan is established, you may alter the amount of the deposit, alter
the frequency of the deposit, or terminate your participation in the program by
notifying your employer.
AUTOMATIC EXCHANGE PLAN. The Automatic Exchange Plan allows you to make
regular, systematic exchanges (minimum $50) from one Strong Funds account into
another Strong Funds account. By setting up the Plan, you authorize the Fund
and its agents to redeem a set dollar amount or number of shares from the first
account and purchase shares of a second Strong Fund. In addition, you authorize
a Fund and its agents to accept telephone instructions to change the dollar
amount and frequency of the exchange. An exchange transaction is a sale and
purchase of shares for federal income tax purposes and may result in a capital
gain or loss. To establish the Plan, request a form by calling 1-800-368-3863.
To participate in the Automatic Exchange Plan, you must have an initial account
balance of $2,500 in the first account and at least the minimum initial
investment in the second account. Exchanges may be made on any day or days of
your choice. If the amount remaining in the first account is less than the
exchange amount you requested, then the remaining amount will be exchanged. At
such time as the first account has a zero balance, your participation in the
Plan will be terminated. You may also terminate the Plan at any time by calling
or writing to the Fund. Once participation in the Plan has been terminated for
any reason, to reinstate the Plan you must do so in writing; simply investing
additional funds will not reinstate the Plan.
SYSTEMATIC WITHDRAWAL PLAN. You can set up automatic withdrawals from your
account at regular intervals. To begin distributions, you must have an initial
balance of $5,000 in your account and withdraw at least $50 per payment. To
establish the Systematic Withdrawal Plan, request a form by calling
1-800-368-3863. Depending upon the size of the account and the withdrawals
requested (and fluctuations in net asset value of the shares redeemed),
redemptions for the purpose of satisfying such withdrawals may reduce or even
exhaust the account. If the amount remaining in the account is not sufficient
to meet a payment, the remaining amount will be redeemed and the Plan will be
terminated.
SPECIAL SITUATIONS
POWER OF ATTORNEY. If you are investing as attorney-in-fact for another person,
please complete the account application in the name of such person and sign the
back of the application in the following form: "[applicant's name] by [your
name], attorney-in-fact." To avoid having to file an affidavit prior to each
transaction, please complete the Power of Attorney form available from Strong
Funds at 1-800-368-3863. However, if you would like to use your own power of
attorney form, please call the same number for instructions.
CORPORATIONS AND TRUSTS. If you are investing for a corporation, please include
with your account application a certified copy of your corporate resolution
indicating which officers
II-11
<PAGE> 37
are authorized to act on behalf of the corporation. As an alternative,
you may complete a Certification of Authorized Individuals form, which can
be obtained from the Funds. Until a valid corporate resolution or
Certification of Authorized Individuals 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.
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.
II-12
<PAGE> 38
APPENDIX A
Ratings of Debt Securities:
<TABLE>
<CAPTION>
MOODY'S STANDARD & FITCH
INVESTORS POOR'S INVESTORS
SERVICE, INC. CORPORATION SERVICE, INC. DEFINITION
<S> <C> <C> <C> <C>
LONG-TERM Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper medium grade
Baa BBB BBB Medium grade
Ba BB BB Low grade
B B B Speculative
Caa, Ca, C CCC, CC, C CCC, CC, C Submarginal
D D DDD, DD, D Probably in default
</TABLE>
<TABLE>
<CAPTION>
MOODY'S S&P FITCH
<S> <C> <C> <C>
SHORT-TERM MIG1/VMIG1 Best quality SP-1+ Very strong F-1+ Exceptionally
quality strong quality
MIG2/VMIG2 High quality SP-1 Strong quality F-1 Very strong quality
MIG3/VMIG3 Favorable SP-2 Satisfactory F-2 Good credit quality
quality grade
MIG4/VMIG4 Adequate quality F-3 Fair credit quality
SG Speculative grade SP-3 Speculative grade F-S Weak credit quality
COMMERCIAL P-1 Superior quality A-1+ Extremely strong F-1+ Exceptionally
PAPER quality strong quality
A-1 Strong quality F-1 Very strong quality
P-2 Strong quality A-2 Satisfactory F-2 Good credit quality
quality
P-3 Acceptable quality A-3 Adequate quality F-3 Fair credit quality
B Speculative F-S Weak credit quality
quality
Not Prime C Doubtful quality D Default
</TABLE>
A-1
<PAGE> 39
Explanation of Quality Ratings:
<TABLE>
<CAPTION>
BOND
RATING EXPLANATION
<S> <C> <C>
MOODY'S Aaa Highest quality, smallest degree of investment risk.
INVESTORS
SERVICE, Aa High quality; together with Aaa bonds, they compose the high-grade bond
INC. group.
A Upper medium-grade obligations; many favorable investment attributes.
Baa Medium-grade obligations; neither highly protected nor poorly secured.
Interest and principal appear adequate for the present but certain
protective elements may be lacking or may be unreliable over any great
length of time.
Ba More uncertain, with speculative elements. Protection of interest and
principal payments not well safeguarded during good and bad times.
B Lack characteristics of desirable investment; potentially low assurance of
timely interest and principal payments or maintenance of other contract
terms over time.
Caa Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
Ca Speculative in a high degree; could be in default or have other marked
shortcomings.
C Lowest-rated; extremely poor prospects of ever attaining investment
standing.
STANDARD & AAA Highest rating; extremely strong capacity to pay principal and interest.
POOR'S AA High quality; very strong capacity to pay principal and interest.
GROUP A Strong capacity to pay principal and interest; somewhat more susceptible to
the adverse effects of changing circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest; normally exhibit adequate
protection parameters, but adverse economic conditions or changing
circumstances more likely to lead to a weakened capacity to pay principal
and interest than for higher-rated bonds.
BB, Predominantly speculative with respect to the issuer's capacity to meet
B, required interest and principal payments. BB- lowest degree of
CCC, speculation; C- the highest degree of speculation. Quality and protective
CC, C characteristics outweighed by large uncertainties or major risk exposure to
adverse conditions.
CI No interest being paid.
D In default.
FITCH AAA Highest quality; obligor has exceptionally strong ability to pay interest
INVESTORS and repay principal, which is unlikely to be affected by reasonably
SERVICE, foreseeable events.
INC. AA Very high quality; obligor's ability to pay interest and repay principal is
very strong. Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+.
A High quality; obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than higher-rated bonds.
BBB Satisfactory credit quality; obligor's ability to pay interest and repay
principal is considered adequate. Unfavorable changes in economic
conditions and circumstances are more likely to adversely affect these
bonds and impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for higher-rated
bonds.
BB, Not investment-grade; predominantly speculative with respect to the
B, issuer's capacity to repay interest and repay principal in accordance with
CCC, the terms of the obligation for bond issues not in default. BB is least
CC, C speculative. C is the most speculative.
DDD, Bonds are in default on interest and/or principal payments. DDD represents
DD, D the highest potential for recovery of these bonds, and D represents the
lowest potential for recovery.
</TABLE>
See the Appendix to the Funds' Statement of Additional
Information for a more complete description of ratings.
A-2
<PAGE> 40
APPENDIX B
WEIGHTED AVERAGE RATINGS OF BONDS(1)
<TABLE>
<CAPTION>
AVERAGE PERCENTAGE OF ASSETS HELD DURING 1994(2) PERCENTAGE OF ASSETS HELD ON DECEMBER 31, 1994
HIGH-YIELD MUNICIPAL BOND HIGH-YIELD MUNICIPAL BOND
<S> <C> <C> <C> <C> <C> <C> <C>
EQUIVALENT EQUIVALENT
S&P MOODY'S RATED UNRATED(3) S&P MOODY'S RATED UNRATED(3)
AAA Aaa(4) % - AAA Aaa(4) % -
AA Aa - AA Aa -
A A - A A - -
BBB Baa BBB Baa
BB Ba BB Ba
B B - B B -
CCC Caa - - CCC Caa - -
CC Ca - - CC Ca - -
C C - - C C - -
TOTALS % % TOTALS % %
</TABLE>
1. A security rated differently by the rating services is included in the
category representing the higher of the ratings assigned to the
security.
2. Based on a weighted average of the securities held at the end of each
month. Investment grade bonds are those rated in one of the four highest
categories by a nationally recognized rating organization. See
"Fundamentals of Fixed Income Investing" in this Prospectus for a
discussion of the risks associated with non-investment grade bonds and
the Statement of Additional Information for a description of credit
ratings. The Appendix does not contain information on the Money,
Short-Term, Insured, and Bond Funds because these Funds did not
invest more than 5% in non-investment grade bonds.
3. This category represents the comparable quality of unrated securities,
as determined by the Advisor.
4. Includes all U.S. government obligations.
A-3
<PAGE> 41
CUSTODIAN
Firstar Trust Company
P.O. Box 701, Milwaukee, Wisconsin 53201
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
AUDITORS
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street, Milwaukee, Wisconsin 53202
INVESTMENT ADVISOR
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
DISTRIBUTOR
Strong Funds Distributors, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
<PAGE> 42
STATEMENT OF ADDITIONAL INFORMATION
STRONG MUNICIPAL MONEY MARKET FUND, INC.
STRONG SHORT-TERM MUNICIPAL BOND FUND, INC.
STRONG INSURED MUNICIPAL BOND FUND, INC.
STRONG MUNICIPAL BOND FUND, INC.
STRONG HIGH-YIELD MUNICIPAL BOND FUND, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: 1-414-359-1400
Toll-Free: 1-800-368-3863
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of Strong Municipal Money
Market Fund, Inc., Strong Short-Term Municipal Bond Fund, Inc., Strong Insured
Municipal Bond Fund, Inc., Strong Municipal Bond Fund, Inc., and Strong
High-Yield Municipal Bond Fund, Inc. (the "Funds") dated May 1, 1995. Requests
for copies of the Prospectus should be made by writing to the Funds, P.O. Box
2936, Milwaukee, Wisconsin 53201, Attention: Corporate Secretary; or by
calling one of the numbers listed above. The financial statements appearing in
the Funds' Annual Report, which accompanies this Statement of Additional
Information, are incorporated herein by reference.
This Statement of Additional Information is dated May 1, 1995
<PAGE> 43
STRONG MUNICIPAL INCOME FUNDS
<TABLE>
<S> <C>
TABLE OF CONTENTS PAGE
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
COMMON INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Taxable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Variable- or Floating Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Lending of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Mortgage Dollar Rolls and Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . . 0
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Sector Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
INVESTMENT POLICIES AND TECHNIQUES--MONEY FUND . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Maturity Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Proposed Diversification Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
INVESTMENT POLICIES AND TECHNIQUES--SHORT-TERM, INSURED,
BOND, AND HIGH-YIELD FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
High Yield (High Risk) Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Insurance (Insured Fund) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
DIRECTORS AND OFFICERS OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
INVESTMENT ADVISOR AND UNDERWRITER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Systematic Withdrawal Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Automatic Investment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
General Procedures for Shareholder Accounts . . . . . . . . . . . . . . . . . . . . . . . . . 0
Telephone Exchange and Redemption Privileges and Automatic Exchange
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
FUND ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
PORTFOLIO MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated May 1, 1995, and if given or made, such
information or representations may not be relied upon as having been authorized
by the Funds.
This Statement of Additional Information does not constitute an offer to sell
securities.
<PAGE> 44
INVESTMENT RESTRICTIONS
The investment objective of the Strong Municipal Money Market Fund,
Inc. (the "Money Fund") is to seek federally tax-exempt current income, a
stable share price and daily liquidity. The investment objective of the Strong
Short-Term Municipal Bond Fund, Inc. (the "Short-Term Fund") is to seek total
return by investing for a high level of federally tax-exempt current income
with a low degree of share-price fluctuation. The investment objective of the
Strong Insured Municipal Bond Fund, Inc. (the "Insured Fund") and the Strong
Municipal Bond Fund, Inc. (the "Bond Fund") is to seek total return by
investing for a high level of federally tax-exempt current income with a
moderate degree of share-price fluctuation. The investment objective of the
Strong High-Yield Municipal Bond Fund, Inc. (the "High-Yield Fund") is to seek
total return by investing for a high level of federally tax-exempt current
income. The Funds' investment objectives and policies are described in detail
in the Prospectus under the caption "Investment Objectives and Policies." The
following are the Funds' fundamental investment limitations which cannot be
changed without shareholder approval.
Each Fund:
<TABLE>
<S> <C>
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
oustanding 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 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 Investment Company Act of 1940.
4. May not act as an underwriter of another issuer's securities, except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio
securities.
5. May not purchase or sell physical commodities unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts, or other derivative
instruments, or from investing in securities or other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's total assets would be lent to other persons, except
through (i) purchases of debt securities or other debt instruments, or (ii) engaging in repurchase agreements.
7. May not purchase the securities of any issuer if, as a result, more than 25% of the Fund's total assets would be invested
in the securities of issuers, the principal business activities of which are in the same industry.
8. May not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments
(but this shall not prohibit the Fund from purchasing or selling securities or other instruments backed by real estate or
of issuers engaged in real estate activities).
9. May, notwithstanding any other fundamental investment policy or restriction, invest all of its assets in the
securities of a single open-end management investment company with substantially the same fundamental investment objective,
policies, and restrictions as the Fund.
10. May not, under normal market conditions, invest less than 80% of its net assets in municipal securities.
</TABLE>
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<PAGE> 45
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:
<TABLE>
<S> <C>
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 SEC or
its staff, and provided that transactions in options, futures contracts, options on futures contracts, or other derivative
instruments are not deemed to constitute selling securities short.
2. Purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the
clearance of transactions; and provided that margin deposits in connection with futures contracts, options on futures
contracts, or other derivative instruments shall not constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more than 15% (10% with respect to the Money Fund)
of its net assets would be invested in illiquid securities, or such other amounts as may be permitted under the Investment
Company Act of 1940.
4. Purchase securities of other investment companies except in compliance with the Investment Company Act of 1940 and
applicable state law.
5. Invest all of its assets in the securities of a single open-end investment management company with substantially the
same fundamental investment objective, restrictions and policies as the Fund.
6. Purchase the securities of any issuer (other than securities issued or guaranteed by domestic or foreign governments
or political subdivisions thereof) if, as a result, more than 5% of its total assets would be invested in the securities of
issuers that, including predecessor or unconditional guarantors, have a record of less than three years of continuous
operation. This policy does not apply to securities of pooled investment vehicles or mortgage or asset-backed securities.
7. Invest in direct interests in oil, gas, or other mineral exploration programs or leases; however, the Fund may
invest in the securities of issuers that engage in these activities.
8. Engage in futures or options on futures transactions which are impermissible pursuant to Rule 4.5 under the
Commodity Exchange Act and, in accordance with Rule 4.5, will use futures or options on futures transactions solely for
bona fide hedging transactions (within the meaning of the Commodity Exchange Act), provided, however, that the Fund may,
in addition to bona fide hedging transactions, use futures and options on futures transactions if the aggregate initial
margin and premiums required to establish such positions, less the amount by which any such options positions are in the
money (within the meaning of the Commodity Exchange Act), do not exceed 5% of the Fund's net assets.
In addition, (i) the aggregate value of securities underlying call options on securities written by the Fund or
obligations underlying put options on securities written by the Fund determined as of the date the options are written will
not exceed 50% of the Fund's net assets; (ii) the aggregate premiums paid on all options purchased by the Fund and which
are being held will not exceed 20% of the Fund's net assets; (iii) the Fund will not purchase put or call options, other
than hedging positions, if, as a result thereof, more than 5% of its total assets would be so invested; and (iv) the
aggregate margin deposits required on all futures and options on futures transactions being held will not exceed 5% of the
Fund's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Fund except as may be necessary in connection with
permissible borrowings or investments and then such pledging, mortgaging, or hypothecating may not exceed 33 1/3% of the
Fund's total assets at the time of the borrowing or investment.
10. Purchase or retain the securities of any issuer if any officer or director of the Fund or its investment advisor
beneficially owns more than 1/2 of 1% of the securities of such issuer and such officers and directors together own
beneficially more than 5% of the securities of such issuer.
</TABLE>
4
<PAGE> 46
<TABLE>
<S> <C>
11. Purchase warrants, valued at the lower of cost or market value, in excess of 5% of the Fund's net assets. Included
in that amount, but not to exceed 2% of the Fund's net assets, may be warrants that are not listed on the New York Stock
Exchange or the American Stock Exchange. Warrants acquired by the Fund in units or attached to securities are not subject
to these restrictions.
12. Borrow money except (i) from banks or (ii) through reverse repurchase agreements or mortgage dollar rolls, and will not
purchase securities when bank borrowings exceed 5% of its total assets.
13. Make any loans other than loans of portfolio securities, except through (i) purchases of debt securities or other debt
instruments, or (ii) engaging in repurchase agreements.
</TABLE>
Money Fund. In addition to the common non-fundamental restrictions described
above, the Money Fund may not engage in any transaction or practice which is
not permissible under Rule 2a-7 of the Investment Company Act of 1940,
nothwithstanding any other fundamental investment limitation or non-fundamental
operating policy.
Short-Term, Insured, Bond, and High-Yield Funds. Under normal market
conditions, the Short-Term, Insured, Bond, and High-Yield Funds will invest at
least 65% of each Fund's total assets in bonds.
If a percentage restriction relating to a fundamental or
non-fundamental limitation is adhered to at the time of investment, a later
increase in percentage resulting from a change in market value of the
investment or the total assets will not constitute a violation of that
restriction. 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.
COMMON 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." Investment policies and techniques
that are unique to the Money Fund, Short-Term Fund, Insured Fund, Bond Fund,
and High-Yield Fund are discussed under "Investment Policies and Techniques -
Money Fund, Short-Term Fund, Insured Fund, Bond Fund, and High-Yield Fund,"
respectively.
ILLIQUID SECURITIES
The Funds may invest in illiquid securities (i.e., securities that are
not readily marketable). However, a Fund will not acquire illiquid securities
if, as a result, they would comprise more than 15%, or with respect to the
Money Fund, 10%, of the value of the Fund's net assets (or such other amounts
as may be permitted under the Investment Company Act). The Board of Directors
of each Fund, or its delegate, has the ultimate authority to determine, to the
extent permissible under the federal securities laws, which securities are
illiquid for purposes of this limitation. Certain securities exempt from
registration or issued in transactions exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), including securities
that may be resold pursuant to Rule 144A under the Securities Act, may be
considered liquid. The Board of Directors of each Fund has delegated to Strong
Capital Management, Inc. (the "Advisor") the day-to-day determination of the
liquidity of a security, although it has retained oversight and ultimate
responsibility for such determinations. Although no definitive liquidity
criteria are used, the Board of Directors has directed the Advisor to look to
such factors as (i) the nature of the market for a security (including the
institutional private resale market), (ii) the terms of certain securities or
other instruments allowing for the disposition to a third party or the issuer
thereof (e.g., certain repurchase obligations and demand instruments), (iii)
the availability of market quotations (e.g., for securities quoted in PORTAL
system), and (iv) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities
5
<PAGE> 47
will be priced at fair value as determined in good faith by the Board of
Directors of each Fund. If through the appreciation of restricted securities
or the depreciation of unrestricted securities, a Fund should be in a position
where more than 15%, or with respect to the Money Fund, 10%, of the value of
its net assets are invested in illiquid securities, including restricted
securities which are not readily marketable, the Fund will take such steps as
is deemed advisable, if any, to protect liquidity.
Each Fund may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC
options written by the Fund. The assets used as cover for OTC options written
by the Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option 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.
In addition, the Funds may acquire standby commitments to facilitate
portfolio liquidity. Standby commitments are puts or rights that entitle the
holders thereof to achieve same-day settlement and to receive an exercise price
equal to the amortized cost of the underlying security plus accrued interest,
if any, at the time of exercise. A standby commitment is generally not
transferable by a Fund, although the underlying security is separately
transferable. A Fund may pay for standby commitments either separately, in
cash, or as part of the higher acquisition cost of securities subject to such
commitments (thus reducing the yield on such securities). Standby commitments
are subject to certain risks, including (i) the creditworthiness of the issuers
of standby commitments to pay for the securities at the time the commitments
are exercised, (ii) the possible restrictions on transfer of the standby
commitments, and (iii) the term of the standby commitment, which may be shorter
than the maturity of the underlying security. The Short-Term Fund will not
consider the maturity of any security to be shortened by reason of any standby
commitment to which it is subject.
TAXABLE SECURITIES
From time to time each Fund may invest up to 20% of its total 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: (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 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, a 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. The Short-Term, Insured, Bond, and High-Yield Funds may
temporarily invest up to 100% of their respective total assets in short-term
fixed income securities including taxable obligations as a defensive measure
when, in the opinion of the Advisor, it is advisable to do so because of
adverse market conditions. In addition, each Fund may invest up to 100% of its
total assets in private activity bonds, the interest on which is a
tax-preference item for taxpayers subject to the federal alternative minimum
tax.
VARIABLE- OR FLOATING-RATE SECURITIES
Each Fund may invest in securities which offer a variable- or
floating-rate of interest. Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities 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
6
<PAGE> 48
instrument's maturity to be shorter than its stated maturity. Any such
determination by the Money Fund will be made in accordance with Rule 2a-7.
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 Funds' 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%, or with respect to the Money
Fund, 10%, 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. The High-Yield Fund will
only invest in investment-grade variable- and floating-rate securities. 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 dollar-weighted average portfolio maturity, a
Fund will consider a floating or variable rate security to have a maturity
equal to its stated maturity (or redemption date if it has been called for
redemption), except that it may consider (i) variable rate securities to have a
maturity equal to the period remaining until the next readjustment in the
interest rate, unless subject to a demand feature, (ii) variable rate
securities subject to a demand feature to have a remaining maturity equal to
the longer of (a) the next readjustment in the interest rate or (b) the period
remaining until the principal can be recovered through demand, and (iii)
floating rate securities subject to a demand feature to have a maturity equal
to the period remaining until the principal can be recovered through demand.
Variable and floating rate securities generally are subject to less principal
fluctuation than securities without these attributes since the securities
usually trade at par following the readjustment in the interest rate.
SHORT SALES AGAINST THE BOX
Each Fund may sell securities short against the box to hedge
unrealized gains on portfolio securities. Selling securities short against the
box involves selling a security that a Fund owns or has the right to acquire,
for delivery at a specified date in the 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.
LENDING OF PORTFOLIO SECURITIES
Each Fund is authorized to lend up to 33 1/3% of the total value of
its portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. 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
7
<PAGE> 49
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 regaining such
rights is considered to be in a Fund's interest. However, the Funds do not
presently intend to engage in such lending.
REPURCHASE AGREEMENTS
In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. If the value of such securities is less than
the repurchase price, plus any agreed-upon additional amount, the other party
to the agreement will be required to provide additional collateral so that at
all times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The Advisor will monitor, on an ongoing basis,
the value of the underlying securities to ensure that the value always equal or
exceeds the repurchase price plus accrued interest.
Each Fund may enter into repurchase agreements with member banks of
the Federal Reserve System or certain non-bank dealers. In a repurchase
agreement, a Fund acquires a security at one price and, at the time of the
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. 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 a Fund enters into repurchase agreements to
evaluate those risks. The High-Yield Fund will not enter into repurchase
agreements equaling more than 10% of the Fund's assets with banks or non-bank
dealers that have lower than investment grade ratings. Repurchase agreements
generate taxable income to a Fund. Accordingly, a Fund may not invest more than
20% of its assets in repurchase agreements and other securities which generate
income that is not exempt from federal income taxation. In addition, the Money
Fund will not invest more than 10% of its net assets in repurchase agreements
maturing in more than seven days and other securities that are not readily
marketable. The Short-Term, Insured, Bond, and High-Yield Funds may invest up
to 15% of their respective net assets in repurchase agreements maturing in more
than seven days and other securities that are not readily marketable. (See
"Illiquid Securities" above.)
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
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 that 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 "Borrowings"
below.)
Each Fund 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, 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. (See "Borrowings" below.) When required by guidelines
of the SEC, a Fund will set aside permissible liquid assets in a segregated
account to secure its obligation to repurchase the security.
8
<PAGE> 50
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 securities or repurchase
agreements that mature on or before the settlement date on 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.
</R.
BORROWINGS
Each Fund may borrow money from banks, limited by each Fund's
fundamental investment restriction to 33 1/3% of its total assets, and may
engage in mortgage dollar roll transactions and reverse repurchase agreements
which may be considered a form of borrowing. (See "Mortgage Dollar Rolls and
Reverse Repurchase Agreements" above.) In addition, each Fund may borrow up to
an additional 5% of its total assets from banks for temporary or emergency
purposes. A Fund will not purchase securities when bank borrowings exceed 5% of
the Fund's total assets.
SECTOR CONCENTRATION
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.
INVESTMENT POLICIES AND TECHNIQUES--MONEY FUND
MATURITY RESTRICTIONS
The Money Fund is subject to certain maturity restrictions pursuant to
Rule 2a-7 under the Investment Company Act of 1940 (the "Investment Company
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, the Money
Fund 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). For purposes of calculating the maturity
of portfolio instruments, the Money Fund will follow the requirements of Rule
2a-7. Under Rule 2a-7, the maturity of portfolio instruments is calculated as
indicated below.
Generally, the maturity of a portfolio instrument shall be deemed to
be the period remaining (calculated from the trade date or such other date on
which the Money 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.
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(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.
As used herein all capitalized but undefined terms shall have the meaning such
terms have in Rule 2a-7.
PROPOSED DIVERSIFICATION RESTRICTIONS
The SEC has proposed amendments to Rule 2a-7 which would impose certain
diversification requirements on tax-exempt money market funds, including that a
fund:
(i) may not acquire second-tier securities (generally securities rated in
the second highest rating category by at least one NRSRO or unrated securities
determined by the Advisor to be of comparable quality) of an issuer if,
immediately after 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; and
(ii) not invest more than 5% of its 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;
To the extent these amendments, if adopted, limit the universe of permitted
investments, they may lower the Fund's yield potential.
INVESTMENT POLICIES AND TECHNIQUES --
SHORT-TERM FUND, INSURED FUND, BOND FUND, AND HIGH-YIELD FUND
HIGH YIELD (HIGH RISK) SECURITIES
IN GENERAL. The Bond Fund has the authority to invest up to 5% of its
assets, the Short-Term Fund up to 20% of its assets, and the High-Yield Fund
may invest without limitation in non-investment grade debt securities (i.e.,
medium and lower-quality securities). Non-investment grade debt securities
(hereinafter referred to as "medium and lower-quality securities") include (i)
bonds rates as low as C by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), or Fitch Investors Service, Inc.
("Fitch"), or CCC by Duff & Phelps, Inc. ("D&P"); (ii) commercial paper rated
as low as C by S&P, Not Prime by Moody's or Fitch 4 by Fitch; and (iii) unrated
debt securities of comparable quality. Medium and 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 High-Yield Fund
also may invest in bonds that are in default, but such bonds are not expected
to exceed 10% of the Fund's total assets. The special risk considerations in
connection with investments in these securities are discussed below. Refer to
the Appendix of this Statement of Additional Information for a discussion of
securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated 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 an
economic downturn could severely disrupt the market for and adversely affect
the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower-quality and comparable unrated securities also tend to be
more sensitive to economic conditions than are higher-rated securities. As a
result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality and comparable
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unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, a Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable
unrated security will decrease in a rising interest rate market, and
accordingly so will a Fund's net asset value. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of
its portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce the Fund's asset base over which
expenses could be allocated and could result in a reduced rate of return for
the Fund.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, a Fund may have
to replace the securities with a lower yielding security, which would result in
a lower return for the Funds.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of lower-quality and
comparable unrated securities and, therefore, may not fully reflect the true
risks of an investment. In addition, credit rating agencies may or may not
make timely changes in a rating to reflect changes in the economy or in the
condition of the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in lower-quality and comparable unrated
securities will be more dependent on the Advisor's credit analysis than would
be the case with investments in investment-grade debt securities. The Advisor
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Advisor continually monitors the investments in
each Fund's portfolio and carefully evaluates whether to dispose of or to
retain lower-quality and comparable unrated securities whose credit ratings or
credit quality may have changed.
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.
NEW AND PROPOSED LEGISLATION. Recent legislation has been adopted,
and from time to time, proposals have been discussed, regarding new legislation
designed to limit the use of certain lower-quality and comparable unrated
securities by certain issuers. An example of legislation is a recent law which
requires federally insured savings and loan associations to divest their
investments in these securities over time. It is not currently possible to
determine the impact of the recent legislation or the proposed legislation on
the lower-quality and comparable unrated securities market. However, it is
anticipated that if additional
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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.
INSURANCE (INSURED FUND)
IN GENERAL. Under normal market conditions, 65% of the Insured Fund's
municipal securities must be insured as to the timely payment of principal and
interest. Such insurance will either be (i) purchased by the Insured Fund or
by a previous owner of a municipal security ("Mutual Fund Insurance"); or (ii)
obtained from the issuer or underwriter of the municipal securities ("Issue
Insurance"). If a municipal security is already covered by Issue Insurance
when acquired by the Insured Fund, the coverage will not be duplicated by
Mutual Fund Insurance. If a municipal security is not covered by Issue
Insurance, then it may be covered by Mutual Fund Insurance purchased by the
Insured Fund. The Insured Fund anticipates that all or substantially all of
its insured municipal securities will be subject to Issue Insurance. Although
the insurance feature reduces certain financial risks, the premiums for Mutual
Fund Insurance (if purchased by the Insured Fund, which are paid from the
Fund's assets) and the higher market price paid for municipal securities
covered by Issue Insurance reduce the Fund's current yield.
Insurance will cover the timely payment of interest and principal on
municipal securities and will be obtained from insurers with a high
claims-paying ability designated by or under the authority of the Insured
Fund's Board of Directors. In order to be considered as an eligible insurer,
such insurers must guarantee the timely payment of all principal and interest
on the municipal securities as they become due. However, such insurance may
provide that in the event of non-payment of interest or principal, when due,
with respect to an insured municipal bond, the insurer is not obligated to make
such payment until a specified time period (which may be 30 days or more after
it has been notified by the Insured Fund that such non-payment has occurred).
For these purposes, a payment of principal is due only at final maturity of the
municipal bond and not at the time any earlier sinking fund payment is due. In
addition to the requirement that the insurer insure the timely payment of
principal and interest on municipal securities as they become due, the
insurer's claims-paying ability must also be determined to be high by or under
the authority of the Insured Fund's Board of Directors. While the insurance
will guarantee the timely payment of principal and interest, it does not
guarantee the market value of the municipal securities or the net asset value
of the Insured Fund's shares.
Municipal securities are generally eligible to be insured under Mutual
Fund Insurance if, at the time of purchase by the Insured Fund, they are
identified separately or by category in qualitative guidelines furnished by the
mutual fund insurer and are in compliance with the aggregate limitations on
amounts set forth in such guidelines. Premium variations are based, in part,
on the rating of the municipal securities being insured at the time the Insured
Fund purchases the securities. The insurer may prospectively withdraw
particular municipal securities from the classifications of securities eligible
for insurance or change the aggregate amount limitation of each issue or
category of eligible municipal securities. But, the insurer must continue to
insure the full amount of the municipal securities previously acquired, which
the insurer has indicated are eligible so long as they remain in the Insured
Fund's portfolio. The qualitative guidelines and aggregate amount limitations
established by the insurer from time to time will not necessarily be the same
as those the Insured Fund would use to govern selection of municipal securities
for the Fund's investments. Therefore, from time to time such guidelines and
limitations may affect investment decisions in the event the Fund's portfolio
securities are insured by Mutual Fund Insurance.
For Mutual Fund Insurance that terminates upon the sale of the insured
security, the insurance does not have any effect on the resale value of such
security. Therefore, the Insured Fund will generally retain any insured
municipal securities which are in default or, in the judgment of the Advisor,
are in significant risk of default and place a value on the insurance. This
value will be equal to the difference between the market value of the defaulted
municipal securities and the market value of similar municipal securities which
are not in default. As a result, the Advisor may be unable to manage the
Insured Fund's portfolio to the extent the Fund holds defaulted municipal
securities, which will limit its ability in certain circumstances to purchase
other municipal securities. While a defaulted municipal security is held by
the Insured Fund, the Fund continues to pay the insurance premium thereon but
also collects interest payments from the insurer and retains the right to
collect the full amount of principal from the insurer when the municipal
security comes due. The Insured Fund expects that the market value of a
defaulted municipal security covered by Issue Insurance will generally be
greater than the market value of an otherwise comparable defaulted municipal
security covered by Mutual Fund Insurance.
PRINCIPAL INSURERS. Currently, Municipal Bond Investors Assurance
Corporation ("MBIA"), Capital Guaranty Insurance Company ("Capital Guaranty"),
Financial Guaranty Insurance Company ("FGIC"), AMBAC Indemnity Corporation
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("AMBAC"), Financial Security Assurance Corp., together with its affiliated
insurance companies -- Financial Security Assurance International Inc. and
Financial Security Assurance of Oklahoma, Inc. (collectively, "FSA"), Connie
Lee Insurance Co. ("Connie Lee"), and Capital Markets Assurance Corporation
("CapMAC") are considered to have a high claims-paying ability and, therefore,
are eligible insurers for the Insured Fund's insured municipal securities.
Additional insurers may be added without further notification if such insurers'
claims-paying ability is determined to be high by or under the authority of the
Insured Fund's Board of Directors. The following information concerning these
eligible insurers is based upon information provided by such insurers or
information filed with certain state insurance regulators. The Insured Fund
has not independently verified such information and makes no representations as
to the accuracy and adequacy of such information or as to the absence of
material adverse changes subsequent to the date thereof.
MBIA is a monoline financial guaranty insurance company created from
an unincorporated association (the Municipal Bond Insurance Association),
through which its members wrote municipal bond insurance on a several and
joint-basis through 1986. On January 5, 1990, MBIA acquired all of the
outstanding stock of Bond Investors Group, Inc., the parent of Bond Investors
Guaranty Insurance Company ("BIG"), which has subsequently changed its name to
MBIA Insurance Corp. of Illinois. Through a reinsurance agreement, BIG ceded
all of its net insured risks, as well as its related unearned premium and
contingency reserves, to MBIA. MBIA issues municipal bond insurance policies
guarantying the timely payment of principal and interest on new municipal bond
issues and leasing obligations of municipal entities, secondary market
insurance of such instruments and insurance on such instruments held in unit
investment trusts and mutual funds. As of December 31, 1994, MBIA
(consolidated) had statutory capital (i.e., surplus plus contingency reserves)
of approximately $_____ billion (unaudited) -- prepared in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. MBIA has a claims-paying ability rating of "AAA" by S&P and "Aaa"
by Moody's. Municipal securities insured by any insurer with such a
claims-paying ability rating will generally carry the same rating or credit
risk as the insurers. Accordingly, S&P and Moody's rate all bond issues
insured by MBIA and BIG "AAA" and "Aaa," respectively.
Capital Guaranty is a monoline insurance company whose policies
guaranty the timely payment of principal and interest on new issue and
secondary market issue municipal bond transactions. As of December 31, 1994,
Capital Guaranty had statutory capital of approximately $_____ million
(unaudited) -- prepared in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities. Capital Guaranty
has a claims-paying ability rating of "AAA" by S&P and "Aaa" by Moody's.
Financial Guaranty Insurance Corporation, a wholly owned subsidiary of
General Electric Capital Corporation, is an insurer of Municipal securities,
including new issues, securities held in unit investment trusts and mutual
funds, and those traded on secondary market. As of December 31, 1994, FGIC had
statutory capital of approximately $1 billion (unaudited) -- prepared in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. FGIC has a claims-paying ability rating of
"AAA" by S&P and "Aaa" by Moody's.
AMBAC, a wholly owned subsidiary of AMBAC Inc., is a monoline
insurance company whose policies guaranty the payment of principal and interest
on Municipal securities issues. As of December 31, 1994, AMBAC had statutory
capital of approximately $_____ billion (unaudited) -- prepared in accordance
with statutory accounting practices prescribed or permitted by insurance
regulatory authorities. AMBAC has a claims-paying ability rating of "AAA" by
S&P and "Aaa" by Moody's.
FSA, which is wholly owned by U.S. West Capital Corporation, is a
monoline insurer whose policies guaranty the timely payment of principal and
interest on new issue and secondary market issue Municipal securities
transactions, among other financial obligations. As of December 31, 1994, FSA
had statutory capital of approximately $_____ million (unaudited) -- prepared
in accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. FSA has a claims-paying ability rating of
"AAA" by S&P and "Aaa" by Moody's.
Connie Lee, a wholly-owned subsidiary of College Construction Loan
Insurance Association, is an insurer of municipal securities issued by
colleges, universities, and teaching hospitals. As of December 31, 1994,
Connie Lee had statutory capital of approximately $_____ million -- prepared
in accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. Connie Lee has a claims-paying ability of
"AAA" by S&P. Moody's has not issued a claims-paying ability rating for Connie
Lee.
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CapMAC, a wholly-owned subsidiary of CapMAC Holdings, Inc., is a
monoline insurance company whose policies guarantee the timely payment of
principal and interest on new issue and secondary market issue municipal
securities transactions, among other financial obligations. As of December 31,
1994, CapMAC had statutory capital of approximately $ _____ million -- prepared
in accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. CapMAC has a claims-paying ability rating of
"AAA" by S&P and "Aaa" by Moody's.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. As discussed in the Prospectus, the Advisor may
use a variety of derivative instruments, including options, futures contracts
(sometimes referred to as "futures") and options on futures contracts for any
lawful purpose, such as to hedge the Fund's portfolio, manage risk, or attempt
to enhance returns.
The use of these instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they may be
traded, the Commodity Futures Trading Commission ("CFTC") and various state
regulatory authorities. In addition, the Funds' ability to use these
instruments will be limited by tax considerations.
In addition to the products, strategies and risks described below and
in the Prospectus, the Advisor expects to discover additional derivative
instruments and other hedging techniques. These new opportunities may become
available as the Advisor develops new techniques, as regulatory authorities
broaden the range of permitted transactions. The Advisor may utilize these
opportunities to the extent that they are consistent with the Funds' investment
objective and permitted by the Funds' investment limitations and applicable
regulatory authorities.
SPECIAL RISKS OF THESE INSTRUMENTS. The use of derivative instruments
involves special considerations and risks as described below. Risks pertaining
to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon the
Advisor's ability to predict movements of the overall securities and currency
markets, which requires different skills than predicting changes in the prices
of individual securities. While the Advisor is experienced in the use of these
instruments, there can be no assurance that any particular strategy adopted
will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might
occur due to factors unrelated to the value of the investments being hedged,
such as speculative or other pressures on the markets in which these
instruments are traded. The effectiveness of hedges using instruments on
indices will depend on the degree of correlation between price movements in the
index and price movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. For example, if a Fund entered into
a short hedge because the Advisor projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the instrument. Moreover, if the price of the
instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss.
(4) As described below, a Fund might be required to maintain assets
as "cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close
out its positions in such instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. The requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. A Fund's ability to close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the
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ability and willingness of the other party to the transaction ("counter party")
to enter into a transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time and price that
is favorable to the Fund.
For a discussion of the federal income tax treatment of the Funds'
derivative instruments, see "TAXES -- Derivative Instruments" below.
GENERAL LIMITATIONS ON CERTAIN DERIVATIVE TRANSACTIONS. The
Short-Term Fund, Insured Fund, Bond Fund and High-Yield Fund have each filed a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the Commodity Futures Trading Commission (the "CFTC") and
the National Futures Association, which regulate trading in the futures
markets. Pursuant to Rule 4.5 of the regulations under the Commodity Exchange
Act (the "CEA"), the notice of eligibility for each Fund includes
representations that the Fund will use futures contracts and related options
solely for bona fide hedging purposes within the meaning of CFTC regulations,
provided that a Fund may hold other positions in futures contracts and related
options that do not qualify as a bona fide hedging position if the aggregate
initial margin deposits and premiums required to establish these positions,
less the amount by which any such options positions are "in the money," do not
exceed 5% of the Fund's net assets. Adoption of these guidelines does not
limit the percentage of the Fund's assets at risk to 5%. A Fund may purchase a
put or call option, including any straddles or spreads, only if the value of
its premium, when aggregated with the premiums on all other options purchased
by the Fund, does not exceed 5% of the Fund's total assets.
In addition, (i) the aggregate value of securities underlying call
options on securities written by a Fund or obligations underlying put options
on securities written by a Fund determined as of the date the options are
written will not exceed 50% of the Fund's net assets; (ii) the aggregate
premiums paid on all options purchased by a Fund and which are being held will
not exceed 20% of the Fund's net assets; and (iii) a Fund will not purchase put
or call options, other than hedging positions, if, as a result thereof, more
than 5% of its total assets would be so invested; and (iv) the aggregate margin
deposits required on all futures and options on futures transactions being held
will not exceed 5% of a Fund's total assets.
The foregoing limitations are not fundamental policies of the Funds
and may be changed by each Fund's Board of Directors without shareholder
approval as regulatory agencies permit.
Transactions using options (other than purchased options) expose the
Funds to counter-party risk. To the extent required by SEC guidelines, a Fund
will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, other options, or futures or (2)
cash and liquid high grade debt securities with a value sufficient at all times
to cover its potential obligations to the extent not covered as provided in (1)
above. Each Fund will also set aside cash and/or appropriate liquid assets in
a segregated custodial account if required to do so by the SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be
sold while the position in the corresponding option or futures contract is
open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of a Fund's assets to cover or segregated
accounts could impede portfolio management or a Fund's ability to meet
redemption requests or other current obligations.
FUTURES CONTRACTS. Each Fund may enter into futures contracts
(hereinafter referred to as "futures" or "futures contracts"), including
interest rate and index futures. Each Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve
as a long hedge, and the sale of futures or the purchase of put options thereon
can serve as a short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy similar to that
used for writing covered options in securities. The Funds' hedging may include
purchases of futures as an offset against the effect of expected increases in
securities prices and sales of futures as an offset against the effect of
expected declines in securities prices. The Funds' futures transactions may be
entered into for any lawful purpose such as hedging purposes, risk management,
or to enhance returns. The Funds may also write put options on interest rate
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
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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
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 (debt security) for a specified price at a designated
date, time, and place. An index futures contract is an agreement pursuant to
which the parties agree to take or make delivery of an amount of cash equal to
the difference between the value of the index at the close of the last trading
day of the contract and the price at which the index futures contract was
originally written. Transactions costs are incurred when a futures contract is
bought or sold and margin deposits must be maintained. A futures contract may
be satisfied by delivery or purchase, as the case may be, of the instrument or
by payment of the change in the cash value of the index. More commonly,
futures contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching futures contract. Although the value of
an index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase
price is less than the original sale price, a Fund realizes a gain; if it is
more, a Fund realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, a Fund realizes a gain; if it is less, a Fund
realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that a Fund will be able to
enter into an offsetting transaction with respect to a particular futures
contract at a particular time. If a Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the futures contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, a Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. government securities or other liquid, high grade debt securities, in an
amount generally equal to 10% or less of the contract value. Margin must also
be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, 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
16
<PAGE> 58
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 market are
less onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the future markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
OPTIONS. Each Fund may also purchase or write put and call options on
securities 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 "Common Investment Policies and Techniques--Illiquid
Securities." writing put options serves as a limited long hedge because
increases in the value of the hedged investment would be offset to the extent
of the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be
obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions. Options that expire unexercised
have no value.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, a Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Funds to
realize the profit or limit the loss on an option position prior to its
exercise or expiration.
The Funds may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. OTC options are
contracts between a Fund and the other party to the transaction ("counter
party") (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Fund purchases or writes an OTC option, it relies on
the counter party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the counter party to do so would result in
the loss of any premium paid by the Fund as well as the loss of any expected
benefit of the transaction.
The Funds' ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Funds
intend to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the counter party, or
by a transaction in the secondary market if any such market exists. Although
the Funds will enter into OTC options only with counter parties that are
expected to be capable of entering into closing transactions with the Funds,
there is no assurance that the Funds will in fact be able to close out an OTC
option at a favorable price prior to expiration. In the event of insolvency of
the counter party, a Fund might be unable to close out an OTC option position
at any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Fund could
17
<PAGE> 59
cause material losses because the Fund would be unable to sell the investment
used as a cover for the written option until the option expires or is
exercised.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract the effectiveness of attempted
hedging.
SPREAD TRANSACTIONS. Each Fund may purchase from securities dealers
covered spread options. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the Fund
does not own, but which is used as a benchmark. The risk to the Fund in
purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect the Fund against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
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 Investment Company Act, is indicated by an asterisk.
Each officer and director holds the same position with the following registered
investment companies: Strong Money Market Fund, Inc., Strong U.S. Treasury
Money Fund, Inc., Strong Advantage Fund, Inc., Strong Short-Term Bond Fund,
Inc., Strong Government Securities Fund, Inc., Strong Corporate Bond Fund,
Inc., Strong Asset Allocation Fund, Inc., Strong Total Return Fund, Inc.,
Strong Discovery Fund, Inc., Strong Opportunity Fund, Inc., Strong Common Stock
Fund, Inc., Strong International Stock Fund, Inc., Strong Discovery Fund II,
Inc., Strong Special Fund II, Inc., Strong American Utilities Fund, Inc.,
Strong Asia Pacific Fund, Inc., Strong Growth Fund, Inc., Strong International
Bond Fund, Inc., and Strong Short-Term Global Bond Fund, Inc. (collectively,
the "Strong Funds").
*Richard S. Strong, Chairman of the Board and Director of the Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the
Advisor, which he founded in 1974. Since August 1985, Mr. Strong has been a
Security Analyst and Portfolio Manager of the Advisor. In October 1991, Mr.
Strong also became the Chairman of the Advisor. Mr. Strong is a director of
the Advisor. Since October 1993, Mr. Strong has been Chairman and a director
of Strong Holdings, Inc., a Wisconsin corporation and subsidiary of the Advisor
("Holdings"), and the Fund's underwriter, Strong Funds Distributors, Inc., a
Wisconsin corporation and subsidiary of Holdings ("Distributor"). Since
January 1994, Mr. Strong has been Chairman and a director of Heritage Reserve
Development Corporation, a Wisconsin Corporation and subsidiary of Holdings
("Heritage"); and since February 1994, Mr. Strong has been a member of the
Managing Boards of Fussville Real Estate Holdings L.L.C. ("Real Estate
Holdings"), a Wisconsin Limited Liability Company and subsidiary of the
Advisor, and Fussville Development L.L.C. ("Development"), a Wisconsin Limited
Liability Company and subsidiary of the Advisor, and certain of its
subsidiaries. Mr. Strong has served as a director and Chairman of the Board of
the Money Fund and Bond Fund since commencement of operations in October 1986
and as director of the Short-Term Fund and Insured Fund since their
incorporation in December 1990 and Chairman of the Board of those Funds since
August 1991. Mr. Strong has served as a director and Chairman of the Board of
the High-Yield Fund since its incorporation in March 1987.
Marvin E. Nevins, Director of the Funds.
Private Investor. From 1945 to 1980 Mr. Nevins was Chairman of
Wisconsin Centrifugal Inc., a foundry. From July 1983 to December 1986, he was
Chairman of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins
is a former Chairman of the Wisconsin Association of Manufacturers & Commerce.
He was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin. Mr. Nevins has served
as a director of the Money Fund and Bond Fund since commencement of operations
in October 1986, as a director of the Short-Term Fund and Insured Fund since
incorporation in December 1990 and as a director of the High-Yield Fund since
its incorporation in March 1987.
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<PAGE> 60
Willie D. Davis, 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
Broadcasing, Inc. Mr. Davis was a director of the Fireman's Fund (an insurance
company) from 1975 until 1990. Mr. Davis has served as a director of the Funds
since July 1994.
*John Dragisic, Vice Chairman and Director of the Funds.
Mr. Dragisic has been Vice Chairman and a director of the Advisor and
director of Holdings and Distributor since July 1994. Mr. Dragisic previously
served as a director of the Money Fund and Bond Fund from July 1991 until July
1994; the Short-Term Fund and Insured Fund from August 1991 until July 1994;
and the High-Yield Fund from July 1993 until July 1994. Mr. Dragisic was the
President and Chief Executive Officer of Grunau Company, Inc. (a mechanical
contracting and engineering firm), Milwaukee, Wisconsin from 1987 until July
1994. From 1981 to 1987, he was an Executive Vice President with Grunau
Company, Inc. From 1969 until 1973, Mr. Dragisic worked for the InterAmerican
Development Bank. Mr. Dragisic received his Ph.D. in Economics in 1971 from
the University of Wisconsin-Madison and his B.A. degree in Economics in 1962
from Lake Forest College. Mr. Dragisic has served as Vice Chairman of the
Funds since July 1994 and director of the Funds since April 1995.
Stanley Kritzik, Director of the Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since _____
and a Director of Aurora Health Care and Health Network Ventures, Inc. since
____. He has served as a Director of the Funds since April 1995.
William F. Vogt, Director of the Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc.,
Denver, Colorado since 1990. From 1982 until 1990, he served as an executive
director of University Physicians, Denver, Colorado. Mr. Vogt was also a
fellow of the Medical Group Management Association, American College of Medical
Practice Executives. He has served as a director of the Funds since April
1995.
Lawrence A. Totsky, C.P.A., Vice President of the Funds.
Mr. Totsky has been Senior Vice President of the Advisor since
September 1994. Mr. Totsky served as Vice President of the Advisor from
December 1992 to September 1994. Mr. Totsky acted as the Advisor's Manager of
Shareholder Accounting and Compliance from June 1987 to June 1991 when he was
named Director of Mutual Fund Administration. Mr. Totsky has been the Vice
President of the Money, Short-Term, Insured, and Bond Funds since May 1993, and
Vice President of the High-Yield Fund since July 1993.
Thomas P. Lemke, Vice President of the Funds.
Mr. Lemke has been Senior Vice President, Secretary, and General
Counsel of the Advisor since September 1994. For two years prior to joining
the Advisor, Mr. Lemke acted as Resident Counsel for Funds Management at J.P.
Morgan & Co., Inc. From February 1989 until April 1992, Mr. Lemke acted as
Associate General Counsel to Sanford C. Bernstein Co., Inc. For two years
prior to that, Mr. Lemke was Of Counsel at the Washington, D.C. law firm of Tew
Jorden & Schulte, a successor of Finley, Kumble Wagner. From August 1979 until
December 1986, Mr. Lemke worked at the Securities and Exchange Commission, most
notably as the Chief Counsel to the Division of Investment Management (November
1984 - December 1986), and as Special Counsel to the Office of Insurance
Products, Division of Investment Management (April 1982 - October 1984). Mr.
Lemke has been a Vice President of the Funds since October 1994.
19
<PAGE> 61
Ann E. Oglanian, Secretary of the Funds.
Ms. Oglanian has been an Associate Counsel of the Advisor since
January 1992. Ms. Oglanian acted as Associate Counsel for the Chicago-based
investment management firm, Kemper Financial Services, Inc. from June 1988
until December 1991. Mr. Oglanian has been the Secretary of the Funds since
May 1994.
Thomas M. Zoeller, Treasurer of the Funds.
Mr. Zoeller has been the Treasurer of the Advisor since October 1991,
Treasurer of Holdings and Treasurer and Secretary of Distributor since October
1993, Treasurer of Heritage since January 1994, and Treasurer of Real Estate
Holdings and Development since February 1994. Mr. Zoeller was the Controller
for the Advisor from August 1991 until October 1991. From August 1989 until
August 1991, he was the Assistant Controller for the Advisor. Prior to joining
the Advisor in 1989, Mr. Zoeller was a Certified Public Accountant in the audit
department of Arthur Andersen & Co., Milwaukee, Wisconsin. Mr. Zoeller is a
1986 graduate of Florida State University. Mr. Zoeller has been the Treasurer
of the Money, Short-Term, Insured, and Bond Funds since November 1991 and
Treasurer of the High-Yield Fund since July 1993.
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 33962-8172. 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 3003 Third Street Avenue, Denver,
Colorado 80206.
As of January 31, 1995, the officers and directors of the Money,
Short-Term Bond, Bond, and High-Yield Funds in the aggregate beneficially owned
less than 1% of each Fund's then outstanding shares. As of January 31, 1995,
the officers and directors of the Insured Fund in the aggregate beneficially
owned 48,178 shares of the Fund's common stock, which was approximately 1.16%
of the Funds then outstanding shares. Directors and officers of the Funds who
are officers, directors, employees, or shareholders of the Advisor do not
receive any remuneration from the Fund for serving as directors or officers.
PRINCIPAL SHAREHOLDERS
As of January 31, 1995, the following entities owned of record or were known
to own of record more than 5% of the following fund's outstanding shares:
<TABLE>
<CAPTION>
Short-Term Bond Shares Percentage
<S> <C> <C>
Charles Schwab & Co., Inc. 2,094,064 13.10%
101 Montgomery Street
San Francisco, California 94104
Bond
Charles Schwab & Co., Inc. 2,698,814 8.51
High-Yield
Charles Schwab & Co., Inc. 1,512,905 11.16
National Financial Services Corporation 790,590 5.83
One World Financial Center, 4th Floor
200 Liberty Street
New York, New York 0281-1003
</TABLE>
INVESTMENT ADVISOR AND UNDERWRITER
The Advisor to the Funds is Strong Capital Management, Inc. Mr.
Richard S. Strong controls the Advisor. Mr. Strong is the Chairman and a
director of the Advisor, Mr. Dragisic is the Vice Chairman and a director of
the Advisor, Mr. Totsky is a
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<PAGE> 62
Senior Vice President of the Advisor, Mr. Lemke is a Senior Vice President,
Secretary and General Counsel of the Advisor, Ms. Oglanian is an Associate
Counsel of the Advisor and Mr. Zoeller is the Treasurer of the Advisor. A
brief description of each Fund's investment advisory agreement ("Advisory
Agreement") is set forth in the Prospectus under "About the Funds -
Management."
Each Fund's Advisory Agreement, dated April 13, 1995, was last
approved by shareholders at the annual meeting of shareholders held on April
13, 1995. An Advisory Agreement is required to be approved annually by the
Board of Directors of the Fund or by vote of a majority of the Fund's
outstanding voting securities (as defined in the Investment Company Act). In
either case, each annual renewal must be approved by the vote of a majority of
the Fund's directors who are not parties to the Advisory Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. Each Advisory Agreement is terminable,
without penalty, on 60 days' written notice by the Board of Directors of the
Fund; by vote of a majority of the Fund's outstanding voting securities; or by
the Advisor. In addition, the Advisory Agreement will terminate automatically
in the event of its assignment.
Under the terms of each Advisory Agreement, the Advisor manages the
Fund's investments subject to the supervision of the Fund's Board of Directors.
The Advisor is responsible for investment decisions and supplies investment
research and portfolio management. 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 its expense.
Except for expenses assumed by the Advisor as set forth above or as
described below with respect to the distribution of a Fund's shares, a Fund is
responsible for all its other expenses, including, without limitation, interest
charges, taxes, brokerage commissions, and similar expenses; expenses of issue,
sale, repurchase, or redemption of shares; expenses of registering or
qualifying shares for sale; expenses for printing and distribution costs of
prospectuses and semi-annual financial statements mailed to existing
shareholders; and charges of custodians, transfer agent fees (including the
printing and mailing of reports and notices to shareholders), fees of
registrars, fees for auditing and legal services, fees for clerical services
related to record keeping and shareholder relations, the cost of stock
certificates, and fees for directors who are not "interested persons" of the
Advisor; expenses of indemnification; extraordinary expenses; and costs of
shareholder and director meetings.
As compensation for its services, the Money Fund, Short-Term Fund, and
Insured Fund each pay to the Advisor a monthly advisory fee at the annual rate
of .50% of the average daily net assets of the respective Fund and the Bond
Fund and High-Yield Fund pay the Advisor a monthly advisory fee at the annual
rate of .60% of the average daily net assets of the Bond Fund and High-Yield
Fund. (See "About the Funds - Determining Your Share Price" in the
Prospectus.) From time to time, the Advisor may voluntarily waive all or a
portion of its management fee for a Fund. The following table sets forth
certain information concerning advisory fees for each Fund:
<TABLE>
<CAPTION>
Advisory Fee
Incurred Advisory Fee Advisory Fee
by Fund Waiver Paid by Fund
------- ------ ------------
<S> <C> <C> <C>
Money Fund
1992 $5,167,616 $ 31,046 $5,136,570
1993 $5,863,644 $ 0 $5,863,644
1994 $________ $________ $________
Short-Term Fund
1992 $ 269,307 $ 217,500 $ 51,807
1993 $ 870,125 $ 72,920 $ 797,205
1994 $________ $________ $________
Insured Fund
1992 $ 55,489 $ 55,489 $ 0
1993 $ 246,484 $ 45,481 $ 201,003
1994 $________ $________ $________
</TABLE>
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<PAGE> 63
<TABLE>
<S> <C> <C> <C>
Bond Fund
1992 $1,133,859 $ 947,364 $ 186,495
1993 $2,375,112 $ 51,246 $ 2,323,866
1994 $________ $_________ $_________
High-Yield Fund
1993(1) $ 11,150 $ 11,150 $ 0
1994 $________ $_________ $__________
- ------------------------------------------------------------ --------
</TABLE>
(1) The High-Yield Fund commenced operations on October 1, 1993.
The organizational expenses of the Short-Term Fund, Insured Fund, and
High-Yield Fund which were approximately $72,000, $72,000, and $31,000,
respectively, were advanced by the Advisor and will be reimbursed by each Fund
over a period of not more than 60 months from each Fund's date of inception.
Each Advisory Agreement requires the Advisor to reimburse a Fund in
the event that the expenses and charges payable by the Fund in any fiscal year,
including the advisory fee but excluding taxes, interest, brokerage
commissions, and similar fees, and to the extent permitted, extraordinary fees,
exceed that percentage of the average net asset value of the Fund for such
year. Such excess is determined by valuations made as of the close of each
business day of the year, which is the most restrictive percentage provided by
the state laws of the various states in which the Fund's common stock is
qualified for sale; or if the states in which the Fund's common stock is
qualified for sale impose no restrictions, then 2%. The most restrictive
percentage limitation currently applicable to a Fund is 2 1/2% of its average
daily net assets to $30,000,000, 2% on the next $70,000,000 of its average
daily net assets, and 1 1/2% of the average daily net assets in excess of
$100,000,000. Reimbursement of expenses in excess of the applicable limitation
will be made on a monthly basis and will be paid to the Fund by reduction of
the Advisor's fee, subject to later adjustment, month by month, for the
remainder of the Fund's fiscal year. The Advisor may from time to time
voluntarily absorb expenses for a Fund in addition to the reimbursement of
expenses in excess of applicable limitations.
On July 12, 1994, the Securities and Exchange Commission (the SEC)
filed an administrative action (Order) against SCM, Mr. Strong, and another
employee of SCM in connection with conduct that occurred between 1987 and early
1990. In re Strong/Corneliuson Capital Management, Inc., et al. Admin. Proc.
File No. 3-8411. The proceeding was settled by consent without admitting or
denying the allegations in the Order. The Order alleged that SCM and Mr. Strong
aided and abetted violations of Section 17(a) of the 1940 Act by effecting
trades between mutual funds, and between mutual funds and Harbour Investments
Ltd. (Harbour), without complying with the exemptive provisions of SEC Rule
17a-7 or otherwise obtaining an exemption. It further alleged that SCM
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 SCM's policy on personal trading and by failing to disclose
trading by Harbour, an entity in which principals of SCM 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 SCM agreed to various
undertakings, including adoption of certain procedures and a limitation for six
months on accepting certain types of new advisory clients.
Under a Distribution Agreement dated December 1, 1993 with each Fund
(a "Distribution Agreement"), Strong Funds Distributors, Inc. acts as
underwriter of each Fund's shares (the "Distributor"). Each Distribution
Agreement provides that the Distributor will use its best efforts to distribute
the Fund's shares. Since the Funds are "no-load" funds, no sales commissions
are charged on the purchase of Fund shares. Each Distribution Agreement
further provides that the Distributor will bear the costs of printing
prospectuses and shareholder reports which are used for selling purposes, as
well as advertising and other costs attributable to the distribution of a
Fund's shares. The Distributor is an indirect subsidiary of the Advisor and
controlled by the Advisor and Richard S. Strong. Prior to December 1, 1993,
the Advisor acted as underwriter for each Fund. On December 1, 1993, the
Distributor succeeded to the broker-dealer registration of the Advisor and, in
connection therewith, a Distribution Agreement was executed on substantially
identical terms as the former distribution agreement with the Advisor as
distributor. Each Distribution Agreement is subject to the same termination
and renewal provisions as are described above with respect to the Advisory
Agreements.
From time to time, the Distributor may hold in-house sales incentive
programs for its associated persons under which these persons may receive
non-cash compensation awards in connection with the sale and distribution of a
Fund's shares. These awards may include items such as, but not limited to,
gifts, merchandise, gift certificates, and payment of travel expenses, meals
22
<PAGE> 64
and lodging. As required by the National Association of Securities Dealers,
Inc. or NASD's proposed rule amendments in this area, any in-house sales
incentive program will be multi-product oriented, i.e., any incentive will be
based on an associated person's gross production of all securities within a
product type and will not be based on the sales of shares of any specifically
designated mutual fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities
for the Funds and for the placement of the Funds' 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 by 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 the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. Brokerage will not be allocated
based on the sale of the Funds' shares.
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 who supplies brokerage and research services a
commission for effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction.
Brokerage and research services include (a) furnishing advice as to the value
of securities, the advisability of investing, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreements, 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 is of the opinion that the continued receipt of
supplemental investment research services from broker-dealers is essential to
its provision of high-quality portfolio management services to the Funds. The
Advisory Agreements provide that such higher commissions will not be paid by
the Funds 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 the Fund will be reasonable in relation
to the benefits to the Fund over the long term. The investment advisory fees
paid by the Funds under the Advisory Agreements are not reduced as a result of
the Advisor's receipt of research services.
The Money Fund paid brokerage commissions in 1992, 1993, and 1994 of
$0, $0, and $0, respectively. The Short-Term Fund paid brokerage commissions
for the years ending December 1993 and 1994 of $0 and $0. The Bond Fund paid
brokerage commissions during the years ended December 31, 1992, 1993, and 1994
of $0, $0, and $0, respectively. The Insured Fund paid brokerage commissions
for 1992, 1993, and 1994 of $0, $0, and $0, respectively. The High-Yield Fund
paid brokerage commissions during 1993 and 1994 of $0 and $0, respectively.
Generally, research services provided consist of portfolio pricing and
capital changes services and reports, research reports dealing with
macroeconomic trends and monetary and fiscal policy, research reports on
individual companies and industries, and information dealing with market trends
and technical analysis. 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. The Advisor's receipt of these administrative benefits arises from
its ability, in certain cases, to direct brokerage to certain firms in
connection with its management of client portfolios. In making good faith
allocations between administrative benefits and research and brokerage
services, a conflict of interest may exist by reason of the Advisor's
allocation of the costs of such benefits and services between those that
primarily benefit the Advisor and those that primarily benefit its clients,
such as the Funds.
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<PAGE> 65
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 separately measure the benefits
from research services to each of the accounts (including the Funds) managed by
the Advisor. Because the volume and nature of the trading activities of the
accounts are not uniform, the amount of commissions in excess of those charged
by another broker paid by each account for brokerage and research services will
vary. However, in the opinion of the Advisor, such costs to the Funds will not
be disproportionate to the benefits received by the Funds on a continuing
basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by 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 the Funds 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.
In view of the Short-Term Fund's and Insured Fund's investment
objectives and portfolio management policies, their annual portfolio turnover
rate is expected to exceed 100%. However, it is estimated that the rate of
portfolio turnover will generally not exceed 200%. In view of the Bond Fund's
investment objective and portfolio management policies, it is estimated that
the Bond Fund's annual portfolio turnover rate will generally be approximately
100%, although this rate should not be construed as a limiting factor and the
portfolio turnover rate may exceed 300% when the Advisor deems changes
appropriate. In view of the High-Yield Fund's investment objective and
portfolio management policies, it is estimated that the Fund's annual portfolio
turnover rate will not generally exceed 300%, although this rate should not be
construed as a limiting factor when the Advisor deems changes appropriate. The
annual portfolio turnover rate indicates changes in a Fund's portfolio; for
instance, a rate of 100% would result if all the securities in the portfolio
(excluding securities whose maturities at acquisition were one year or less) at
the beginning of an annual period had been replaced by the end of the period.
The turnover rate may vary from year to year, as well as within a year, and may
be affected by portfolio sales necessary to meet cash requirements for
redemptions of each Fund shares.
CUSTODIAN
As custodian of the Funds' assets, Firstar Trust Company has custody of
all securities and cash of the Funds, delivers and receives payment for
securities sold, receives and pays for securities purchased, collects income
from investments, and performs other duties, all as directed by the officers of
the Funds. The custodian is in no way responsible for any of the investment
policies or decisions of the Funds.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
The Advisor acts as transfer agent and dividend-disbursing agent for
the Funds. The Advisor is compensated based on an annual fee per open account
of $32.50 for the Money Fund and $31.50 for the Short-Term Fund, Insured Fund,
Bond Fund, and High-Yield Fund, 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. The fees
received and the services provided as transfer agent and dividend disbursing
agent are in addition to those received and provided by the Advisor under the
Advisory Agreements. In addition, the Advisor provides certain printing and
mailing services for the Funds, such as printing and mailing of shareholder
account statements, checks, and tax forms.
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<PAGE> 66
The following table sets forth certain information concerning amounts
paid by the Funds for transfer agency and dividend disbursing and printing and
mailing services:
<TABLE>
<CAPTION>
Transfer Agency and Dividend Disbursement
Services Charges Incurred
----------------------------------------------------------------------------
Per Printing and Amounts Net Amount
Account Expense Mailing Waived By Paid By
Fund Charges Reimbursements Services Advisor Fund
-------- ------- -------------- -------- ------- ----------
Money Fund
<S> <C> <C> <C> <C> <C>
1992 $690,433 $584,742 $ 46,600 $ 0 $ 1,321,775
1993 812,633 497,291 46,480 0 1,356,404
1994 _______ _______ _______ _______ ________
Short-Term Fund
1992 $ 47,568 $ 21,123 $ 351 $ 69,042 $ 0
1993 159,911 115,122 6,513 115,022 166,524
1994 _______ _______ _______ _______ ________
Insured Fund
1992 $ 5,719 $ 10,444 $ 113 $ 16,276 $ 0
1993 83,721 29,789 2,852 103,131 13,232
1994 ______ _______ _______ _______ ________
Bond Fund
1992 $221,717 $ 45,442 $ 771 $ 317,930 $ 0
1993 454,518 154,679 18,295 323,196 304,296
1994 _______ _______ _______ _______ ________
High-Yield Fund
1993(1) $ 1,671 $ 545 $ 18 $ 2,234 $ 0
1994 _______ _______ _______
- --------------------------------------------------------------------
</TABLE>
(1) The High-Yield Fund commenced operations on October 1, 1993.
From time to time, the Funds, directly or indirectly through
arrangements with the Advisor, may pay amounts to third parties that provide
transfer agent and other administrative services relating to the Funds to
persons who beneficially own interests in the Funds, such as participants in
401k plans. These services may include, among other things, sub-accounting
services, answering inquiries relating to the Funds, transmitting, on behalf of
the Funds, proxy statements, annual reports, updated prospectuses, other
communications regarding the Funds, and related services as the Funds or
beneficial owners may reasonably request. In such cases, the Funds will not pay
fees at a rate that is greater than the rate the Funds are currently paying the
Advisor for providing these services to Fund shareholders.
TAXES
GENERAL
As indicated under "About the Funds - Distributions and Taxes" in the
Prospectus, each Fund intends to continue to qualify annually as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
(the "Code"). This qualification does not involve governmental supervision of
the Funds' management practices or policies.
In order to qualify for treatment as a RIC under the Code, each Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment income
and net short-term capital gain) and must meet several additional requirements.
Among these requirements are the following: (1) a Fund must derive
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<PAGE> 67
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 other income (including gains from options or
futures) derived with respect to its business of investing in securities
("Income Requirement"); (2) a 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, 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 voting
securities; and (4) at the close of each quarter of a Fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax 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.
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures, involves complex rules that will determine for
income tax purposes the character and timing of recognition of the gains and
losses the Funds realize in connection therewith. Income from transactions in
options and futures derived by each Fund with respect to its business of
investing in securities, will qualify as permissible income under the Income
Requirement. However, income from the disposition of options and futures 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 or futures contracts beyond
the time when it otherwise would be advantageous to do so, in order for the Fund
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 and
futures 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 the Fund makes a certain election, any gain or loss recognized with
respect to Section 1256 Contracts is considered to be 60% long-term capital gain
or loss and 40% short-term capital gain or loss, without regard to the holding
period of the Section 1256 Contract. Unrealized gains on Section 1256 Contracts
that have been held by a Fund for less than three months as of the end of its
taxable year, and that are recognized for federal income tax purposes as
described above, will not be considered gains on investments held for less than
three months for purposes of the 30% Limitation.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
Certain Funds may acquire zero-coupon, step-coupon, or other securities
issued with original issue discount. As the holder of those securities, a Fund
must include in its income the original issue discount that accrues on the
securities during the taxable year, even if the Fund receives no corresponding
payment on the securities during the year. Similarly, the Fund must include in
its gross income securities it receives as interest on pay-in-kind securities.
Because a Fund annually must distribute substantially all of its investment
company taxable income, including any original issue discount and other non-cash
income, to satisfy the Distribution Requirement and to avoid imposition of the
Excise Tax, it may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions may be made from
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<PAGE> 68
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 the Fund's ability to sell other securities, or options or futures
contracts, held for less than three months that it might wish to sell in the
ordinary course of its portfolio management.
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 is
open for trading. None of the Funds determines its net asset value on days the
New York Stock Exchange is closed and at other times described in the
Prospectus. The New York Stock Exchange is closed on New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when such holiday falls on a Sunday, the New
York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period.
The Money Fund values its securities on the amortized cost basis and
seeks to maintain its net asset value at a constant $1.00 per share. In the
event a difference of 1/2 of 1% or more were to occur between the net asset
value calculated by reference to market values and the Money Fund's $1.00 per
share net asset value or if there were any other deviation which the Board of
Directors believed would result in a material dilution to shareholders or
purchasers, the Board of Directors would consider taking any one or more of the
following actions or any other action considered appropriate: selling portfolio
securities to shorten average portfolio maturity or to realize capital gains or
losses, reducing or suspending shareholder income accruals, redeeming shares in
kind, or utilizing a value per unit based upon available indications of market
value. Available indications of market value may include, among other things,
quotations or market value estimates of securities and/or values based on yield
data relating to money market securities that are published by reputable
sources.
SHAREHOLDER SERVICES
As described under "Shareholder Manual - Shareholder Services" in the
Prospectus, all income dividends and capital gain distributions will be invested
automatically in additional Fund shares unless the Fund is otherwise notified in
writing.
SYSTEMATIC WITHDRAWAL PLAN
You can set up automatic withdrawals from your account at monthly,
quarterly, or annual intervals. To begin distributions, you must have an
initial balance of $5,000 in your account. To establish the Systematic
Withdrawal Plan, call 1-800-368-3863 and request an application. To establish
the Systematic Withdrawal Plan, you deposit your Fund shares with the Fund and
appoint it as your agent to effect redemptions of Fund shares held in your
account for the purpose of making monthly, quarterly, or annual withdrawal
payments of a fixed amount to you out of your account. Fund shares deposited by
you in your account must be endorsed or accompanied by a stock power. Your
signature should be guaranteed by an eligible guarantor institution as described
under "Shareholder Manual - Shareholder Services" in the Prospectus.
The minimum amount of a withdrawal payment is $50. These payments will
be made from the proceeds of periodic redemption of shares in the account at net
asset value. Redemptions will be made on the fifth business day preceding the
last day of each month or, if that day is a holiday, on the next preceding
business day.
Withdrawal payments cannot be considered to be yield or income on the
shareholder's investment since portions of each payment will normally consist of
a return of capital. Depending on the size or the frequency of the
disbursements requested and the fluctuation in the value of the Fund's
portfolio, redemptions for the purpose of making such disbursements may reduce
or even exhaust your account.
You may vary the amount or frequency of withdrawal payments, temporarily
discontinue them, or change the designated payee or payee's address by notifying
the Fund.
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<PAGE> 69
AUTOMATIC INVESTMENT PLAN
An Automatic Investment Plan may be established at any time. By
participating in the Automatic Investment Plan, you may automatically make
purchases of shares of the Fund on a regular, convenient basis. You may choose
to make contributions on any day of each month in amounts of $50 or more.
Under the Automatic Investment Plan, your bank or other financial
institution debits preauthorized amounts drawn on your account each month and
applies such amounts to the purchase of shares of the Fund. The Automatic
Investment Plan can be implemented with any financial institution that is a
member of the Automated Clearing House. An Automatic Investment Plan form is
attached to the Prospectus. No service fee is charged by the Fund for
participating in the Automatic Investment Plan.
GENERAL PROCEDURES FOR SHAREHOLDER ACCOUNTS
As set forth under "About the Funds - Organization" in the Prospectus,
certificates for Fund shares are only issued upon written request.
Either an investor or the Fund, by written notice to the other, may
terminate the investor's participation in the plans, programs, privileges, or
other services described under "Shareholder Manual - Shareholder Services' in
the Prospectus without penalty any time, except as discussed in the Prospectus.
Your account may be terminated by the Fund on not less than 30 days'
notice if, at the time of any transfer or redemption of shares in the account,
the value of the remaining shares in the account at the current net asset value
falls below $500. Upon any such termination, the shares will be redeemed at the
then current net asset value and a check for the proceeds of redemption sent
within seven days of such redemption.
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGES AND AUTOMATIC EXCHANGE PLAN
A discussion of the Telephone Exchange and Redemption Privileges and
Automatic Exchange Plan is set forth in the Prospectus under the captions
"Shareholder Manual - Shareholder Services."
Shares of the Fund and any other funds sponsored by the Advisor may be
exchanged for each other at relative net asset values. Exchanges will be
effected by redemption of shares of the Fund held and purchase of shares of the
fund for which Fund shares are being exchanged (the "New Fund"). For federal
income tax purposes, any such exchange constitutes a sale upon which a capital
gain or loss will be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis. If
you are interested in exercising any of these exchange privileges, you should
obtain prospectuses of other funds sponsored by the Advisor from the Advisor.
Upon a telephone exchange, the transfer agent establishes a new account in the
New Fund with the same registration and dividend and capital gains options as
the redeemed account, unless otherwise specified, and confirms the purchase to
you. In order to establish a Systematic Withdrawal Plan for the new account,
however, an exchanging shareholder must file a specific written request.
The Funds employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds may not be liable for losses
due to unauthorized or fraudulent instructions. Such procedures include but are
not limited to requiring a form of personal identification prior to acting on
instructions received by telephone, providing written confirmations of such
transactions to the address of record, and tape recording telephone
instructions.
The Telephone Exchange and Redemption Privileges and Automatic Exchange
Plan are available only in states where shares of the New Fund may be sold, and
may be modified or discontinued at any time. Additional information regarding
the Telephone Exchange and Redemption Privileges and Automatic Exchange Plan is
contained in the Fund's Prospectus.
FUND ORGANIZATION
Each Fund is a Wisconsin corporation that is authorized to offer
separate series of shares representing interests in separate porfolios of
securities, each with differing investment objectives. The shares in any one
portfolio may, in turn, be offered
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<PAGE> 70
in separate classes, each with differing preferences, limitations or relative
rights. However, the Articles of Incorporation for each of the Funds provides
that if additional classes of shares are issued by a Fund, such new classes of
shares may not affect the preferences, limitations or relative rights of the
Fund's outstanding shares. In addition, the Board of Directors of each Fund is
authorized to allocate assets, liabilities, income and expenses to each series
and class. Classes within a series may have different expense arrangements
than other classes of the same series and, accordingly, the net asset value of
shares with a series may differ. Finally, all holders of shares of a Fund may
vote on each matter presented to shareholders for action except with respect to
any matter which affects only one or more series or class, in which case only
the shares of the affected series or class is entitled to vote. Fractional
shares have the same rights proportionately as do full shares. Shares of the
Funds have no preemptive, conversion, or subscription rights. Each Fund
currently has only one series of common stock outstanding. If a Fund issues
additional series, the assets belonging to each series of shares will be held
separately by the custodian, and in effect each series will be a separate fund.
SHAREHOLDER MEETINGS
Each Fund is a Wisconsin corporation organized on the following dates
and has the following authorized shares of capital stock:
<TABLE>
<CAPTION>
Incorporation Authorized
Fund Date Shares Par Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Fund 07/28/86 10,000,000,000 .0001
Short-Term Fund 07/28/86 10,000,000,000 .00001
Insured Fund 12/28/90 10,000,000,000 .00001
Bond Fund 12/28/90 100,000,000 .001
High-Yield Fund 03/20/87 1,000,000,000 .001
</TABLE>
The Wisconsin Business Corporation Law permits registered investment
companies, such as the Funds, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the Investment Company 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 Investment Company Act.
The Funds' Bylaws also contain procedures for the removal of directors
by its shareholders. At any meeting of shareholders, duly called and at which a
quorum is present, the shareholders may, by the affirmative vote of the holders
of a majority of the votes entitled to be cast thereon, remove any director or
directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of removed directors.
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. Whenever ten
or more shareholders of record who have been such for at least six months
preceding the date of application, and who hold in the aggregate either shares
having a net asset value of at least $25,000 or at least one percent (1%) of the
total outstanding shares, whichever is less, shall apply to the corporation's
Secretary in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to a request for a meeting as
described above and accompanied by a form of communication and request which
they wish to transmit, the Secretary shall within five business days after such
application either: (1) afford to such applicants access to a list of the names
and addresses of all shareholders as recorded on the books of the Fund; or (2)
inform such applicants as to the approximate number of shareholders of record
and the approximate cost of mailing to them the proposed communication and form
of request.
If the Secretary elects to follow the course specified in clause (2) of
the last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Commission, together with a copy
of the material to be mailed, a written statement signed by at least a majority
of the Board of Directors to the effect that in their opinion either such
material contains untrue statements of fact or omits to state facts necessary to
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<PAGE> 71
make the statements contained therein not misleading, or would be in violation
of applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Commission may, and if demanded by the Board of
Directors or by such applicants shall, enter an order either sustaining one or
more of such objections or refusing to sustain any of them. If the Commission
shall enter an order refusing to sustain any of such objections, or if, after
the entry of an order sustaining one or more of such objections, the Commission
shall find, after notice and opportunity for hearing, that all objections so
sustained have been met, and shall enter an order so declaring, the Secretary
shall mail copies of such material to all shareholders with reasonable
promptness after the entry of such order and the renewal of such tender.
PERFORMANCE INFORMATION
IN GENERAL
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" and "tax equivalent yield." In addition, the
Short-Term Fund's, Insured Fund's, Bond Fund's, and High-Yield Fund's
performance may be shown in the form of "average annual total return," "total
return," and "cumulative total return" and the Money Fund's performance may be
shown in the form of "effective yield." From time to time, the Advisor may
agree to waive or reduce its management fee and to absorb certain operating
expenses for each Fund. All performance and returns noted herein are historical
and do not necessarily represent the future performance of a Fund.
YIELD
The Short-Term, Insured, Bond, and High-Yield Funds' yield is computed
in accordance with a standardized method prescribed by rules of the Commission.
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 December 31, 1994, the Short-Term Fund's
current yield was ____%, the Insured Fund's current yield was ____%, the Bond
Fund's current yield was ____%, and the High-Yield Fund's current yield was
____%. For this period, the Advisor [absorbed expenses and/or waived management
fees] of ___% for the [name of Fund or Funds]. Without these waivers and/or
absorptions, the [name of Fund or Funds] yield would have been ____%. In
computing yield, the Funds follow certain standardized accounting practices
specified by Commission 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 Money Fund's current yield quotation is based on a seven-day period
and is computed as follows. The first calculation is net investment income per
share, which is accrued interest on portfolio securities, plus or 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
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<PAGE> 72
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 December 31, 1994, the Money
Fund's current yield was ____%.
EFFECTIVE YIELD
The Money Fund's 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 December 31, 1994, the Money
Fund's effective yield was ____%.
TAX-EQUIVALENT YIELD
Each Fund's tax-equivalent yield is computed by dividing that portion of
the Fund's yield (computed as described above) that is tax-exempt by (one minus
the stated federal income tax rate) and adding the result to that portion, if
any, of the yield of each 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 each Fund's yield
computed as described above, the Short-Term Fund's, Insured Fund's, Bond Fund's
and High-Yield Fund's 30-day tax equivalent yield (period ended December 31,
1994) were ____%, ____%, ____%, and _____%, respectively, and the Money Fund's
7-day tax equivalent yield (period ended December 31, 1994) was ____%. 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
the Fund over a twelve month period by the Fund's net asset value on the last
day of the period. The distribution rate differs from the Fund's yield because
the distribution rate includes distributions to shareholders from sources other
than dividends and interest, such as premium income from option writing and
short-term capital gains. Therefore, the Fund's distribution rate may be
substantially different than the Fund's yield. Both the Fund's yield and
distribution rate will fluctuate.
AVERAGE ANNUAL TOTAL RETURN
The Short-Term Fund's, Insured Fund's, Bond Fund's, and High-Yield
Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the Commission. The average annual
total return for the 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 the
Fund's shares on the first day of the period and computing the "ending value" of
that investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value 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
31
<PAGE> 73
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.
A Fund's performance figures are based upon historical results and are
not necessarily representative of future performance. Each Fund's shares are
sold at net asset value per share. The Short-Term Fund's, Insured Fund's, Bond
Fund's, and High-Yield Fund's returns and net asset value will fluctuate and
shares are redeemable at the then current net asset value of the Fund, which may
be more or less than original cost. The Money Fund's yield will fluctuate.
While the Money Fund seeks to maintain a stable net asset value of $1.00, there
is no assurance that it will be able to do so. An investment in the Money Fund
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
December 31, 1994. No adjustment has been made for taxes, if any, payable on
dividends. The periods indicated were ones of fluctuating securities prices.
SHORT-TERM FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
---------- ---- -------- --------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $______ _____% _____%
One Year 10,000 ______ _____ _____
- -----------------------
(1) December 31, 1991
INSURED FUND
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
---------- ---- -------- --------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $______ _____% _____%
One Year 10,000 ______ _____ _____
- -----------------------
(1) November 25, 1991
BOND FUND
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
---------- ---- -------- --------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $______ _____% _____%
Five Years 10,000 ______ _____ _____
One Year 10,000 ______ _____ _____
- ------------------------
(1) October 23, 1986
</TABLE>
32
<PAGE> 74
HIGH-YIELD FUND
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ ------------
Initial Ending Value
$10,000 December 31, Percentage Percentage
Investment 1994 Increase Increase
---------- ---- -------- --------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $______ _____% _____%
One Year 10,000 ______ _____ _____
- ------------------------
</TABLE>
(1) October 1, 1993
The Short-Term Fund's, Insured Fund's, Bond Fund's, and High-Yield
Fund's total return for the three months ending March 31, 1995, were -____%,
- -____%, -____% and -____, 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 taxable 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 1994 federal tax
rates (in effect as of __________ 1994).
TAXABLE EQUIVALENT YIELD
[need to update based on 1994 tax rates]
<TABLE>
<CAPTION>
A TAX-FREE YIELD OF:
4% 5% 6% 7% 8%
1994 Taxable Income Levels
Single Married Filing Marginal IS EQUIVALENT TO A TAXABLE YIELD OF:
Jointly Tax Rate
<S> <C> <C> <C> <C> <C> <C> <C>
under 22,751 under 38,001 15% 4.71% 5.88% 7.06% 8.24% 9.41%
22,751-55,100 38,001-91,850 28% 5.56% 6.94% 8.33% 9.72% 11.11%
55,101-115,000 91,851-140,000 31% 5.80% 7.25% 8.70% 10.14% 11.59%
115,001-250,000 140,001-250,000 36% 6.25% 7.81% 9.38% 10.94% 12.50%
over 250,000 over 250,000 39.6% 6.62% 8.28% 9.93% 11.59% 13.25%
</TABLE>
* A taxpayer with an adjusted gross income in excess of $__________ may, to
the extent such taxpayer itemizes deductions, be subject to a higher
marginal rate.
COMPARISONS - IN GENERAL
(1) LIPPER ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT
RANKING ORGANIZATIONS
From time to time, in marketing and other fund literature, each 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. Each Fund
will be compared to Lipper's appropriate fund category, that is by
33
<PAGE> 75
fund objective and portfolio holdings. Lipper also issues a monthly yield
analysis for fixed-income funds and the Funds may, from time to time, advertise
those rankings.
(2) MORNINGSTAR, INC.
Each Fund's performance also may 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 or necessarily predictive of
future performance.
(3) INDEPENDENT SOURCES
Evaluations of a Fund's performance made by independent sources may
also be used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund, especially those with
similar objectives. Sources for Fund performance information and articles
about a Fund may include publications such as Money, Forbes, Kiplinger's,
Financial World, Business Week, U.S. News and World Report, The Wall Street
Journal, Barron's and a variety of investment newsletters.
(4) INDICES
The Funds may compare their performance to a wide variety of indices
including the following:
(a) The Consumer Price Index, generally considered to be a measure
of inflation.
(b) The CDA Investment Technologies Mutual Fund-Municipal Bond
Index, a weighted performance average of other mutual funds
with a federally tax-exempt income objective.
(c) The Salomon Brothers High Grade Corporate Bond Index, an
unmanaged index that generally represents the performance of
high grade long-term taxable bonds during various market
conditions.
(d) The Lehman Brothers Municipal Bond Index, an unmanaged index
that generally represents the performance of high grade
intermediate and long-term municipal bonds during various
market conditions.
(e) The Lehman Brothers 3-Year Municipal Bond Index
(f) The Lehman Brothers Insured Municipal Bond Index
(g) The Lehman Brothers Municipal Bond Index
(h) The Lehman Brothers Baa Municipal Bond Index
(i) IBC/Donoghue's All-Taxable Money Market Fund Average,
currently based upon the total return, assuming reinvestment
of dividends, of 496 taxable money market funds.
(j) IBC/Donoghue's Tax-Free Money Fund AverageTM
(k) The CDA Investment Technologies U.S. Treasury Bill Index, an
unmanaged index based on the average monthly yield of U.S.
Treasury Bills maturing in 30 days.
There are differences and similarities between the investments which a
Fund may purchase and the investments measured by the indices which are
described herein. 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.
(5) MONEY MARKET FUNDS
Investors may also want to compare performance of the Funds 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.
(6) STRONG FAMILY OF FUNDS
The Strong Family of Funds offers a comprehensive range of
conservative to aggressive investment options. The Funds may from time to time
be compared to the other funds in the Strong Family of Funds based on a
risk/reward spectrum. The following graphs illustrate the risk/return spectrum
for the Strong Family of Funds and the Funds' place on that spectrum.
THE STRONG FUND'S RELATIVE RISK AND RETURN
34
<PAGE> 76
LOWER RISK AND HIGHER RISK AND
RETURN POTENTIAL RETURN POTENTIAL
__
-------| |--------------------------------------------------------------
| MONEY | | | INCOME | |
| MARKET | | | FUNDS | GROWTH FUNDS |
| FUNDS | | | | |
-------|__|--------------------------------------------------------------
THE STRONG MUNICIPAL
MONEY MARKET FUND
LOWER RISK AND HIGHER RISK AND
RETURN POTENTIAL RETURN POTENTIAL
__
--------------------| |-------------------------------------------------
| MONEY MARKET | | | INCOME | GROWTH FUNDS |
| FUNDS | | | FUNDS | |
--------------------|__|-------------------------------------------------
STRONG SHORT-TERM MUNICIPAL BOND FUND
LOWER RISK AND HIGHER RISK AND
RETURN POTENTIAL RETURN POTENTIAL
__
------------------------------| |---------------------------------------
| MONEY MARKET | INCOME | | | GROWTH FUNDS |
| FUNDS | FUNDS | | | |
------------------------------|__|---------------------------------------
THE STRONG INSURED
MUNICIPAL BOND FUND
LOWER RISK AND HIGHER RISK AND
RETURN POTENTIAL RETURN POTENTIAL
__
------------------------------------| |---------------------------------
| MONEY MARKET | INCOME | | | GROWTH FUNDS |
| FUNDS | FUNDS | | | |
------------------------------------|__|---------------------------------
THE STRONG MUNICIPAL BOND FUND
35
<PAGE> 77
LOWER RISK AND HIGHER RISK AND
RETURN POTENTIAL RETURN POTENTIAL
__
----------------------------------------| |----------------------------
| MONEY | INCOME | | |
| MARKET | FUNDS | | GROWTH FUNDS |
| FUNDS | | | |
----------------------------------------|__| ---------------------------
STRONG HIGH-YIELD MUNICIPAL BOND FUND
The Funds are members of the Strong Family of Funds. All of the
members of the Strong Family and their investment objectives are listed below.
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Strong U.S. Treasury Money Fund Current income, a stable share price and daily liquidity.
- -------------------------------------------------------------------------------------------------------------------------
Strong Money Market Fund Current income, a stable share price and daily liquidity.
- -------------------------------------------------------------------------------------------------------------------------
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
- -------------------------------------------------------------------------------------------------------------------------
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low
degree of share-price fluctuation.
- -------------------------------------------------------------------------------------------------------------------------
Strong Government Securities Total return by investing for a high level of current income with a
Fund 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 Short-Term Global Bond Total return by investing for a high level of income with a low degree
Fund of share-price fluctuation.
- -------------------------------------------------------------------------------------------------------------------------
Strong International Bond Fund A high total return by investing for both income and capital
appreciation.
- -------------------------------------------------------------------------------------------------------------------------
Strong Asset Allocation Fund A high total return consistent with reasonable risk over the long term.
- -------------------------------------------------------------------------------------------------------------------------
Strong Total Return Fund A high total return by investing for capital growth and income.
- -------------------------------------------------------------------------------------------------------------------------
Strong American Utilities Fund Total return by investing for both income and capital growth.
- -------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund Capital growth.
- -------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund Capital growth.
- -------------------------------------------------------------------------------------------------------------------------
Strong Common Stock Fund* Capital growth.
- -------------------------------------------------------------------------------------------------------------------------
Strong Discovery Fund Capital growth.
- -------------------------------------------------------------------------------------------------------------------------
Strong International Stock Fund Capital growth.
- -------------------------------------------------------------------------------------------------------------------------
Strong Asia Pacific Fund Capital growth.
- -------------------------------------------------------------------------------------------------------------------------
Strong Municipal Money Market Federally tax-exempt current income, a stable share-price and daily
Fund liquidity.
- -------------------------------------------------------------------------------------------------------------------------
Strong Short-Term Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a low degree of share-price fluctuation.
- -------------------------------------------------------------------------------------------------------------------------
Strong Insured Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a moderate degree of share-price fluctuation.
- -------------------------------------------------------------------------------------------------------------------------
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
- -------------------------------------------------------------------------------------------------------------------------
Strong High-Yield Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income.
- -------------------------------------------------------------------------------------------------------------------------
Strong Special Fund II** Capital growth.
- -------------------------------------------------------------------------------------------------------------------------
Strong Discovery Fund II** Capital growth.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Strong Common Stock Fund is currently closed to new investors.
** The Fund is an investment vehicle that funds variable annuity accounts.
COMPARISONS - SHORT-TERM FUND, INSURED FUND, BOND FUND, AND HIGH-YIELD FUND
36
<PAGE> 78
(1) U.S. TREASURY BILLS, NOTES, OR BONDS
Investors may want to compare the performance of a Fund to that of
United States Treasury Bills, Notes, or Bonds, which are issued by the U.S.
Government, because such instruments 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.
(2) CERTIFICATES OF DEPOSIT
Investors may want to compare a Fund's performance to that of
certificates of deposit offered by banks and other depository institutions.
Certificates of deposit represent an alternative (taxable) income producing
product. Certificates of deposit may offer fixed or variable interest rates
and principal is guaranteed and may be insured. Withdrawal of the deposits
prior to maturity normally will be subject to a penalty. Rates offered by
banks and other depository institutions are subject to change at any time
specified by the issuing institution. The bonds held by the Bond Fund and
High-Yield Fund are generally of longer term than most certificates of deposit
and may reflect longer term market interest rate fluctuations.
(3) INDIVIDUAL MUNICIPAL BONDS
The Short-Term Fund, Insured Fund, Bond Fund, and High-Yield 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.
COMPARISONS - MONEY FUND
(1) DONOGHUE'S MONEY MARKET FUND REPORT ("DONOGHUE")
The performance of the Money Fund may be compared to other money
market funds rated by Donoghue's, a reporting service on money market funds.
As reported by Donoghue's, all investment results represent total return
(annualized results for the period net of management fees and expenses) and one
year investment results are effective annual yields assuming reinvestment of
dividends.
(2) VARIOUS BANK PRODUCTS
The 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, 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
37
<PAGE> 79
will normally be subject to a penalty. In contrast, shares of the Money Fund
are redeemable at the net asset value (normally, $1.00 per share) next
determined after a request is received, without charge.
GENERAL INFORMATION
SERVICE ORIENTATION
The Advisor is an independent, Midwestern-based investment advisor,
unaffiliated with any bank, securities brokerage, or insurance company. The
Advisor strives for excellence both in investment management and in the service
provided to investors. This commitment affects many aspects of the business,
including professional staffing, product development, investment management,
and service delivery. Through its commitment to excellence, the Advisor
intends to benefit investors and to encourage them to think of Strong Funds as
their mutual fund family.
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 Fund include, but are not limited to, changes in
interest rates, political developments, the competitive environment, consumer
behavior, industry trends, technological advances, macroeconomic trends, and
the supply and demand of various financial instruments. In addition, marketing
materials may cite the portfolio management's views or interpretations of such
factors.
PORTFOLIO MANAGEMENT
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 Fund's objectives. This policy is
based on a fundamental belief that economic and financial conditions create
favorable and unfavorable investment periods (or seasons) and that these
different seasons require different investment approaches. Through its active
management approach, the Advisor seeks to avoid or reduce any negative change
in the Short-Term Fund's, Insured Fund's, Bond Fund's, and High-Yield Fund's
net asset value per share during periods of falling bond prices. In addition,
the Advisor seeks competitive municipal money market yields for the Money Fund
with emphasis on capital preservation and daily liquidity.
Financial goals vary from person to person. Investors may choose one
or more of the Strong Funds to help them reach their financial goals. To help
you better understand the Strong Municipal Income Funds and determine which
Fund or combination of Funds best meets your personal investment objectives,
they are described in the same Prospectus. Though they appear in the same
Prospectus, each of the Strong Municipal Income Funds are separately
incorporated investment companies. Because the Funds share a Prospectus, there
may be the possibility of cross liability between the Funds.
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 Securities and Exchange Commission.
FINANCIAL STATEMENTS
The Annual Report that is attached hereto contains the following
financial information for each Fund:
(a) Schedules of Investments in Securities.
(b) Statements of Operations.
(c) Statements of Assets and Liabilities.
(d) Statements of Changes in Net Assets.
(e) Notes to Financial Statements.
(f) Financial Highlights.
(g) Report of Independent Accountants.
38
<PAGE> 80
APPENDIX
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
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
A-1
<PAGE> 81
and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grade period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such Bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes Bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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.
A-2
<PAGE> 82
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated 'AAA'. Because bonds rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable future
developments, short-term debt of the issuers is generally rated
'F-1+'.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher
ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or
liquidation.
A-3
<PAGE> 83
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the risk
factor varies from industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying its
debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, and
DD, D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization
of the obligor. 'DDD' represents the highest potential for
recovery of these bonds, and 'D' represents the lowest potential
for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important
to the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
A-4
<PAGE> 84
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
- ---------------------------------------------------------------------------------------------------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
- ----------------------------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
- ----------------------------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
- ----------------------------------------------------------------------------------------------------
BBB+ Below average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
- ----------------------------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according to
BB- industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
- ----------------------------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will not be met
B when due. Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a higher
or lower rating grade.
- ----------------------------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable uncertainty exists as to
timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
- ----------------------------------------------------------------------------------------------------
DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend arrearages.
- ----------------------------------------------------------------------------------------------------
</TABLE>
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-5
<PAGE> 85
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
STANDARD & POOR'S NOTE RATINGS
A S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating.
The following criteria will be used in making the assessment:
Amortization schedule - the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note.
Source of payment - the more the issue depends on the market for its
refinancing, the more likely it is to be considered a note.
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay interest and principal, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representation as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
A-6
<PAGE> 86
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (i)
leading market positions in well established industries, (ii) high rates of
return on funds employed, (iii) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (iv) broad margins in
earnings coverage of fixed financial charges and high internal cash generation,
and (v) well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 (Very Strong Credit Quality) Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated 'F-1+'.
F-2 (Good Credit Quality) Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the margin
of safety is not as great as for issues assigned 'F-1+' and 'F-1'
ratings.
A-7
<PAGE> 87
F-3 (Fair Credit Quality) Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could
cause these securities to be rated below investment grade.
F-S (Weak Credit Quality) Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D (Default) Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations
with maturities of under one year, including commercial paper, the uninsured
portion of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which as defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
Rating Scale: Definition
------------- ----------
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors
and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing
requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
Duff 3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-investment Grade
Duff 4 Speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt
service. Operating factors and market access may be
subject to a high degree of variation.
A-8
<PAGE> 88
Default
Duff 5 Issuer failed to meet scheduled principal and/or
interest payments.
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
The TBW Short-Term Ratings apply, unless otherwise noted, to
unsubordinated instruments of the rated entities with a maturity of one year or
less, including deposits, bank notes, bankers' acceptances, federal funds,
letters of credit, commercial paper and other obligations comparable in
priority and security to those specifically listed herein. These ratings do
not consider any collateral or security as the basis for the rating, although
some of the securities may in fact have collateral. Further, these ratings do
not incorporate consideration of the possible sovereign risk associated with a
foreign deposit (defined as a deposit taken in a branch outside the country in
which the rated entity is headquartered) of the rated entity. TBW Short-Term
Ratings are intended to assess the likelihood of an untimely or incomplete
payments of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3 The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA SHORT-TERM RATINGS
IBCA Short-Term Ratings assess the borrowing characteristics of banks
and corporations, and the capacity for timely repayment of debt obligations.
The Short-Term Ratings relate to debt which has a maturity of less than one
year.
A1+ Obligations supported by the highest capacity for timely
repayment and possess a particularly strong credit feature.
A1 Obligations supported by the highest capacity for timely
repayment.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or which
are currently in default.
D Obligations which are currently in default.
A-9
<PAGE> 5
STRONG MUNICIPAL BOND FUND, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Inapplicable
(b) Exhibits
(1) Articles of Incorporation, as amended
(2) Restated By-Laws
(3) Inapplicable
(4) Specimen Stock Certificate
(5) Investment Advisory Agreement
(6) Distribution Agreement
(7) Inapplicable
(8) Custody Agreement
(8.1) Amendment to Custody Agreement
(9) Shareholder Servicing Agent Agreement
(10) Inapplicable
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16) Computation of Performance Figures
(17) Power of Attorney
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.
C-1
<PAGE> 6
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of January 31, 1995
-------------- ------------------------------
<S> <C>
Common Stock, $.001 par value 11,499
</TABLE>
Item 27. Indemnification
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Surplus Lines Insurance
Company and First State Insurance Company in the aggregate amount of
$10,000,000, subject to certain deductions. Pursuant to the authority of the
Wisconsin Business Corporation Law, Article VII of Registrant's By-Laws
provides as follows:
ARTICLE VII. INDEMNIFICATION
7.01. Provision of Indemnification. The corporation shall,
to the fullest extent permitted or required by Sections 180.0850 to
180.0859, inclusive, of the Wisconsin Business Corporation Law,
including any amendments thereto (but in the case of any such
amendment, only to the extent such amendment permits or requires the
corporation to provide broader indemnification rights than prior to
such amendment), indemnify its Directors and Officers against any and
all Liabilities, and advance any and all reasonable Expenses, incurred
thereby in any Proceeding to which any such Director or Officer is a
Party because he or she is or was a Director or Officer of the
corporation. The corporation shall also indemnify an employee who is
not a Director or Officer, to the extent that the employee has been
successful on the merits or otherwise in defense of a Proceeding, for
all Expenses incurred in the Proceeding if the employee was a Party
because he or she is or was an employee of the corporation. The
rights to indemnification granted hereunder shall not be deemed
exclusive of any other rights to indemnification against Liabilities
or the advancement of Expenses which a Director, Officer or employee
may be entitled under any written agreement, Board resolution, vote of
shareholders, the Wisconsin Business Corporation Law or otherwise.
The corporation may, but shall not be required to, supplement the
foregoing rights to indemnification against Liabilities and
advancement of Expenses under this Section 7.01 by the purchase of
insurance on behalf of any one or more of such Directors, Officers or
employees, whether or not the corporation would be obligated to
indemnify or advance Expenses to such Director, Officer or employee
under this Section 7.01. All capitalized terms used in this Article
VII and not otherwise defined herein shall have the meaning set forth
in Section 180.0850 of the Wisconsin Business Corporation law.
Notwithstanding anything herein to the contrary, in no event shall the
corporation indemnify any person hereunder in contravention of any
provision of the Investment Company Act of 1940.
7.02. Amendment. This Article VII may only be altered,
amended or repealed by the affirmative vote of not less than
two-thirds of the shareholders of the corporation so entitled to vote;
provided, however, that such shareholder authorization shall not be
required in the event such alteration or amendment:
(i) is made in order to conform to any amendment or
revision of the Wisconsin Business Corporation Law which expands the
Director's and/or Officer's rights to indemnification thereunder or is
otherwise beneficial to the Executive; or
(ii) in the sole judgment and discretion of the board of
directors of the corporation, does not materially adversely affect the
rights and protections of the shareholders of the corporation.
C-2
<PAGE> 7
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 American Utilities Fund, Inc.; Strong Asia Pacific Fund, Inc.;
Strong Asset Allocation Fund, Inc.; Strong Common Stock Fund, Inc.; Strong
Discovery Fund II, Inc.; Strong Discovery Fund, Inc.; Strong Government
Securities Fund, Inc.; Strong Growth Fund, Inc.; Strong High-Yield Municipal
Bond Fund, Inc.; Strong Income Fund, Inc.; Strong Insured Municipal Bond Fund,
Inc.; Strong International Bond Fund, Inc.; Strong International Stock Fund,
Inc.; Strong Money Market Fund, Inc.; Strong Municipal Money Market Fund, Inc.;
Strong Opportunity Fund, Inc.; Strong Short-Term Bond Fund, Inc.; Strong
Short-Term Global Bond Fund, Inc.; Strong Short-Term Municipal Bond Fund, Inc.;
Strong Special Fund II, Inc.; Strong Total Return Fund, Inc.; and Strong U.S.
Treasury Money Fund, 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) None
Item 30. Location of Accounts and Records
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Treasurer, Thomas M.
Zoeller, at Registrant's corporate offices, 100 Heritage Reserve, Menomonee
Falls, Wisconsin 53051.
Item 31. Management Services
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered, upon request and without charge, a copy of the
Registrant's latest annual report to shareholders.
C-3
<PAGE> 8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Village of Menomonee Falls, and State of Wisconsin on the 23rd day of February,
1995.
STRONG MUNICIPAL BOND FUND, INC.
(Registrant)
BY: /s/ John Dragisic
----------------------------------
John Dragisic, Vice Chairman
Each person whose signature appears below constitutes and appoints
John Dragisic, Thomas P. Lemke, Lawrence A. Totsky, and Ann E. Oglanian, 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 any and all post-effective amendments to this
Registration Statement on Form N-1A and to file the same, with all exhibits
thereto, and any other documents in connection therewith, with the Securities
and Exchange Commission and any other regulatory body on or before May 30,
1996, 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.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ John Dragisic Vice Chairman of the Board (Principal
- --------------------------------- Executive Officer) February 23, 1995
John Dragisic
/s/ Thomas M. Zoeller Treasurer (Principal Financial and
- --------------------------------- Accounting Officer) February 23, 1995
Thomas M. Zoeller
/s/ Richard S. Strong Chairman of the Board and a Director February 23, 1995
- ---------------------------------
Richard S. Strong
/s/ Marvin E. Nevins Director February 23, 1995
- ---------------------------------
Marvin E. Nevins
/s/ Willie D. Davis Director February 23, 1995
- ---------------------------------
Willie D. Davis
</TABLE>
<PAGE> 9
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Exhibit Page No.
----------- ------- --------
<S> <C> <C>
(1) Articles of Incorporation, as amended(2)
(2) Restated By-Laws(3)
(3) Inapplicable
(4) Specimen Stock Certificate(1)
(5) Investment Advisory Agreement(1)
(6) Distribution Agreement(1)
(7) Inapplicable
(8) Custody Agreement(1)
(8.1) Amendment to Custody Agreement(2)
(9) Shareholder Servicing Agent Agreement(2)
(10) Inapplicable
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16) Computation of Performance Figures
(17) Power of Attorney (See Signature Page)
</TABLE>
- -------------------------------
(1) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A of Registrant.
(2) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement on Form N-1A of Registrant. The Articles of Incorporation, as
amended, are incorporated by reference to Exhibit 1.1 to Amendment No. 3.
The Shareholder Servicing Agent Agreement is incorporated by reference to
Exhibit 9.1 to Amendment No. 3.
(3) Incorporated herein by reference to Amendment No. 5 to the Registration
Statement on Form N-1A of Registrant. The Restated By-Laws are
incorporated by reference to Exhibit 2.2 to Amendment No. 5.
<PAGE> 1
EXHIBIT 16
Strong Municipal Bond Fund, Inc.
SCHEDULE OF COMPUTATION OF
PERFORMANCE QUOTATIONS
I. CURRENT ANNUALIZED YIELD: 30 days ended December 30, 1994
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
1,678,691.26 - 200,069.80
YIELD = 2[(---------------------------------- + 1)6 - 1]
31,316,022.187 x 9.23
YIELD = 6.22%
II. TAX-EQUIVALENT YIELD: 30 Days ended December 30, 1994
A. Formula
Tax-Equivalent Yield = YIELD (as defined above)
-------------------------------
100% - Stated Marginal Tax Rate
B. Calculation
6.22%/(1 - .31 tax rate*)
6.22%/.69 = 9.01%
*31% federal tax rate
III. AVERAGE ANNUAL COMPOUNDED RETURN
A. Formula _____
P (1 + T)n = ERV or T \n/ERV/P -1
<PAGE> 2
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 12-31-93 through 12-31-94
___________
-4.55% = \1/9,545/10,000 - 1
2. Five-year period 12-31-89 through 12-31-94
_____________
7.26% = \5/14,198/10,000 - 1
3. Since inception 10-23-86 through 12-31-94
_____________
6.13% = \8.19/16,275/10,000 - 1
IV. TOTAL RETURN
A. Formula
EV-IV
------
IV = TR
Where: EV = Value at the end of the period, including
reinvestment of all dividends
and capital gains distributions
IV = Initial value of a hypothetical investment at the net
asset value
TR = Total Return
B. Calculation
EV-IV
------
IV = TR
One-year period ended December 31, 1994
9,545 - 10,000
--------------
10,000 = -4.55 %
