As filed with the Securities and Exchange Commission on or about December 27,
2000
Securities Act Registration No. 33-7604
Investment Company Act Registration No. 811-4769
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
------
Post-Effective Amendment No. 20 [X]
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 21 [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
Elizabeth N. Cohernour
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check
appropriate box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule
485
[X] on January 1, 2001 pursuant to paragraph (b) of Rule
485
[ ] 60 days after filing pursuant to paragraph (a)(1) of
Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule
485
[ ] 75 days after filing pursuant to paragraph (a)(2) of
Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule
485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
<PAGE>
STRONG MUNICIPAL BOND FUND, INC.
PART C
OTHER INFORMATION
Item 23. EXHIBITS
(a) Articles of Incorporation dated July 31, 1996(2)
(a.1) Amendment to Articles of Incorporation dated February 22, 2000(4)
(a.2) Amendment to Articles of Incorporation dated July 24, 2000(5)
(b) Bylaws dated October 20, 1995(1)
(b.1) Amendment to Bylaws dated May 1, 1998(3)
(c) Specimen Stock Certificate(4)
(d) Amended and Restated Investment Advisory Agreement(4)
(e) Distribution Agreement(4)
(e.1) Distribution Agreement - Advisor Class(4)
(e.2) Dealer Agreement (Advisor Shares Only)(4)
(e.3) Mutual Fund Distribution and Shareholder Services Agreement
(Advisor Shares Only)
(e.4) Services Agreement(4)
(f) Inapplicable
(g) Custody Agreement(1)
(h) Amended and Restated Transfer and Dividend Disbursing Agent
Agreement(4)
(h.1) Administration Agreement - Investor Class(4)
(h.2) Administration Agreement - Advisor Class(4)
(h.3) Administration Agreement - Institutional Class(5)
(i) Inapplicable
(j) Consent of Independent Accountants
(k) Inapplicable
(l) Inapplicable
(m) Amended and Restated Rule 12b-1 Plan
(n) Amended and Restated Rule 18f-3 Plan
(o) Inapplicable
(p) Code of Ethics for Access Persons dated November 9, 2000
(p.1) Code of Ethics for Non-Access Persons dated November 9, 2000
(q) Power of Attorney dated December 27, 2000
(r) Letter of Representation
(1) Incorporated herein by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A of Registrant filed on or about April
26, 1996.
(2) Incorporated herein by reference to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A of the Registrant filed on or about
December 30, 1996.
(3) Incorporated herein by reference to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A of the Registrant filed on or about
October 29, 1998.
(4) Incorporated herein by reference to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A of the Registrant filed on or about
February 25, 2000.
(5) Incorporated herein by reference to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A of the Registrant filed on or about
July 27, 2000.
<PAGE>
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant neither controls any person nor is under common control with any
other person.
Item 25. INDEMNIFICATION
Officers and directors of the Funds, its advisor and underwriter are
insured under a joint directors and officers/errors and omissions insurance
policy underwritten by a group of insurance companies in the aggregate amount of
$115,000,000, subject to certain deductions. Pursuant to the authority of the
Wisconsin Business Corporation Law ("WBCL"), Article VII of Registrant's Bylaws
provides as follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01. MANDATORY INDEMNIFICATION. The Corporation shall
indemnify, to the full extent permitted by the WBCL, as in effect from
time to time, the persons described in Sections 180.0850 through
180.0859 (or any successor provisions) of the WBCL or other provisions
of the law of the State of Wisconsin relating to indemnification of
directors and officers, as in effect from time to time. The
indemnification afforded such persons by this section shall not be
exclusive of other rights to which they may be entitled as a matter of
law.
SECTION 7.02. PERMISSIVE SUPPLEMENTARY BENEFITS. The Corporation
may, but shall not be required to, supplement the right of
indemnification under Section 7.01 of (a) the purchase of insurance on
behalf of any one or more of such persons, whether or not the
Corporation would be obligated to indemnify such person under Section
7.01; (b) individual or group indemnification agreements with any one
or more such persons; and (c) advances for related expenses of such a
person.
SECTION 7.03. AMENDMENT. This Article VII may be amended or
repealed only by a vote of the shareholders and not by a vote of the
Board of Directors.
SECTION 7.04. INVESTMENT COMPANY ACT. In no event shall the
Corporation indemnify any person hereunder in contravention of any
provision of the Investment Company Act.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The information contained under "Who are the funds' investment advisor and
portfolio managers?" in the Prospectus and under "Directors and Officers,"
"Investment Advisor," and "Distributor" in the Statement of Additional
Information is hereby incorporated by reference pursuant to Rule 411 under the
Securities Act of 1933.
Item 27. PRINCIPAL UNDERWRITERS
(a) Strong Investments, Inc., principal underwriter for Registrant, also
serves as principal underwriter for Strong Advantage Fund, Inc.; Strong Asia
Pacific Fund, Inc.; Strong Balanced Fund, Inc.; Strong Common Stock Fund, Inc.;
Strong Conservative Equity Funds, Inc.; Strong Corporate Bond Fund, Inc.; Strong
Discovery Fund, Inc.; Strong Equity Funds, Inc.; Strong Government Securities
Fund, Inc.; Strong Heritage Reserve Series, Inc.; Strong High-Yield Municipal
<PAGE>
Bond Fund, Inc.; Strong Income Funds, Inc.; Strong Income Funds II, Inc.;
Strong International Equity Funds, Inc.; Strong International Income Funds,
Inc.; Strong Large Cap Growth Fund, Inc; Strong Life Stage Series, Inc.; Strong
Money Market Fund, Inc.; Strong Municipal Funds, Inc.; Strong Opportunity Fund,
Inc.; Strong Opportunity Fund II, Inc.; Strong Schafer Funds, Inc.; Strong
Schafer Value Fund, Inc.; Strong Short-Term Bond Fund, Inc.; Strong Short-Term
Global Bond Fund, Inc.; Strong Short-Term Municipal Bond Fund, Inc.; and Strong
Variable Insurance Funds, Inc.
(b)
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH UNDERWRITER WITH FUND
----------------------------------------------------------------------------------------------------------
Peter D. Schwab President and Director none
100 Heritage Reserve
Menomonee Falls, WI 53051
Richard W. Smirl Vice President and Chief
100 Heritage Reserve Compliance Officer none
Menomonee Falls, WI 53051
Dana J. Russart Vice President none
100 Heritage Reserve
Menomonee Falls, WI 53051
Michael W. Stefano Vice President none
100 Heritage Reserve
Menomonee Falls, WI 53051
Lawrence B. Zuntz Vice President none
100 Heritage Reserve
Menomonee Falls, WI 53051
Dennis A. Wallestad Vice President Vice President
100 Heritage Reserve
Menomonee Falls, WI 53051
Elizabeth N. Cohernour Secretary Vice President and
100 Heritage Reserve Secretary
Menomonee Falls, WI 53051
Thomas M. Zoeller Treasurer and Chief Vice President
100 Heritage Reserve Financial Officer
Menomonee Falls, WI 53051
Kevin J. Scott Assistant Treasurer none
100 Heritage Reserve
Menomonee Falls, WI 53051
Constance R. Wick Assistant Secretary none
100 Heritage Reserve
Menomonee Falls, WI 53051
</TABLE>
(c) None
<PAGE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Vice President,
Elizabeth N. Cohernour, at Registrant's corporate offices, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
Item 29. MANAGEMENT SERVICES
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 30. UNDERTAKINGS
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933,
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
Village of Menomonee Falls, and State of Wisconsin on the 27th day of December,
2000.
STRONG MUNICIPAL BOND FUND, INC.
(Registrant)
By:/s/ Elizabeth N. Cohernour
-----------------------------------------
Elizabeth N. Cohernour, Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement on Form N-1A has been
signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME TITLE DATE
Chairman of the Board (Principal Executive
/s/ Richard S. Strong Officer) and a Director December 27, 2000
-----------------------------------------------
Richard S. Strong
Treasurer (Principal Financial and
/s/ John W. Widmer Accounting Officer) December 27, 2000
-----------------------------------------------
John W. Widmer
Director December 27, 2000
-----------------------------------------------
Marvin E. Nevins*
Director December 27, 2000
-----------------------------------------------
Willie D. Davis*
Director December 27, 2000
-----------------------------------------------
William F. Vogt*
Director December 27, 2000
-----------------------------------------------
Stanley Kritzik*
Director December 27, 2000
-----------------------------------------------
Neal Malicky*
</TABLE>
* Susan A. Hollister signs this document pursuant to powers of attorney filed
with this Post- Effective Amendment to the Registration Statement on Form
N-1A.
By: /s/ Susan A. Hollister
-----------------------------------------
Susan A. Hollister
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
EDGAR
EXHIBIT NO. EXHIBIT EXHIBIT NO.
----------- ------- -----------
(e.3) Mutual Fund Distribution and Shareholder Services Agreement EX-99.e3
(j) Consent of Independent Accountants EX-99.j
(m) Amended and Restated 12b-1 Plan EX-99.m
(n) Amended and Restated 18f-3 Plan EX-99.n
(p) Code of Ethics for Access Persons EX-99.p
(p.1) Code of Ethics for Non-Access Persons EX-99.p1
(q) Power of Attorney EX-99.q
(r) Letter of Representation EX-99.r
</TABLE>
PROSPECTUS JANUARY 1, 2001
[INVESTOR CLASS (written vertically)]
The Strong
Municipal Income
Funds
[PICTURE OF MAN HOLDING TELEPHONE]
Strong High-Yield Municipal Bond Fund
Strong Municipal Bond Fund
Strong Short-Term High Yield Municipal Fund
Strong Short-Term Municipal Bond Fund
[STRONG LOGO] STRONG
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
YOUR INVESTMENT
KEY INFORMATION
WHAT ARE THE FUNDS' GOALS? 1
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES? 1
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS? 3
WHAT ARE THE FUNDS' FEES AND EXPENSES? 7
WHO ARE THE FUNDS' INVESTMENT ADVISOR AND PORTFOLIO MANAGERS? 8
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
COMPARING THE FUNDS 10
A WORD ABOUT CREDIT QUALITY 11
TAXABLE INVESTMENTS 12
IF YOU ARE SUBJECT TO ALTERNATIVE MINIMUM TAX 13
FINANCIAL HIGHLIGHTS 13
YOUR ACCOUNT
SHARE PRICE 18
BUYING SHARES 18
SELLING SHARES 21
ADDITIONAL POLICIES 23
DISTRIBUTIONS 25
TAXES 26
SERVICES FOR INVESTORS 27
RESERVED RIGHTS 30
FOR MORE INFORMATION BACK COVER
IN THIS PROSPECTUS, "WE" OR "US" REFERS TO STRONG CAPITAL MANAGEMENT, INC., THE
INVESTMENT ADVISOR, ADMINISTRATOR, AND TRANSFER AGENT FOR THE STRONG FUNDS.
<PAGE>
YOUR INVESTMENT
KEY INFORMATION
WHAT ARE THE FUNDS' GOALS?
The STRONG HIGH-YIELD MUNICIPAL BOND FUND seeks total return by investing for a
high level of federally tax-exempt current income.
The STRONG MUNICIPAL BOND FUND and the STRONG SHORT-TERM HIGH YIELD MUNICIPAL
FUND seek total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
The STRONG SHORT-TERM MUNICIPAL BOND FUND seeks total return by investing for a
high level of federally tax-exempt current income with a low degree of
share-price fluctuation.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
The HIGH-YIELD MUNICIPAL BOND FUND invests primarily in long-term, medium- and
lower-quality municipal bonds. The fund's manager emphasizes bonds whose credit
quality may be improving, and issuers that complement current investment themes,
such as the "aging of America." The manager also takes the overall interest rate
environment into consideration. The fund typically maintains an average maturity
between 10 and 25 years.
The MUNICIPAL BOND FUND invests primarily in long-term, higher- and
medium-quality municipal bonds. The fund's manager conducts intensive research
on individual issuers to uncover solid investment opportunities, especially
looking for bonds whose quality may be improving. The fund typically maintains
an average maturity between 10 and 20 years.
The SHORT-TERM HIGH YIELD MUNICIPAL FUND follows a similar investment style to
the HIGH-YIELD MUNICIPAL BOND Fund, but invests primarily in short- and
intermediate-term, medium- and lower-quality municipal bonds. The fund typically
maintains an average maturity between one and three years.
The SHORT-TERM MUNICIPAL BOND FUND invests primarily in short- and
intermediate-term, higher- and medium-quality municipal bonds, following the
investment style of the MUNICIPAL BOND FUND. The fund typically maintains an
average maturity of three years or less.
Although each of the funds invests primarily for income, they also employ
techniques designed to realize capital appreciation. For example, the managers
may select bonds with maturities and coupon rates that position them for
potential capital appreciation for a variety of reasons, including a manager's
view on the direction of future interest-rate movements and the potential for a
credit upgrade.
The funds' managers may sell a holding if its value becomes unattractive (for
example, when its fundamental qualities deteriorate or when other opportunities
exist that have more attractive yields). Also, the managers may invest any
amount in cash or cash-type securities (high-quality, short-term debt securities
issued by corporations, financial institutions, or the U.S. government) as a
temporary defensive position to avoid losses during adverse market conditions.
This could reduce the benefit to the funds if the market goes up. In this case,
the funds may not achieve their investment goal.
The funds may invest without limitation in municipal bonds, such as private
activity bonds, whose interest may be subject to the federal alternative minimum
tax (AMT).
<PAGE>
((Side Box))
Under normal market conditions, the funds will invest at least 80% of their
assets in municipal bonds. MUNICIPAL BONDS are debt obligations issued by or for
U.S. states, territories, and possessions and the District of Columbia and their
political subdivisions, agencies, and instrumentalities. Municipal bonds can be
issued to obtain money for public purposes or for privately operated facilities
or projects. Some municipal bonds pay interest that is exempt from federal
income tax. Examples of municipal bonds are general obligation bonds, revenue
bonds, industrial development bonds, notes, and municipal lease obligations.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS?
BOND RISKS: The major risks of each fund are those of investing in the bond
market. A bond's market value is affected significantly by changes in interest
rates--generally, when interest rates rise, the bond's market value declines,
and when interest rates decline, its market value rises (interest-rate risk).
Generally, the longer a bond's maturity, the greater the risk and the higher its
yield. Conversely, the shorter a bond's maturity, the lower the risk and the
lower its yield (maturity risk). A bond's value can also be affected by changes
in the bond's credit quality rating or its issuer's financial condition
(credit-quality risk). Because bond values fluctuate, the fund's share price
fluctuates. So, when you sell your investment, you may receive more or less
money than you originally invested.
HIGH-YIELD BOND RISKS: The HIGH-YIELD MUNICIPAL BOND FUND and the SHORT-TERM
HIGH YIELD MUNICIPAL FUND invest in lower-quality bonds, commonly known as
high-yield bonds or junk bonds that present a significant risk for loss of
principal and interest. These bonds offer the potential for higher returns but
also involve greater risk than bonds of better quality, including an increased
possibility that the bond's issuer may not be able to make its payments of
interest and principal (credit-quality risk). If that happens, the fund's share
price would decrease and its income distributions would be reduced. An economic
downturn or period of rising interest rates (interest-rate risk) could adversely
affect the market for these bonds and reduce the fund's ability to sell its
bonds (liquidity risk). The lack of a liquid market for these bonds could
decrease the fund's share price. The HIGH-YIELD MUNICIPAL BOND FUND and the
SHORT-TERM HIGH YIELD MUNICIPAL FUND also have the ability to invest in debt
obligations that are in default and these obligations possess an increased
possibility that the issuer may not be able to make its payments of principal
and interest.
MANAGEMENT RISK: The funds are subject to management risk because they are
actively managed. There is no guarantee that the investment techniques and risk
analyses used by the managers will produce the desired results.
The funds are appropriate for investors who are comfortable with the risks
described here. Also, the HIGH-YIELD MUNICIPAL BOND FUND and the MUNICIPAL BOND
FUND are appropriate for investors whose financial goals are four to seven years
in the future. The SHORT-TERM HIGH YIELD MUNICIPAL FUND and the SHORT-TERM
MUNICIPAL BOND FUND are appropriate for investors whose financial goals are two
to four years in the future. The funds are not appropriate for investors
concerned primarily with principal stability.
FUND STRUCTURE
Each of the funds has adopted a multiple class plan. The MUNICIPAL BOND FUND and
the SHORT-TERM MUNICIPAL BOND FUND offer Investor Class shares, Advisor Class
shares, and Institutional Class shares. The HIGH-YIELD MUNICIPAL BOND FUND and
the SHORT-TERM HIGH YIELD MUNICIPAL FUND offer Investor Class shares and Advisor
Class shares. Only the Investor Class shares of each fund are offered in this
prospectus. The principal differences between each of the classes of shares are
that the Advisor Class shares are subject to distribution fees and expenses
under a 12b-1 plan and each class of shares is subject to different
administrative and transfer agency fees and expenses.
<PAGE>
FUND PERFORMANCE
The following return information illustrates how the performance of the funds'
Investor Class shares can vary, which is one indication of the risks of
investing in the funds. Please keep in mind that the past performance of the
funds' Investor Class shares does not represent how they will perform in the
future. The information assumes that you reinvested all dividends and
distributions.
CALENDAR YEAR TOTAL RETURNS
-------------------------------------------------------------
Short-Term High-Yield Short-Term
Municipal Municipal Municipal High Yield
Year Bond Bond Bond Municipal
-------------------------------------------------------------
-------------------------------------------------------------
1990 4.6% - - -
-------------------------------------------------------------
-------------------------------------------------------------
1991 13.4% - - -
-------------------------------------------------------------
-------------------------------------------------------------
1992 12.2% 7.2% - -
-------------------------------------------------------------
-------------------------------------------------------------
1993 11.8% 6.8% - -
-------------------------------------------------------------
-------------------------------------------------------------
1994 -4.6% -1.6% -1.0% -
-------------------------------------------------------------
-------------------------------------------------------------
1995 11.4% 5.4% 14.6% -
-------------------------------------------------------------
-------------------------------------------------------------
1996 2.4% 4.9% 5.1% -
-------------------------------------------------------------
-------------------------------------------------------------
1997 12.1% 6.9% 13.9% -
-------------------------------------------------------------
-------------------------------------------------------------
1998 6.7% 5.6% 5.3% 6.1%
-------------------------------------------------------------
-------------------------------------------------------------
1999 -6.5% 1.2% -5.5% 0.8%
-------------------------------------------------------------
BEST AND WORST QUARTERLY PERFORMANCE
(DURING THE PERIODS SHOWN ABOVE)
<TABLE>
<CAPTION>
<S> <C> <C>
FUND NAME BEST QUARTER RETURN WORST QUARTER RETURN
------------------------------------- ----------------------------------- -----------------------------------
High-Yield Municipal Bond 4.7% (1st Q 1995) -3.5% (4th Q 1999)
Municipal Bond 5.8% (2nd Q 1992) -5.1% (1st Q 1994)
Short-Term High Yield Municipal 1.9% (2nd Q 1998) -1.1% (4th Q 1999)
Short-Term Municipal Bond 2.4% (3rd Q 1995) -1.8% (1st Q 1994)
</TABLE>
THE YEAR-TO-DATE RETURNS THROUGH SEPTEMBER 30, 2000 ARE: MUNICIPAL BOND, 2.90%;
SHORT-TERM MUNICIPAL BOND, 3.68%; HIGH-YIELD MUNICIPAL BOND, 1.05%; AND
SHORT-TERM HIGH YIELD MUNICIPAL, 2.43%.
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12-31-99
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FUND/INDEX 1-YEAR 5-YEAR 10-YEAR SINCE INCEPTION
HIGH-YIELD MUNICIPAL BOND -5.49% 6.43% -- 5.38% (10-1-93)
High-Yield Municipal Bond Index -1.80% 7.40% -- 5.20%
Lipper High Yield Municipal Debt
Funds Index -3.65% 6.23% -- 4.33%
MUNICIPAL BOND -6.48% 5.00% 6.12% 5.70% (10-23-86)
Lehman Brothers Municipal Bond Index -2.06% 6.91% 6.89% 7.08%
Lipper General Municipal Debt Funds Index-4.07% 6.14% 6.29% 6.52%
SHORT-TERM HIGH YIELD MUNICIPAL 0.78% -- -- 3.69% (11-30-97)
Lehman Brothers 1-3 Year Non-Investment
Grade Municipal Bond Index 3.66% -- -- 4.63%
Lipper High Yield Municipal Debt
Funds Index -3.65% -- -- 1.59%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHORT-TERM MUNICIPAL BOND 1.16% 4.76% -- 4.48% (12-31-91)
Lehman Brothers Municipal
3 Year Bond Index 1.96% 5.17% -- 4.88%
Lipper Short Municipal Debt Funds Average 1.69% 4.35% -- 4.13%
</TABLE>
THE HIGH-YIELD MUNICIPAL BOND INDEX IS COMPRISED OF THE LEHMAN BROTHERS BAA
MUNICIPAL BOND INDEX FROM INCEPTION THROUGH DECEMBER 31, 1995, AND THE LEHMAN
BROTHERS HIGH-YIELD MUNICIPAL BOND INDEX FROM JANUARY 1, 1996 TO PRESENT. THE
LEHMAN BROTHERS BAA MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF MUNICIPAL BONDS RATED BAA. THE LEHMAN BROTHERS HIGH-YIELD
MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF MUNICIPAL
BONDS RATED BELOW BAA. THE LIPPER HIGH YIELD MUNICIPAL DEBT FUNDS INDEX IS AN
EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS IN THIS
LIPPER CATEGORY. THE LEHMAN BROTHERS MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX
GENERALLY REPRESENTATIVE OF INVESTMENT-GRADE, TAX-EXEMPT BONDS. THE LIPPER
GENERAL MUNICIPAL DEBT FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF
THE LARGEST QUALIFYING FUNDS IN THIS LIPPER CATEGORY. THE LEHMAN BROTHERS 1-3
YEAR NON-INVESTMENT GRADE MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF MUNICIPAL BONDS RATED BELOW BAA WITH MATURITIES OF ONE TO
THREE YEARS. THE LIPPER HIGH YIELD MUNICIPAL DEBT FUNDS INDEX IS AN EQUALLY
WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS IN THIS LIPPER
CATEGORY. THE LEHMAN BROTHERS MUNICIPAL 3 YEAR BOND INDEX IS AN UNMANAGED INDEX
GENERALLY REPRESENTATIVE OF THREE-YEAR, TAX-EXEMPT BONDS. THE LIPPER SHORT
MUNICIPAL DEBT FUNDS AVERAGE REPRESENTS FUNDS THAT INVEST IN MUNICIPAL DEBT
ISSUES WITH DOLLAR-WEIGHTED AVERAGE MATURITIES OF LESS THAN THREE YEARS.
For current yield information on these funds, call 1-800-368-3863.
WHAT ARE THE FUNDS' FEES AND EXPENSES?
This section describes the fees and expenses that you may pay if you buy and
hold shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
The Investor Class shares of each fund are 100% no-load, so you pay no sales
charges (loads) to buy or sell shares.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
The costs of operating each fund are deducted from fund assets, which means you
pay them indirectly. These costs are deducted before computing the daily share
price or making distributions. As a result, they don't appear on your account
statement, but instead reduce the total return you receive from your fund
investment.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENT OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TOTAL ANNUAL FUND
FUND MANAGEMENT FEES OTHER EXPENSES OPERATING EXPENSES*
---------------------------------------- --------------------- ---------------------- -----------------------
High-Yield Municipal Bond 0.35% 0.38% 0.73%
Municipal Bond 0.35% 0.41% 0.76%
Short-Term High Yield Municipal 0.35% 0.37% 0.72%
Short-Term Municipal Bond 0.25% 0.35% 0.60%
</TABLE>
*TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT REFLECT OUR WAIVER OF MANAGEMENT
FEES AND/OR ABSORPTIONS. WITH WAIVERS AND ABSORPTIONS, THE TOTAL ANNUAL FUND
OPERATING EXPENSES OF THE SHORT-TERM HIGH YIELD MUNICIPAL FUND WERE 0.63%. WE
CAN TERMINATE WAIVERS AND ABSORPTIONS FOR THIS FUND AT ANY TIME.
EXAMPLE: This example is intended to help you compare the cost of investing in
the funds with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the fund and reinvest all dividends and distributions
for the time periods indicated, and then redeem all of your shares at the end of
those periods. The example also assumes that your investment has a 5% return
each year and that the funds' operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------- --------------- ---------------- ------------- ------------
High-Yield Municipal Bond $75 $233 $406 $906
Municipal Bond $78 $243 $422 $942
Short-Term High Yield Municipal $74 $230 $401 $894
Short-Term Municipal Bond $61 $192 $335 $750
</TABLE>
<PAGE>
WHO ARE THE FUNDS' INVESTMENT ADVISOR AND PORTFOLIO MANAGERS?
Strong Capital Management, Inc. (Strong) is the investment advisor for the
funds. Strong provides investment management services for mutual funds and other
investment portfolios representing assets, as of October 31, 2000, of over $45
billion. Strong began conducting business in 1974. Since then, its principal
business has been providing investment advice for individuals and institutional
accounts, such as pension and profit-sharing plans, as well as mutual funds,
several of which are available through variable insurance products. Strong's
address is P.O. Box 2936, Milwaukee, WI 53201.
The following individuals are the funds' portfolio managers.
MARY-KAY H. BOURBULAS manages the HIGH-YIELD MUNICIPAL BOND FUND and the
SHORT-TERM HIGH YIELD MUNICIPAL FUND and has over ten years of investment
experience. She joined Strong as a portfolio manager in October 1991. Ms.
Bourbulas co-managed the HIGH-YIELD MUNICIPAL BOND FUND from its inception in
1993 until December 1995, when she assumed sole management responsibility for
the fund. She has managed the SHORT-TERM HIGH YIELD MUNICIPAL FUND since its
inception in November 1997. Prior to joining Strong, Ms. Bourbulas was employed
by Stein Roe & Farnham, where she co-managed two tax-exempt funds. Ms. Bourbulas
received her bachelors degree in Economics from Northwestern University in 1989.
LYLE J. FITTERER manages the MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL
BOND FUND. Mr. Fitterer joined Strong in 1989 and has over seven years of
investment experience. He is a Chartered Financial Analyst and Certified Public
Accountant. He has managed the MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL
BOND FUND since March 2000. He served as the Managing Director of Institutional
Client Services from December 1998 to March 2000 and as a fixed income portfolio
manager from January 1996 to December 1998. He served as a fixed income research
analyst/trader from February 1993 to January 1996 and as an equity trader from
February 1992 to February 1993. Mr. Fitterer received his bachelors degree in
Accounting from the University of North Dakota in 1989.
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
COMPARING THE FUNDS
The following will help you distinguish the funds and determine their
suitability for your investment needs:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AVERAGE INCOME
FUND MATURITY CREDIT QUALITY POTENTIAL VOLATILITY
-----------------------------------------------------------------------------------------------------------
High-Yield 10 to 25 At least 65% rated High Moderate
MUNICIPAL BOND YEARS* MEDIUM OR LOWER TO HIGH
----------------------------------------------------------------------------------------------------------
Municipal Bond 10 to 20 At least 85% rated Moderate Moderate
years* higher or medium to High
UP TO 15% RATED LOWER
----------------------------------------------------------------------------------------------------------
Short-Term High Yield 1 to 3 At least 80% rated High Moderate
MUNICIPAL YEARS MEDIUM OR LOWER
----------------------------------------------------------------------------------------------------------
Short-Term 3 years At least 85% rated Low to Low
Municipal Bond or less higher or medium Moderate
UP TO 15% RATED LOWER
----------------------------------------------------------------------------------------------------------
</TABLE>
* EXPECTED RANGE
The MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL BOND FUND invest a portion
of their assets in lower-quality securities that present a significant risk for
loss of principal and interest.
The HIGH-YIELD MUNICIPAL BOND FUND and the SHORT-TERM HIGH YIELD MUNICIPAL FUND
may invest in bonds that are in default, but the funds are not expected to
invest more than 10% of net assets in those bonds.
<PAGE>
A WORD ABOUT CREDIT QUALITY
CREDIT QUALITY measures the issuer's expected ability to pay interest and
principal payments on time. Credit quality can be "higher-quality",
"medium-quality", "lower-quality", or "in default".
HIGHER-QUALITY means bonds that are in any of the three highest rating
categories. For example, bonds rated AAA to A by Standard & Poor's Ratings Group
(S&P)*.
MEDIUM-QUALITY means bonds that are in the fourth-highest rating category. For
example, bonds rated BBB by S&P*.
LOWER-QUALITY means bonds that are below the fourth-highest rating category.
They are also known as non-investment, high-risk, high-yield, or "junk bonds".
For example, bonds rated BB to C by S&P*.
IN DEFAULT means the bond's issuer has not paid principal or interest on time.
*OR THOSE RATED IN THIS CATEGORY BY ANY NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION. S&P IS ONLY ONE EXAMPLE OF A NATIONALLY RECOGNIZED STATISTICAL
RATING ORGANIZATION.
This chart shows S&P's definition and ratings group for credit quality. Other
rating organizations use similar definitions.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CREDIT QUALITY S&P'S S&P'S RATINGS RATING
DEFINITION GROUP CATEGORY
---------------- ------------------------ ----------------------- -----------------------
Highest quality AAA First highest
Higher High quality AA Second highest
Upper medium grade A Third highest
---------------- ------------------------ ----------------------- -----------------------
Medium Medium grade BBB Fourth highest
---------------- ------------------------ ----------------------- -----------------------
Low grade BB
Lower Speculative B
Submarginal CCC, CC, C
---------------- ------------------------ -----------------------
In default Probably in default D
---------------- ------------------------ -----------------------
</TABLE>
We determine a bond's credit-quality rating at the time of investment by
conducting credit research and analysis and by relying on credit ratings of
several nationally recognized statistical rating organizations. These
organizations are called NRSROs. When we determine if a bond is in a specific
category, we may use the highest rating assigned to it by any NRSRO. If a bond
is not rated, we rely on our credit research and analysis to rate the bond. If a
bond's credit-quality rating is downgraded after our investment, we monitor the
situation to decide if we need to take any action such as selling the bond.
Typically, municipal bonds are not rated. This means that investments in
municipal bonds may require more credit analysis by us than investments in
taxable bonds. Also, investments in lower-quality bonds will be more dependent
on our credit analysis than would be higher-quality bonds because, while
lower-quality bonds generally offer higher yields than higher-quality bonds with
similar maturities, lower-quality bonds involve greater risks. These risks
include the possibility of default or bankruptcy because the issuer's capacity
to pay interest and repay principal is considered predominantly speculative.
Also, lower-quality bonds are less liquid, meaning that they may be harder to
sell than bonds of higher quality because the demand for them may be lower and
there are fewer potential buyers. This lack of liquidity may lower the value of
the fund and your investment.
TAXABLE INVESTMENTS
A fund may invest up to 20% of its net assets in U.S. government and corporate
bonds and other debt securities that are of the same quality as the fund's
investments in municipal bonds. A fund will generally invest in these bonds to
take advantage of capital gains opportunities. These bonds produce taxable
income, unlike municipal bonds, which generally provide tax-exempt income.
IF YOU ARE SUBJECT TO THE ALTERNATIVE MINIMUM TAX
The funds may invest, without limitation, in municipal obligations whose
interest is a tax-preference item for purposes of the federal alternative
minimum tax (AMT). If you are subject to the AMT, a substantial portion of your
fund's distributions to you may not be exempt from federal income tax. If this
is the case, a fund's net return to you may be lower.
FINANCIAL HIGHLIGHTS
This information describes investment performance of the Investor Class shares
of the funds for the periods shown. Certain information reflects financial
results for a single Investor Class share outstanding for the entire period.
"Total Return" shows how much an investment in the Investor Class shares of the
fund would have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These figures have been audited by
PricewaterhouseCoopers LLP, whose report, along with the fund's financial
statements, is included in the fund's annual report.
STRONG HIGH-YIELD MUNICIPAL BOND FUND--INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31,Dec. 31,
SELECTED PER-SHARE DATA(a) 2000 1999 1998 1997 1996(b) 1995
Net Asset Value, Beginning of Period $9.79 $10.52 $10.09 $9.45 $9.91 $9.29
Income From Investment Operations:
Net Investment Income 0.59 0.58 0.59 0.61 0.44 0.69
Net Realized and Unrealized Gains
(Losses) on Investments (0.88) (0.68) 0.45 0.64 (0.46) 0.62
Total from Investment Operations (0.29) (0.10) 1.04 1.25 (0.02) 1.31
Less Distributions:
From Net Investment Income(c) (0.59) (0.58) (0.59) (0.61) (0.44) (0.69)
From Net Realized Gains -- (0.05) (0.02) -- -- --
Total Distributions (0.59) (0.63) (0.61) (0.61) (0.44) (0.69)
Net Asset Value, End of Period $8.91 $9.79 $10.52 $10.09 $9.45 $9.91
RATIOS AND SUPPLEMENTAL DATA
Total Return -2.9% -1.1% +10.5% +13.6% -0.1% +14.6%
Net Assets, End of Period (In Millions) $439 $635 $667 $361 $238 $267
Ratio of Expenses to Average Net Assets
Without Waivers, Absorptions and
Fees Paid Indirectly by Advisor 0.7% 0.7% 0.7% 0.7% 0.7%* 0.8%
Ratio of Expenses to Average Net Assets 0.7% 0.7% 0.7% 0.7% 0.7%* 0.4%
Ratio of Net Investment Income to Average
Net Assets 6.4% 5.7% 5.7% 6.2% 6.9%* 7.1%
Portfolio Turnover Rate(d) 17.5% 52.5% 66.5% 92.1% 106.8% 113.8%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) In 1996, the fund changed its fiscal year-end from December to August.
(c) Tax-exempt for regular federal income tax purposes.
(d) Calculated on the basis on the fund as a whole without distinguishing
between the classes of shares issued.
STRONG MUNICIPAL BOND FUND--INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Aug. 31, Aug. 31, Aug. 31, Aug. 31,Aug. 31, Dec. 31,
SELECTED PER-SHARE DATA(a) 2000 1999 1998 1997 1996(b) 1995
Net Asset Value, Beginning of Period $9.37 $9.96 $9.52 $8.99 $9.52 $9.23
Income From Investment Operations:
Net Investment Income 0.50 0.51 0.51 0.50 0.33 0.52
Net Realized and Unrealized Gains
(Losses) on Investments (0.59) (0.59) 0.44 0.53 (0.53) 0.51
Total from Investment Operations (0.09) (0.08) 0.95 1.03 (0.20) 1.03
Less Distributions:
From Net Investment Income(c) (0.50) (0.51) (0.51) (0.50) (0.33) (0.54)
In Excess of Net Investment Income -- -- -- -- -- (0.20)
Total Distributions (0.50) (0.51) (0.51) (0.50) (0.33) (0.74)
Net Asset Value, End of Period $8.78 $9.37 $9.96 $9.52 $8.99 $9.52
RATIOS AND SUPPLEMENTAL DATA
Total Return -0.9% -1.0% +10.1% +11.8% -2.1% +11.4%
Net Assets, End of Period (In Millions) $274 $370 $287 $232 $247 $247
Ratio of Expenses to Average Net Assets
without Fees Paid Indirectly by Advisor 0.8% 0.7% 0.7% 0.8% 0.8%* 0.8%
Ratio of Expenses to Average Net Assets 0.8% 0.7% 0.7% 0.8% 0.8%* 0.8%
Ratio of Net Investment Income to
Average Net Assets 5.6% 5.1% 5.2% 5.4% 5.4%* 5.4%
Portfolio Turnover Rate(d) 19.2% 22.4% 58.5% 85.0% 172.9% 513.8%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) In 1996, the fund changed its fiscal year-end from December to August.
(c) Tax-exempt for regular federal income tax purposes.
(d) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
STRONG SHORT-TERM HIGH YIELD MUNICIPAL FUND--INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Aug. 31, Aug. 31, Aug. 31,
SELECTED PER-SHARE DATA(a) 2000 1999 1998(b)
Net Asset Value, Beginning of Period $9.99 $10.17 $10.00
Income From Investment Operations:
Net Investment Income 0.51 0.50 0.37
Net Realized and Unrealized Gains
(Losses) on Investments (0.39) (0.18) 0.17
Total from Investment Operations 0.12 0.32 0.54
Less Distributions:
From Net Investment Income(c) (0.51) (0.50) (0.37)
Total Distributions (0.51) (0.50) (0.37)
Net Asset Value, End of Period $9.60 $ 9.99 $10.17
RATIOS AND SUPPLEMENTAL DATA
Total Return +1.3% +3.2% +5.5%
Net Assets, End of Period (In Millions) $140 $182 $101
Ratio of Expenses to Average Net Assets
Without Waivers and Absorptions 0.7% 0.7% 1.0%*
Ratio of Expenses to Average Net Assets 0.6% 0.4% 0.4%*
Ratio of Net Investment Income to
Average Net Assets 5.2% 4.9% 5.0%*
Portfolio Turnover Rate(d) 27.9% 22.7% 8.1%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) For the period from November 30, 1997 (inception) to August 31, 1998.
(c) Tax-exempt for regular federal income tax purposes.
(d) Calculated on the basis of the fund as a whole without distinguishing
between the classes of shares issued.
STRONG SHORT-TERM MUNICIPAL BOND FUND--INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Aug. 31, Aug. 31, Aug. 31, Aug. 31,Aug. 31, Dec. 31,
SELECTED PER-SHARE DATA(a) 2000 1999 1998 1997 1996(b) 1995
Net Asset Value, Beginning of Period $9.76 $9.95 $9.82 $9.67 $9.77 $9.73
Income From Investment Operations:
Net Investment Income 0.46 0.47 0.48 0.49 0.33 0.47
Net Realized and Unrealized Gains
(Losses) on Investments (0.12) (0.19) 0.13 0.15 (0.10) 0.04
Total from Investment Operations 0.34 0.28 0.61 0.64 0.23 0.51
Less Distributions:
From Net Investment Income(c) (0.46) (0.47) (0.48) (0.49) (0.33) (0.47)
Total Distributions (0.46) (0.47) (0.48) (0.49) (0.33) (0.47)
Net Asset Value, End of Period $9.64 $9.76 $9.95 $9.82 $9.67 $9.77
RATIOS AND SUPPLEMENTAL DATA
Total Return +3.6% +2.8% +6.3% +6.7% +2.4% +5.4%
Net Assets, End of Period (In Millions) $307 $325 $211 $165 $136 $133
Ratio of Expenses to Average Net Assets 0.6% 0.6% 0.6% 0.7% 0.7%* 0.8%
Ratio of Net Investment Income to
Average Net Assets 4.8% 4.7% 4.8% 5.0% 5.1%* 4.8%
Portfolio Turnover Rate(d) 48.6% 22.7% 15.7% 26.2% 38.0% 226.8%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) In 1996, the fund changed its fiscal year-end from December to August.
(c) Tax-exempt for regular federal income tax purposes.
(d) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
YOUR ACCOUNT
SHARE PRICE
Your transaction price for buying, selling, or exchanging shares of the funds or
specific classes of the funds is the net asset value per share (NAV) for that
fund or class of shares. NAV is generally calculated as of the close of trading
on the New York Stock Exchange (NYSE) (usually 3:00 p.m. Central Time) every day
the NYSE is open. If the NYSE closes at any other time, or if an emergency
exists, NAV may be calculated at a different time. Your share price will be the
next NAV calculated after we accept your order.
NAV is based on the market value of the securities in a fund's portfolio. If
market prices are not available, NAV is based on a security's fair value as
determined in good faith by us under the supervision of the Board of Directors
of the Strong Funds.
((Side Box))
------------------------------------------------------
We determine the share price or NAV of a fund or class by dividing net assets
attributable to the fund or class (the value of the investments, cash, and other
assets attributable to the fund or class minus the liabilities attributable to
the fund or class) by the number of fund or class shares outstanding.
------------------------------------------------------
BUYING SHARES
INVESTMENT MINIMUMS: When buying shares, you must meet the following investment
minimum requirements.
INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENT MINIMUM
---------------- --------------------------- ------------------------------
Regular accounts $2,500 $50
MULTIPLE CLASS PLAN
Each fund has adopted a multiple class plan. The MUNICIPAL BOND FUND and the
SHORT-TERM MUNICIPAL BOND FUND offer Investor Class shares, Advisor Class
shares, and Institutional Class shares. The HIGH-YIELD MUNICIPAL BOND FUND and
the SHORT-TERM HIGH YIELD MUNICIPAL FUND offer Investor Class shares and Advisor
Class shares. Each class is offered at its net asset value without the
imposition of any sales load; however, each class of shares is subject to fees
and expenses that may differ between classes. The principal differences between
each of the classes of shares are that the Advisor Class shares are subject to
distribution fees and expenses under a 12b-1 plan, and each class of shares is
subject to different administrative and transfer agency fees and expenses.
BUYING INSTRUCTIONS You can buy shares in several ways.
MAIL
You can open or add to an account by mail with a check made payable to Strong.
Send it to the address listed on the back of this prospectus, along with your
account application (for a new account) or an Additional Investment Form (for an
existing account).
EXCHANGE OPTION
Sign up for the exchange option when you open your account. To add this option
to an existing account, visit the Account Services area at WWW.ESTRONG.COM or
call 1-800-368-3863 for a Shareholder Account Options Form.
((Side Box))
QUESTIONS?
Call 1-800-368-3863
24 hours a day,
7 days a week
EXPRESS PURCHASESM
You can make additional investments to your existing account directly from your
bank account. If you didn't establish this option when you opened your account,
visit the Account Services area at WWW.ESTRONG.COM or call us at 1-800-368-3863
for a Shareholder Account Options Form.
STRONG DIRECT(R)
You can use Strong Direct(R) to add to your investment from your bank account or
to exchange shares between Strong Funds by calling 1-800-368-7550. See "Services
for Investors" for more information.
STRONG ONLINE ACCOUNT ACCESS
You can use Strong online account access at WWW.ESTRONG.COM to add to your
investment from your bank account or to exchange shares between Strong Funds.
See "Services for Investors" for more information.
INVESTOR CENTERS
You can visit our Investor Center in Menomonee Falls, Wisconsin, near Milwaukee.
Visit the Account Services area at WWW.ESTRONG.COM or call 1-800-368-3863 for
hours and directions or for the location of our other Investor Centers.
WIRE
Call 1-800-368-3863 for instructions before wiring funds either to open or add
to an account. This helps to ensure that your account will be credited promptly
and correctly.
AUTOMATIC INVESTMENT SERVICES
See "Services for Investors" for detailed information on all of our automatic
investment services. You can sign up for these plans when you open your account
or you can add them later by visiting the Account Services area at
WWW.ESTRONG.COM or by calling 1-800-368-3863 for the appropriate form.
BROKER-DEALER
You may purchase shares through a broker-dealer or other intermediary, who may
charge you a fee. Broker-dealers, including each fund's distributor, and other
intermediaries may also from time to time sponsor or participate in promotional
programs pursuant to which investors receive incentives for establishing with
the broker-dealer or intermediary an account and/or for purchasing shares of the
Strong Funds through the account(s). Investors should contact the broker-dealer
or intermediary and consult the Statement of Additional Information for more
information about promotional programs.
<PAGE>
PLEASE REMEMBER . . .
o We only accept checks payable to Strong.
o We do not accept cash, third-party checks, credit card convenience checks,
or checks drawn on banks outside the U.S.
o You will be charged $20 for every check, wire, or Electronic Funds Transfer
returned unpaid.
SELLING SHARES
You can access the money in your account by selling (also called redeeming) some
or all of your shares by one of the methods below. After your redemption request
is accepted, we normally send you the proceeds on the next business day.
SELLING INSTRUCTIONS You can sell shares in several ways.
MAIL
Write a letter of instruction. It should specify your account number, the dollar
amount or number of shares you wish to redeem, the names and signatures of the
owners (or other authorized persons), and your mailing address. Then, mail it to
the address listed on the back of this prospectus.
REDEMPTION OPTION
Sign up for the redemption option when you open your account, or add it later by
visiting the Account Services area at WWW.ESTRONG.COM, or by calling
1-800-368-3863 to request a Shareholder Account Options Form. With this option,
you may sell shares by phone or via the Internet and receive the proceeds in one
of three ways:
(1) We can mail a check to your account's address. Checks will not be
forwarded by the Postal Service, so please notify us if your address
has changed.
(2) We can transmit the proceeds by Electronic Funds Transfer to a properly
pre-authorized bank account. The proceeds usually will arrive at your
bank two banking days after we process your redemption.
(3) For a $10 fee, we can transmit the proceeds by wire to a properly
pre-authorized bank account. The proceeds usually will arrive at your
bank the first banking day after we process your redemption.
STRONG DIRECT(R)
You can redeem shares through Strong Direct(R) at 1-800-368-7550. See "Services
for Investors" for more information.
STRONG ONLINE ACCOUNT ACCESS
You can use Strong online account access at WWW.ESTRONG.COM to redeem shares.
See "Services for Investors" for more information.
INVESTOR CENTERS
You can visit our Investor Center in Menomonee Falls, Wisconsin, near Milwaukee.
Visit the Account Services area at WWW.ESTRONG.COM or call 1-800-368-3863 for
hours and directions or for the location of our other Investor Centers.
SYSTEMATIC WITHDRAWAL PLAN
You can set up automatic withdrawals from your account at regular intervals. You
can sign up for this service when you open your account, or you can add it later
by visiting the Account Services area at WWW.ESTRONG.COM or by calling
1-800-368-3863 for the appropriate form. See "Services for Investors" for more
information on this service and other automatic investment and withdrawal
services.
<PAGE>
BROKER-DEALER
You may sell shares through a broker-dealer or other intermediary, who may
charge you a fee.
CHECK WRITING
Sign up for free check writing when you open your account or call 1-800-368-3863
to add it later to an existing account. Check redemptions must be for a minimum
of $500. Checks will only be honored if written against purchases that were made
more than 10 days before the check is presented for payment. You cannot write a
check to close an account.
PLEASE REMEMBER ...
o If you recently purchased shares, the payment of your redemption proceeds
may be delayed by up to 10 days to allow the purchase check or electronic
transaction to clear.
o You will be charged a $10 service fee for a stop-payment on a check written
on your Strong Funds account.
o Some transactions and requests require a signature guarantee.
o If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must sign
the certificates and all signatures must be guaranteed.
((Side Box))
------------------------------------------------------
SIGNATURE GUARANTEES help ensure that major transactions or changes to your
account are in fact authorized by you. For example, we require a signature
guarantee on written redemption requests for more than $100,000. You can obtain
a signature guarantee for a nominal fee from most banks, brokerage firms, and
other financial institutions. A notary public stamp or seal cannot be
substituted for a signature guarantee.
------------------------------------------------------
ADDITIONAL POLICIES
DEPOSIT OF UNSPECIFIED CHECKS
When your investment check does not clearly indicate the fund that you would
like to purchase, we will deposit the check into the Strong Money Market Fund
until you clarify your investment decision.
INVESTING THROUGH A THIRD PARTY
If you invest through a third party (rather than directly with us), the policies
and fees may be different than described in this prospectus. Banks, brokers,
401(k) plans, financial advisors, and financial supermarkets may charge
transaction fees and may set different minimum investments or limitations on
buying or selling shares. Consult a representative of your plan or financial
institution for details.
LOW BALANCE ACCOUNT FEE
Because of the high cost of maintaining small accounts, an annual low balance
account fee of $10 (or the value of the account if the account value is less
than $10) will be charged to all accounts that fail to meet the initial
investment minimum. The fee, which is payable to the transfer agent, will not
apply to (1) any retirement accounts, (2) accounts with an automatic investment
plan (unless regular investments have been discontinued), or (3) shareholders
whose combined Strong Funds assets total $100,000 or more. We may waive the fee,
in our discretion, in the event that a significant market correction lowers an
account balance below the account's initial investment minimum.
<PAGE>
MARKET TIMERS
The fund will consider the following factors to identify market timers:
shareholders who have (1) requested an exchange out of the fund within two weeks
of an earlier exchange request, (2) exchanged shares out of a fund more than
twice in a calendar quarter, (3) exchanged shares equal to at least $5 million,
or more than 1% of a fund's net assets, or (4) otherwise seem to follow a timing
pattern. Shares under common ownership or control are combined for purposes of
these limits.
PURCHASES IN KIND
You may, if we approve, purchase shares of the fund with securities that are
eligible for purchase by the fund (consistent with the fund's investment
restrictions, policies, and goal) and that have a value that is readily
ascertainable in accordance with the fund's valuation policies.
TELEPHONE AND ELECTRONIC TRANSACTIONS
We use reasonable procedures to confirm that telephone and electronic
transaction requests are genuine. We may be responsible if we do not follow
these procedures. You are responsible for losses resulting from fraudulent or
unauthorized instructions received over the telephone or electronically,
provided we reasonably believe the instructions were genuine. To safeguard your
account, please keep your Strong Direct(R) and Strong online account access
passwords confidential. Contact us immediately if you believe there is a
discrepancy between a transaction you performed and the confirmation statement
you received, or if you believe someone has obtained unauthorized access to your
account or password.
During times of unusual market activity, our phones may be busy and you may
experience a delay placing a telephone request. During these times, consider
trying Strong Direct(R), our 24-hour automated telephone system, bY calling
1-800-368-7550, or Strong online account access, our online transaction center,
by visiting WWW.ESTRONG.COM. Please remember that you must have telephone
redemption as an option on your account to redeem shares through Strong
Direct(R) or Strong online account access.
VERIFICATION OF ACCOUNT STATEMENTS
You should contact us in writing regarding any errors or discrepancies within 60
days after the date of the statement confirming a transaction. The statement
will be deemed correct if we do not hear from you within those 60 days.
DISTRIBUTIONS
-------------------------------------------------------------------------------
DISTRIBUTION POLICY
Each fund generally pays you dividends from net investment income monthly and
distributes any net capital gains that it realizes annually. Dividends are
declared on each day NAV is calculated, except for bank holidays. Dividends
earned on weekends, holidays, and days when the fund's NAV is not calculated are
declared on the first day preceding these days that the fund's NAV is
calculated. Your investment generally earns dividends from the first business
day after we accept your purchase order.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Your dividends and capital gains distributions will be automatically reinvested
in additional shares of the fund or class, as applicable, unless you choose
otherwise. Your other options are to receive checks for these payments, have
them automatically invested in another Strong Fund, or have them deposited into
your bank account. To change the current option for payment of dividends and
capital gains distributions, please call 1-800-368-3863.
TAXES
-------------------------------------------------------------------------------
Generally, a municipal fund's distributions will be composed primarily of
tax-exempt income. However, the fund may make distributions of net investment
income and capital gains that are taxable to you.
TAXABLE DISTRIBUTIONS
Any net investment income and net short-term capital gains distributions you
receive are generally taxable as ordinary dividend income at your income tax
rate. Distributions of net capital gains are generally taxable as long-term
capital gains. This is generally true no matter how long you have owned your
shares and whether you reinvest your distributions or take them in cash. You may
also have to pay taxes when you exchange or sell shares if your shares have
increased in value since you bought them.
TAX-EXEMPT DISTRIBUTIONS
Exempt-interest dividends from municipal funds are generally exempt from federal
income taxes, but may be subject to state and local tax. Also, if you are
subject to the Alternative Minimum Tax, you may have to pay federal tax on a
substantial portion of your income from exempt-interest dividends.
RETURN OF CAPITAL
If your fund's distributions exceed its earnings and profits, all or a portion
of those distributions may be treated as a return of capital to you. A return of
capital may be treated as a sale of your shares. It may also reduce the cost
basis of your shares.
YEAR-END STATEMENT
To assist you in tax preparation, after the end of each calendar year, we send
you a statement of your fund's ordinary dividends and net capital gains
distributions (Form 1099).
BACKUP WITHHOLDING
By law, we must withhold 31% of your distributions and proceeds if (1) you are
subject to backup withholding or (2) you have not provided us with complete and
correct taxpayer information such as your Social Security number or tax
identification number.
((Side Box))
-------------------------------------------------------
YOU MAY WANT TO AVOID selling shares of a mutual fund at a loss if you have
purchased additional shares of the same fund within 30 days prior to the sale or
if you plan to purchase additional shares of the same fund within 30 days
following the sale. This is called a wash sale and you will not be allowed to
claim a tax loss on this transaction.
-------------------------------------------------------
Because everyone's tax situation is unique, you should consult your tax
professional for assistance.
SERVICES FOR INVESTORS
We provide you with a variety of services to help you manage your investment.
For more details, call 1-800-368-3863, 24 hours a day, 7 days a week. These
services include:
STRONG DIRECT (R) AUTOMATED TELEPHONE SYSTEM
Our 24-hour automated response system enables you to use a touch-tone phone to
access current share prices (1-800-368-3550), to access fund and account
information (1-800-368-5550), and to make purchases, exchanges, or redemptions
among your existing accounts if you have elected these services
(1-800-368-7550). Passwords help to protect your account information.
ESTRONG.COM
Visit us online at WWW.ESTRONG.COM to access your fund's performance and
portfolio holding information. In addition to general information about
investing, our web site offers daily performance information, portfolio manager
commentaries, and information on available account options.
STRONG ONLINE ACCOUNT ACCESS
If you are a shareholder, you may use Strong online account access to access
your account information 24 hours a day from your personal computer. Strong
online account access allows you to view account history, account balances, and
recent dividend activity, as well as to make purchases, exchanges, or
redemptions among your existing accounts if you have elected these services.
Encryption technology and passwords help to protect your account information.
You may register to use Strong online account access at WWW.ESTRONG.COM.
<PAGE>
STRONGMAIL
If you register for StrongMail at WWW.STRONGMAIL.COM, you will receive your
fund's closing price by e-mail each business day. In addition, StrongMail offers
market news and updates throughout the day.
STRONG EXCHANGE OPTION
You may exchange shares of a fund for shares of another Strong Fund, either in
writing, by telephone, or through your personal computer, if the accounts are
identically registered (with the same name, address, and taxpayer identification
number). Please ask us for the appropriate prospectus and read it before
investing in any of the Strong Funds. Remember, an exchange of shares of one
Strong Fund for those of another Strong Fund is considered a sale and a purchase
of shares for several purposes, including tax purposes and may result in a
capital gain or loss. Some Strong Funds that you may want to exchange into may
charge an initial sales charge, or may charge a redemption fee of 0.50% to 1.00%
on the sale of shares held for less than 6 to 12 months. Purchases by exchange
are subject to the investment requirements and other criteria of the fund
purchased.
STRONG CHECK WRITING
Strong Funds offers check writing on most of its bond and money market funds.
Checks written on your account are subject to this prospectus and the terms and
conditions found in the front of the book of checks.
STRONG AUTOMATIC INVESTMENT SERVICES
You may invest or redeem automatically in the following ways, some of which may
be subject to additional restrictions or conditions.
AUTOMATIC INVESTMENT PLAN (AIP) This plan allows you to make regular,
automatic investments from your bank checking or savings account.
AUTOMATIC EXCHANGE PLAN This plan allows you to make regular, automatic
exchanges from one eligible Strong Fund to another.
AUTOMATIC DIVIDEND REINVESTMENT
Your dividends and capital gains will be automatically reinvested in
additional shares unless you choose otherwise. Your other options are to
receive checks for these payments, have them automatically invested in
another Strong Fund, or have them deposited into your bank account.
PAYROLL DIRECT DEPOSIT PLAN
This plan allows you to send all or a portion of your paycheck, Social
Security check, military allotment, or annuity payment to the Strong Funds
of your choice.
SYSTEMATIC WITHDRAWAL PLAN
This plan allows you to redeem a fixed sum from your account on a regular
basis. Payments may be sent electronically to a bank account or as a check
to you or anyone you properly designate.
SOME OF THESE SERVICES MAY BE SUBJECT TO ADDITIONAL RESTRICTIONS OR CONDITIONS.
CALL 1-800-368-3863 FOR MORE INFORMATION.
<PAGE>
RESERVED RIGHTS...
------------------------------------------------------------------------------
We reserve the right to:
o Refuse, change, discontinue, or temporarily suspend account services,
including purchase, exchange, or telephone and Strong online account access
redemption privileges, for any reason.
o Reject any purchase request for any reason, including exchanges from other
Strong Funds. Generally, we do this if the purchase or exchange is
disruptive to the efficient management of a fund (due to the timing of the
investment or an investor's history of excessive trading).
o Change the minimum or maximum investment amounts.
o Delay sending out redemption proceeds for up to seven days (this generally
only applies to very large redemptions without notice, excessive trading,
or during unusual market conditions).
o Suspend redemptions or postpone payments when the NYSE is closed for any
reason other than its usual weekend or holiday closings, when trading is
restricted by the SEC, or under any emergency circumstances.
o Make a redemption in kind (a payment in portfolio securities rather than
cash) if the amount you are redeeming is in excess of the lesser of (1)
$250,000 or (2) 1% of the fund's assets. Generally, redemption in kind is
used when large redemption requests may cause harm to the fund and its
shareholders. This includes redemptions made by check writing.
o Close any account that does not meet minimum investment requirements. We
will give you notice and 60 days to increase your balance to the required
minimum.
o Waive the initial investment minimum at our discretion.
o Reject any purchase or redemption request that does not contain all
required documentation.
o Amend or terminate purchases in kind at any time.
<PAGE>
FOR MORE INFORMATION
More information is available upon request at no charge, including:
SHAREHOLDER REPORTS: Additional information is available in the annual and
semi-annual report to shareholders. These reports contain a letter from
management, discuss recent market conditions, economic trends and investment
strategies that significantly affected your investment's performance during the
last fiscal year, and list portfolio holdings.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI contains more details about
investment policies and techniques. A current SAI is on file with the SEC and is
incorporated into this prospectus by reference. This means that the SAI is
legally considered a part of this prospectus even though it is not physically
contained within this prospectus.
To request information or to ask questions:
BY TELEPHONE FOR HEARING-IMPAIRED (TDD)
1-414-359-1400 or 1-800-368-3863 1-800-999-2780
BY MAIL BY OVERNIGHT DELIVERY
Strong Funds Strong Funds
P.O. Box 2936 900 Heritage Reserve
Milwaukee, WI 53201-2936 Menomonee Falls, WI 53051
ON THE INTERNET BY E-MAIL
View online or download documents: [email protected]
Strong Funds: WWW.ESTRONG.COM
SEC*: www.sec.gov
To reduce the volume of mail you receive, only one copy of financial reports,
prospectuses, and other regulatory materials is mailed to your household. You
can call us at 1-800-368-3863, or write to us at the address listed above, to
request (1) additional copies free of charge or (2) that we discontinue our
practice of householding regulatory materials.
This prospectus is not an offer to sell securities in places other than the
United States and its territories.
*INFORMATION ABOUT A FUND (INCLUDING THE SAI) CAN ALSO BE REVIEWED AND COPIED AT
THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE ROOM IN WASHINGTON,
D.C. YOU MAY CALL THE COMMISSION AT 1-202-942-8090 FOR INFORMATION ABOUT THE
OPERATION OF THE PUBLIC REFERENCE ROOM. REPORTS AND OTHER INFORMATION ABOUT A
FUND ARE ALSO AVAILABLE FROM THE EDGAR DATABASE ON THE COMMISSION'S INTERNET
SITE AT WWW.SEC.GOV. YOU MAY OBTAIN A COPY OF THIS INFORMATION, AFTER PAYING A
DUPLICATING FEE, BY SENDING A WRITTEN REQUEST TO THE COMMISSION'S PUBLIC
REFERENCE SECTION, WASHINGTON, D.C. 20549-0102, OR BY SENDING AN ELECTRONIC
REQUEST TO THE FOLLOWING E-MAIL ADDRESS: [email protected].
Strong High-Yield Municipal Bond Fund, a series of Strong High-Yield Municipal
Bond Fund, Inc., SEC file number: 811-7930
Strong Municipal Bond Fund, a series of Strong Municipal Bond Fund, Inc.,
SEC file number: 811-4769
Strong Short-Term High Yield Municipal Fund, a series of Strong Municipal
Funds, Inc., SEC file number: 811-4770
Strong Short-Term Municipal Bond Fund, a series of Strong
Short-Term Municipal Bond Fund, Inc., SEC file number: 811-6409
PROSPECTUS JANUARY 1, 2001
[ADVISOR CLASS (written vertically)]
The Strong
Municipal Income
Funds
[PICTURE OF MAN HOLDING TELEPHONE]
Strong High-Yield Municipal Bond Fund
Strong Municipal Bond Fund
Strong Short-Term High Yield Municipal Fund
Strong Short-Term Municipal Bond Fund
[STRONG LOGO] STRONG
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
YOUR INVESTMENT
KEY INFORMATION
WHAT ARE THE FUNDS' GOALS? 1
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES? 1
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS? 3
WHAT ARE THE FUNDS' FEES AND EXPENSES? 8
WHO ARE THE FUNDS' INVESTMENT ADVISOR AND PORTFOLIO MANAGERS? 9
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
COMPARING THE FUNDS 11
A WORD ABOUT CREDIT QUALITY 12
TAXABLE INVESTMENTS 13
IF YOU ARE SUBJECT TO THE ALTERNATIVE MINIMUM TAX 14
FINANCIAL HIGHLIGHTS 14
YOUR ACCOUNT
DISTRIBUTION FEES 19
SHARE PRICE 19
BUYING SHARES 20
SELLING SHARES 22
ADDITIONAL POLICIES 23
DISTRIBUTIONS 24
TAXES 25
RESERVED RIGHTS 26
FOR MORE INFORMATION BACK COVER
IN THIS PROSPECTUS, "WE" OR "US" REFERS TO STRONG CAPITAL MANAGEMENT, INC., THE
INVESTMENT ADVISOR, ADMINISTRATOR, AND TRANSFER AGENT FOR THE STRONG FUNDS.
<PAGE>
YOUR INVESTMENT
KEY INFORMATION
WHAT ARE THE FUNDS' GOALS?
The STRONG HIGH-YIELD MUNICIPAL BOND FUND seeks total return by investing for a
high level of federally tax-exempt current income.
The STRONG MUNICIPAL BOND FUND and the STRONG SHORT-TERM HIGH YIELD MUNICIPAL
FUND seek total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
The STRONG SHORT-TERM MUNICIPAL BOND FUND seeks total return by investing for a
high level of federally tax-exempt current income with a low degree of
share-price fluctuation.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
The HIGH-YIELD MUNICIPAL BOND FUND invests primarily in long-term, medium- and
lower-quality municipal bonds. The fund's manager emphasizes bonds whose credit
quality may be improving, and issuers that complement current investment themes,
such as the "aging of America." The manager also takes the overall interest rate
environment into consideration. The fund typically maintains an average maturity
between 10 and 25 years.
The MUNICIPAL BOND FUND invests primarily in long-term, higher- and
medium-quality municipal bonds. The fund's manager conducts intensive research
on individual issuers to uncover solid investment opportunities, especially
looking for bonds whose quality may be improving. The fund typically maintains
an average maturity between 10 and 20 years.
The SHORT-TERM HIGH YIELD MUNICIPAL FUND follows a similar investment style to
the HIGH-YIELD MUNICIPAL BOND Fund, but invests primarily in short- and
intermediate-term, medium- and lower-quality municipal bonds. The fund typically
maintains an average maturity between one and three years.
The SHORT-TERM MUNICIPAL BOND FUND invests primarily in short- and
intermediate-term, higher- and medium-quality municipal bonds, following the
investment style of the MUNICIPAL BOND FUND. The fund typically maintains an
average maturity of three years or less.
Although each of the funds invests primarily for income, they also employ
techniques designed to realize capital appreciation. For example, the managers
may select bonds with maturities and coupon rates that position them for
potential capital appreciation for a variety of reasons, including a manager's
view on the direction of future interest-rate movements and the potential for a
credit upgrade.
The funds' managers may sell a holding if its value becomes unattractive (for
example, when its fundamental qualities deteriorate or when other opportunities
exist that have more attractive yields). Also, the managers may invest any
amount in cash or cash-type securities (high-quality, short-term debt securities
issued by corporations, financial institutions, or the U.S. government) as a
temporary defensive position to avoid losses during adverse market conditions.
This could reduce the benefit to the funds if the market goes up. In this case,
the funds may not achieve their investment goal.
The funds may invest without limitation in municipal bonds, such as private
activity bonds, whose interest may be subject to the federal alternative minimum
tax (AMT).
<PAGE>
((Side Box))
Under normal market conditions, the funds will invest at least 80% of their
assets in municipal bonds. MUNICIPAL BONDS are debt obligations issued by or for
U.S. states, territories, and possessions and the District of Columbia and their
political subdivisions, agencies, and instrumentalities. Municipal bonds can be
issued to obtain money for public purposes or for privately operated facilities
or projects. Some municipal bonds pay interest that is exempt from federal
income tax. Examples of municipal bonds are general obligation bonds, revenue
bonds, industrial development bonds, notes, and municipal lease obligations.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS?
BOND RISKS: The major risks of each fund are those of investing in the bond
market. A bond's market value is affected significantly by changes in interest
rates--generally, when interest rates rise, the bond's market value declines,
and when interest rates decline, its market value rises (interest-rate risk).
Generally, the longer a bond's maturity, the greater the risk and the higher its
yield. Conversely, the shorter a bond's maturity, the lower the risk and the
lower its yield (maturity risk). A bond's value can also be affected by changes
in the bond's credit-quality rating or its issuer's financial condition
(credit-quality risk). Because bond values fluctuate, the fund's share price
fluctuates. So, when you sell your investment, you may receive more or less
money than you originally invested.
HIGH-YIELD BOND RISKS: The HIGH-YIELD MUNICIPAL BOND FUND and the SHORT-TERM
HIGH YIELD MUNICIPAL FUND invest in lower-quality bonds, commonly known as
high-yield bonds or junk bonds that present a significant risk for loss of
principal and interest. These bonds offer the potential for higher returns but
also involve greater risk than bonds of better quality, including an increased
possibility that the bond's issuer may not be able to make its payments of
interest and principal (credit-quality risk). If that happens, the fund's share
price would decrease and its income distributions would be reduced. An economic
downturn or period of rising interest rates (interest-rate risk) could adversely
affect the market for these bonds and reduce the fund's ability to sell its
bonds (liquidity risk). The lack of a liquid market for these bonds could
decrease the fund's share price. The HIGH-YIELD MUNICIPAL BOND FUND and the
SHORT-TERM HIGH YIELD MUNICIPAL FUND also have the ability to invest in debt
obligations that are in default and these obligations possess an increased
possibility that the issuer may not be able to make its payments of principal
and interest.
MANAGEMENT RISK: The funds are subject to management risk because they are
actively managed. There is no guarantee that the investment techniques and risk
analyses used by the managers will produce the desired results.
The funds are appropriate for investors who are comfortable with the risks
described here. Also, the HIGH-YIELD MUNICIPAL BOND FUND and the MUNICIPAL BOND
FUND are appropriate for investors whose financial goals are four to seven years
in the future. The SHORT-TERM HIGH YIELD MUNICIPAL FUND and the SHORT-TERM
MUNICIPAL BOND FUND are appropriate for investors whose financial goals are two
to four years in the future. The funds are not appropriate for investors
concerned primarily with principal stability.
FUND STRUCTURE
Each of the funds has adopted a multiple class plan. The MUNICIPAL BOND FUND and
the SHORT-TERM MUNICIPAL BOND FUND offer Investor Class shares, Advisor Class
shares, and Institutional Class shares. The HIGH-YIELD MUNICIPAL BOND FUND and
the SHORT-TERM HIGH YIELD MUNICIPAL FUND offer Investor Class shares and Advisor
Class shares. Only the Advisor Class shares of each fund are offered in this
prospectus. The principal differences between each of the classes of shares are
that the Advisor Class shares are subject to distribution fees and expenses
under a 12b-1 plan and each class of shares is subject to different
administrative and transfer agency fees and expenses. Because 12b-1 fees are
paid out of the fund's assets on an ongoing basis, over time, these fees will
increase the cost of an investment in Advisor Class shares and may cost more
than paying other types of sales charges.
<PAGE>
FUND PERFORMANCE
The following return information illustrates how the performance of the funds'
Advisor Class shares can vary, which is one indication of the risks of investing
in the funds. Performance results for Advisor Class shares, which were first
offered on February 29, 2000, are based on the historical performance of the
Investor Class shares from the inception of the funds up to February 28, 2000,
recalculated to reflect the higher annual expense ratio applicable to the
Advisor Class shares. The Investor Class shares are not offered by this
prospectus. The returns for the Advisor Class are substantially similar to those
of the Investor Class shares because each are invested in the same portfolio of
securities and the only differences relate to the differences in the fees and
expenses of each class of shares. Please keep in mind that the past performance
of each fund's shares does not represent how they will perform in the future.
The information assumes that you reinvested all dividends and distributions.
CALENDAR YEAR TOTAL RETURNS
-------------------------------------------------------------
Short-Term High-Yield Short-Term
Municipal Municipal Municipal High Yield
Year Bond Bond Bond Municipal
-------------------------------------------------------------
-------------------------------------------------------------
1990 4.3% - - -
-------------------------------------------------------------
-------------------------------------------------------------
1991 13.0% - - -
-------------------------------------------------------------
-------------------------------------------------------------
1992 11.8% 6.8% - -
-------------------------------------------------------------
-------------------------------------------------------------
1993 11.4% 6.4% - -
-------------------------------------------------------------
-------------------------------------------------------------
1994 -4.9% -2.0% -1.3% -
-------------------------------------------------------------
-------------------------------------------------------------
1995 11.0% 5.0% 14.2% -
-------------------------------------------------------------
-------------------------------------------------------------
1996 2.1% 4.5% 4.7% -
-------------------------------------------------------------
-------------------------------------------------------------
1997 11.7% 6.5% 13.5% -
-------------------------------------------------------------
-------------------------------------------------------------
1998 6.3% 5.2% 4.9% 5.7%
-------------------------------------------------------------
-------------------------------------------------------------
1999 -6.8% 0.8% -5.8% 0.4%
-------------------------------------------------------------
THE YEAR-TO-DATE RETURNS THROUGH SEPTEMBER 30, 2000 ARE: MUNICIPAL BOND, 2.65%;
SHORT-TERM MUNICIPAL BOND, 3.38%; HIGH-YIELD MUNICIPAL BOND, 0.78%; AND
SHORT-TERM HIGH YIELD MUNICIPAL, 2.12%.
BEST AND WORST QUARTERLY PERFORMANCE
(DURING THE PERIODS SHOWN ABOVE)
<TABLE>
<CAPTION>
<S> <C> <C>
FUND NAME BEST QUARTER RETURN WORST QUARTER RETURN
------------------------------------- ----------------------------------- -----------------------------------
High-Yield Municipal Bond 4.6% (1st Q 1995) -3.6% (4th Q 1999)
-------------------------------------
Municipal Bond 5.7% (2nd Q 1992) -5.2% (1st Q 1994)
-------------------------------------
Short-Term High Yield Municipal 1.8% (2nd Q 1998) -1.2% (4th Q 1999)
-------------------------------------
Short-Term Municipal Bond 2.3% (3rd Q 1995) -1.9% (1st Q 1994)
-------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12-31-99
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FUND/INDEX 1-YEAR 5-YEAR 10-YEAR SINCE INCEPTION
HIGH-YIELD MUNICIPAL BOND -5.83% 6.04% -- 5.00% (10-1-93)
High-Yield Municipal Bond Index -1.80% 7.40% -- 5.20%
Lipper High Yield Municipal Debt
Funds Index -3.65% 6.23% -- 4.33%
MUNICIPAL BOND -6.80% 4.65% 5.77% 5.34% (10-23-86)
Lehman Brothers Municipal Bond Index -2.06% 6.91% 6.89% 7.08%
Lipper General Municipal Debt Funds Index-4.07% 6.14% 6.29% 6.52%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHORT-TERM HIGH YIELD MUNICIPAL 0.39% -- -- 3.28% (11-30-97)
Lehman Brothers 1-3 Year Non-Investment
Grade Municipal Bond Index 3.66% -- -- 4.63%
Lipper High Yield Municipal Debt
Funds Index -3.65% -- -- 1.59%
SHORT-TERM MUNICIPAL BOND 0.79% 4.37% -- 4.10% (12-31-91)
Lehman Brothers Municipal
3 Year Bond Index 1.96% 5.17% -- 4.88%
Lipper Short Municipal Debt Funds Average 1.69% 4.35% -- 4.13%
</TABLE>
THE HIGH-YIELD MUNICIPAL BOND INDEX IS COMPRISED OF THE LEHMAN BROTHERS BAA
MUNICIPAL BOND INDEX FROM INCEPTION THROUGH DECEMBER 31, 1995, AND THE LEHMAN
BROTHERS HIGH-YIELD MUNICIPAL BOND INDEX FROM JANUARY 1, 1996 TO PRESENT. THE
LEHMAN BROTHERS BAA MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF MUNICIPAL BONDS RATED BAA. THE LEHMAN BROTHERS HIGH-YIELD
MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF MUNICIPAL
BONDS RATED BELOW BAA. THE LIPPER HIGH YIELD MUNICIPAL DEBT FUNDS INDEX IS AN
EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS IN THIS
LIPPER CATEGORY. THE LEHMAN BROTHERS MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX
GENERALLY REPRESENTATIVE OF INVESTMENT-GRADE, TAX-EXEMPT BONDS. THE LIPPER
GENERAL MUNICIPAL DEBT FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF
THE LARGEST QUALIFYING FUNDS IN THIS LIPPER CATEGORY. THE LEHMAN BROTHERS 1-3
YEAR NON-INVESTMENT GRADE MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF MUNICIPAL BONDS RATED BELOW BAA WITH MATURITIES OF ONE TO
THREE YEARS. THE LIPPER HIGH YIELD MUNICIPAL DEBT FUNDS INDEX IS AN EQUALLY
WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS IN THIS LIPPER
CATEGORY. THE LEHMAN BROTHERS MUNICIPAL 3 YEAR BOND INDEX IS AN UNMANAGED INDEX
GENERALLY REPRESENTATIVE OF THREE-YEAR, TAX-EXEMPT BONDS. THE LIPPER SHORT
MUNICIPAL DEBT FUNDS AVERAGE REPRESENTS FUNDS THAT INVEST IN MUNICIPAL DEBT
ISSUES WITH DOLLAR-WEIGHTED AVERAGE MATURITIES OF LESS THAN THREE YEARS.
For current yield information on these funds, call 1-800-368-1683.
WHAT ARE THE FUNDS' FEES AND EXPENSES?
This section describes the fees and expenses that you may pay if you buy and
hold shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
The Advisor Class shares of each fund are 100% no-load, so you pay no sales
charges (loads) to buy or sell shares.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from
fund assets) The costs of operating each fund are deducted from fund assets,
which means you pay them indirectly. These costs are deducted before computing
the daily share price or making distributions. As a result, they don't appear on
your account statement, but instead reduce the total return you receive from
your fund investment.
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENT OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TOTAL ANNUAL FUND
FUND MANAGEMENT FEES 12B-1 FEES OTHER EXPENSES OPERATING EXPENSES*
------------------------------------ --------------------------------------------------------------------------------
High-Yield Municipal Bond 0.35% 0.25% 0.54% 1.14%
Municipal Bond 0.35% 0.25% 0.51% 1.11%
Short-Term High Yield Municipal 0.35% 0.25% 0.60% 1.20%
Short-Term Municipal Bond 0.25% 0.25% 0.43% 0.93%
</TABLE>
*TOTAL ANNUAL FUND OPERATING EXPENSES DO NOT REFLECT OUR WAIVER OF MANAGEMENT
FEES AND/OR ABSORPTIONS. WITH WAIVERS AND ABSORPTIONS, THE TOTAL ANNUAL FUND
OPERATING EXPENSES OF THE FOLLOWING FUNDS WERE: HIGH-YIELD MUNICIPAL BOND;
1.11%, MUNICIPAL BOND; 1.09%; AND SHORT-TERM HIGH YIELD MUNICIPAL, 1.09%. WE CAN
TERMINATE WAIVERS AND ABSORPTIONS FOR THESE FUNDS AT ANY TIME.
EXAMPLE: This example is intended to help you compare the cost of investing in
the funds with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the fund and reinvest all dividends and distributions
for the time periods indicated, and then redeem all of your shares at the end of
those periods. The example also assumes that your investment has a 5% return
each year and that the funds' operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------- --------------- ---------------- ------------- ------------
High-Yield Municipal Bond $116 $362 $628 $1386
Municipal Bond $113 $353 $612 $1352
Short-Term High Yield Municipal $122 $381 $660 $1455
Short-Term Municipal Bond $95 $296 $515 $1143
</TABLE>
WHO ARE THE FUNDS' INVESTMENT ADVISOR AND PORTFOLIO MANAGERS?
Strong Capital Management, Inc. (Strong) is the investment advisor for the
funds. Strong provides investment management services for mutual funds and other
investment portfolios representing assets, as of October 31, 2000, of over $45
billion. Strong began conducting business in 1974. Since then, its principal
business has been providing investment advice for individuals and institutional
accounts, such as pension and profit-sharing plans, as well as mutual funds,
several of which are available through variable insurance products. Strong's
address is P.O. Box 2936, Milwaukee, WI 53201.
The following individuals are the funds' portfolio managers.
MARY-KAY H. BOURBULAS manages the HIGH-YIELD MUNICIPAL BOND FUND and the
SHORT-TERM HIGH YIELD MUNICIPAL FUND and has over ten years of investment
experience. She joined Strong as a portfolio manager in October 1991. Ms.
Bourbulas co-managed the HIGH-YIELD MUNICIPAL BOND FUND from its inception in
1993 until December 1995, when she assumed sole management responsibility for
the fund. She has managed the SHORT-TERM HIGH YIELD MUNICIPAL FUND since its
inception in November 1997. Prior to joining Strong, Ms. Bourbulas was employed
by Stein Roe & Farnham, where she co-managed two tax-exempt funds. Ms. Bourbulas
received her bachelors degree in Economics from Northwestern University in 1989.
LYLE J. FITTERER manages the MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL
BOND FUND. Mr. Fitterer joined Strong in 1989 and has over seven years of
investment experience. He is a Chartered Financial Analyst and Certified Public
Accountant. He has managed the MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL
BOND FUND since March 2000. He served as the Managing Director of Institutional
Client Services from December 1998 to March 2000 and as a fixed income portfolio
manager from January 1996 to December 1998. He served as a fixed income research
analyst/trader from February 1993 to January 1996 and as an equity trader from
February 1992 to February 1993. Mr. Fitterer received his bachelors degree in
Accounting from the University of North Dakota in 1989.
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
COMPARING THE FUNDS
The following will help you distinguish the funds and determine their
suitability for your investment needs:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AVERAGE INCOME
FUND MATURITY CREDIT QUALITY POTENTIAL VOLATILITY
----------------------------------------------------------------------------------------------------------
High-Yield 10 to 25 At least 65% rated High Moderate
MUNICIPAL BOND YEARS* MEDIUM OR LOWER TO HIGH
----------------------------------------------------------------------------------------------------------
Municipal Bond 10 to 20 At least 85% rated Moderate Moderate
years* higher or medium to High
UP TO 15% RATED LOWER
----------------------------------------------------------------------------------------------------------
Short-Term High Yield 1 to 3 At least 80% rated High Moderate
MUNICIPAL YEARS MEDIUM OR LOWER
----------------------------------------------------------------------------------------------------------
Short-Term 3 years At least 85% rated Low to Low
Municipal Bond or less higher or medium Moderate
UP TO 15% RATED LOWER
----------------------------------------------------------------------------------------------------------
* EXPECTED RANGE
</TABLE>
<PAGE>
The MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL BOND FUND invest a portion
of their assets in lower-quality securities that present a significant risk for
loss of principal and interest.
The HIGH-YIELD MUNICIPAL BOND FUND and the SHORT-TERM HIGH YIELD MUNICIPAL FUND
may invest in bonds that are in default, but the funds are not expected to
invest more than 10% of net assets in those bonds.
A WORD ABOUT CREDIT QUALITY
CREDIT QUALITY measures the issuer's expected ability to pay interest and
principal payments on time. Credit quality can be "higher-quality",
"medium-quality", "lower-quality", or "in default".
HIGHER-QUALITY means bonds that are in any of the three highest rating
categories. For example, bonds rated AAA to A by Standard & Poor's Ratings Group
(S&P)*.
MEDIUM-QUALITY means bonds that are in the fourth-highest rating category. For
example, bonds rated BBB by S&P*.
LOWER-QUALITY means bonds that are below the fourth-highest rating category.
They are also known as non-investment, high-risk, high-yield, or "junk bonds".
For example, bonds rated BB to C by S&P*.
IN DEFAULT means the bond's issuer has not paid principal or interest on time.
*OR THOSE RATED IN THIS CATEGORY BY ANY NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION. S&P IS ONLY ONE EXAMPLE OF A NATIONALLY RECOGNIZED STATISTICAL
RATING ORGANIZATION.
This chart shows S&P's definition and ratings group for credit quality. Other
rating organizations use similar definitions.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CREDIT QUALITY S&P'S S&P'S RATINGS RATING
DEFINITION GROUP CATEGORY
---------------- ------------------------ ----------------------- -----------------------
Highest quality AAA First highest
Higher High quality AA Second highest
Upper medium grade A Third highest
---------------- ------------------------ ----------------------- -----------------------
Medium Medium grade BBB Fourth highest
---------------- ------------------------ ----------------------- -----------------------
Low grade BB
Lower Speculative B
Submarginal CCC, CC, C
---------------- ------------------------ -----------------------
In default Probably in default D
---------------- ------------------------ -----------------------
</TABLE>
We determine a bond's credit-quality rating at the time of investment by
conducting credit research and analysis and by relying on credit ratings of
several nationally recognized statistical rating organizations. These
organizations are called NRSROs. When we determine if a bond is in a specific
category, we may use the highest rating assigned to it by any NRSRO. If a bond
is not rated, we rely on our credit research and analysis to rate the bond. If a
bond's credit-quality rating is downgraded after our investment, we monitor the
situation to decide if we need to take any action such as selling the bond.
Typically, municipal bonds are not rated. This means that investments in
municipal bonds may require more credit analysis by us than investments in
taxable bonds. Also, investments in lower-quality bonds will be more dependent
on our credit analysis than would be higher-quality bonds because, while
lower-quality bonds generally offer higher yields than higher-quality bonds with
similar maturities, lower-quality bonds involve greater risks. These risks
include the possibility of default or bankruptcy because the issuer's capacity
to pay interest and repay principal is considered predominantly speculative.
Also, lower-quality bonds are less liquid, meaning that they may be harder to
sell than bonds of higher quality because the demand for them may be lower and
there are fewer potential buyers. This lack of liquidity may lower the value of
the fund and your investment.
<PAGE>
TAXABLE INVESTMENTS
A fund may invest up to 20% of its net assets in U.S. government and corporate
bonds and other debt securities that are of the same quality as the fund's
investments in municipal bonds. A fund will generally invest in these bonds to
take advantage of capital gains opportunities. These bonds produce taxable
income, unlike municipal bonds, which generally provide tax-exempt income.
IF YOU ARE SUBJECT TO THE ALTERNATIVE MINIMUM TAX
The funds may invest, without limitation, in municipal obligations whose
interest is a tax-preference item for purposes of the federal alternative
minimum tax (AMT). If you are subject to the AMT, a substantial portion of your
fund's distributions to you may not be exempt from federal income tax. If this
is the case, a fund's net return to you may be lower.
FINANCIAL HIGHLIGHTS
This information describes investment performance of the Advisor Class shares of
the funds for the periods shown. Certain information reflects financial results
for a single Advisor Class share outstanding for the entire period. "Total
Return" shows how much an investment in the Advisor Class shares of the fund
would have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. The Advisor Class shares of the fund
were first offered on February 29, 2000. These figures have been audited by
PricewaterhouseCoopers LLP, whose report, along with the fund's financial
statements, is included in the fund's annual report.
STRONG HIGH-YIELD MUNICIPAL BOND FUND--ADVISOR CLASS
<TABLE>
<CAPTION>
<S> <C>
Aug. 31,
SELECTED PER-SHARE DATA(a) 2000(b)
Net Asset Value, Beginning of Period $8.92
Income From Investment Operations:
Net Investment Income 0.28
Net Realized and Unrealized Losses on Investments (0.01)
Total from Investment Operations 0.27
Less Distributions:
From Net Investment Income(c) (0.28)
Total Distributions (0.28)
Net Asset Value, End of Period $8.91
RATIOS AND SUPPLEMENTAL DATA
Total Return +3.1%
Net Assets, End of Period (In Millions) $0(d)
Ratio of Expenses to Average Net Assets
Without Waivers and Absorptions 1.1%*
Ratio of Expenses to Average Net Assets 1.1%*
Ratio of Net Investment Income to
Average Net Assets 6.3%*
Portfolio Turnover Rate(e) 17.5%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) For the period from March 1, 2000 (Commencement of Class) to
August 31, 2000.
(c) Tax-exempt for regular federal income tax purposes.
(d) Amount is less than $500,000.
(e) Calculated on the basis of the fund as a whole without distinguishing
between the classes of shares issued.
STRONG MUNICIPAL BOND FUND--ADVISOR CLASS
<TABLE>
<CAPTION>
<S> <C>
Aug. 31,
SELECTED PER-SHARE DATA(a) 2000(b)
Net Asset Value, Beginning of Period $8.64
Income From Investment Operations:
Net Investment Income 0.24
Net Realized and Unrealized Gains
on Investments 0.14
Total from Investment Operations 0.38
Less Distributions:
From Net Investment Income(c) (0.24)
Total Distributions (0.24)
Net Asset Value, End of Period $8.78
RATIOS AND SUPPLEMENTAL DATA
Total Return +4.4%
Net Assets, End of Period (In Millions) $0(d)
Ratio of Expenses to Average Net Assets
Without Waivers and Absorptions 1.1%*
Ratio of Expenses to Average Net Assets 1.1%*
Ratio of Net Investment Income to
Average Net Assets 5.4%*
Portfolio Turnover(e) 19.2%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) For the period from March 1, 2000 (Commencement of Class) to
August 31, 2000.
(c) Tax-exempt for regular federal income tax purposes.
(d) Amount is less than $500,000.
(e) Calculated on the basis of the fund as a whole without
distinguishing between classes of shares issued.
STRONG SHORT-TERM HIGH YIELD MUNICIPAL FUND--ADVISOR CLASS
<TABLE>
<CAPTION>
<S> <C>
Aug. 31,
SELECTED PER-SHARE DATA(a) 2000(b)
Net Asset Value, Beginning of Period $9.63
Income From Investment Operations:
Net Investment Income 0.24
Net Realized and Unrealized Losses on Investments (0.03)
Total from Investment Operations 0.21
Less Distributions:
From Net Investment Income(c) (0.24)
Total Distributions (0.24)
Net Asset Value, End of Period $9.60
RATIOS AND SUPPLEMENTAL DATA
Total Return +2.2%
Net Assets, End of Period (In Millions) $0(d)
Ratio of Expenses to Average Net Assets
Without Waivers and Absorptions 1.2%*
Ratio of Expenses to Average Net Assets 1.1%*
Ratio of Net Investment Income to Average Net Assets 4.9%*
Portfolio Turnover Rate(e) 27.9%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) For the period from March 1, 2000 (Commencement of Class) to
August 31, 2000.
(c) Tax-exempt for regular federal income tax purposes.
(d) Amount is less than $500,000.
(e) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
STRONG SHORT-TERM MUNICIPAL BOND FUND--ADVISOR CLASS
<TABLE>
<CAPTION>
<S> <C>
Aug. 31,
SELECTED PER-SHARE DATA(a) 2000(b)
Net Asset Value, Beginning of Period $9.58
Income From Investment Operations:
Net Investment Income 0.22
Net Realized and Unrealized Gains on Investments 0.06
Total from Investment Operations 0.28
Less Distributions:
From Net Investment Income(c) (0.22)
Total Distributions (0.22)
Net Asset Value, End of Period $9.64
RATIOS AND SUPPLEMENTAL DATA
Total Return +2.9%
Net Assets, End of Period (In Millions) $3
Ratio of Expenses to Average Net Assets 0.9%*
Ratio of Net Investment Income to Average Net Assets 4.5%*
Portfolio Turnover Rate(d) 48.6%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) For the period from March 1, 2000 (Commencement of Class) to
August 31, 2000.
(c) Tax-exempt for regular federal income tax purposes.
(d) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
YOUR ACCOUNT
DISTRIBUTION FEES
The Strong Funds have adopted a Rule 12b-1 distribution plan for the Advisor
Class shares of the funds. Under the distribution plan, each fund may make
monthly payments to the fund's distributor at the annual rate of 1.00% of the
average daily net assets of the fund attributable to its Advisor Class shares.
However, under the Distribution Agreement for the Advisor Class shares, payments
to the fund's distributor under the distribution plan are currently limited to
payment at an annual rate equal to 0.25% of average daily net assets
attributable to Advisor Class shares. Such payments may be made for
distribution-related services and other services that are primarily intended to
result in the sale of Advisor Class shares of the fund. Because Rule 12b-1 fees
are ongoing, over time they will increase the cost of an investment in the
Advisor Class shares of the fund and may cost more than other types of sales
charges.
SHARE PRICE
Your transaction price for buying, selling, or exchanging shares of the fund or
specific classes of the fund is the net asset value per share (NAV) for the fund
or class of shares. NAV is generally calculated as of the close of trading on
the New York Stock Exchange (NYSE) (usually 3:00 p.m. Central Time) every day
the NYSE is open. If the NYSE closes at any other time, or if an emergency
exists, NAV may be calculated at a different time. Your share price will be the
next NAV calculated after we accept your order.
NAV is based on the market value of the securities in a fund's portfolio. If
market prices are not available, NAV is based on a security's fair value as
determined in good faith by us under the supervision of the Board of Directors
of the Strong Funds.
<PAGE>
((Side Box))
------------------------------------------------------
We determine the share price or NAV of a fund or class by dividing net assets
attributable to the fund or class (the value of the investments, cash, and other
assets attributable to the fund or class minus the liabilities attributable to
the fund or class) by the number of fund or class shares outstanding.
------------------------------------------------------
BUYING SHARES
INVESTMENT MINIMUMS: When buying shares, you must meet the following investment
minimum requirements.
<TABLE>
<CAPTION>
<S> <C> <C>
INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENT MINIMUM
-------------------------------------------- ------------------------------------ -------------------------------------
Regular accounts $2,500 $50
</TABLE>
MULTIPLE CLASS PLAN: Each fund has adopted a multiple class plan. The MUNICIPAL
BOND FUND and the SHORT-TERM MUNICIPAL BOND FUND offer Investor Class shares,
Advisor Class shares, and Institutional Class shares. The HIGH-YIELD MUNICIPAL
BOND FUND and the SHORT-TERM HIGH YIELD MUNICIPAL FUND offer Investor Class
shares and Advisor Class shares. Each class is offered at its net asset value
without the imposition of any sales load; however, each class of shares is
subject to fees and expenses that may differ between classes. The principal
differences between each of the classes of shares are that the Advisor Class
shares are subject to distribution fees and expenses under a 12b-1 plan, and
each class of shares is subject to different administrative and transfer agency
fees and expenses.
BUYING INSTRUCTIONS You can buy shares in several ways.
MAIL
You can open or add to an account by mail with a check made payable to Strong.
Send it to the address listed on the back of this prospectus, along with your
account application (for a new account) or an Additional Investment Form (for an
existing account).
EXCHANGE OPTION
Sign up for the exchange option when you open your account. You may exchange
your shares of the fund for shares of another Strong Fund. You may make an
exchange by calling Strong Institutional Client Services at 1-800-368-1683 or by
sending a facsimile to 1-414-359-3535. Please obtain and read the appropriate
prospectus before investing in any of the Strong Funds. Remember, an exchange of
shares of one Strong Fund for those of another Strong Fund is considered a sale
and a purchase of fund shares for several purposes, including tax purposes and
may result in a capital gain or loss. Some Strong Funds that you may want to
exchange into may charge an initial sales charge, or may charge a redemption fee
of 0.50% to 1.00% on the sale of shares held for less than 6 to 12 months.
Purchases by exchange are subject to the investment requirements and other
criteria of the fund or class purchased.
WIRE
Call 1-800-368-1683 for instructions before wiring funds either to open or add
to an account. This helps to ensure that your account will be credited promptly
and correctly.
BROKER-DEALER
You may purchase shares through a broker-dealer or other intermediary, who may
charge you a fee. Broker-dealers, including each fund's distributor, and other
intermediaries may also from time to time sponsor or participate in promotional
programs pursuant to which investors receive incentives for establishing with
the broker-dealer or intermediary an account and/or for purchasing shares of the
Strong Funds through the account(s). Investors should contact the broker-dealer
or intermediary and consult the Statement of Additional Information for more
information about promotional programs.
<PAGE>
PLEASE REMEMBER . . .
o We only accept checks payable to Strong.
o We do not accept cash, third-party checks, credit card convenience checks,
or checks drawn on banks outside the U.S.
o You will be charged $20 for every check, wire, or Electronic Funds Transfer
returned unpaid.
SELLING SHARES
You can access the money in your account by selling (also called redeeming) some
or all of your shares by one of the methods below. After your redemption request
is accepted, we normally send you the proceeds on the next business day.
SELLING INSTRUCTIONS You can sell shares in several ways.
MAIL
Write a letter of instruction. It should specify your account number, the dollar
amount or number of shares you wish to redeem, the names and signatures of the
owners (or other authorized persons), and your mailing address. Then, mail it to
the address listed on the back of this prospectus.
REDEMPTION OPTION
Sign up for the redemption option when you open your account. With this option,
you may sell shares by phone and receive the proceeds in one of three ways:
(1) We can mail a check to your account's address. Checks will not be
forwarded by the Postal Service, so please notify us if your address
has changed.
(2) We can transmit the proceeds by Electronic Funds Transfer to a properly
pre-authorized bank account. The proceeds usually will arrive at your
bank two banking days after we process your redemption.
(3) For a $10 fee, we can transmit the proceeds by wire to a properly
pre-authorized bank account. The proceeds usually will arrive at your
bank the first banking day after we process your redemption.
BROKER-DEALER
You may sell shares through a broker-dealer or other intermediary, who may
charge you a fee.
PLEASE REMEMBER ...
o If you recently purchased shares, the payment of your redemption proceeds
may be delayed by up to 10 days to allow the purchase check or electronic
transaction to clear.
o You will be charged a $10 service fee for a stop-payment on a check written
on your Strong Funds account.
o Some transactions and requests require a signature guarantee.
((Side Box))
SIGNATURE GUARANTEES help ensure that major transactions or changes to your
account are in fact authorized by you. For example, we require a signature
guarantee on written redemption requests for more than $100,000. You can obtain
a signature guarantee for a nominal fee from most banks, brokerage firms, and
other financial institutions. A notary public stamp or seal cannot be
substituted for a signature guarantee.
ADDITIONAL POLICIES
DEPOSIT OF UNSPECIFIED CHECKS
When your investment check does not clearly indicate the fund that you would
like to purchase, we will deposit the check into the Strong Money Market Fund
until you clarify your investment decision.
INVESTING THROUGH A THIRD PARTY
If you invest through a third party (rather than directly with us), the policies
and fees may be different than described in this prospectus. Banks, brokers,
401(k) plans, financial advisors, and financial supermarkets may charge
transaction fees and may set different minimum investments or limitations on
buying or selling shares. Consult a representative of your plan or financial
institution for details.
MARKET TIMERS
The fund will consider the following factors to identify market timers:
shareholders who have (1) requested an exchange out of the fund within two weeks
of an earlier exchange request, (2) exchanged shares out of a fund more than
twice in a calendar quarter, (3) exchanged shares equal to at least $5 million,
or more than 1% of a fund's net assets, or (4) otherwise seem to follow a timing
pattern. Shares under common ownership or control are combined for purposes of
these limits.
PURCHASES IN KIND
You may, if we approve, purchase shares of the fund with securities that are
eligible for purchase by the fund (consistent with the fund's investment
restrictions, policies, and goal) and that have a value that is readily
ascertainable in accordance with the fund's valuation policies.
TELEPHONE TRANSACTIONS
We use reasonable procedures to confirm that telephone transaction requests are
genuine. We may be responsible if we do not follow these procedures. You are
responsible for losses resulting from fraudulent or unauthorized instructions
received over the telephone, provided we reasonably believe the instructions
were genuine. During times of unusual market activity, our phones may be busy
and you may experience a delay placing a telephone request.
VERIFICATION OF ACCOUNT STATEMENTS
You should contact us in writing regarding any errors or discrepancies within 60
days after the date of the statement confirming a transaction. The statement
will be deemed correct if we do not hear from you within those 60 days.
DISTRIBUTIONS
-------------------------------------------------------------------------------
DISTRIBUTION POLICY
Each fund generally pays you dividends from net investment income monthly and
distributes any net capital gains that it realizes annually. Dividends are
declared on each day NAV is calculated, except for bank holidays. Dividends
earned on weekends, holidays, and days when the fund's NAV is not calculated are
declared on the first day preceding these days that the fund's NAV is
calculated. Your investment generally earns dividends from the first business
day after we accept your purchase order.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Your dividends and capital gains distributions will be automatically reinvested
in additional shares of the fund or class, as applicable, that paid them, unless
you choose otherwise. Your other options are to receive checks for these
payments, have them automatically invested in another Strong Fund, or have them
deposited into your bank account. To change the current option for payment of
dividends and capital gains distributions, please call 1-800-368-1683.
<PAGE>
TAXES
-------------------------------------------------------------------------------
Generally, a municipal fund's distributions will be composed primarily of
tax-exempt income. However, the fund may make distributions of net investment
income and capital gains that are taxable to you.
TAXABLE DISTRIBUTIONS
Any net investment income and net short-term capital gains distributions you
receive are generally taxable as ordinary dividend income at your income tax
rate. Distributions of net capital gains are generally taxable as long-term
capital gains. This is generally true no matter how long you have owned your
shares and whether you reinvest your distributions or take them in cash. You may
also have to pay taxes when you exchange or sell shares if your shares have
increased in value since you bought them.
TAX-EXEMPT DISTRIBUTIONS
Exempt-interest dividends from municipal funds are generally exempt from federal
income taxes, but may be subject to state and local tax. Also, if you are
subject to the Alternative Minimum Tax, you may have to pay federal tax on a
substantial portion of your income from exempt-interest dividends.
RETURN OF CAPITAL
If your fund's distributions exceed its earnings and profits, all or a portion
of those distributions may be treated as a return of capital to you. A return of
capital may be treated as a sale of your shares. It may also reduce the cost
basis of your shares.
YEAR-END STATEMENT
To assist you in tax preparation, after the end of each calendar year, we send
you a statement of your fund's ordinary dividends and net capital gains
distributions (Form 1099).
BACKUP WITHHOLDING
By law, we must withhold 31% of your distributions and proceeds if (1) you are
subject to backup withholding or (2) you have not provided us with complete and
correct taxpayer information such as your Social Security number or tax
identification number.
Because everyone's tax situation is unique, you should consult your tax
professional for assistance.
RESERVED RIGHTS...
-------------------------------------------------------------------------------
We reserve the right to:
o Refuse, change, discontinue, or temporarily suspend account services,
including purchase, exchange, or telephone redemption privileges, for any
reason.
o Reject any purchase request for any reason, including exchanges from other
Strong Funds. Generally, we do this if the purchase or exchange is
disruptive to the efficient management of a fund (due to the timing of the
investment or an investor's history of excessive trading).
o Change the minimum or maximum investment amounts.
o Delay sending out redemption proceeds for up to seven days (this generally
only applies to very large redemptions without notice, excessive trading,
or during unusual market conditions).
o Suspend redemptions or postpone payments when the NYSE is closed for any
reason other than its usual weekend or holiday closings, when trading is
restricted by the SEC, or under any emergency circumstances.
o Make a redemption in kind (a payment in portfolio securities rather than
cash) if the amount you are redeeming is in excess of the lesser of (1)
$250,000 or (2) 1% of the fund's assets. Generally, redemption in kind is
used when large redemption requests may cause harm to the fund and its
shareholders.
o Close any account that does not meet minimum investment requirements. We
will give you notice and 60 days to increase your balance to the required
minimum.
o Waive the initial investment minimum at our discretion.
o Reject any purchase or redemption request that does not contain all
required documentation.
o Amend or terminate purchases in kind at any time.
<PAGE>
FOR MORE INFORMATION
More information is available upon request at no charge, including:
SHAREHOLDER REPORTS: Additional information is available in the annual and
semi-annual report to shareholders. These reports contain a letter from
management, discuss recent market conditions, economic trends and investment
strategies that significantly affected your investment's performance during the
last fiscal year, and list portfolio holdings.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI contains more details about
investment policies and techniques. A current SAI is on file with the SEC and is
incorporated into this prospectus by reference. This means that the SAI is
legally considered a part of this prospectus even though it is not physically
contained within this prospectus.
To request information or to ask questions:
BY TELEPHONE BY OVERNIGHT DELIVERY
1-800-368-1683 Strong Institutional Client Services
100 Heritage Reserve
Menomonee Falls, WI 53051
BY MAIL
Strong Institutional Client Services ON THE INTERNET
P.O. Box 2936 View online or download documents:
Milwaukee, WI 53201-2936 SEC*: www.sec.gov
This prospectus is not an offer to sell securities in places other than the
United States and its territories.
*INFORMATION ABOUT A FUND (INCLUDING THE SAI) CAN ALSO BE REVIEWED AND COPIED AT
THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE ROOM IN WASHINGTON,
D.C. YOU MAY CALL THE COMMISSION AT 1-202-942-8090 FOR INFORMATION ABOUT THE
OPERATION OF THE PUBLIC REFERENCE ROOM. REPORTS AND OTHER INFORMATION ABOUT A
FUND ARE ALSO AVAILABLE FROM THE EDGAR DATABASE ON THE COMMISSION'S INTERNET
SITE AT WWW.SEC.GOV. YOU MAY OBTAIN A COPY OF THIS INFORMATION, AFTER PAYING A
DUPLICATING FEE, BY SENDING A WRITTEN REQUEST TO THE COMMISSION'S PUBLIC
REFERENCE SECTION, WASHINGTON, D.C. 20549-0102, OR BY SENDING AN ELECTRONIC
REQUEST TO THE FOLLOWING E-MAIL ADDRESS: [email protected].
Strong High-Yield Municipal Bond Fund, a series of Strong High-Yield Municipal
Bond Fund, Inc., SEC file number: 811-7930
Strong Municipal Bond Fund, a series
of Strong Municipal Bond Fund, Inc., SEC file number: 811-4769
Strong Short-Term
High Yield Municipal Fund, a series of Strong Municipal Funds, Inc., SEC file
number: 811-4770
Strong Short-Term Municipal Bond Fund, a series of Strong
Short-Term Municipal Bond Fund, Inc., SEC file number: 811-6409
PROSPECTUS JANUARY 1, 2001
[INSTITUTIONAL CLASS (written vertically)]
The Strong
Municipal Income
Funds
[PICTURE OF MAN HOLDING TELEPHONE]
Strong Municipal Bond Fund
Strong Short-Term Municipal Bond Fund
[STRONG LOGO] STRONG
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
YOUR INVESTMENT
KEY INFORMATION
WHAT ARE THE FUNDS' GOALS? 1
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES? 1
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS? 2
WHAT ARE THE FUNDS' FEES AND EXPENSES? 6
WHO ARE THE FUNDS' INVESTMENT ADVISOR AND PORTFOLIO MANAGER? 7
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
COMPARING THE FUNDS 7
A WORD ABOUT CREDIT QUALITY 8
TAXABLE INVESTMENTS 10
IF YOU ARE SUBJECT TO THE ALTERNATIVE MINIMUM TAX 10
FINANCIAL HIGHLIGHTS 10
YOUR ACCOUNT
SHARE PRICE 13
BUYING SHARES 13
SELLING SHARES 14
ADDITIONAL POLICIES 15
DISTRIBUTIONS 17
TAXES 18
RESERVED RIGHTS 19
FOR MORE INFORMATION BACK COVER
IN THIS PROSPECTUS, "WE" OR "US" REFERS TO STRONG CAPITAL MANAGEMENT, INC., THE
INVESTMENT ADVISOR, ADMINISTRATOR, AND TRANSFER AGENT FOR THE STRONG FUNDS.
<PAGE>
YOUR INVESTMENT
KEY INFORMATION
WHAT ARE THE FUNDS' GOALS?
The STRONG MUNICIPAL 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 STRONG SHORT-TERM MUNICIPAL BOND FUND seeks total return by investing for a
high level of federally tax-exempt current income with a low degree of
share-price fluctuation.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
The MUNICIPAL BOND FUND invests primarily in long-term, higher- and
medium-quality municipal bonds. The fund's manager conducts intensive research
on individual issuers to uncover solid investment opportunities, especially
looking for bonds whose quality may be improving. The fund typically maintains
an average maturity between 10 and 20 years.
The SHORT-TERM MUNICIPAL BOND FUND invests primarily in short- and
intermediate-term, higher- and medium-quality municipal bonds, following the
investment style of the MUNICIPAL BOND FUND. The fund typically maintains an
average maturity of three years or less.
((Side Box))
Under normal market conditions, the funds will invest at least 80% of their
assets in municipal bonds. MUNICIPAL BONDS are debt obligations issued by or for
U.S. states, territories, and possessions and the District of Columbia and their
political subdivisions, agencies, and instrumentalities. Municipal bonds can be
issued to obtain money for public purposes or for privately operated facilities
or projects. Some municipal bonds pay interest that is exempt from federal
income tax. Examples of municipal bonds are general obligation bonds, revenue
bonds, industrial development bonds, notes, and municipal lease obligations.
Although each of the funds invests primarily for income, they also employ
techniques designed to realize capital appreciation. For example, the manager
may select bonds with maturities and coupon rates that position them for
potential capital appreciation for a variety of reasons, including a manager's
view on the direction of future interest-rate movements and the potential for a
credit upgrade.
The funds' manager may sell a holding if its value becomes unattractive (for
example, when its fundamental qualities deteriorate or when other opportunities
exist that have more attractive yields). Also, the manager may invest any amount
in cash or cash-type securities (high-quality, short-term debt securities issued
by corporations, financial institutions, or the U.S. government) as a temporary
defensive position to avoid losses during adverse market conditions. This could
reduce the benefit to the funds if the market goes up. In this case, the funds
may not achieve their investment goal.
The funds may invest without limitation in municipal bonds, such as private
activity bonds, whose interest may be subject to the federal alternative minimum
tax (AMT).
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS?
BOND RISKS: The major risks of each fund are those of investing in the bond
market. A bond's market value is affected significantly by changes in interest
rates--generally, when interest rates rise, the bond's market value declines,
and when interest rates decline, its market value rises (interest-rate risk).
Generally, the longer a bond's maturity, the greater the risk and the higher its
yield. Conversely, the shorter a bond's maturity, the lower the risk and the
lower its yield (maturity risk). A bond's value can also be affected by changes
in the bond's credit quality rating or its issuer's financial condition
(credit-quality risk). Because bond values fluctuate, the fund's share price
fluctuates. So, when you sell your investment, you may receive more or less
money than you originally invested.
MANAGEMENT RISK: The funds are subject to management risk because they are
actively managed. There is no guarantee that the investment techniques and risk
analyses used by the manager will produce the desired results.
The funds are appropriate for investors who are comfortable with the risks
described here. Also, the MUNICIPAL BOND FUND is appropriate for investors whose
financial goals are four to seven years in the future. The SHORT-TERM MUNICIPAL
BOND FUND is appropriate for investors whose financial goals are two to four
years in the future. The funds are not appropriate for investors concerned
primarily with principal stability.
FUND STRUCTURE
Each of the funds has adopted a multiple class plan. The funds offer Investor
Class shares, Advisor Class shares, and Institutional Class shares. Only the
Institutional Class shares of each fund are offered in this prospectus. The
principal differences between each of the classes of shares are that the Advisor
Class shares are subject to distribution fees and expenses under a 12b-1 plan
and each class of shares is subject to different administrative and transfer
agency fees and expenses.
FUND PERFORMANCE
The following return information illustrates how the performance of the funds'
Institutional Class shares can vary, which is one indication of the risks of
investing in the funds. Performance results for the Institutional Class shares,
which were first offered on July 31, 2000, are based on the historical
performance of each fund's Investor Class shares from the inception of the fund
up to July 30, 2000. The Investor Class shares of these funds, which are not
offered by this prospectus, achieved performance results which are lower than
those that are expected to be achieved by the Institutional Class shares because
the Investor Class shares are invested in the same portfolio of securities but
are subject to a higher annual expense ratio. The returns for the Institutional
Class shares are substantially similar to those of the Investor Class shares
because each are invested in the same portfolio of securities and the only
differences relate to the differences in the fees and expenses of each class of
shares. Please keep in mind that the past performance of the funds' shares does
not represent how they will perform in the future. The information assumes that
you reinvested all dividends and distributions.
<PAGE>
CALENDAR YEAR TOTAL RETURNS
-------------------------------------
Short-Term
Municipal Municipal
Year Bond Bond
-------------------------------------
-------------------------------------
1990 4.6% -
-------------------------------------
-------------------------------------
1991 13.4% -
-------------------------------------
-------------------------------------
1992 12.2% 7.2%
-------------------------------------
-------------------------------------
1993 11.8% 6.8%
-------------------------------------
-------------------------------------
1994 -4.6% -1.6%
-------------------------------------
-------------------------------------
1995 11.4% 5.4%
-------------------------------------
-------------------------------------
1996 2.4% 4.9%
-------------------------------------
-------------------------------------
1997 12.1% 6.9%
-------------------------------------
-------------------------------------
1998 6.7% 5.6%
-------------------------------------
-------------------------------------
1999 -6.5% 1.2%
-------------------------------------
BEST AND WORST QUARTERLY PERFORMANCE
(DURING THE PERIODS SHOWN ABOVE)
<TABLE>
<CAPTION>
<S> <C> <C>
FUND NAME BEST QUARTER RETURN WORST QUARTER RETURN
------------------------------------- ----------------------------------- -----------------------------------
Municipal Bond 5.8% (2nd Q 1992) -5.1% (1st Q 1994)
Short-Term Municipal Bond 2.4% (3rd Q 1995) -1.8% (1st Q 1994)
</TABLE>
THE YEAR-TO-DATE RETURNS THROUGH SEPTEMBER 30, 2000 ARE: MUNICIPAL BOND, 2.95%
AND SHORT-TERM MUNICIPAL BOND, 3.72%.
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12-31-99
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FUND/INDEX 1-YEAR 5-YEAR 10-YEAR SINCE INCEPTION
MUNICIPAL BOND -6.48% 5.00% 6.12% 5.70% (10-23-86)
Lehman Brothers Municipal Bond Index -2.06% 6.91% 6.89% 7.08%
Lipper General Municipal Debt Funds Index -4.07% 6.14% 6.29% 6.52%
SHORT-TERM MUNICIPAL BOND 1.16% 4.76% -- 4.48% (12-31-91)
Lehman Brothers Municipal
3 Year Bond Index 1.96% 5.17% -- 4.88%
Lipper Short Municipal Debt Funds Average 1.70% 4.36% -- 4.13%
</TABLE>
THE LEHMAN BROTHERS MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX GENERALLY
REPRESENTATIVE OF INVESTMENT-GRADE, TAX-EXEMPT BONDS. THE LIPPER GENERAL
MUNICIPAL DEBT FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE
LARGEST QUALIFYING FUNDS IN THIS LIPPER CATEGORY. THE LEHMAN BROTHERS MUNICIPAL
3 YEAR BOND INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF THREE-YEAR,
TAX-EXEMPT BONDS. THE LIPPER SHORT MUNICIPAL DEBT FUNDS AVERAGE REPRESENTS FUNDS
THAT INVEST IN MUNICIPAL DEBT ISSUES WITH DOLLAR-WEIGHTED AVERAGE MATURITIES OF
LESS THAN THREE YEARS.
For current yield information on these funds, call 1-800-733-2274.
WHAT ARE THE FUNDS' FEES AND EXPENSES?
This section describes the fees and expenses that you may pay if you buy and
hold shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
The Institutional Class shares of each fund are 100% no-load, so you pay no
sales charges (loads) to buy or sell shares.
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
The costs of operating each fund are deducted from fund assets, which means you
pay them indirectly. These costs are deducted before computing the daily share
price or making distributions. As a result, they don't appear on your account
statement, but instead reduce the total return you receive from your fund
investment.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENT OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TOTAL ANNUAL FUND
FUND MANAGEMENT FEES OTHER EXPENSES OPERATING EXPENSES
---------------------------------------- --------------------- ---------------------- -----------------------
Municipal Bond 0.35% 0.09% 0.44%
Short-Term Municipal Bond 0.25% 0.08% 0.33%
</TABLE>
EXAMPLE: This example is intended to help you compare the cost of investing in
the funds with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the funds and reinvest all dividends and
distributions for the time periods indicated, and then redeem all of your shares
at the end of those periods. The example also assumes that your investment has a
5% return each year and that the funds' operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions,
your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------- --------------- ---------------- ------------- ------------
Municipal Bond $45 $141 $246 $555
Short-Term Municipal Bond $34 $106 $185 $418
</TABLE>
WHO ARE THE FUNDS' INVESTMENT ADVISOR AND PORTFOLIO MANAGER?
Strong Capital Management, Inc. (Strong) is the investment advisor for the
funds. Strong provides investment management services for mutual funds and other
investment portfolios representing assets, as of October 31, 2000, of over $45
billion. Strong began conducting business in 1974. Since then, its principal
business has been providing investment advice for individuals and institutional
accounts, such as pension and profit-sharing plans, as well as mutual funds,
several of which are available through variable insurance products. Strong's
address is P.O. Box 2936, Milwaukee, WI 53201.
LYLE J. FITTERER manages the MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL
BOND FUND. Mr. Fitterer joined Strong in 1989 and has over seven years of
investment experience. He is a Chartered Financial Analyst and Certified Public
Accountant. He has managed the MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL
BOND FUND since March 2000. He served as the Managing Director of Institutional
Client Services from December 1998 to March 2000 and as a fixed income portfolio
manager from January 1996 to December 1998. He served as a fixed income research
analyst/trader from February 1993 to January 1996 and as an equity trader from
February 1992 to February 1993. Mr. Fitterer received his bachelors degree in
Accounting from the University of North Dakota in 1989.
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
COMPARING THE FUNDS
The following will help you distinguish the funds and determine their
suitability for your investment needs:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FUND AVERAGE MATURITY CREDIT QUALITY INCOME POTENTIAL VOLATILITY
-------------------- ------------------- -------------------- ------------- ------------
Municipal Bond 10 to 20 years* At least 85% rated Moderate to High Moderate
higher or medium
Up to 15% rated lower
-------------------- ------------------- ---------------------- -------------------- -------------
Short-Term 3 years or less At least 85% rated Low to Moderate Low
Municipal Bond higher or medium
Up to 15% rated lower
-------------------- ------------------- ---------------------- -------------------- -------------
</TABLE>
* EXPECTED RANGE
The MUNICIPAL BOND FUND and the SHORT-TERM MUNICIPAL BOND FUND invest a portion
of their assets in lower-quality securities that present a significant risk for
loss of principal and interest.
A WORD ABOUT CREDIT QUALITY
CREDIT QUALITY measures the issuer's expected ability to pay interest and
principal payments on time. Credit quality can be "higher-quality",
"medium-quality", "lower-quality", or "in default".
HIGHER-QUALITY means bonds that are in any of the three highest rating
categories. For example, bonds rated AAA to A by Standard & Poor's Ratings Group
(S&P)*.
MEDIUM-QUALITY means bonds that are in the fourth-highest rating category. For
example, bonds rated BBB by S&P*.
LOWER-QUALITY means bonds that are below the fourth-highest rating category.
They are also known as non-investment, high-risk, high-yield, or "junk bonds".
For example, bonds rated BB to C by S&P*.
IN DEFAULT means the bond's issuer has not paid principal or interest on time.
*OR THOSE RATED IN THIS CATEGORY BY ANY NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION. S&P IS ONLY ONE EXAMPLE OF A NATIONALLY RECOGNIZED STATISTICAL
RATING ORGANIZATION.
This chart shows S&P's definition and ratings group for credit quality. Other
rating organizations use similar definitions.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CREDIT QUALITY S&P'S S&P'S RATINGS RATING
DEFINITION GROUP CATEGORY
---------------- ------------------------ ----------------------- -----------------------
Highest quality AAA First highest
Higher High quality AA Second highest
Upper medium grade A Third highest
---------------- ------------------------ ----------------------- -----------------------
Medium Medium grade BBB Fourth highest
---------------- ------------------------ ----------------------- -----------------------
Low grade BB
Lower Speculative B
Submarginal CCC, CC, C
---------------- ------------------------ -----------------------
In default Probably in default D
---------------- ------------------------ -----------------------
</TABLE>
We determine a bond's credit-quality rating at the time of investment by
conducting credit research and analysis and by relying on credit ratings of
several nationally recognized statistical rating organizations. These
organizations are called NRSROs. When we determine if a bond is in a specific
category, we may use the highest rating assigned to it by any NRSRO. If a bond
is not rated, we rely on our credit research and analysis to rate the bond. If a
bond's credit-quality rating is downgraded after our investment, we monitor the
situation to decide if we need to take any action such as selling the bond.
Typically, municipal bonds are not rated. This means that investments in
municipal bonds may require more credit analysis by us than investments in
taxable bonds. Also, investments in lower-quality bonds will be more dependent
on our credit analysis than would be higher-quality bonds because, while
lower-quality bonds generally offer higher yields than higher-quality bonds with
similar maturities, lower-quality bonds involve greater risks. These risks
include the possibility of default or bankruptcy because the issuer's capacity
to pay interest and repay principal is considered predominantly speculative.
Also, lower-quality bonds are less liquid, meaning that they may be harder to
sell than bonds of higher quality because the demand for them may be lower and
there are fewer potential buyers. This lack of liquidity may lower the value of
the fund and your investment.
TAXABLE INVESTMENTS
A fund may invest up to 20% of its net assets in U.S. government and corporate
bonds, and other debt securities that are of the same quality as the fund's
investments in municipal bonds. A fund will generally invest in these bonds to
take advantage of capital gains opportunities. These bonds produce taxable
income, unlike municipal bonds, which generally provide tax-exempt income.
IF YOU ARE SUBJECT TO THE ALTERNATIVE MINIMUM TAX
The funds may invest, without limitation, in municipal obligations whose
interest is a tax-preference item for purposes of the federal alternative
minimum tax (AMT). If you are subject to the AMT, a substantial portion of your
fund's distributions to you may not be exempt from federal income tax. If this
is the case, a fund's net return to you may be lower.
FINANCIAL HIGHLIGHTS
This information describes investment performance of the Institutional Class
shares of the funds for the periods shown. Certain information reflects
financial results for a single Institutional Class share outstanding for the
entire period. "Total Return" shows how much an investment in the Institutional
Class shares of the fund would have increased (or decreased) during each period,
assuming you had reinvested all dividends and distributions. The Institutional
Class shares were first offered on July 31, 2000. These figures have been
audited by PricewaterhouseCoopers LLP, whose report, along with the fund's
financial statements, is included in the fund's annual report.
STRONG MUNICIPAL BOND FUND--INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
<S> <C>
Aug. 31,
SELECTED PER-SHARE DATA(a) 2000(b)
Net Asset Value, Beginning of Period $8.73
Income From Investment Operations:
Net Investment Income 0.04
Net Realized and Unrealized Gains on Investments 0.06
Total from Investment Operations 0.10
Less Distributions:
From Net Investment Income(c) (0.04)
Total Distributions (0.04)
Net Asset Value, End of Period $8.79
RATIOS AND SUPPLEMENTAL DATA
Total Return +1.2%
Net Assets, End of Period (In Millions) $0(d)
Ratio of Expenses to Average Net Assets 0.4%*
Ratio of Net Investment Income to
Average Net Assets 5.5%*
Portfolio Turnover Rate(e) 19.2%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) For the period from August 1, 2000 (Commencement of Class) to
August 31, 2000.
(c) Tax-exempt for regular federal income tax purposes.
(d) Amount is less than $500,000.
(e) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
STRONG SHORT-TERM MUNICIPAL BOND FUND--INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
<S> <C>
Aug. 31,
SELECTED PER-SHARE DATA(a) 2000(b)
Net Asset Value, Beginning of Period $9.61
Income From Investment Operations:
Net Investment Income 0.04
Net Realized and Unrealized Gains on Investments 0.03
Total from Investment Operations 0.07
Less Distributions:
From Net Investment Income(c) (0.04)
Total Distributions (0.04)
Net Asset Value, End of Period $9.64
RATIOS AND SUPPLEMENTAL DATA
Total Return +0.8%
Net Assets, End of Period (In Millions) $0(d)
Ratio of Expenses to Average Net Assets 0.3%*
Ratio of Net Investment Income to Average Net Assets 5.3%*
Portfolio Turnover Rate(e) 48.6%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) For the period from August 1, 2000 (Commencement of Class) to
August 31, 2000.
(c) Tax-exempt for regular federal income tax purposes.
(d) Amount is less than $500,000
(e) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
YOUR ACCOUNT
SHARE PRICE
Your transaction price for buying, selling, or exchanging shares of the funds or
specific classes of the funds is the net asset value per share (NAV) for that
fund or class of shares. NAV is generally calculated as of the close of trading
on the New York Stock Exchange (NYSE) (usually 3:00 p.m. Central Time) every day
the NYSE is open. If the NYSE closes at any other time, or if an emergency
exists, NAV may be calculated at a different time. Your share price will be the
next NAV calculated after we accept your order.
NAV is based on the market value of the securities in a fund's portfolio. If
market prices are not available, NAV is based on a security's fair value as
determined in good faith by us under the supervision of the Board of Directors
of the Strong Funds.
((Side Box))
------------------------------------------------------
We determine the share price or NAV of a fund or class by dividing net assets
attributable to the fund or class (the value of the investments, cash, and other
assets attributable to the fund or class minus the liabilities attributable to
the fund or class) by the number of fund or class shares outstanding.
------------------------------------------------------
BUYING SHARES
Prior to your initial investment, complete and sign an application and send it
to Strong Institutional Client Services, P.O. Box 2936, Milwaukee, WI 53201-2936
or send it by facsimile to 1-414-359-3535. The initial investment minimum for
each fund is $1 million. The initial investment minimum for the funds is waived
for registered investment advisors with an initial investment minimum of at
least $250,000. After your initial investment, additional transactions may be
made in any amount. Shares must be purchased by wire unless you use the Exchange
Option described below. To purchase by wire, place
<PAGE>
an order by calling 1-800-733-2274 before 3:00 p.m. Central Time. Firstar Bank
Milwaukee, N.A., the fund's agent, must receive payment by the close of the
federal wire system that day. If payment is not received by this deadline, your
order may be canceled or you may be liable for the resulting interest expenses.
You should wire federal funds as follows:
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA routing number: 075000022
Account number: 112737-090
For further credit to: (insert your account number and registration)
MULTIPLE CLASS PLAN
Each fund has adopted a multiple class plan. The funds offer Investor Class
shares, Advisor Class shares, and Institutional Class shares. Each class is
offered at its net asset value without the imposition of any sales load;
however, each class of shares is subject to fees and expenses that may differ
between classes. The principal differences between each of the classes of shares
are that the Advisor Class shares are subject to distribution fees and expenses
under a 12b-1 plan and each class of shares is subject to different
administrative and transfer agency fees and expenses.
BROKER-DEALER
Broker-dealers, including each fund's distributor, and other intermediaries may
also from time to time sponsor or participate in promotional programs pursuant
to which investors receive incentives for establishing with the broker-dealer or
intermediary an account and/or for purchasing shares of the Strong Funds through
the account(s). Investors should contact the broker-dealer or intermediary and
consult the Statement of Additional Information for more information about
promotional programs.
SELLING SHARES
Shares must be redeemed by wire unless you use the Exchange Option described
below. The fund pays the wire fees, which are a fund expense. You may redeem
shares by either telephone or written instruction.
To redeem by wire, place an order by calling Strong Institutional Client
Services at 1-800-733-2274 before 3:00 p.m. Central Time. The original
application must be on file with the fund's transfer agent before a redemption
will be processed. You may also redeem shares by sending a written request to
Strong Institutional Client Services, P.O. Box 2936, Milwaukee, WI 53201-2936 or
sending it by facsimile to 1-414-359-3535. Your written request must be signed
exactly as the names of the registered owners appear on the fund's account
records, and the request must be signed by the minimum number of persons
designated on the account application that are required to effect a redemption.
Please note that any written redemption request of $100,000 or more must be
accompanied by a signature guarantee. Payment of the redemption proceeds will be
wired to the bank account(s) designated on the account application. Redemption
proceeds will ordinarily be wired the next business day, but in no event more
than seven days after receipt of the redemption.
((Side Box))
------------------------------------------------------
SIGNATURE GUARANTEES help ensure that major transactions or changes to your
account are in fact authorized by you. For example, we require a signature
guarantee on written redemption requests for more than $100,000. You can obtain
a signature guarantee for a nominal fee from most banks, brokerage firms, and
other financial institutions. A notary public stamp or seal cannot be
substituted for a signature guarantee.
------------------------------------------------------
ADDITIONAL POLICIES
ADVANCE NOTICE OF LARGE TRANSACTIONS
We strongly urge you to begin all purchases and redemptions as early in the day
as possible and to notify us at least one day in advance of transactions in
excess of $5 million. This will allow Strong to manage the fund most
effectively. When you give us this advance notice, you must provide us with your
name and account number.
DEPOSIT OF UNSPECIFIED CHECKS
When your investment check does not clearly indicate the fund that you would
like to purchase, we will deposit the check into the Strong Money Market Fund
until you clarify your investment decision.
EXCHANGE OPTION
You may exchange your shares of the fund for shares of another Strong Fund. You
may make an exchange by calling Strong Institutional Client Services at
1-800-733-2274 or by sending a facsimile to 1-414-359-3535. Please obtain and
read the appropriate prospectus before investing in any of the Strong Funds.
Remember, an exchange of shares of one Strong Fund for those of another Strong
Fund is considered a sale and a purchase of fund shares for several purposes,
including tax purposes and may result in a capital gain or loss. Some Strong
Funds that you may want to exchange into may charge an initial sales charge, or
may charge a redemption fee of 0.50% to 1.00% on the sale of shares held for
less than 6 to 12 months. Purchases by exchange are subject to the investment
requirements and other criteria of the fund and class purchased.
INVESTING THROUGH A THIRD PARTY
If you invest through a third party (rather than directly with us), the policies
and fees may be different than described in this prospectus. Banks, brokers,
401(k) plans, financial advisors, and financial supermarkets may charge
transaction fees and may set different minimum investments or limitations on
buying or selling shares. Consult a representative of your plan or financial
institution for details.
MARKET TIMERS
The fund will consider the following factors to identify market timers:
shareholders who have (1) requested an exchange out of the fund within two weeks
of an earlier exchange request, (2) exchanged shares out of a fund more than
twice in a calendar quarter, (3) exchanged shares equal to at least $5 million,
or more than 1% of a fund's net assets, or (4) otherwise seem to follow a timing
pattern. Shares under common ownership or control are combined for purposes of
these limits.
PURCHASES IN KIND
You may, if we approve, purchase shares of the fund with securities that are
eligible for purchase by the fund (consistent with the fund's investment
restrictions, policies, and goal) and that have a value that is readily
ascertainable in accordance with the fund's valuation policies.
TELEPHONE TRANSACTIONS
We use reasonable procedures to confirm that telephone transaction requests are
genuine. We may be responsible if we do not follow these procedures. You are
responsible for losses resulting from fraudulent or unauthorized instructions
received over the telephone, provided we reasonably believe the instructions
were genuine. During times of unusual market activity, our phones may be busy
and you may experience a delay placing a telephone request.
VERIFICATION OF ACCOUNT STATEMENTS
You should contact us in writing regarding any errors or discrepancies within 60
days after the date of the statement confirming a transaction. The statement
will be deemed correct if we do not hear from you within those 60 days.
DISTRIBUTIONS
------------------------------------------------------------------------------
DISTRIBUTION POLICY
The fund generally pays you dividends from net investment income monthly and
distributes any net capital gains that it realizes annually. Dividends are
declared on each day NAV is calculated, except for bank holidays. Dividends
earned on weekends, holidays, and days when the fund's NAV is not calculated are
declared on the first day preceding these days that the fund's NAV is
calculated. Your investment generally earns dividends from the first business
day after we accept your purchase order.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Your dividends and capital gains distributions will be automatically reinvested
in additional shares of the fund or class, as applicable, unless you choose
otherwise. Your other options are to receive checks for these payments, or have
them credited to your bank account by Electronic Funds Transfer. To change the
current option for payment of dividends and capital gains distributions, please
call 1-800-733-2274.
TAXES
------------------------------------------------------------------------------
Generally, a municipal fund's distributions will be composed primarily of
tax-exempt income. However, the fund may make distributions of net investment
income and capital gains that are taxable to you.
TAXABLE DISTRIBUTIONS
Any net investment income and net short-term capital gains distributions you
receive are generally taxable as ordinary dividend income at your income tax
rate. Distributions of net capital gains are generally taxable as long-term
capital gains. This is generally true no matter how long you have owned your
shares and whether you reinvest your distributions or take them in cash. You may
also have to pay taxes when you exchange or sell shares if your shares have
increased in value since you bought them.
TAX-EXEMPT DISTRIBUTIONS
Exempt-interest dividends from municipal funds are generally exempt from federal
income taxes, but may be subject to state and local tax. Also, if you are
subject to the Alternative Minimum Tax, you may have to pay federal tax on a
substantial portion of your income from exempt-interest dividends.
RETURN OF CAPITAL
If your fund's distributions exceed its earnings and profits, all or a portion
of those distributions may be treated as a return of capital to you. A return of
capital may be treated as a sale of your shares. It may also reduce the cost
basis of your shares.
YEAR-END STATEMENT
To assist you in tax preparation, after the end of each calendar year, we send
you a statement of your fund's ordinary dividends and net capital gains
distributions (Form 1099).
BACKUP WITHHOLDING
By law, we must withhold 31% of your distributions and proceeds if (1) you are
subject to backup withholding or (2) you have not provided us with complete and
correct taxpayer information such as your Social Security number or tax
identification number.
Because everyone's tax situation is unique, you should consult your tax
professional for assistance.
RESERVED RIGHTS
-------------------------------------------------------------------------------
We reserve the right to:
o Reject any purchase request for any reason, including exchanges from other
Strong Funds. Generally, we do this if the purchase or exchange is
disruptive to the efficient management of a fund (due to the timing of the
investment or an investor's history of excessive trading).
o Change the minimum or maximum investment amounts.
o Close any account that does not meet minimum investment requirements. We
will give you notice and 60 days to increase your balance to the required
minimum.
o Waive the initial investment minimum at our discretion.
o Reject any purchase or redemption request that does not contain all
required documentation.
o Amend or terminate purchases in kind at any time.
o Where principles of fair treatment and fiduciary responsibility dictate:
o Delay sending out redemption proceeds for up to seven days.
o Suspend redemptions or postpone payments when the NYSE is closed for
any reason other than its usual weekend or holiday closings, when
trading is restricted by the SEC, or under any emergency circumstances.
o Make a redemption in kind (a payment in portfolio securities rather
than cash) if the amount you are redeeming is in excess of the
lesser of (1)$250,000 or (2) 1% of the fund's assets.
<PAGE>
FOR MORE INFORMATION
More information is available upon request at no charge, including:
SHAREHOLDER REPORTS: Additional information is available in the annual and
semi-annual report to shareholders. These reports contain a letter from
management, discuss recent market conditions, economic trends and investment
strategies that significantly affected your investment's performance during the
last fiscal year, and list portfolio holdings.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI contains more details about
investment policies and techniques. A current SAI is on file with the SEC and is
incorporated into this prospectus by reference. This means that the SAI is
legally considered a part of this prospectus even though it is not physically
contained within this prospectus.
To request information or to ask questions:
BY TELEPHONE BY OVERNIGHT DELIVERY
1-800-733-2274 Strong Institutional Client Services
100 Heritage Reserve
Menomonee Falls, WI 53051
BY MAIL
Strong Institutional Client Services ON THE INTERNET
P.O. Box 2936 View online or download documents:
Milwaukee, WI 53201-2936 SEC*: www.sec.gov
This prospectus is not an offer to sell securities in places other than the
United States and its territories.
*INFORMATION ABOUT A FUND (INCLUDING THE SAI) CAN ALSO BE REVIEWED AND COPIED AT
THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE ROOM IN WASHINGTON,
D.C. YOU MAY CALL THE COMMISSION AT 1-202-942-8090 FOR INFORMATION ABOUT THE
OPERATION OF THE PUBLIC REFERENCE ROOM. REPORTS AND OTHER INFORMATION ABOUT A
FUND ARE ALSO AVAILABLE FROM THE EDGAR DATABASE ON THE COMMISSION'S INTERNET
SITE AT WWW.SEC.GOV. YOU MAY OBTAIN A COPY OF THIS INFORMATION, AFTER PAYING A
DUPLICATING FEE, BY SENDING A WRITTEN REQUEST TO THE COMMISSION'S PUBLIC
REFERENCE SECTION, WASHINGTON, D.C. 20549-0102, OR BY SENDING AN ELECTRONIC
REQUEST TO THE FOLLOWING E-MAIL ADDRESS: [email protected].
Strong Municipal Bond Fund, a series of Strong Municipal Bond Fund, Inc.,
SEC file number: 811-4769
Strong Short-Term Municipal Bond Fund, a series of Strong Short-Term Municipal
Bond Fund, Inc., SEC file number: 811-6409
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
STRONG HIGH-YIELD MUNICIPAL BOND FUND, A SERIES FUND OF STRONG HIGH-YIELD
MUNICIPAL BOND FUND, INC. STRONG MUNICIPAL BOND FUND, A SERIES FUND OF STRONG
MUNICIPAL BOND FUND, INC. STRONG SHORT-TERM HIGH YIELD MUNICIPAL FUND, A SERIES
FUND OF STRONG MUNICIPAL FUNDS, INC. STRONG SHORT-TERM MUNICIPAL BOND FUND, A
SERIES FUND OF STRONG SHORT-TERM MUNICIPAL BOND FUND, INC.
P.O. Box 2936
Milwaukee, WI 53201
Telephone: 1-414-359-1400
Toll-Free: 1-800-368-3863
e-mail: [email protected]
web site: www.eStrong.com
Throughout this SAI, "the Fund" is intended to refer to each Fund listed above,
unless otherwise indicated. This SAI is not a Prospectus and should be read
together with the Prospectus for the Fund dated January 1, 2001. Requests for
copies of the Prospectus should be made by calling any number listed above. The
financial statements appearing in the Annual Report, which accompanies this SAI,
are incorporated into this SAI by reference.
January 1, 2001
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS PAGE
INVESTMENT RESTRICTIONS...........................................................................................4
INVESTMENT POLICIES AND TECHNIQUES................................................................................6
Strong High-Yield Municipal Bond Fund..........................................................................6
Strong Municipal Bond Fund.....................................................................................6
Strong Short-Term High Yield Municipal Fund....................................................................6
Strong Short-Term Municipal Bond Fund..........................................................................6
Borrowing......................................................................................................7
Cash Management................................................................................................7
Convertible Securities.........................................................................................7
Derivative Instruments.........................................................................................8
High-Yield (High-Risk) Securities.............................................................................14
Illiquid Securities...........................................................................................15
Lending of Portfolio Securities...............................................................................16
Maturity......................................................................................................16
Mortgage- and Asset-Backed Debt Securities....................................................................17
Municipal Obligations.........................................................................................18
Participation Interests.......................................................................................19
Repurchase Agreements.........................................................................................19
Reverse Repurchase Agreements and Mortgage Dollar Rolls.......................................................19
Sector Concentration..........................................................................................20
Short Sales...................................................................................................20
Standby Commitments...........................................................................................20
Taxable Securities............................................................................................20
Temporary Defensive Position..................................................................................20
U.S. Government Securities....................................................................................21
Variable- or Floating-Rate Securities.........................................................................21
When-Issued and Delayed-Delivery Securities...................................................................22
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities..........................................................22
DIRECTORS AND OFFICERS...........................................................................................23
PRINCIPAL SHAREHOLDERS...........................................................................................25
INVESTMENT ADVISOR...............................................................................................26
ADMINISTRATOR....................................................................................................30
DISTRIBUTOR......................................................................................................33
DISTRIBUTION PLAN................................................................................................33
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................................................................35
CUSTODIAN........................................................................................................38
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.....................................................................39
TAXES............................................................................................................41
DETERMINATION OF NET ASSET VALUE.................................................................................43
ADDITIONAL SHAREHOLDER INFORMATION...............................................................................43
ORGANIZATION.....................................................................................................47
SHAREHOLDER MEETINGS.............................................................................................48
PERFORMANCE INFORMATION..........................................................................................48
GENERAL INFORMATION..............................................................................................58
INDEPENDENT ACCOUNTANTS..........................................................................................59
LEGAL COUNSEL....................................................................................................59
APPENDIX A- DEFINITION OF BOND RATINGS...........................................................................60
APPENDIX B - ASSET COMPOSITION BY BOND RATINGS...................................................................67
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this SAI and its corresponding
Prospectus and, if given or made, such information or representations may not be
relied upon as having been authorized. This SAI does not constitute an offer to
sell securities.
<PAGE>
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT LIMITATIONS
The following are the Fund's fundamental investment limitations which, along
with the Fund's investment objective (which is described in the Prospectus),
cannot be changed without shareholder approval. To obtain approval, a majority
of the Fund's outstanding voting shares must vote for the change. A majority of
the Fund's outstanding voting securities means the vote of the lesser of: (1)
67% or more of the voting securities present, if more than 50% of the
outstanding voting securities are present or represented, or (2) more than 50%
of the outstanding voting shares.
Unless indicated otherwise below, the Fund:
1. May not with respect to 75% of its total assets, purchase the
securities of any issuer (except securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities) if, as a result,
(1) more than 5% of the Fund's total assets would be invested in the
securities of that issuer, or (2) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
2. May (1) borrow money from banks and (2) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 ("1940 Act") which may involve a borrowing, provided that
the combination of (1) and (2) shall not exceed 33 1/3% of the value of
the Fund's total assets (including the amount borrowed), less the
Fund's liabilities (other than borrowings), except that the Fund may
borrow up to an additional 5% of its total assets (not including the
amount borrowed) from a bank for temporary or emergency purposes (but
not for leverage or the purchase of investments). The Fund may also
borrow money from the other Strong Funds or other persons to the extent
permitted by applicable law.
3. May not issue senior securities, except as permitted under the 1940
Act.
4. May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase
and sale of portfolio securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's
total assets would be lent to other persons, except through (1)
purchases of debt securities or other debt instruments, or (2) engaging
in repurchase agreements.
7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Fund's total assets would be invested in the securities
of issuers, the principal business activities of which are in the same
industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prohibit the Fund from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objective, policies, and restrictions as the
Fund.
10. May not, under normal market conditions, invest less than 80% of its
net assets in municipal securities.
<PAGE>
NON-FUNDAMENTAL OPERATING POLICIES
The following are the Fund's non-fundamental operating policies, which may be
changed by the Fund's Board of Directors without shareholder approval.
Unless indicated otherwise below, the Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, or
unless it covers such short sale as required by the current rules and
positions of the Securities and Exchange Commission ("SEC") or its staff,
and provided that transactions in options, futures contracts, options on
futures contracts, or other derivative instruments are not deemed to
constitute selling securities short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts, options
on futures contracts, or other derivative instruments shall not constitute
purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more than
15% (10% with respect to a money fund) of its net assets would be invested
in illiquid securities, or such other amounts as may be permitted under the
1940 Act.
4. Purchase securities of other investment companies except in compliance with
the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end investment
management company with substantially the same fundamental investment
objective, restrictions and policies as the Fund.
6. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act and, in
accordance with Rule 4.5, will use futures or options on futures
transactions solely for bona fide hedging transactions (within the meaning
of the Commodity Exchange Act), provided, however, that the Fund may, in
addition to bona fide hedging transactions, use futures and options on
futures transactions if the aggregate initial margin and premiums required
to establish such positions, less the amount by which any such options
positions are in the money (within the meaning of the Commodity Exchange
Act), do not exceed 5% of the Fund's net assets.
7. Borrow money except (1) from banks or (2) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when
bank borrowings exceed 5% of its total assets.
8. Make any loans other than loans of portfolio securities, except through (1)
purchases of debt securities or other debt instruments, or (2) engaging in
repurchase agreements.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in the Fund's assets (I.E. due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not constitute a violation of
that restriction.
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
STRONG HIGH-YIELD MUNICIPAL BOND FUND
o Under normal market conditions the Fund invests at least 65% of its total
assets in medium- and lower-quality municipal obligations. Medium-quality
debt obligations are those rated in the fourth-highest category (E.G.,
bonds rated BBB by S&P).
o The Fund may also invest in debt obligations that are in default, but such
obligations are not expected to exceed 10% of the Fund's net assets.
o The Fund may also invest up to 20% of its net assets in taxable securities
of comparable quality to its investments in municipal securities, including
U.S. government securities, bank and corporate obligations, and short-term
fixed-income securities.
o When the Advisor determines that market conditions warrant a temporary
defensive position, the Fund may invest without limitation in cash and
short-term fixed-income securities.
STRONG MUNICIPAL BOND FUND
o Under normal market conditions, the Fund invests at least 85% of its net
assets in investment-grade debt obligations, which range from those in the
highest rating category to those rated in the fourth-highest rating
category (E.G., BBB or higher by S&P).
o The Fund may also invest up to 15% of its net assets in
non-investment-grade debt, otherwise known as high-yield (high-risk)
securities or "junk bonds" (E.G., those debt obligations rated as high as
BB and as low as C by S&P).
o The Fund may also invest up to 20% of its net assets in taxable securities
of comparable quality to its investments in municipal securities, including
U.S. government securities, bank and corporate obligations, and short-term
fixed-income securities.
o When the Advisor determines that market conditions warrant a temporary
defensive position, the Fund may invest without limitation in cash and
short-term fixed-income securities.
STRONG SHORT-TERM HIGH YIELD MUNICIPAL FUND
o Under normal market conditions, the Fund invests at least 80% of its total
assets in medium- and lower-quality municipal obligations. Medium-quality
debt obligations are those rated in the fourth-highest category (E.G.,
bonds rated BBB through C by S&P).
o The Fund may also invest in debt obligations that are in default, but such
obligations are not expected to exceed 10% of the Fund's net assets.
o The Fund may also invest up to 20% of its net assets in taxable securities
of comparable quality to its investments in municipal securities, including
U.S. government securities, bank and corporate obligations, and short-term
fixed-income securities.
o When the Advisor determines that market conditions warrant a temporary
defensive position, the Fund may invest without limitation in cash and
short-term fixed-income securities.
STRONG SHORT-TERM MUNICIPAL BOND FUND
o Under normal market conditions, the Fund invests at least 85% of its net
assets in investment-grade debt obligations, which range from those in the
highest rating category to those rated in the fourth-highest rating
category (E.G., BBB or higher by S&P).
o The Fund may also invest up to 15% of its net assets in
non-investment-grade debt, otherwise known as high-yield (high-risk)
securities or "junk bonds" (E.G., those debt obligations rated as high as
BB and as low as C by S&P).
o The Fund may also invest up to 20% of its net assets in taxable securities
of comparable quality to its investments in municipal securities, including
U.S. government securities, bank and corporate obligations, and short-term
fixed-income securities.
o When the Advisor determines that market conditions warrant a temporary
defensive position, the Fund may invest without limitation in cash and
short-term fixed-income securities.
The following information supplements the discussion of the Fund's investment
objective, policies, and techniques described in the Prospectus.
BORROWING
The Fund may borrow money from banks and make other investments or engage in
other transactions permissible under the 1940 Act that may be considered a
borrowing (such as mortgage dollar rolls and reverse repurchase agreements).
However, the Fund may not purchase securities when bank borrowings exceed 5% of
the Fund's total assets. Presently, the Fund only intends to borrow from banks
for temporary or emergency purposes.
The Fund has established a line-of-credit ("LOC") with certain banks by which it
may borrow funds for temporary or emergency purposes. A borrowing is presumed to
be for temporary or emergency purposes if it is repaid by the Fund within 60
days and is not extended or renewed. The Fund intends to use the LOC to meet
large or unexpected redemptions that would otherwise force the Fund to liquidate
securities under circumstances that are unfavorable to the Fund's remaining
shareholders. The Fund pays a commitment fee to the banks for the LOC.
CASH MANAGEMENT
The Fund may invest directly in cash and short-term fixed-income securities,
including, for this purpose, shares of one or more money market funds managed by
Strong Capital Management, Inc., the Fund's investment advisor ("Advisor")
(collectively, the "Strong Money Funds"). The Strong Money Funds seek current
income, a stable share price of $1.00, and daily liquidity. All money market
instruments can change in value when interest rates or an issuer's
creditworthiness change dramatically. The Strong Money Funds cannot guarantee
that they will always be able to maintain a stable net asset value of $1.00 per
share.
CONVERTIBLE SECURITIES
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into or exchanged for a specified amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest normally paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed,
converted, or exchanged. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock since they have
fixed income characteristics, and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. Most
convertible securities currently are issued by U.S. companies, although a
substantial Eurodollar convertible securities market has developed, and the
markets for convertible securities denominated in local currencies are
increasing.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security is called for redemption, the Fund will be required to
permit the issuer to redeem the security, convert it into the underlying common
stock, or sell it to a third party.
<PAGE>
DERIVATIVE INSTRUMENTS
IN GENERAL. The Fund may use derivative instruments for any lawful purpose
consistent with its investment objective such as hedging or managing risk.
Derivative instruments are commonly defined to include securities or contracts
whose values depend on (or "derive" from) the value of one or more other assets,
such as securities, currencies, or commodities. These "other assets" are
commonly referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to OPTIONS or FORWARD CONTRACTS. Options and forward
contracts are considered to be the basic "building blocks" of derivatives. For
example, forward-based derivatives include forward contracts, swap contracts, as
well as exchange-traded futures. Option-based derivatives include privately
negotiated, over-the-counter ("OTC") options (including caps, floors, collars,
and options on forward and swap contracts) and exchange-traded options on
futures. Diverse types of derivatives may be created by combining options or
forward contracts in different ways, and by applying these structures to a wide
range of underlying assets.
An option is a contract in which the "holder" (the buyer) pays a certain amount
("premium") to the "writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or sell to the writer (in a
"put") a specific asset at an agreed upon price at or before a certain time. The
holder pays the premium at inception and has no further financial obligation.
The holder of an option-based derivative generally will benefit from favorable
movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option-based derivative generally will receive fees or
premiums but generally is exposed to losses due to changes in the value of the
underlying asset.
A forward is a sales contract between a buyer (holding the "long" position) and
a seller (holding the "short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed price at the agreed future
date and the seller agrees to deliver the asset. The seller hopes that the
market price on the delivery date is less than the agreed upon price, while the
buyer hopes for the contrary. The change in value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset.
HEDGING. The Fund may use derivative instruments to protect against possible
adverse changes in the market value of securities held in, or are anticipated to
be held in, its portfolio. Derivatives may also be used to "lock-in" realized
but unrecognized gains in the value of its portfolio securities. Hedging
strategies, if successful, can reduce the risk of loss by wholly or partially
offsetting the negative effect of unfavorable price movements in the investments
being hedged. However, hedging strategies can also reduce the opportunity for
gain by offsetting the positive effect of favorable price movements in the
hedged investments. To the extent that a hedge matures prior to or after the
disposition of the investment subject to the hedge, any gain or loss on the
hedge will be realized earlier or later than any offsetting gain or loss on the
hedged investment.
MANAGING RISK. The Fund may also use derivative instruments to manage the risks
of its portfolio. Risk management strategies include, but are not limited to,
facilitating the sale of portfolio securities, managing the effective maturity
or duration of debt obligations in its portfolio, establishing a position in the
derivatives markets as a substitute for buying or selling certain securities, or
creating or altering exposure to certain asset classes, such as equity, debt, or
foreign securities. The use of derivative instruments may provide a less
expensive, more expedient or more specifically focused way to invest than
"traditional" securities (I.E., stocks or bonds) would.
EXCHANGE AND OTC DERIVATIVES. Derivative instruments may be exchange-traded or
traded in OTC transactions between private parties. Exchange-traded derivatives
are standardized options and futures contracts traded in an auction on the floor
of a regulated exchange. Exchange contracts are generally very liquid. The
exchange clearinghouse is the counterparty of every contract. Thus, each holder
of an exchange contract bears the credit risk of the clearinghouse (and has the
benefit of its financial strength) rather than that of a particular
counterparty. OTC transactions are subject to additional risks, such as the
credit risk of the counterparty to the instrument, and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
<PAGE>
RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments involves
risks and special considerations as described below. Risks pertaining to
particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as the risk of the
underlying assets, namely that the value of the underlying asset may go up or
down. Adverse movements in the value of an underlying asset can expose the Fund
to losses. Derivative instruments may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly the
ability of the Advisor to predict movements of the securities, currencies, and
commodity markets, which requires different skills than predicting changes in
the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed. The Advisor's decision to engage in a
derivative instrument will reflect its judgment that the derivative transaction
will provide value to the Fund and its shareholders and is consistent with the
Fund's objectives, investment limitations, and operating policies. In making
such a judgment, the Advisor will analyze the benefits and risks of the
derivative transaction and weigh them in the context of the Fund's entire
portfolio and investment objective.
(2) CREDIT RISK. The Fund will be subject to the risk that a loss may be
sustained as a result of the failure of a counterparty to comply with the terms
of a derivative instrument. The counterparty risk for exchange-traded derivative
instruments is generally less than for privately negotiated or OTC derivative
instruments, since generally a clearing agency, which is the issuer or
counterparty to each exchange-traded instrument, provides a guarantee of
performance. For privately negotiated instruments, there is no similar clearing
agency guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the derivative transaction and possibly other losses. The Fund will
enter into transactions in derivative instruments only with counterparties that
the Advisor reasonably believes are capable of performing under the contract.
(3) CORRELATION RISK. When a derivative transaction is used to completely hedge
another position, changes in the market value of the combined position (the
derivative instrument plus the position being hedged) result from an imperfect
correlation between the price movements of the two instruments. With a perfect
hedge, the value of the combined position remains unchanged for any change in
the price of the underlying asset. With an imperfect hedge, the values of the
derivative instrument and its hedge are not perfectly correlated. Correlation
risk is the risk that there might be imperfect correlation, or even no
correlation, between price movements of an instrument and price movements of
investments being hedged. For example, if the value of a derivative instruments
used in a short hedge (such as writing a call option, buying a put option, or
selling a futures contract) increased by less than the decline in value of the
hedged investments, the hedge would not be perfectly correlated. Such a lack of
correlation might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in which
these instruments are traded. The effectiveness of hedges using instruments on
indices will depend, in part, on the degree of correlation between price
movements in the index and price movements in the investments being hedged.
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity risk. Liquidity
risk is the risk that a derivative instrument cannot be sold, closed out, or
replaced quickly at or very close to its fundamental value. Generally, exchange
contracts are very liquid because the exchange clearinghouse is the counterparty
of every contract. OTC transactions are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. The Fund might be required by applicable regulatory requirement to
maintain assets as "cover," maintain segregated accounts, designate assets on
its books and records, and/or make margin payments when it takes positions in
derivative instruments involving obligations to third parties (I.E., instruments
other than purchased options). If the Fund was unable to close out its positions
in such instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired, matured, or was
closed out. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to sell or close out a position in an instrument prior
to expiration or maturity depends on the existence of a liquid secondary market
or, in the absence of such a market, the ability and willingness of the
counterparty to enter into a transaction closing out the position. Therefore,
there is no assurance that any derivatives position can be sold or closed out at
a time and price that is favorable to the Fund.
(5) LEGAL RISK. Legal risk is the risk of loss caused by the legal
unenforcibility of a party's obligations under the derivative. While a party
seeking price certainty agrees to surrender the potential upside in exchange for
downside protection, the party taking the risk is looking for a positive payoff.
Despite this voluntary assumption of risk, a counterparty that has lost money in
a derivative transaction may try to avoid payment by exploiting various legal
uncertainties about certain derivative products.
(6) SYSTEMIC OR "INTERCONNECTION" RISK. Interconnection risk is the risk that a
disruption in the financial markets will cause difficulties for all market
participants. In other words, a disruption in one market will spill over into
other markets, perhaps creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves, thus creating a large
interconnected web of financial obligations. This interconnectedness raises the
possibility that a default by one large dealer could create losses at other
dealers and destabilize the entire market for OTC derivative instruments.
GENERAL LIMITATIONS. The use of derivative instruments is subject to applicable
regulations of the SEC, the several options and futures exchanges upon which
they may be traded, the Commodity Futures Trading Commission ("CFTC"), and
various state regulatory authorities. In addition, the Fund's ability to use
derivative instruments may be limited by certain tax considerations.
The Fund has filed a notice of eligibility for exclusion from the definition of
the term "commodity pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures markets. In accordance with
Rule 4.5 of the regulations under the Commodity Exchange Act ("CEA"), the notice
of eligibility for the Fund includes representations that the Fund will use
futures contracts and related options solely for bona fide hedging purposes
within the meaning of CFTC regulations, provided that the Fund may hold other
positions in futures contracts and related options that do not qualify as a bona
fide hedging position if the aggregate initial margin deposits and premiums
required to establish these positions, less the amount by which any such futures
contracts and related options positions are "in the money," do not exceed 5% of
the Fund's net assets. Adherence to these guidelines does not limit the Fund's
risk to 5% of the Fund's assets.
The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging the Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of the Fund's assets, as defined under the 1940 Act, the SEC
has stated that the Fund may use coverage or designation of the Fund's assets.
To the extent required by SEC guidelines, the Fund will not enter into any such
transactions unless it owns either: (1) an offsetting ("covered") position in
securities, options, futures, or derivative instruments; or (2) cash or liquid
securities positions with a value sufficient at all times to cover its potential
obligations to the extent that the position is not "covered". The Fund will also
designate on its record liquid assets if required to do so by SEC and CFTC
regulations. Assets designated on the Fund's records cannot be sold while the
derivative position is open, unless they are replaced with similar assets. As a
result, the designation of a large portion of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
In some cases, the Fund may be required to maintain or limit exposure to a
specified percentage of its assets to a particular asset class. In such cases,
when the Fund uses a derivative instrument to increase or decrease exposure to
an asset class and is required by applicable SEC guidelines to designate liquid
assets on its books and records to secure its obligations under the derivative
instruments, the Advisor may, where reasonable in light of the circumstances,
measure compliance with the applicable percentage by reference to the nature of
the economic exposure created through the use of the derivative instrument and
not by reference to the nature of the exposure arising from the liquid assets
designated on the Fund's books and records (unless another interpretation is
specified by applicable regulatory requirements).
OPTIONS. The Fund may use options for any lawful purpose consistent with its
investment objective such as hedging or managing risk. An option is a contract
in which the "holder" (the buyer) pays a certain amount ("premium") to the
"writer" (the seller) to obtain the right, but not the obligation, to buy from
the writer (in a "call") or sell to the writer (in a "put") a specific asset at
an agreed upon price ("strike price" or "exercise price") at or before a certain
time ("expiration date"). The holder pays the premium at inception and has no
further financial obligation. The holder of an option will benefit from
favorable movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option will receive fees or premiums but is exposed to
losses due to changes in the value of the underlying asset. The Fund may buy or
write (sell) put and call options on assets, such as securities, currencies,
financial commodities, and indices of debt and equity securities ("underlying
assets") and enter into closing transactions with respect to such options to
terminate an existing position. Options used by the Fund may include European,
American, and Bermuda style options. If an option is exercisable only at
maturity, it is a "European" option; if it is also exercisable prior to
maturity, it is an "American" option. If it is exercisable only at certain
times, it is a "Bermuda" option.
The Fund may purchase (buy) and write (sell) put and call options underlying
assets and enter into closing transactions with respect to such options to
terminate an existing position. The purchase of a call option serves as a long
hedge, and the purchase of a put option serves as a short hedge. Writing put or
call options can enable the Fund to enhance income by reason of the premiums
paid by the purchaser of such options. Writing call options serves as a limited
short hedge because declines in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security at less than its market value or will be
obligated to purchase the security at a price greater than that at which the
security must be sold under the option. All or a portion of any assets used as
cover for OTC options written by the Fund would be considered illiquid to the
extent described under "Investment Policies and Techniques -- Illiquid
Securities." Writing put options serves as a limited long hedge because
decreases in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the historical
price volatility of the underlying investment, the current market value of the
underlying investment, the time remaining until expiration, the relationship of
the exercise price to the market price of the underlying investment, and general
market conditions.
The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases or writes an OTC option,
it relies on the counterparty to make or take delivery of the underlying
investment upon exercise of the option. Failure by the counterparty to do so
would result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with counter parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration. If the Fund were unable to effect a closing
transaction for an option it had purchased, it would have to exercise the option
to realize any profit.
The Fund may engage in options transactions on indices in much the same manner
as the options on securities discussed above, except the index options may serve
as a hedge against overall fluctuations in the securities market represented by
the relevant market index.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of the
attempted hedging.
SPREAD TRANSACTIONS. The Fund may use spread transactions for any lawful purpose
consistent with its investment objective such as hedging or managing risk. The
Fund may purchase covered spread options from securities dealers. Such covered
spread options are not presently exchange-listed or exchange-traded. The
purchase of a spread option gives the Fund the right to put, or sell, a security
that it owns at a fixed dollar spread or fixed yield spread in relation to
another security that the Fund does not own, but which is used as a benchmark.
The risk to the Fund in purchasing covered spread options is the cost of the
premium paid for the spread option and any transaction costs. In addition, there
is no assurance that closing transactions will be available. The purchase of
spread options will be used to protect the Fund against adverse changes in
prevailing credit quality spreads, I.E., the yield spread between high quality
and lower quality securities. Such protection is only provided during the life
of the spread option.
FUTURES CONTRACTS. The Fund may use futures contracts for any lawful purpose
consistent with its investment objective such as hedging or managing risk. The
Fund may enter into futures contracts, including, but not limited to, interest
rate and index futures. The Fund may also purchase put and call options, and
write covered put and call options, on futures in which it is allowed to invest.
The purchase of futures or call options thereon can serve as a long hedge, and
the sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a limited
short hedge, and writing covered put options on futures contracts can serve as a
limited long hedge, using a strategy similar to that used for writing covered
options in securities. The Fund may also write put options on futures contracts
while at the same time purchasing call options on the same futures contracts in
order to create synthetically a long futures contract position. Such options
would have the same strike prices and expiration dates. The Fund will engage in
this strategy only when the Advisor believes it is more advantageous to the Fund
than purchasing the futures contract.
To the extent required by regulatory authorities, the Fund only enters into
futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce the Fund's exposure to market or interest rate fluctuations, the Fund may
be able to hedge its exposure more effectively and perhaps at a lower cost
through the use of futures contracts.
An interest rate futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (E.G., debt security) for a specified price at a designated date,
time, and place. An index futures contract is an agreement pursuant to which the
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index futures contract was originally
written. Transaction costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures contract may be satisfied
by delivery or purchase, as the case may be, of the instrument or by payment of
the change in the cash value of the index. More commonly, futures contracts are
closed out prior to delivery by entering into an offsetting transaction in a
matching futures contract. Although the value of an index might be a function of
the value of certain specified securities, no physical delivery of those
securities is made. If the offsetting purchase price is less than the original
sale price, the Fund realizes a gain; if it is more, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If the Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures contract.
No price is paid by the Fund upon entering into a futures contract. Instead, at
the inception of a futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, "initial margin" consisting of cash and/or
other appropriate liquid assets in an amount generally equal to 10% or less of
the contract value. Margin must also be deposited when writing a call or put
option on a futures contract, in accordance with applicable exchange rules.
Unlike margin in securities transactions, initial margin on futures contracts
does not represent a borrowing, but rather is in the nature of a performance
bond or good-faith deposit that is returned to the Fund at the termination of
the transaction if all contractual obligations have been satisfied. Under
certain circumstances, such as periods of high volatility, the Fund may be
required by an exchange to increase the level of its initial margin payment, and
initial margin requirements might be increased generally in the future by
regulatory action.
Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather represents a
daily settlement of the Fund's obligations to or from a futures broker. When the
Fund purchases an option on a future, the premium paid plus transaction costs is
all that is at risk. In contrast, when the Fund purchases or sells a futures
contract or writes a call or put option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If the Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous. Purchasers and sellers of futures positions and options on
futures can enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Positions in futures and options on futures may be closed only on an exchange or
board of trade that provides a secondary market. The Fund intends to enter into
futures transactions only on exchanges or boards of trade where there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist for a particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or option on a futures contract
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to designate liquid assets on its books and
records.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
SWAP AGREEMENTS. The Fund may enter into interest rate, securities index,
commodity, or security and currency exchange rate swap agreements for any lawful
purpose consistent with the Fund's investment objective, such as for the purpose
of attempting to obtain or preserve a particular desired return or spread at a
lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return or spread. The Fund also may enter into swaps
in order to protect against an increase in the price of, or the currency
exchange rate applicable to, securities that the Fund anticipates purchasing at
a later date. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to several years.
In a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount" (I.E.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate) in a particular foreign currency, or in a "basket" of
securities representing a particular index. Swap agreements may include interest
rate caps, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates exceed a specified rate,
or "cap;" interest rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall
below a specified level, or "floor;" and interest rate collars, under which a
party sells a cap and purchases a floor, or vice versa, in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Fund, the obligations
of the parties would be exchanged on a "net basis." Consequently, the Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement ("net amount"). The
Fund's obligation under a swap agreement will be accrued daily (offset against
amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by designating liquid assets on the Fund's books
and records.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend, in part, on the Advisor's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Swap agreements may be considered to be
illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. Certain restrictions imposed on the Fund by the
Internal Revenue Code of 1986 ("IRC") may limit the Fund's ability to use swap
agreements. The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that the Advisor
reasonably believes are capable of performing under the swap agreements. If
there is a default by the other party to such a transaction, the Fund will have
to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In addition to the derivative
instruments and strategies described above and in the Prospectus, the Advisor
expects to discover additional derivative instruments and other hedging or risk
management techniques. The Advisor may utilize these new derivative instruments
and techniques to the extent that they are consistent with the Fund's investment
objective and permitted by the Fund's investment limitations, operating
policies, and applicable regulatory authorities.
HIGH-YIELD (HIGH-RISK) SECURITIES
IN GENERAL. Non-investment grade debt obligations ("lower-quality securities")
include (1) bonds rated as low as C by Moody's Investors ("Moody's"), Standard &
Poor's Ratings Group ("S&P"), and comparable ratings of other nationally
recognized statistical rating organizations ("NRSROs"); (2) commercial paper
rated as low as C by S&P, Not Prime by Moody's, and comparable ratings of other
NRSROs; and (3) unrated debt obligations of comparable quality. Lower-quality
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as predominantly
speculative and present a significant risk for loss of principal and interest.
The special risk considerations in connection with investments in these
securities are discussed below. Refer to the Appendix for a description of the
securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and comparable
unrated security market is relatively new and its growth has paralleled a long
economic expansion. As a result, it is not clear how this market may withstand a
prolonged recession or economic downturn. Such conditions could severely disrupt
the market for and adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality and comparable unrated
securities may experience financial stress and may not have sufficient revenues
to meet their payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by an
issuer of these securities is significantly greater than issuers of higher-rated
securities because such securities are generally unsecured and are often
subordinated to other creditors. Further, if the issuer of a lower-quality or
comparable unrated security defaulted, the Fund might incur additional expenses
to seek recovery. Periods of economic uncertainty and changes would also
generally result in increased volatility in the market prices of these
securities and thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so will
the Fund's net asset value. If the Fund experiences unexpected net redemptions
in such a market, it may be forced to liquidate a portion of its portfolio
securities without regard to their investment merits. Due to the limited
liquidity of lower-quality and comparable unrated securities (discussed below),
the Fund may be forced to liquidate these securities at a substantial discount.
Any such liquidation would force the Fund to sell the more liquid portion of its
portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities typically
contain redemption, call, or prepayment provisions that permit the issuer of
such securities containing such provisions to, at its discretion, redeem the
securities. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance them with
debt securities with a lower interest rate. To the extent an issuer is able to
refinance the securities, or otherwise redeem them, the Fund may have to replace
the securities with a lower yielding security, which would result in a lower
return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are designed to
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in lower-quality and
comparable unrated obligations will be more dependent on the Advisor's credit
analysis than would be the case with investments in investment-grade debt
obligations. The Advisor employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history, and the current trend of earnings. The Advisor continually
monitors the investments in the Fund's portfolio and carefully evaluates whether
to dispose of or to retain lower-quality and comparable unrated securities whose
credit ratings or credit quality may have changed.
LIQUIDITY AND VALUATION. The Fund may have difficulty disposing of certain
lower-quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all lower-quality and comparable unrated securities, there is no established
retail secondary market for many of these securities. The Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on the market
price of the security. As a result, the Fund's asset value and ability to
dispose of particular securities, when necessary to meet the Fund's liquidity
needs or in response to a specific economic event, may be impacted. The lack of
a liquid secondary market for certain securities may also make it more difficult
for the Fund to obtain accurate market quotations for purposes of valuing the
Fund's portfolio. Market quotations are generally available on many
lower-quality and comparable unrated issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. During periods of thin trading, the spread between bid and
asked prices is likely to increase significantly. In addition, adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of lower-quality and comparable unrated
securities, especially in a thinly traded market.
LEGISLATION. Legislation may be adopted, from time to time, designed to limit
the use of certain lower-quality and comparable unrated securities by certain
issuers. It is anticipated that if additional legislation is enacted or
proposed, it could have a material affect on the value of these securities and
the existence of a secondary trading market for the securities.
ILLIQUID SECURITIES
The Fund may invest in illiquid securities (I.E., securities that are not
readily marketable). However, the Fund will not acquire illiquid securities if,
as a result, the illiquid securities would comprise more than 15% (10% for money
market funds) of the value of the Fund's net assets (or such other amounts as
may be permitted under the 1940 Act). However, as a matter of internal policy,
the Advisor intends to limit the Fund's investments in illiquid securities to
10% of its net assets.
The Board of Directors of the Fund, or its delegate, has the ultimate authority
to determine, to the extent permissible under the federal securities laws, which
securities are illiquid for purposes of this limitation. Certain securities
exempt from registration or issued in transactions exempt from registration
under the Securities Act of 1933, as amended ("Securities Act"), such as
securities that may be resold to institutional investors under Rule 144A under
the Securities Act and Section 4(2) commercial paper, may be considered liquid
under guidelines adopted by the Fund's Board of Directors. The Board of
Directors of the Fund has delegated to the Advisor the day-to-day determination
of the liquidity of a security, although it has retained oversight and ultimate
responsibility for such determinations. The Board of Directors has directed the
Advisor to look to such factors as (1) the frequency of trades or quotes for a
security, (2) the number of dealers willing to purchase or sell the security and
number of potential buyers, (3) the willingness of dealers to undertake to make
a market in the security, (4) the nature of the security and nature of the
marketplace trades, such as the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer, (5) the likelihood
that the security's marketability will be maintained throughout the anticipated
holding period, and (6) any other relevant factors. The Advisor may determine
4(2) commercial paper to be liquid if (1) the 4(2) commercial paper is not
traded flat or in default as to principal and interest, (2) the 4(2) commercial
paper is rated in one of the two highest rating categories by at least two
NRSROs, or if only one NRSRO rates the security, by that NRSRO, or is determined
by the Advisor to be of equivalent quality, and (3) the Advisor considers the
trading market for the specific security taking into account all relevant
factors. With respect to any foreign holdings, a foreign security may be
considered liquid by the Advisor (despite its restricted nature under the
Securities Act) if the security can be freely traded in a foreign securities
market and all the facts and circumstances support a finding of liquidity.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced in accordance with pricing procedures
adopted by the Board of Directors of the Fund. If through the appreciation of
restricted securities or the depreciation of unrestricted securities the Fund
should be in a position where more than 15% of the value of its net assets are
invested in illiquid securities, including restricted securities that are not
readily marketable (except for 144A Securities and 4(2) commercial paper deemed
to be liquid by the Advisor), the Fund will take such steps as is deemed
advisable, if any, to protect the liquidity of the Fund's portfolio.
The Fund may sell OTC options and, in connection therewith, segregate assets or
cover its obligations with respect to OTC options written by the Fund. The
assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total value of its portfolio
securities to broker-dealers or institutional investors that the Advisor deems
qualified, but only when the borrower maintains with the Fund's custodian bank
collateral either in cash or money market instruments in an amount at least
equal to the market value of the securities loaned, plus accrued interest and
dividends, determined on a daily basis and adjusted accordingly. Although the
Fund is authorized to lend, the Fund does not presently intend to engage in
lending. In determining whether to lend securities to a particular broker-dealer
or institutional investor, the Advisor will consider, and during the period of
the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest, or other distributions on the securities loaned. The Fund will retain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest, or other
distributions, when retaining such rights is considered to be in the Fund's
interest.
MATURITY
The Fund's average portfolio maturity represents an average based on the actual
stated maturity dates of the debt securities in the Fund's portfolio, except
that (1) variable-rate securities are deemed to mature at the next interest-rate
adjustment date, (2) debt securities with put features are deemed to mature at
the next put-exercise date, (3) the maturity of mortgage-backed and certain
other asset-backed securities is determined on an "expected life" basis by the
Advisor, and (4) securities being hedged with futures contracts may be deemed to
have a longer maturity, in the case of purchases of futures contracts, and a
shorter maturity, in the case of sales of futures contracts, than they would
otherwise be deemed to have. In addition, a security that is subject to
redemption at the option of the issuer on a particular date ("call date"), which
is prior to the security's stated maturity, may be deemed to mature on the call
date rather than on its stated maturity date. The call date of a security will
be used to calculate average portfolio maturity when the Advisor reasonably
anticipates, based upon information available to it, that the issuer will
exercise its right to redeem the security. The average portfolio maturity of the
Fund is dollar-weighted based upon the market value of the Fund's securities at
the time of the calculation.
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The Fund may utilize puts which are provided on a "best efforts" or similar
basis (a "soft put") to shorten the maturity of securities when the Advisor
reasonably believes, based upon information available to it at the time the
security is acquired, that the issuer of the put has or will have both the
willingness and the resources or creditworthiness to repurchase the securities
at the time the Fund exercises the put. Failure of an issuer to honor a soft put
may, depending on the specific put, have a variety of possible consequences,
including (a) an automatic extension of the put to a later date, (b) the
elimination of the put, in which case the effective maturity of the security may
be its final maturity date, or (c) a default of the security, typically after
the passage of a cure period. Should either the exercise date of the put
automatically extend or the put right be eliminated as a result of the failure
to honor a soft put, the affected security may include a provision that adjusts
the interest rate on the security to an amount intended to result in the
security being priced at par. However, not all securities have rate reset
provisions or, if they have such provisions, the reset rate may be capped at a
rate that would prevent the security from being priced at par. Furthermore, it
is possible that the interest rate may reset to a level that increases the
interest expense to the issuer by an amount which negatively affects the credit
quality of the security.
MORTGAGE- AND ASSET-BACKED DEBT SECURITIES
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or are secured by and payable from, assets such as
motor vehicle installment sales contracts, other installment loan contracts,
home equity loans, leases of various types of property, and receivables from
credit card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any mortgage- and asset-backed security is difficult to
predict with precision and actual yield to maturity may be more or less than the
anticipated yield to maturity. The yield characteristics of mortgage- and
asset-backed securities differ from those of traditional debt securities. Among
the principal differences are that interest and principal payments are made more
frequently on mortgage-and asset-backed securities, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the Fund
purchases these securities at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing the yield to maturity.
Conversely, if the Fund purchases these securities at a discount, a prepayment
rate that is faster than expected will increase yield to maturity, while a
prepayment rate that is slower than expected will reduce yield to maturity.
Amounts available for reinvestment by the Fund are likely to be greater during a
period of declining interest rates and, as a result, are likely to be reinvested
at lower interest rates than during a period of rising interest rates.
Accelerated prepayments on securities purchased by the Fund at a premium also
impose a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is prepaid in full. The market for privately
issued mortgage- and asset-backed securities is smaller and less liquid than the
market for government-sponsored mortgage-backed securities.
While many mortgage- and asset-backed securities are issued with only one class
of security, many are issued in more than one class, each with different payment
terms. Multiple class mortgage- and asset-backed securities are issued for two
main reasons. First, multiple classes may be used as a method of providing
credit support. This is accomplished typically through creation of one or more
classes whose right to payments on the security is made subordinate to the right
to such payments of the remaining class or classes. Second, multiple classes may
permit the issuance of securities with payment terms, interest rates, or other
characteristics differing both from those of each other and from those of the
underlying assets. Examples include so-called "strips" (mortgage- and
asset-backed securities entitling the holder to disproportionate interests with
respect to the allocation of interest and principal of the assets backing the
security), and securities with class or classes having characteristics that
mimic the characteristics of non-mortgage- or asset-backed securities, such as
floating interest rates (I.E., interest rates which adjust as a specified
benchmark changes) or scheduled amortization of principal.
The Fund may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such market
value may be extremely volatile. With respect to certain stripped securities,
such as interest only and principal only classes, a rate of prepayment that is
faster or slower than anticipated may result in the Fund failing to recover all
or a portion of its investment, even though the securities are rated investment
grade.
Mortgage- and asset-backed securities backed by assets, other than as described
above, or in which the payment streams on the underlying assets are allocated in
a manner different than those described above may be issued in the future. The
Fund may invest in such securities if such investment is otherwise consistent
with its investment objectives and policies and with the investment restrictions
of the Fund.
MUNICIPAL OBLIGATIONS
IN GENERAL. Municipal obligations are debt obligations issued by or on behalf of
states, territories, and possessions of the United States and the District of
Columbia and their political subdivisions, agencies, and instrumentalities.
Municipal obligations generally include debt obligations issued to obtain funds
for various public purposes. Certain types of municipal obligations are issued
in whole or in part to obtain funding for privately operated facilities or
projects. Municipal obligations include general obligation bonds, revenue bonds,
industrial development bonds, notes, and municipal lease obligations. Municipal
obligations also include obligations, the interest on which is exempt from
federal income tax, that may become available in the future as long as the Board
of Directors of the Fund determines that an investment in any such type of
obligation is consistent with the Fund's investment objective.
BONDS AND NOTES. General obligation bonds are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of interest and
principal. Revenue bonds are payable only from the revenues derived from a
project or facility or from the proceeds of a specified revenue source.
Industrial development bonds are generally revenue bonds secured by payments
from and the credit of private users. Municipal notes are issued to meet the
short-term funding requirements of state, regional, and local governments.
Municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax and revenue anticipation notes, construction loan notes,
short-term discount notes, tax-exempt commercial paper, demand notes, and
similar instruments.
LEASE OBLIGATIONS. Municipal lease obligations may take the form of a lease, an
installment purchase, or a conditional sales contract. They are issued by state
and local governments and authorities to acquire land, equipment, and
facilities, such as state and municipal vehicles, telecommunications and
computer equipment, and other capital assets. The Fund may purchase these
obligations directly, or it may purchase participation interests in such
obligations. (See "Participation Interests" below.) Municipal leases are
generally subject to greater risks than general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet in order to issue municipal obligations. Municipal
leases may contain a covenant by the state or municipality to budget for,
appropriate, and make payments due under the obligation. Certain municipal
leases may, however, contain "non-appropriation" clauses, which provide that the
issuer is not obligated to make payments on the obligation in future years
unless funds have been appropriated for this purpose each year. Accordingly,
such obligations are subject to "non-appropriation" risk. While municipal leases
are secured by the underlying capital asset, it may be difficult to dispose of
any such asset in the event of non-appropriation or other default.
MORTGAGE-BACKED BONDS. The Fund's investments in municipal obligations may
include mortgage-backed municipal obligations, which are a type of municipal
security issued by a state, authority, or municipality to provide financing for
residential housing mortgages to target groups, generally low-income individuals
who are first-time home buyers. The Fund's interest, evidenced by such
obligations, is an undivided interest in a pool of mortgages. Payments made on
the underlying mortgages and passed through to the Fund will represent both
regularly scheduled principal and interest payments. The Fund may also receive
additional principal payments representing prepayments of the underlying
mortgages. While a certain level of prepayments can be expected, regardless of
the interest rate environment, it is anticipated that prepayment of the
underlying mortgages will accelerate in periods of declining interest rates. In
the event that the Fund receives principal prepayments in a declining
interest-rate environment, its reinvestment of such funds may be in bonds with a
lower yield.
PARTICIPATION INTERESTS
A participation interest gives the Fund an undivided interest in a municipal
obligation in the proportion that the Fund's participation interest bears to the
principal amount of the obligation. These instruments may have fixed, floating,
or variable rates of interest. The Fund will only purchase participation
interests if accompanied by an opinion of counsel that the interest earned on
the underlying municipal obligations will be tax-exempt. If the Fund purchases
unrated participation interests, the Board of Directors or its delegate must
have determined that the credit risk is equivalent to the rated obligations in
which the Fund may invest. Participation interests may be backed by a letter of
credit or guaranty of the selling institution. When determining whether such a
participation interest meets the Fund's credit quality requirements, the Fund
may look to the credit quality of any financial guarantor providing a letter of
credit or guaranty.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement, thereby, determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. The Advisor will monitor, on an ongoing basis, the value of
the underlying securities to ensure that the value always equals or exceeds the
repurchase price plus accrued interest. Repurchase agreements could involve
certain risks in the event of a default or insolvency of the other party to the
agreement, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities. Although no definitive creditworthiness
criteria are used, the Advisor reviews the creditworthiness of the banks and
non-bank dealers with which the Fund enters into repurchase agreements to
evaluate those risks. The Fund may, under certain circumstances, deem repurchase
agreements collateralized by U.S. government securities to be investments in
U.S. government securities.
REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR ROLLS
The Fund may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions as discussed below. In a reverse repurchase agreement, the Fund
would sell a security and enter into an agreement to repurchase the security at
a specified future date and price. The Fund generally retains the right to
interest and principal payments on the security. Since the Fund receives cash
upon entering into a reverse repurchase agreement, it may be considered a
borrowing. When required by guidelines of the SEC, the Fund will set aside
permissible liquid assets in a segregated account to secure its obligations to
repurchase the security.
The Fund may also enter into mortgage dollar rolls, in which the Fund would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While the Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would be compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the initial
sale. The Fund also could be compensated through the receipt of fee income
equivalent to a lower forward price. At the time the Fund would enter into a
mortgage dollar roll, it would set aside permissible liquid assets in a
segregated account to secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions may be considered
a borrowing by the Fund.
<PAGE>
The mortgage dollar rolls and reverse repurchase agreements entered into by the
Fund may be used as arbitrage transactions in which the Fund will maintain an
offsetting position in investment grade debt obligations or repurchase
agreements that mature on or before the settlement date on the related mortgage
dollar roll or reverse repurchase agreements. Since the Fund will receive
interest on the securities or repurchase agreements in which it invests the
transaction proceeds, such transactions may involve leverage. However, since
such securities or repurchase agreements will be high quality and will mature on
or before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, the Advisor believes that such arbitrage transactions do not present
the risks to the Fund that are associated with other types of leverage.
SECTOR CONCENTRATION
From time to time, the Fund may invest 25% or more of its assets in municipal
bonds that are related in such a way that an economic, business, or political
development or change affecting one such security could also affect the other
securities (for example, securities whose issuers are located in the same
state). Such related sectors may include hospitals, retirement centers,
pollution control, single family housing, multiple family housing, industrial
development, utilities, education, and general obligation bonds. The Fund also
may invest 25% or more of its assets in municipal bonds whose issuers are
located in the same state. Such states may include California, Pennsylvania,
Texas, New York, Florida, and Illinois.
SHORT SALES
The Fund may sell securities short (1) to hedge unrealized gains on portfolio
securities or (2) if it covers such short sale with liquid assets as required by
the current rules and positions of the SEC or its staff. Selling securities
short against the box involves selling a security that the Fund owns or has the
right to acquire, for delivery at a specified date in the future. If the Fund
sells securities short against the box, it may protect unrealized gains, but
will lose the opportunity to profit on such securities if the price rises.
STANDBY COMMITMENTS
In order to facilitate portfolio liquidity, the Fund may acquire standby
commitments from brokers, dealers, or banks with respect to 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 the Fund obtains standby commitments to evaluate those risks.
TAXABLE SECURITIES
From time to time when the Advisor deems it appropriate, the Fund may invest up
to 20% of its net assets on a temporary basis in taxable investments (of
comparable quality to their respective tax-free investments), which would
produce interest not exempt from federal income tax, including among others: (1)
obligations issued or guaranteed, as to principal and interest, by the United
States government, its agencies, or instrumentalities; (2) obligations of
financial institutions, including banks, savings and loan institutions,
insurance companies and mortgage banks, such as certificates of deposit,
bankers' acceptances, and time deposits; (3) corporate obligations, including
preferred stock and commercial paper, with equivalent credit quality to the
municipal securities in which the Fund may invest; and (4) repurchase agreements
with respect to any of the foregoing instruments. For example, the Fund may
invest in such taxable investments pending the investment or reinvestment of
such assets in municipal securities, in order to avoid the necessity of
liquidating portfolio securities to satisfy redemptions or pay expenses, or when
such action is deemed to be in the interest of the Fund's shareholders. In
addition, the Fund may invest up to 100% of its total assets in private activity
bonds, the interest on which is a tax-preference item for taxpayers subject to
the federal alternative minimum tax.
TEMPORARY DEFENSIVE POSITION
When the Advisor determines that market conditions warrant a temporary defensive
position, the Fund may invest without limitation in cash and short-term fixed
income securities, including U.S. government securities, commercial paper,
banker's acceptances, certificates of deposit, and time deposits.
U.S. GOVERNMENT SECURITIES
U.S. government securities are issued or guaranteed by the U.S. government or
its agencies or instrumentalities. Securities issued by the government include
U.S. Treasury obligations, such as Treasury bills, notes, and bonds. Securities
issued by government agencies or instrumentalities include obligations of the
following:
o the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full faith
and credit of the United States;
o the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
o the Federal National Mortgage Association, whose securities are supported
by the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
o the Student Loan Marketing Association, the Interamerican Development Bank,
and International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
VARIABLE- OR FLOATING-RATE SECURITIES
The Fund may invest in securities which offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (E.G., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes. The interest
rate on variable- or floating-rate securities is ordinarily determined by
reference to or is a percentage of a bank's prime rate, the 90-day U.S. Treasury
bill rate, the rate of return on commercial paper or bank certificates of
deposit, an index of short-term interest rates, or some other objective measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on seven days notice; in other
cases, the demand feature is exercisable at any time on 30 days notice or on
similar notice at intervals of not more than one year. Some securities which do
not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics. When considering the
maturity of any instrument which may be sold or put to the issuer or a third
party, the Fund may consider that instrument's maturity to be shorter than its
stated maturity.
Variable-rate demand notes include master demand notes which are obligations
that permit the Fund to invest fluctuating amounts, that may change daily
without penalty, pursuant to direct arrangements between the Fund, as lender,
and the borrower. The interest rates on these notes fluctuate from time to time.
The issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days notice to the
holders of such obligations. The interest rate on a floating-rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The interest rate on a
variable-rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be traded. There generally is
not an established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. Such obligations frequently are not rated by credit rating agencies
and, if not so rated, the Fund may invest in them only if the Advisor determines
that at the time of investment the obligations are of comparable quality to the
other obligations in which the Fund may invest. The Advisor, on behalf of the
Fund, will consider on an ongoing basis the creditworthiness of the issuers of
the floating- and variable-rate demand obligations in the Fund's portfolio.
The Fund will not invest more than 15% of its net assets (10% for money market
funds) in variable- and floating-rate demand obligations that are not readily
marketable (a variable- or floating-rate demand obligation that may be disposed
of on not more than seven days notice will be deemed readily marketable and will
not be subject to this limitation). In addition, each variable- or floating-rate
obligation must meet the credit quality requirements applicable to all the
Fund's investments at the time of purchase. When determining whether such an
obligation meets the Fund's credit quality requirements, the Fund may look to
the credit quality of the financial guarantor providing a letter of credit or
other credit support arrangement.
In determining the Fund's weighted average portfolio maturity, the Fund (except
money market funds) will consider a floating- or variable-rate security to have
a maturity equal to its stated maturity (or redemption date if it has been
called for redemption), except that it may consider (1) variable-rate securities
to have a maturity equal to the period remaining until the next readjustment in
the interest rate, unless subject to a demand feature, (2) variable-rate
securities subject to a demand feature to have a remaining maturity equal to the
longer of (a) the next readjustment in the interest rate or (b) the period
remaining until the principal can be recovered through demand, and (3)
floating-rate securities subject to a demand feature to have a maturity equal to
the period remaining until the principal can be recovered through demand.
Variable- and floating-rate securities generally are subject to less principal
fluctuation than securities without these attributes since the securities
usually trade at amortized cost following the readjustment in the interest rate.
Money market funds will determine the maturity of floating- and variable-rate
securities in accordance with Rule 2a-7 under the Investment Company Act of
1940.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or delayed-delivery basis. The
price of debt obligations so purchased, which may be expressed in yield terms,
generally is fixed at the time the commitment to purchase is made, but delivery
and payment for the securities take place at a later date. During the period
between the purchase and settlement, no payment is made by the Fund to the
issuer and no interest on the debt obligations accrues to the Fund. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Fund's other assets. While when-issued and
delayed-delivery securities may be sold prior to the settlement date, the Fund
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the Fund
makes the commitment to purchase these types of securities, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Fund does not believe that its net asset value will be adversely
affected by these types of securities purchases.
To the extent required by the SEC, the Fund will maintain cash and marketable
securities equal in value to commitments for when-issued or delayed-delivery
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date. When the time comes to pay for
when-issued or delayed-delivery securities, the Fund will meet its obligations
from then-available cash flow, sale of the securities held in the separate
account, described above, sale of other securities or, although it would not
normally expect to do so, from the sale of the when-issued or delayed-delivery
securities themselves (which may have a market value greater or less than the
Fund's payment obligation).
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may invest in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon and step-coupon securities are sold at a deep discount to
their face value. Pay-in-kind securities pay interest through the issuance of
additional securities. Because such securities do not pay current cash income,
the price of these securities can be volatile when interest rates fluctuate.
While these securities do not pay current cash income, federal income tax law
requires the holders of zero-coupon, step-coupon, and pay-in-kind securities to
include in income each year the portion of the original issue discount (or
deemed discount) and other non-cash income on such securities accruing that
year. In order to continue to qualify as a "regulated investment company" or
"RIC" under the IRC and avoid a certain excise tax, the Fund may be required to
distribute a portion of such discount and income and may be required to dispose
of other portfolio securities, which may occur in periods of adverse market
prices, in order to generate cash to meet these distribution requirements.
<PAGE>
DIRECTORS AND OFFICERS
The Board of Directors of the Fund is responsible for managing the Fund's
business and affairs. Directors and officers of the Fund, together with
information as to their principal business occupations during the last five
years, and other information are shown below. Each director who is deemed an
"interested person," as defined in the 1940 Act, is indicated by an asterisk
(*). Each officer and director holds the same position with the 27 registered
open-end management investment companies consisting of 60 mutual funds ("Strong
Funds"). The Strong Funds, in the aggregate, pay each Director who is not a
director, officer, or employee of the Advisor, or any affiliated company (a
"disinterested director") an annual fee of $101,000 plus $6,000 per Board
meeting, except for the Chairman of the Independent Directors Committee. The
Chairman of the Independent Directors Committee receives an annual fee of
$111,100 plus $6,600 per Board meeting. The Independent Directors have formed an
Audit Committee. For their services on the Audit Committee, each Independent
Director receives an additional $2,500 per meeting attended. The Chairman of the
Audit Committee receives $2,750 per meeting attended. In addition, each
disinterested director is reimbursed by the Strong Funds for travel and other
expenses incurred in connection with attendance at such meetings. Other officers
and directors of the Strong Funds receive no compensation or expense
reimbursement from the Strong Funds.
*RICHARD S. STRONG (DOB 5/12/42), Director and Chairman of the Board of the
Strong Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the Advisor,
which he founded in 1974. Since August 1985, Mr. Strong has been a Security
Analyst and Portfolio Manager of the Advisor. In October 1991, Mr. Strong also
became the Chairman of the Advisor. Mr. Strong is a Director of the Advisor. Mr.
Strong has been in the investment management business since 1967.
MARVIN E. NEVINS (DOB 7/9/18), Director of the Strong Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of Wisconsin
Centrifugal Inc., a foundry. From 1980 until 1981, Mr. Nevins was the Chairman
of the Wisconsin Association of Manufacturers & Commerce. He has been a Director
of A-Life Medical, Inc., San Diego, CA since 1996 and Surface Systems, Inc. (a
weather information company), St. Louis, MO since 1992. 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 and Carroll College.
WILLIE D. DAVIS (DOB 7/24/34), Director of the Strong Funds.
Mr. Davis has been Director of Alliance Bank since 1980, Sara Lee Corporation (a
food/consumer products company) since 1983, KMart Corporation (a discount
consumer products company) since 1985, Dow Chemical Company since 1988, MGM
Mirage (formerly MGM Grand, Inc.) (an entertainment/hotel company) since 1990,
Wisconsin Energy Corporation (formerly WICOR, Inc.) (a utility company) since
1990, Johnson Controls, Inc. (an industrial company) since 1992, Checker's Drive
In Restaurants, Inc. (formerly Rally's Hamburgers, Inc.) since 1994,
Metro-Goldwyn-Mayer, Inc. (an entertainment company) since 1998, and Bassett
Furniture Industries, Inc. since 1997. Mr. Davis has been a trustee of the
University of Chicago since 1980 and Marquette University since 1988. Since
1977, Mr. Davis has been President and Chief Executive Officer of All Pro
Broadcasting, Inc. Mr. Davis was a Director of the Fireman's Fund (an insurance
company) from 1975 until 1990.
STANLEY KRITZIK (DOB 1/9/30), Director and Chairman of the Audit Committee of
the Strong Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since 1962, a Director
of Aurora Health Care since 1987 and of Wisconsin Health Information Network
since November 1997, and a member of the Board of Governors of the Snowmass
Village Resort Association since October 1999. He was a Director of Health
Network Ventures, Inc. from 1992 until April 2000.
WILLIAM F. VOGT (DOB 7/19/47), Director and Chairman of the Independent
Directors Committee of the Strong Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc. since 1990.
From 1982 until 1990, he served as Executive Director of University Physicians
of the University of Colorado. Mr. Vogt is the Past President of the Medical
Group Management Association and a Fellow of the American College of Medical
Practice Executives.
<PAGE>
NEAL MALICKY (DOB 9/14/34), Director of the Strong Funds.
Mr. Malicky has been President Emeritus of Baldwin-Wallace College since July
2000. From July 1999 to June 2000, he served as Chancellor of Baldwin-Wallace
College. From 1981 to June 1999, he served as President of Baldwin-Wallace
College. He is a Trustee of Southwest Community Health Systems, Cleveland
Scholarship Program, and The National Conference for Community Justice and
President of the Reserve Homeowners Association. He is also the Past President
of the National Association of Schools and Colleges of the United Methodist
Church, the Past Chairperson of the Association of Independent Colleges and
Universities of Ohio, and the Past Secretary of the National Association of
Independent Colleges and Universities.
ELIZABETH N. COHERNOUR (DOB 4/26/50), Vice President and Secretary of the Strong
Funds.
Ms. Cohernour has been General Counsel and Senior Vice President of the Advisor
since January 2000. From February 1999 until January 2000, Ms. Cohernour acted
as Counsel to MFP Investors. From May 1988 to February 1999, Ms. Cohernour acted
as General Counsel and Vice President to Franklin Mutual Advisers, Inc.
CATHLEEN A. EBACHER (DOB 11/9/62), Vice President and Assistant Secretary of the
Strong Funds.
Ms. Ebacher has been Senior Counsel of the Advisor since December 1997. From
November 1996 until December 1997, Ms. Ebacher acted as Associate Counsel to the
Advisor. From May 1992 until November 1996, Ms. Ebacher acted as Corporate
Counsel to Carson Pirie Scott & Co., a department store retailer. From June 1989
until May 1992, Ms. Ebacher was an attorney for Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, s.c., a Milwaukee law firm.
RHONDA K. HAIGHT (DOB 11/13/64), Assistant Treasurer of the Strong Funds.
Ms. Haight has been Manager of the Mutual Fund Accounting Department of the
Advisor since January 1994. From May 1990 to January 1994, Ms. Haight was a
supervisor in the Mutual Fund Accounting Department of the Advisor. From June
1987 to May 1990, Ms. Haight was a Mutual Fund Accountant of the Advisor.
SUSAN A. HOLLISTER (DOB 7/8/68), Vice President and Assistant Secretary of the
Strong Funds.
Ms. Hollister has been Associate Counsel of the Advisor since July 1999. From
August 1996 until May 1999, Ms. Hollister completed a Juris Doctor at the
University of Wisconsin Law School. From December 1993 until August 1996, Ms.
Hollister was Deposit Operations Supervisor for First Federal Savings Bank, La
Crosse - Madison.
DENNIS A. WALLESTAD (DOB 11/3/62), Vice President of the Strong Funds.
Mr. Wallestad has been Director of Finance and Operations of the Advisor since
February 1999. From April 1997 to February 1999, Mr. Wallestad was the Chief
Financial Officer of The Ziegler Companies, Inc. From November 1996 to April
1997, Mr. Wallestad was the Chief Administrative Officer of Calamos Asset
Management, Inc. From July 1994 to November 1996, Mr. Wallestad was Chief
Financial Officer for Firstar Trust and Investments Group. From September 1991
to June 1994 and from September 1985 to August 1989, Mr. Wallestad was an Audit
Manager for Arthur Andersen & Co., LLP in Milwaukee. Mr. Wallestad completed a
Masters of Accountancy from the University of Oklahoma from September 1989 to
August 1991.
JOHN W. WIDMER (DOB 1/19/65), Treasurer of the Strong Funds.
Mr. Widmer has been Treasurer of the Advisor since April 1999. From May 1997 to
January 2000, Mr. Widmer was the Manager of Financial Management and Sales
Reporting Systems. From May 1992 to May 1997, Mr. Widmer was an Accounting and
Business Advisory Manager in the Milwaukee office of Arthur Andersen LLP. From
June 1987 to May 1992, Mr. Widmer was an accountant at Arthur Andersen LLP.
<PAGE>
THOMAS M. ZOELLER (DOB 2/21/64), Vice President of the Strong Funds.
Mr. Zoeller has been Senior Vice President and Chief Financial Officer of the
Advisor since February 1998 and a member of the Office of the Chief Executive
since November 1998. From October 1991 to February 1998, Mr. Zoeller was the
Treasurer and Controller of the Advisor, and from August 1991 to October 1991 he
was the Controller. From August 1989 to August 1991, Mr. Zoeller was the
Assistant Controller of the Advisor. From September 1986 to August 1989, Mr.
Zoeller was a Senior Accountant at Arthur Andersen & Co.
Except for Messrs. Nevins, Davis, Kritzik, Vogt, and Malicky, the address of all
of the above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard #1006, Naples, Florida 34108. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301. Mr. Kritzik's address
is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin 53202-0547. Mr.
Vogt's address is 55 North Holden Road, P.O. Box 7657, Avon, CO 81620. Mr.
Malicky's address is 518 Bishop Place, Berea, OH 44017.
Unless otherwise noted below, as of November 30, 2000, the officers and
directors of the Fund in the aggregate beneficially owned less than 1% of any
class of the Fund's then outstanding shares.
<TABLE>
<CAPTION>
<S> <C> <C>
FUND CLASS/SHARES PERCENT
---------------------------------------- ---------------------------------------------- ------------------------------
High-Yield Municipal Bond Advisor Class - 1,682 100%*
Municipal Bond Investor Class - 323,801 1.09%
Advisor Class - 1,736 100%*
Institutional Class - 1,718 100%*
Short-Term High Yield Municipal Investor Class - 143,991 1.09%
Advisor Class - 1,558 100%*
Short-Term Municipal Bond Investor Class - 949,087 2.81%
</TABLE>
* This represents the initial capital of the class of shares of the Fund.
PRINCIPAL SHAREHOLDERS
Unless otherwise noted below, as of November 30, 2000 no persons owned of record
or are known to own of record or beneficially more than 5% of any class of the
Fund's then outstanding shares.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND ADDRESS FUND/CLASS/SHARES PERCENT
-------------------------------------- ------------------------------------------------------- -----------------------
Charles Schwab & Co., Inc. High-Yield Municipal Bond - Investor Class - 19.67%
101 Montgomery Street 8,973,645
San Francisco, CA 94104-4122
----------------------------------------
Strong Capital Management, Inc. High Yield Municipal Bond - Advisor Class - 100%*
100 Heritage Reserve 1,682
Menomonee Falls, WI 53051-4400
----------------------------------------
Charles Schwab & Co., Inc. Municipal Bond - Investor Class - 3,305,113 11.13%
101 Montgomery Street
San Francisco, CA 94104-4122
----------------------------------------
Strong Capital Management, Inc. Municipal Bond - Advisor Class - 1,736 100%*
100 Heritage Reserve
Menomonee Falls, WI 53051-4400
----------------------------------------
Strong Capital Management, Inc. Municipal Bond - Institutional Class - 1,718 100%*
100 Heritage Reserve
Menomonee Falls, WI 53051-4400
----------------------------------------
Dean V. White Short-Term High Yield Municipal - Investor 20.22%
1000 E. 80th Place Ste. 700N Class - 2,666,236
Merrillville, IN 46410-5667
----------------------------------------
Charles Schwab & Co., Inc. Short-Term High Yield Municipal - Investor 13.54%
101 Montgomery Street Class - 1,784,388
San Francisco, CA 94104-4122
----------------------------------------
Walter H. Morris Short-Term High Yield Municipal - Investor 5.05%
3610 W. River Ridge Court Class - 666,186
Mequon, WI 53092-2754
----------------------------------------
Strong Capital Management, Inc. Short-Term High Yield Municipal - Advisor 100%*
100 Heritage Reserve Class - 1,558
Menomonee Falls, WI 53051-4400
----------------------------------------
Charles Schwab & Co., Inc. Short-Term Municipal Bond - Investor Class - 16.74%
101 Montgomery Street 5,644,892
San Francisco, CA 94104-4122
----------------------------------------
Skywest, Inc. Short-Term Municipal Bond - Investor Class - 6.53%
444 S. River Road 2,200,635
St. George, UT 84790-2085
----------------------------------------
DB Alex Brown LLC Short-Term Municipal Bond - Advisor Class - 100%*
P.O. Box 1346 100,000
Baltimore, MD 21203
----------------------------------------
Charles Schwab & Co., Inc. Short-Term Municipal Bond - Institutional Class - 100%
101 Montgomery Street 70,172
San Francisco, CA 94104-4122
--------------------------------------
</TABLE>
* This represents the initial capital of the class of shares of the Fund.
INVESTMENT ADVISOR
The Fund has entered into an Advisory Agreement with Strong Capital Management,
Inc. ("Advisor"). Mr. Strong controls the Advisor due to his stock ownership of
the Advisor. Mr. Strong is the Chairman and a Director of the Advisor, Ms.
Cohernour is Senior Vice President and General Counsel of the Advisor, Ms.
Ebacher is Senior Counsel of the Advisor, Ms. Haight is Manager of the Mutual
Fund Accounting Department of the Advisor, Ms. Hollister is Associate Counsel of
the Advisor, Mr. Wallestad is Senior Vice President of the Advisor, Mr. Widmer
is Treasurer of the Advisor, and Mr. Zoeller is Senior Vice President and Chief
Financial Officer of the Advisor. As of October 31, 2000, the Advisor had over
$45 billion under management.
The Advisory Agreement is required to be approved annually by either the Board
of Directors of the Fund or by vote of a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act). In either case, each annual
renewal must be approved by the vote of a majority of the Fund's directors who
are not parties to the Advisory Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement is terminable, without penalty, on 60 days
written notice by the Board of Directors of the Fund, by vote of a majority of
the Fund's outstanding voting securities, or by the Advisor, and will terminate
automatically in the event of its assignment.
Under the terms of the Advisory Agreement, the Advisor manages the Fund's
investments subject to the supervision of the Fund's Board of Directors. The
Advisor is responsible for investment decisions and supplies investment research
and portfolio management. The Advisory Agreement authorizes the Advisor to
delegate its investment advisory duties to a subadvisor in accordance with a
written agreement under which the subadvisor would furnish such investment
advisory services to the Advisor. In that situation, the Advisor continues to
have responsibility for all investment advisory services furnished by the
subadvisor under the subadvisory agreement. At its expense, the Advisor provides
office space and all necessary office facilities, equipment, and personnel for
servicing the investments of the Fund. The Advisor places all orders for the
purchase and sale of the Fund's portfolio securities at the Fund's expense.
Except for expenses assumed by the Advisor, as set forth above, or by Strong
Investments, Inc. ("Distributor") with respect to the distribution of the Fund's
shares, the Fund is responsible for all its other expenses, including, without
limitation, interest charges, taxes, brokerage commissions, and similar
expenses; expenses of issue, sale, repurchase, or redemption of shares; expenses
of registering or qualifying shares for sale with the states and the SEC;
expenses for printing and distribution of prospectuses to existing shareholders;
charges of custodians (including fees as custodian for keeping books and similar
services for the Fund), transfer agents (including the printing and mailing of
reports and notices to shareholders), registrars, auditing and legal services,
and clerical services related to recordkeeping and shareholder relations;
printing of stock certificates; fees for directors who are not "interested
persons" of the Advisor; expenses of indemnification; extraordinary expenses;
and costs of shareholder and director meetings.
On January 28, 2000, the Board of Directors of the Fund determined that certain
administrative services provided by the Advisor under the then current Advisory
Agreement should be provided pursuant to a separate administration agreement,
which would more clearly delineate the nature of the administrative services to
be provided and the cost to the Fund associated with those administrative
services. The Board of Directors also approved an amendment to the Advisory
Agreement ("Amended Advisory Agreement") that would remove all references in the
Advisory Agreement regarding the provision of administrative services and
approved the adoption of a separate Administration Agreement with the Advisor.
The specific terms of the new Administration Agreement are described below. The
advisory and administrative services that will be provided under the Amended
Advisory Agreement and the new Administration Agreement for the then existing
class of shares will be, at a minimum, the same services as those provided under
the then current Advisory Agreement for the then existing class of shares, the
quality of those services will remain the same, and the personnel performing
such services will remain the same.
As a result of these arrangements, the annual advisory fee paid by each Fund has
been reduced by 0.25% of the average daily net asset value of the Fund,
effective February 29, 2000. In no event will the fees under the Administrative
Agreement for the Investor Class and Advisor Class shares of these Funds exceed
0.25% of the average daily net asset value of the Fund. In no event will the
fees under the Administration Agreement for the Institutional Class shares of
the Municipal Bond and Short-Term Municipal Bond Funds exceed 0.02% of the
average daily net asset value of the Funds.
The Advisor Class shares of the Fund and the Institutional Class shares of the
Municipal Bond and Short-Term Municipal Bond Funds were not affected by the new
advisory and administrative arrangements because those classes of shares were
first offered for sale on February 29, 2000, and July 31, 2000, respectively.
As compensation for its advisory services, the Fund pays to the Advisor a
monthly management fee at the annual rate specified below of the average daily
net asset value of the Fund. From time to time, the Advisor may voluntarily
waive all or a portion of its management fee for the Fund.
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT ANNUAL RATE
FUND ANNUAL RATE PRIOR TO 2/29/00
---------------------------------------------- ------------------------------------- ----------------------------------
High-Yield Municipal Bond Fund 0.35% 0.60%
Municipal Bond Fund 0.35% 0.60%
Short-Term High Yield Municipal Fund 0.35% 0.60%
Short-Term Municipal Bond Fund 0.25% 0.50%
</TABLE>
<PAGE>
The Fund paid the following management fees for the time periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Management Fee
FISCAL YEAR ENDED MANAGEMENT FEE ($) WAIVER ($) AFTER WAIVER ($)
----------------- ------------------ ---------- ----------------
High-Yield Municipal Bond Fund
8/31/98 2,989,819 0 2,989,819
8/31/99 3,859,214 0 3,859,214
8/31/00 2,371,409 0 2,371,409
Municipal Bond Fund
8/31/98 1,525,080 0 1,525,080
8/31/99 2,168,588 0 2,168,588
8/31/00 1,427,897 0 1,427,897
Short-Term High Yield Municipal Fund
8/31/98(1) 187,415 164,129 23,286
8/31/99 880,013 458,998 421,015
8/31/00 658,698 89,790 568,908
Short-Term Municipal Bond Fund
8/31/98 942,734 0 942,734
8/31/99 1,379,237 0 1,379,237
8/31/00 1,049,689 0 1,049,689
</TABLE>
(1) For the nine-month fiscal period ended August 31, 1998.
The organizational expenses for the Fund which were advanced by the Advisor and
which will be reimbursed by the Fund over a period of not more than 60 months
from the Fund's date of inception are listed below.
FUND ORGANIZATIONAL EXPENSES
Short-Term High Yield Municipal Fund $6,104
The Advisory Agreement requires the Advisor to reimburse the Fund in the event
that the expenses and charges payable by the Fund in any fiscal year, including
the management fee but excluding taxes, interest, brokerage commissions, and
similar fees and to the extent permitted extraordinary expenses, exceed two
percent (2%) of the average net asset value of the Fund for such year, as
determined by valuations made as of the close of each business day of the year.
Reimbursement of expenses in excess of the applicable limitation will be made on
a monthly basis and will be paid to the Fund by reduction of the Advisor's fee,
subject to later adjustment, month by month, for the remainder of the Fund's
fiscal year. The Advisor may from time to time voluntarily absorb expenses for
the Fund in addition to the reimbursement of expenses in excess of applicable
limitations.
On July 12, 1994, the SEC filed an administrative action ("Order") against the
Advisor, Mr. Strong, and another employee of the Advisor in connection with
conduct that occurred between 1987 and early 1990. In re Strong/Corneliuson
Capital Management, Inc., et al. Admin. Proc. File No. 3-8411. The proceeding
was settled by consent without admitting or denying the allegations in the
Order. The Order found that the Advisor and Mr. Strong aided and abetted
violations of Section 17(a) of the 1940 Act by effecting trades between mutual
funds, and between mutual funds and Harbour Investments Ltd. ("Harbour"),
without complying with the exemptive provisions of SEC Rule 17a-7 or otherwise
obtaining an exemption. It further found that the Advisor violated, and Mr.
Strong aided and abetted violations of, the disclosure provisions of the 1940
Act and the Investment Advisers Act of 1940 by misrepresenting the Advisor's
policy on personal trading and by failing to disclose trading by Harbour, an
entity in which principals of the Advisor owned between 18 and 25 percent of the
voting stock. As part of the settlement, the respondents agreed to a censure and
a cease and desist order and the Advisor agreed to various undertakings,
including adoption of certain procedures and a limitation for six months on
accepting certain types of new advisory clients.
On June 6, 1996, the Department of Labor ("DOL") filed an action against the
Advisor for equitable relief alleging violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") in connection with cross trades that
occurred between 1987 and late 1989 involving certain pension accounts managed
by the Advisor. Contemporaneous with this filing, the Advisor, without admitting
or denying the DOL's allegations, agreed to the entry of a consent judgment
resolving all matters relating to the allegations. Reich v. Strong Capital
Management, Inc., (U.S.D.C. E.D. WI) ("Consent Judgment"). Under the terms of
the Consent Judgment, the Advisor agreed to reimburse the affected accounts a
total of $5.9 million. The settlement did not have any material impact on the
Advisor's financial position or operations.
The Fund, the Advisor, and the Distributor have adopted a Code of Ethics
("Code") that governs the personal trading activities of all "Access Persons" of
the Advisor and the Distributor. Access Persons include every director and
officer of the Advisor, the Distributor, and the investment companies managed by
the Advisor, including the Fund, as well as certain employees of the Advisor and
the Distributor who have access to information relating to the purchase or sale
of securities by the Advisor on behalf of accounts managed by it. The Code is
based upon the principal that such Access Persons have a fiduciary duty to place
the interests of the Fund and the Advisor's and Distributor's other clients
ahead of their own.
The Code requires Access Persons (other than Access Persons who are independent
directors of the investment companies managed by the Advisor, including the
Fund) to, among other things, preclear their securities transactions (with
limited exceptions, such as transactions in shares of mutual funds, direct
obligations of the U.S. government, and certain options on broad-based
securities market indexes) and to execute such transactions through the
Advisor's trading department. The Code, which applies to all Access Persons
(other than Access Persons who are independent directors of the investment
companies managed by the Advisor, including the Fund), includes a ban on
acquiring any securities in an initial public offering, other than a new
offering of a registered open-end investment company, and a prohibition from
profiting on short-term trading in securities. In addition, no Access Person may
purchase or sell any security that is contemporaneously being purchased or sold,
or to the knowledge of the Access Person, is being considered for purchase or
sale, by the Advisor on behalf of any mutual fund or other account managed by
it. Finally, the Code provides for trading "black out" periods of seven calendar
days during which time Access Persons may not trade in securities that have been
purchased or sold by any client for which the Advisor serves as an investment
advisor or subadvisor, renders investment advice, makes investment decisions, or
places orders through its Trading Department.
The Advisor provides investment advisory services for multiple clients through
different types of investment accounts (E.G., mutual funds, hedge funds,
separately managed accounts, etc.) who may have similar or different investment
objectives and investment policies (E.G., some accounts may have an active
trading strategy while others follow a "buy and hold" strategy). In managing
these accounts, the Advisor seeks to maximize each account's return, consistent
with the account's investment objectives and investment strategies. While the
Advisor's policies are designed to ensure that over time similarly-situated
clients receive similar treatment, to the maximum extent possible, because of
the range of the Advisor's clients, the Advisor may give advice and take action
with respect to one account that may differ from the advice given, or the timing
or nature of action taken, with respect to another account (the Advisor and its
principals and associates also may take such actions in their personal
securities transactions, to the extent permitted by and consistent with the
Code). For example, the Advisor may use the same investment style in managing
two accounts, but one may have a shorter-term horizon and accept high-turnover
while the other may have a longer-term investment horizon and desire to minimize
turnover. If the Advisor reasonably believes that a particular security may
provide an attractive opportunity due to short-term volatility but may no longer
be attractive on a long-term basis, the Advisor may cause accounts with a
shorter-term investment horizon to buy the security at the same time it is
causing accounts with a longer-term investment horizon to sell the security. The
Advisor takes all reasonable steps to ensure that investment opportunities are,
over time, allocated to accounts on a fair and equitable basis relative to the
other similarly-situated accounts and that the investment activities of
different accounts do not unfairly disadvantage other accounts.
<PAGE>
From time to time, the Advisor votes the shares owned by the Fund according to
its Statement of General Proxy Voting Policy ("Proxy Voting Policy"). The
general principal of the Proxy Voting Policy is to vote any beneficial interest
in an equity security prudently and solely in the best long-term economic
interest of the Fund and its beneficiaries considering all relevant factors and
without undue influence from individuals or groups who may have an economic
interest in the outcome of a proxy vote. Shareholders may obtain a copy of the
Proxy Voting Policy upon request from the Advisor.
The Advisor also provides two programs of custom portfolio management called
Strong Advisor and Strong Private Client. These programs are designed to
determine an investment approach that fits an investor's financial needs and
then provide the investor with a custom built portfolio of Strong Funds and
certain other unaffiliated mutual funds, in the case of Strong Advisor, and
Strong Funds, and individual stocks and bonds, in the case of Strong Private
Client, based on that allocation. The Advisor, on behalf of participants in the
Strong Advisor and Strong Private Client programs, may determine to invest a
portion of the program's assets in any one Strong Fund, which investment,
particularly in the case of a smaller Strong Fund, could represent a material
portion of the Fund's assets. In such cases, a decision to redeem the Strong
Advisor or Strong Private Client program's investment in a Fund on short notice
could raise a potential conflict of interest for the Advisor, between the
interests of participants in the Strong Advisor or Strong Private Client program
and of the Fund's other shareholders. In general, the Advisor does not expect to
direct the Strong Advisor or Strong Private Client program to make redemption
requests on short notice. However, should the Advisor determine this to be
necessary, the Advisor will use its best efforts and act in good faith to
balance the potentially competing interests of participants in the Strong
Advisor and Strong Private Client program and the Fund's other shareholders in a
manner the Advisor deems most appropriate for both parties in light of the
circumstances
From time to time, the Advisor may make available to third parties current and
historical information about the portfolio holdings of the Advisor's mutual
funds or other clients. Release may be made to entities such as fund ratings
entities, industry trade groups, and financial publications. Generally, the
Advisor will release this type of information only where it is otherwise
publicly available. This information may also be released where the Advisor
reasonably believes that the release will not be to the detriment of the best
interests of its clients.
For more complete information about the Advisor, including its services,
investment strategies, policies, and procedures, please call 1-800-368-3863 and
ask for a copy of Part II of the Advisor's Form ADV.
ADMINISTRATOR
The Fund has entered into a separate administration services agreement with the
Advisor in order to provide administration services to the Fund that previously
were provided under the Advisory Agreement ("Administration Agreement").
The Fund has adopted a Rule 18f-3 Plan under the 1940 Act ("Multi-Class Plan").
The Multi-Class Plan permits the Fund to have multiple classes of shares. The
Fund has entered into a separate administration agreement with the Advisor for
each of its separate class of shares ("Administration Agreement - Investor
Class," "Administration Agreement - Advisor Class," and "Administration
Agreement - Institutional Class") The Short-Term High Yield Municipal Fund and
High-Yield Municipal Bond Fund currently offer Investor Class and Advisor Class
shares and the Municipal Bond Fund and Short-Term Municipal Bond Fund offer
Investor Class, Advisor Class, and Institutional Class shares.
The fees received and the services provided by the Advisor, as administrator,
are in addition to fees received and services provided by the Advisor under the
Amended Advisory Agreement.
ADMINISTRATION AGREEMENT - INVESTOR CLASS
Under the Administration Agreement - Investor Class, the Advisor provides
certain administrative functions for the Investor Class shares of the Fund,
including: (i) authorizing expenditures and approving bills for payment on
behalf of the Fund and the Investor Class shares; (ii) supervising preparation
of the periodic updating of the Fund's registration statements with respect to
the Investor Class shares, including Investor Class prospectuses and statements
of additional information, for the purpose of filings with the SEC and state
securities administrators and monitoring and maintaining the effectiveness of
such filings, as appropriate; (iii) supervising preparation of shareholder
reports, notices of dividends, capital gains distributions and tax credits for
the Fund's Investor Class shareholders, and attending to routine correspondence
and other communications with individual Investor Class shareholders; (iv)
supervising the daily pricing of the Fund's investment portfolios and the
publication of the respective net asset values of the Investor Class shares of
the Fund, earnings reports and other financial data to the extent required by
the Fund's Advisory Agreement prior to the adoption of this Administration
Agreement; (v) monitoring relationships with organizations providing services to
the Fund, with respect to the Investor Class shares, including the Custodian,
DST and printers; (vi) supervising compliance by the Fund, with respect to the
Investor Class Shares, with recordkeeping requirements under the 1940 Act and
regulations thereunder, maintaining books and records for the Fund (other than
those maintained by the Custodian and the Fund's transfer agent) and preparing
and filing of tax reports other than the Fund's income tax returns; (vii)
answering shareholder inquiries regarding account status and history, the manner
in which purchases and redemptions of the Investor Class shares may be effected,
and certain other matters pertaining to the Investor Class shares; (viii)
assisting shareholders in designating and changing dividend options, account
designations and addresses; (ix) providing necessary personnel and facilities to
coordinate the establishment and maintenance of shareholder accounts and records
with the Fund's transfer agent; (x) transmitting shareholders' purchase and
redemption orders to the Fund's transfer agent; (xi) arranging for the wiring or
other transfer of funds to and from shareholder accounts in connection with
shareholder orders to purchase or redeem Investor Class shares; (xii) verifying
purchase and redemption orders, transfers among and changes in
shareholder-designated accounts; (xiii) informing the distributor of the gross
amount of purchase and redemption orders for Investor Class shares; and (xiv)
providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law. For its services
for the Investor Class shares of the Fund under the Administration Agreement -
Investor Class, the Advisor receives a monthly fee from the Fund at the annual
rate of 0.25% of the Fund's average daily net assets attributable to the
Investor Class shares.
ADMINISTRATION AGREEMENT - ADVISOR CLASS
Under the Administration Agreement - Advisor Class, the Advisor provides certain
administrative functions for the Advisor Class shares of the Fund, including:
(i) authorizing expenditures and approving bills for payment on behalf of the
Fund and the Advisor Class shares; (ii) supervising preparation of the periodic
updating of the Fund's registration statements with respect to the Advisor Class
shares, including Advisor Class prospectuses and statements of additional
information, for the purpose of filings with the SEC and state securities
administrators and monitoring and maintaining the effectiveness of such filings,
as appropriate; (iii) supervising preparation of shareholder reports, notices of
dividends, capital gains distributions and tax credits for the Fund's Advisor
Class shareholders, and attending to routine correspondence and other
communications with individual shareholders; (iv) supervising the daily pricing
of the Fund's investment portfolios and the publication of the respective net
asset values of the Advisor Class shares of the Fund, earnings reports and other
financial data to the extent required by the Fund's Advisory Agreement prior to
the adoption of this Administration Agreement; (v) monitoring relationships with
organizations providing services to the Fund, with respect to the Advisor Class
shares, including the Custodian, DST and printers; (vi) supervising compliance
by the Fund, with respect to the Advisor Class shares, with recordkeeping
requirements under the 1940 Act and regulations thereunder, maintaining books
and records for the Fund (other than those maintained by the Custodian and the
Fund's transfer agent) and preparing and filing of tax reports other than the
Fund's income tax returns; (vii) providing necessary personnel and facilities to
coordinate the establishment and maintenance of shareholder accounts and records
with the Fund's transfer agent; (viii) transmitting shareholders' purchase and
redemption orders to the Fund's transfer agent; (ix) arranging for the wiring or
other transfer of funds to and from shareholder accounts in connection with
shareholder orders to purchase or redeem Advisor Class shares; (x) verifying
purchase and redemption orders, transfers among and changes in
shareholder-designated accounts; (xi) informing the distributor of the gross
amount of purchase and redemption orders for Advisor Class shares; and (xii)
providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law. For its services
for the Advisor Class shares of the Fund under the Administration Agreement -
Advisor Class, the Advisor receives a monthly fee from the Fund at the annual
rate of 0.25% of the Fund's average daily net assets attributable to the Advisor
Class shares.
ADMINISTRATION AGREEMENT - INSTITUTIONAL CLASS
Under the Administration Agreement - Institutional Class, the Advisor provides
certain administrative functions for the Institutional Class shares of the Fund,
including: (i) authorizing expenditures and approving bills for payment on
behalf of the Fund and the Institutional Class shares; (ii) supervising
preparation of the periodic updating of the Fund's registration statements with
respect to the Institutional Class shares, including Institutional Class
prospectuses and statements of additional information, for the purpose of
filings with the SEC and state securities administrators and monitoring and
maintaining the effectiveness of such filings, as appropriate; (iii) supervising
preparation of shareholder reports, notices of dividends, capital gains
distributions and tax credits for the Fund's Institutional Class shareholders,
and attending to routine correspondence and other communications with individual
shareholders; (iv) supervising the daily pricing of the Fund's investment
portfolios and the publication of the respective net asset values of the
Institutional Class shares of the Fund, earnings reports and other financial
data to the extent required by the Fund's Advisory Agreement prior to the
adoption of this Administration Agreement; (v) monitoring relationships with
organizations providing services to the Fund, with respect to the Institutional
Class shares, including the Custodian, DST and printers; (vi) supervising
compliance by the Fund, with respect to the Institutional Class shares, with
recordkeeping requirements under the 1940 Act and regulations thereunder,
maintaining books and records for the Fund (other than those maintained by the
Custodian and the Fund's transfer agent) and preparing and filing of tax reports
other than the Fund's income tax returns; (vii) transmitting shareholders'
purchase and redemption orders to the Fund's transfer agent; (viii) arranging
for the wiring or other transfer of funds to and from shareholder accounts in
connection with shareholder orders to purchase or redeem Institutional Class
shares; (ix) verifying purchase and redemption orders, transfers among and
changes in shareholder-designated accounts; (x) informing the distributor of the
gross amount of purchase and redemption orders for Institutional Class shares;
and (xi) providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law. For its services
for the Institutional Class shares of the Fund under the Administration
Agreement - Institutional Class, the Advisor receives a monthly fee from the
Fund at the annual rate of 0.02% of the Fund's average daily net assets
attributable to the Institutional Class shares.
The fund paid the following administrative fees for the time periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ADMINISTRATIVE FEE
FISCAL YEAR ENDED ADMINISTRATIVE FEE ($) WAIVER($) AFTER WAIVER ($)
------------------------------- ---------------------------- ---------------------------- ----------------------------
High-Yield Municipal Bond Fund - Investor Class
8/31/00 562,379 0 562,379
High-Yield Municipal Bond Fund - Advisor Class(1)
8/31/00 19 0 19
Municipal Bond Fund - Investor Class
8/31/00 349,719 0 349,719
Municipal Bond Fund - Advisor Class(1)
8/31/00 19 0 19
Municipal Bond Fund - Institutional Class(2)
8/31/00 0 0 0
Short-Term High Yield Municipal Fund - Investor Class
8/31/00 156,232 25,727 130,505
Short-Term High Yield Municipal Fund - Advisor Class(1)
8/31/00 18 3 15
Short-Term Municipal Bond Fund - Investor Class
8/31/00 353,088 0 353,088
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Short-Term Municipal Bond Fund - Advisor Class(1)
8/31/00 1,190 0 1,190
Short-Term Municipal Bond Fund - Institutional Class(2)
8/31/00 0 0 0
</TABLE>
(1) For the six-month fiscal period ended August 31, 2000.
(2) For the one-month fiscal period ended August 31, 2000.
DISTRIBUTOR
Under a Distribution Agreement with the Fund ("Distribution Agreement"), Strong
Investments, Inc. ("Distributor"), P.O. Box 2936, Milwaukee, WI 53201, acts as
underwriter of the Fund's shares. Mr. Strong is the Chairman and Director of the
Distributor. The Distribution Agreement provides that the Distributor will use
its best efforts to distribute the Fund's shares. The Distribution Agreement
further provides that the Distributor will bear the additional costs of printing
prospectuses and shareholder reports that are used for selling purposes, as well
as advertising and any other costs attributable to the distribution of the
Fund's shares. The Distributor is a direct subsidiary of the Advisor and
controlled by the Advisor and Richard S. Strong. The Distribution Agreement is
subject to the same termination and renewal provisions as are described above
with respect to the Advisory Agreement.
The shares of the Fund are offered on a "no-load" basis, which means that no
sales commissions are charged on the purchases of those shares.
Pursuant to a distribution plan adopted on behalf of the Advisor Class shares of
the Fund in accordance to Rule 12b-1 ("Rule 12b-1 Plan") under the 1940 Act, the
Distribution Agreement for the Advisor Class shares of the Fund authorizes the
Fund to bear the costs of preparing and mailing prospectuses and shareholder
reports that are used for selling purposes as well as advertising and other
costs attributable to the distribution of those shares. Under the Distribution
Agreement for the Advisor Class shares of the Fund, payments to the Distributor
under the Rule 12b-1 Plan are limited to payment at an annual rate equal to
0.25% of average daily net assets attributable to Advisor Class shares.
From time to time, the Distributor may hold in-house sales incentive programs
for its associated persons under which these persons may receive compensation
awards in connection with the sale and distribution of the Fund's shares. These
awards may include items such as, but not limited to, cash, gifts, merchandise,
gift certificates, and payment of travel expenses, meals, and lodging. Any
in-house sales incentive program will be conducted in accordance with the rules
of the National Association of Securities Dealers, Inc. ("NASD").
THE FOLLOWING SECTION APPLIES TO THE ADVISOR CLASS SHARES ONLY.
DISTRIBUTION PLAN
The Fund has adopted a Rule 12b-1 Plan pursuant to Rule 12b-1 under the 1940
Act, on behalf of the Advisor Class shares of the Fund. The Rule 12b-1 Plan
authorizes the Fund, with respect to its Advisor Class shares, to make payments
to the Distributor in connection with the distribution of its Advisor Class
shares at an annual rate of up to 1.00% of the Fund's average daily net assets
attributable to its Advisor Class shares. However, under the Distribution
Agreement for the Advisor Class shares of the Fund, payments to the Distributor
under the Rule 12b-1 Plan are limited to payment at an annual rate equal of
0.25% of average daily net assets attributable to Advisor Class shares. Amounts
received by the Distributor under the Distribution Agreement for the Advisor
Class shares of the Fund may be spent by the Distributor for any activities or
expenses primarily intended to result in the sale of Advisor Class shares or the
servicing of shareholders, including, but not limited to: compensation to and
expenses, including overhead and telephone expenses, of employees of the
Distributor who engage in or support the distribution of Advisor Class shares;
printing and distribution of prospectuses, statements of additional information
and any supplements thereto, and shareholder reports to persons other than
existing shareholders; preparation, printing and distribution of
<PAGE>
sales literature and advertising materials; holding seminars and sales meetings
with wholesale and retail sales personnel, which are designed to promote the
distribution of Advisor Class shares; and compensation of broker-dealers. The
Distributor may determine the services to be provided by the broker-dealer to
shareholders in connection with the sale of Advisor Class shares. All or any
portion of the compensation paid to the Distributor may be reallocated by the
Distributor to broker-dealers who sell Advisor Class shares.
The Rule 12b-1 Plan is known as a "compensation" plan because payments under the
Rule 12b-1 Plan are made for services rendered to the Fund with respect to its
Advisor Class shares regardless of the level of expenditures by the Distributor.
The Board of Directors of the Fund, however, will take into account any
expenditures made by the Distributor for purposes of both their quarterly review
of the operation of the Rule 12b-1 Plan and in connection with their annual
consideration of the Rule 12b-1 Plan's renewal.
The Rule 12b-1 Plan will continue in effect from year to year, provided that
such continuance is approved annually by a vote of the Board of Directors of the
Fund, and a majority of the Directors of the Fund who are not interested persons
(as defined in the 1940 Act) of the Fund and have no direct or indirect
financial interest in the operation of the Rule 12b-1 Plan or any agreements
related to the Rule 12b-1 Plan ("Rule 12b-1 Independent Directors"), cast in
person at a meeting called for the purpose of voting on the Rule 12b-1 Plan. The
Rule 12b-1 Plan may not be amended to increase materially the amount to be spent
for the services described in the Rule 12b-1 Plan without the approval of the
Advisor Class shareholders of the Fund, and all material amendments to the Rule
12b-1 Plan must also be approved by the Directors in the manner described above.
The Rule 12b-1 Plan may be terminated at any time, without payment of a penalty,
by a vote of a majority of the Rule 12b-1 Independent Directors, or by a vote of
a majority of the outstanding voting securities of the Fund (as defined in the
1940 Act) on not more than 60 days' written notice to any other party to the
Rule 12b-1 Plan. The Board of Directors of the Fund and the Rule 12b-1
Independent Directors have determined that, in their judgment, there is a
reasonable likelihood that the Rule 12b-1 Plan will benefit the Fund and its
Advisor Class shareholders. Under the Rule 12b-1 Plan, the Distributor will
provide the Board of Directors of the Fund and the Directors will review, at
least quarterly, a written report of the amounts expended under the Rule 12b-1
Plan and the purposes for which such expenditures were made. As part of their
quarterly review of the Rule 12b-1 Plan, the Directors will consider the
continued appropriateness of the Rule 12b-1 Plan and the level of compensation
provided thereunder.
The Fund paid the following distribution and service fees under its Rule 12b-1
Plan:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FISCAL YEAR ENDED RETAINED BY PAID TO DEALERS
PAID BY FUND DISTRIBUTORS(1)
High-Yield Municipal Bond Fund
8/31/00(1) 19 18 1
Municipal Bond Fund
8/31/00(1) 19 19 0
Short-Term High Yield Municipal Fund
8/31/00(1) 18 18 0
Short-Term Municipal Bond Fund
8/31/00(1) 1,190 1,190 0
</TABLE>
---------------------------------
(1) For the six-month fiscal period ended August 31, 2000.
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities for the Fund
and for the placement of the Fund's investment business and the negotiation of
the commissions to be paid on such transactions. It is the policy of the
Advisor, to seek the best execution at the best security price available with
respect to each transaction, in light of the overall quality of brokerage and
research services provided to the Advisor, or the Fund. In OTC transactions,
orders are placed directly with a principal market maker unless it is believed
that a better price and execution can be obtained using a broker. The best price
to the Fund means the best net price without regard to the mix between purchase
or sale price and commissions, if any. In selecting broker-dealers and in
negotiating commissions, the Advisor considers a variety of factors, including
best price and execution, the full range of brokerage services provided by the
broker, as well as its capital strength and stability, and the quality of the
research and research services provided by the broker. Brokerage will not be
allocated based on the sale of any shares of the Strong Funds.
The Advisor has adopted procedures that provide generally for the Advisor to
seek to bunch orders for the purchase or sale of the same security for the Fund,
other mutual funds managed by the Advisor, and other advisory clients
(collectively, "client accounts"). The Advisor will bunch orders when it deems
it to be appropriate and in the best interest of the client accounts. When a
bunched order is filled in its entirety, each participating client account will
participate at the average share price for the bunched order on the same
business day, and transaction costs shall be shared pro rata based on each
client's participation in the bunched order. When a bunched order is only
partially filled, the securities purchased will be allocated on a pro rata basis
to each client account participating in the bunched order based upon the initial
amount requested for the account, subject to certain exceptions, and each
participating account will participate at the average share price for the
bunched order on the same business day.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment advisor, under certain circumstances, to cause an account to pay a
broker or dealer a commission for effecting a transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
the transaction in recognition of the value of the brokerage and research
services provided by the broker or dealer. Brokerage and research services
include (1) furnishing advice as to the value of securities, the advisability of
investing in, purchasing, or selling securities, and the availability of
securities or purchasers or sellers of securities; (2) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement, the Advisor may cause
the Fund to pay a broker, who provides brokerage and research services to the
Advisor, a commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting the transaction. The
Advisor believes it is important to its investment decision-making process to
have access to independent research. The Advisory Agreement provides that such
higher commissions will not be paid by the Fund unless (1) the Advisor
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Advisor's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion; (2) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal laws, and the
Advisory Agreement; and (3) in the opinion of the Advisor, the total commissions
paid by the Fund will be reasonable in relation to the benefits to the Fund over
the long term. The investment management fee paid by the Fund under the Advisory
Agreement is not reduced as a result of the Advisor's receipt of research
services. To request a copy of the Advisor's Soft Dollar Practices, please call
1-800-368-3863.
The Advisor may engage in "step-out" and "give-up" brokerage transactions
subject to best price and execution. In a step-out or give-up trade, an
investment advisor directs trades to a broker-dealer who executes the
transactions while a second broker-dealer clears and settles part or all of the
transaction. The first broker-dealer then shares part of its commission with the
second broker-dealer. The Advisor engages in step-out and give-up transactions
primarily (1) to satisfy directed brokerage arrangements of certain of its
client accounts and/or (2) to pay commissions to broker-dealers who supply
research or analytical services.
Generally, research services provided by brokers may include information on the
economy, industries, groups of securities, individual companies, statistical
information, accounting and tax law interpretations, political developments,
legal developments affecting portfolio securities, technical market action,
pricing and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. Such
research services are received primarily in the form of written reports,
telephone contacts, and personal meetings with security analysts. In addition,
such research services may be provided in the form of access to various
computer-generated data, computer hardware and software, and meetings arranged
with corporate and industry spokespersons, economists, academicians, and
government representatives. In some cases, research services are generated by
third parties but are provided to the Advisor by or through brokers. Such
brokers may pay for all or a portion of computer hardware and software costs
relating to the pricing of securities.
Where the Advisor itself receives both administrative benefits and research and
brokerage services from the services provided by brokers, it makes a good faith
allocation between the administrative benefits and the research and brokerage
services, and will pay for any administrative benefits with cash. In making good
faith allocations between administrative benefits and research and brokerage
services, a conflict of interest may exist by reason of the Advisor's allocation
of the costs of such benefits and services between those that primarily benefit
the Advisor and those that primarily benefit the Fund and other advisory
clients.
From time to time, the Advisor may purchase new issues of securities for the
Fund in a fixed income price offering. In these situations, the seller may be a
member of the selling group that will, in addition to selling the securities to
the Fund and other advisory clients, provide the Advisor with research. The NASD
has adopted rules expressly permitting these types of arrangements under certain
circumstances. Generally, the seller will provide research "credits" in these
situations at a rate that is higher than that which is available for typical
secondary market transactions. These arrangements may not fall within the safe
harbor of Section 28(e).
At least annually, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Fund and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e), the
Advisor allocates brokerage to those firms, provided that the value of any
research and brokerage services was reasonable in relationship to the amount of
commission paid and was subject to best execution. In no case will the Advisor
make binding commitments as to the level of brokerage commissions it will
allocate to a broker, nor will it commit to pay cash if any informal targets are
not met. The Advisor anticipates it will continue to enter into such brokerage
arrangements.
The Advisor may direct the purchase of securities on behalf of the Fund and
other advisory clients in secondary market transactions, in public offerings
directly from an underwriter, or in privately negotiated transactions with an
issuer. When the Advisor believes the circumstances so warrant, securities
purchased in public offerings may be resold shortly after acquisition in the
immediate aftermarket for the security in order to take advantage of price
appreciation from the public offering price or for other reasons. Short-term
trading of securities acquired in public offerings, or otherwise, may result in
higher portfolio turnover and associated brokerage expenses.
The Advisor places portfolio transactions for other advisory accounts, including
other mutual funds managed by the Advisor. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Advisor in servicing all of its accounts; not all of such services may be used
by the Advisor in connection with the Fund. In the opinion of the Advisor, it is
not possible to measure separately the benefits from research services to each
of the accounts managed by the Advisor. Because the volume and nature of the
trading activities of the accounts are not uniform, the amount of commissions in
excess of those charged by another broker paid by each account for brokerage and
research services will vary. However, in the opinion of the Advisor, such costs
to the Fund will not be disproportionate to the benefits received by the Fund on
a continuing basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations between the Fund and other advisory accounts, the main factors
considered by the Advisor are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending the
investment.
<PAGE>
From time to time, the Advisor may invest for a client in securities being
offered in an initial public offering ("IPO"), if the portfolio manager team
responsible for the account believes the investment appropriate and desirable
for that client. In making this judgment, the team generally considers, among
other things, the client's investment objectives and restrictions, tolerance for
risk and high portfolio turnover and tax situation; the investment merits of the
IPO; the account's current holdings and the availability of funds to make the
investment; whether a meaningful position in the IPO securities could be
obtained for the account; and expected transaction and other costs to the client
making the investment. The team also may consider the account's past
participation in IPOs and secondary offerings; brokerage commissions and
mark-ups or mark-downs generated by trading for the account; and any other
indicators of the client's contribution to the availability of the IPO
investment opportunity. After weighing these and other relevant factors, the
portfolio manager team may decide to invest in a particular IPO for some but not
all clients, or for no clients. IPO investments made by a team for two or more
clients may be in amounts that are not equal or proportionate to the
participating account's asset size. Other portfolio manager teams may make
different investment decisions for their clients about the same IPO. When a Fund
is small, IPOs may greatly increase the Fund's total returns. But, as the Fund
grows larger, the Fund is unlikely to achieve the same level of returns from
IPOs. Investing in IPOs is risky, and the prices of stocks purchased in IPOs
tend to fluctuate more widely than stocks of more established companies.
"Hot issues" are IPOs that trade at a premium when secondary market trading
begins. Typically, the demand for "hot issues" exceeds the supply, and the
amount of any "hot issue" IPO made available to an investment manager like the
Advisor usually is limited. In addition, IPO underwriters tend to offer "hot
issues" on a priority basis to investors that have invested or are likely to
invest in other offerings underwritten by the same firm or that have executed a
significant volume of trades through the firm. A portfolio manager team may buy
larger amounts of "hot issue" IPOs for those clients whose past trading,
investing and other activities have contributed to the availability of specific
"hot issue" IPOs or "hot issue" IPOs generally to the Advisor.
Each portfolio manager team places its clients' orders for a particular IPO with
the Advisor's trading desk, and the trading desk seeks to fill those orders
together. If the trading desk is not able to obtain the total amount of
securities needed to fill all orders, the shares actually obtained are allocated
by the trading desk among the participating portfolio manager teams in
accordance with pre-established percentages for each team. The trading desk then
reallocates each team's percentage among those team clients participating in the
order PRO RATA according to the number of shares ordered for each client,
subject to rounding up or down to eliminate odd lots or de minimis amounts. The
percentages of each limited availability IPO, typically a "hot issue," allocated
to each team are fixed in advance, based on the amount of assets under
management by each team and other indicators of a team's overall contribution to
IPO deal flow, including brokerage generated and the team's overall trading and
investing pattern. Team allocation percentages are periodically reevaluated and
adjusted if appropriate, generally at intervals of six months or more. In
addition, a separate, fixed portion of the percentage allocation of the
portfolio manager team that manages the Advisor's private investment companies,
or "hedge funds," is specifically designated to go to the hedge funds. Like the
team level allocations, the amount designated for the hedge funds is determined
in advance and is subject to periodic reevaluation and adjustment. It is
designed to recognize the significant contribution made by the trading and
investing of the hedge funds to IPO deal flow to the Advisor.
The Advisor's policy and procedures for allocating IPO investment opportunities,
including "hot issues," are designed to ensure that all clients are treated
fairly and equitably over time. The Advisor does not, however, allocate IPO
investment opportunities among its clients in equal amounts or PRO RATA based on
the size of an account's assets. Under the Advisor's IPO allocation procedures,
certain clients, including the hedge funds, may receive a greater share than
other clients (in proportion to the size of their account assets) of the IPO
investment opportunities available to the Advisor, including "hot issue" IPOs.
These differences in IPO allocations result from, among other things, (1)
different judgments made by each portfolio manager team at the time an IPO
investment opportunity arises as to whether it would be a desirable and
appropriate investment for each particular client and (2) the fact that the
Advisor's IPO allocation procedures permit those clients who contribute more to
"hot issue" deal flow to receive greater allocations of limited availability
"hot issue" IPOs in proportion to the size of their accounts than may be
allocated to other clients. .
The Advisor also has a policy of blocking further purchases of IPOs for certain
client accounts when the portion of the account's total return for the trailing
four-calendar-quarter period-to-date that is attributable to IPO investments
exceeds certain percentage limits. The restriction remains in place until
IPO-driven performance falls below the percentage limits. This policy is
designed to help ensure that the Advisor does not attract separate account
clients or fund investors on the basis of IPO-driven performance that the
Advisor may not be able to sustain or replicate. The blocking policy is applied
only to those registered investment companies and separate account clients whose
performance is advertised or included in composites of account performance used
to market the Advisor's services. The hedge funds managed by the Advisor are not
subject to these limits.
The Advisor's policies and procedures generally result in greater IPO
allocations (as a percentage of client assets under management) to the hedge
funds and to other clients whose accounts are actively traded, have high
portfolio turnover rates or invest heavily in all types of IPOs and secondary
offerings. As do the hedge funds, these clients may pay the Advisor higher
account management fees, including performance fees.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"). The Fund's procedures in selecting FCMs to execute the
Fund's transactions in futures contracts are similar to those in effect with
respect to brokerage transactions in securities.
The Fund paid the following brokerage commissions for the time periods
indicated:
<TABLE>
<CAPTION>
<S> <C>
FISCAL YEAR ENDED BROKERAGE COMMISSIONS ($)
------------------------------------------------------------ ---------------------------------------------------------
High-Yield Municipal Bond Fund
8/31/98 11,570
8/31/99 18,021
8/31/00 12
Municipal Bond Fund
8/31/98 1,641
8/31/99 8,196
8/31/00 31
Short-Term High Yield Municipal Fund
8/31/98(1) 0
8/31/99 1,932
8/31/00 5
Short-Term Municipal Bond Fund
8/31/98 955
8/31/99 0
8/31/00 4
</TABLE>
(1) For the nine-month fiscal period ended August 31, 1998.
CUSTODIAN
As custodian of the Fund's assets, Firstar Bank Milwaukee, N.A., P.O. Box 761,
Milwaukee, WI 53201, has custody of all securities and cash of the Fund,
delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by officers of the Fund. The custodian is in no way
responsible for any of the investment policies or decisions of the Fund.
<PAGE>
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, WI 53201, acts as transfer agent and
dividend-disbursing agent for the Fund. The Advisor is compensated as follows:
<TABLE>
<CAPTION>
<S> <C>
-------------------------------------- -------------------------------------------------------------------------------
FUND TYPE/SHARE CLASS FEE*
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Money Funds and Investor Class $32.50 annual open account fee, $4.20 annual closed account fee.
shares of Money Funds
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Advisor Class shares of Money 0.20% of the average daily net asset value of all Advisor Class shares.
Funds(1)
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Institutional class shares of Money 0.015% of the average daily net asset value of all Institutional Class shares.
Funds
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Income Funds and Investor Class $31.50 annual open account fee, $4.20 annual closed account fee.
shares of Income Funds
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Advisor Class shares of Income Funds 0.20% of the average daily net asset value of all Advisor Class shares.
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Institutional Class shares of Income 0.015% of the average daily net asset value of all Institutional Class shares.
Funds
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Equity Funds and Investor Class $21.75 annual open account fee, $4.20 annual closed account fee.
shares of Equity Funds
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Advisor Class shares of Equity Funds 0.20% of the average daily net asset value of all Advisor Class shares.
-------------------------------------- -------------------------------------------------------------------------------
-------------------------------------- -------------------------------------------------------------------------------
Institutional Class shares of Equity 0.015% of the average daily net asset value of all Institutional Class shares.
Funds
-------------------------------------- -------------------------------------------------------------------------------
</TABLE>
* Plus out-of-pocket expenses, such as postage and printing expenses in
connection with shareholder communications. (1) Excluding the Strong Heritage
Money Fund. The fee for the Heritage Money Fund is 0.015% of the average daily
net asset value of all Advisor Class shares.
The fees and services provided as transfer agent and dividend disbursing agent
are in addition to those received and provided by the Advisor under the Advisory
Agreements.
From time to time, the Fund, directly or indirectly through arrangements with
the Advisor, and/or the Advisor may pay fees to third parties that provide
transfer agent type services and other administrative services to persons who
beneficially own interests in the Fund, such as participants in 401(k) plans and
shareholders who invest through other financial intermediaries. These services
may include, among other things, sub-accounting services, transfer agent type
activities, answering inquiries relating to the Fund, transmitting proxy
statements, annual reports, updated prospectuses, other communications regarding
the Fund, and related services as the Fund or beneficial owners may reasonably
request. In such cases, the Fund will not pay fees based on the number of
beneficial owners at a rate that is greater than the rate the Fund is currently
paying the Advisor for providing these services to Fund shareholders; however,
the Advisor may pay to the third party amounts in excess of such limitation out
of its own profits.
The Fund paid the following amounts for the time periods indicated for transfer
agency and dividend disbursing and printing and mailing services:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Out-of-Pocket Printing/Mailing Total Cost
Fund Fee ($) Expenses ($) Services ($) Waiver ($) After Waiver ($)
--------------------- ------------------ ------------------- ------------------ ------------------- ------------------
High-Yield Municipal Bond Fund - Investor Class
8/31/1998 291,726 20,274 9,999 0 321,999
8/31/1999 436,171 46,645 2,370 0 485,186
8/31/2000 420,155 23,983 954 0 445,092
High-Yield Municipal Bond Fund - Advisor Class
8/31/2000(2) 15 0 0 0 15
Municipal Bond Fund - Investor Class
8/31/1998 284,090 18,348 4,059 0 306,497
8/31/1999 347,518 26,735 1,904 0 376,157
8/31/2000 329,410 21,365 967 0 351,743
Municipal Bond Fund - Advisor Class
8/31/2000(2) 15 0 0 0 15
Municipal Bond Fund - Institutional Class
8/31/2000(3) 0 0 0 0 0
Short-Term High Yield Municipal Fund - Investor Class
8/31/1998(1) 10,648 5,028 57 1,862 13,871
8/31/1999 48,819 9,380 273 0 58,472
8/31/2000 70,864 7,622 144 0 78,630
Short-Term High Yield Municipal Fund - Advisor Class
8/31/2000(2) 15 0 0 0 15
Short-Term Municipal Bond Fund - Investor Class
8/31/1998 147,004 9,941 2,029 0 158,974
8/31/1999 175,340 24,622 909 0 200,871
8/31/2000 193,524 17,283 463 0 211,270
Short-Term Municipal Bond Fund - Advisor Class
8/31/2000(2) 956 1 0 0 957
Short-Term Municipal Bond Fund - Institutional Class
8/31/2000(3) 0 0 0 0 0
</TABLE>
(1) For the nine-month fiscal period ended August 31, 1998.
(2) For the six-month fiscal period ended August 31, 2000.
(3) For the one-month fiscal period ended August 31, 2000.
<PAGE>
TAXES
GENERAL
The Fund intends to qualify annually for treatment as a RIC under Subchapter M
of the IRC. If so qualified, the Fund will not be liable for federal income tax
on earnings and gains distributed to its shareholders in a timely manner. This
qualification does not involve government supervision of the Fund's management
practices or policies. The following federal tax discussion is intended to
provide you with an overview of the impact of federal income tax provisions on
the Fund or its shareholders. These tax provisions are subject to change by
legislative or administrative action at the federal, state, or local level, and
any changes may be applied retroactively. Any such action that limits or
restricts the Fund's current ability to pass-through earnings without taxation
at the Fund level, or otherwise materially changes the Fund's tax treatment,
could adversely affect the value of a shareholder's investment in the Fund.
Because the Fund's taxes are a complex matter, you should consult your tax
adviser for more detailed information concerning the taxation of the Fund and
the federal, state, and local tax consequences to shareholders of an investment
in the Fund.
In order to qualify for treatment as a RIC under the IRC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if applicable) ("Distribution Requirement") plus
its net investment income excludable from gross income under Section 103(a) of
the Tax Code and must meet several additional requirements. These requirements
include the following: (1) the Fund must derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities (or foreign
currencies if applicable) or other income (including gains from options,
futures, or forward contracts) derived with respect to its business of investing
in securities ("Income Requirement"); (2) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs, and other securities, with these other securities limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (3) at the close of each quarter of
the Fund's taxable year, not more than 25% of the value of its total assets may
be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer. There is a 30-day period after the
end of each calendar year quarter in which to cure any non-compliance with these
requirements. From time to time the Advisor may find it necessary to make
certain types of investments for the purpose of ensuring that the Fund continues
to qualify for treatment as a RIC under the IRC.
If Fund shares are sold at a loss after being held for 12 months or less, the
loss will be disallowed to the extent of any exempt interest dividends received
on those shares. Any portion of such a loss that is not disallowed will be
treated as long-term, instead of short-term, capital loss to the extent of any
capital gain distributions received on those shares.
The Fund's distributions are taxable in the year they are paid, whether they are
taken in cash or reinvested in additional shares, except that certain
distributions declared in the last three months of the year and paid in January
are taxable as if paid on December 31.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
The Fund may make additional distributions if necessary to avoid imposition of
the Excise Tax on undistributed income and gains.
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling (writing)
options and futures and entering into forward currency contracts, if applicable,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of the gains and losses the Fund realizes in
connection therewith. Gains from the disposition of foreign currencies, if any
(except certain gains therefrom that may be excluded by future regulations), and
income from transactions in options, futures, and forward currency contracts, if
applicable, derived by the Fund with respect to its business of investing in
securities or foreign currencies, if applicable, will qualify as permissible
income under the Income Requirement.
For federal income tax purposes, the Fund is required to recognize as income for
each taxable year its net unrealized gains and losses on options, futures, or
forward currency contracts, if any, that are subject to section 1256 of the IRC
("Section 1256 Contracts") and are held by the Fund as of the end of the year,
as well as gains and losses on Section 1256 Contracts actually realized during
the year. Except for Section 1256 Contracts that are part of a "mixed straddle"
and with respect to which the Fund makes a certain election, any gain or loss
recognized with respect to Section 1256 Contracts is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the Section 1256 Contract.
MUNICIPAL SECURITIES
A substantial portion of the dividends paid by the Fund will qualify as
exempt-interest dividends and thus will be excludable from gross income by its
shareholders, if the Fund satisfies the requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a); the Fund intends to continue to satisfy this requirement.
The aggregate dividends excludable from the Fund's shareholders' gross income
may not exceed the Fund's net tax-exempt income. The shareholders' treatment of
dividends from the Fund under local and state income tax laws may differ from
the treatment thereof under the Tax Code.
Tax-exempt interest attributable to certain private activity bonds ("PABs")
(including, in the case of a RIC receiving interest on such bonds, a
proportionate part of the exempt-interest dividends paid by that RIC) is subject
to the alternative minimum tax. Exempt-interest dividends received by a
corporate shareholder also may be indirectly subject to that tax without regard
to whether the Fund's tax-exempt interest was attributable to such bonds.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by PABs or industrial development
bonds ("IDBs") should consult their tax advisors before purchasing shares of the
Fund because, for users of certain of these facilities, the interest on such
bonds is not exempt from federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of PABs or IDBs.
The Fund may invest in municipal bonds that are purchased, generally not on
their original issue, with market discount (that is, at a price less than the
principal amount of the bond or, in the case of a bond that was issued with
original issue discount, a price less than the amount of the issue price plus
accrued original issue discount) ("municipal market discount bonds"). Market
discount generally arises when the value of the bond declines after issuance
(typically, because of an increase in prevailing interest rates or a decline in
the issuer's creditworthiness). Gain on the disposition of a municipal market
discount bond purchased by the Fund after April 30, 1993 (other than a bond with
a fixed maturity date within one year from its issuance), generally is treated
as ordinary (taxable) income, rather than capital gain, to the extent of the
bond's accrued market discount at the time of disposition. Market discount on
such a bond generally is accrued ratably, on a daily basis, over the period from
the acquisition date to the date of maturity. In lieu of treating the
disposition gain as above, the Fund may elect to include market discount in its
gross income currently, for each taxable year to which it is attributable.
PASS-THROUGH INCOME TAX EXEMPTION
Most state laws provide a pass-through to mutual fund shareholders of the state
and local income tax exemption afforded owners of direct U.S. government
obligations. You will be notified annually of the percentage of a Fund's income
that is derived from U.S. government securities.
USE OF TAX-LOT ACCOUNTING
When sell decisions are made by the Fund's portfolio manager, the Advisor
generally sells the tax lots of the Fund's securities that results in the lowest
amount of taxes to be paid by the shareholders on the Fund's capital gain
distributions. The Advisor uses tax-lot accounting to identify and sell the tax
lots of a security that have the highest cost basis and/or longest holding
period to minimize adverse tax consequences to the Fund's shareholders. However,
if the Fund has a capital loss carry forward position, the Advisor would reverse
its strategy and sell the tax lots of a security that have the lowest cost basis
and/or shortest holding period to maximize the use of the Fund's capital loss
carry forward position.
<PAGE>
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may acquire zero-coupon, step-coupon, or other securities issued with
original issue discount. As a holder of those securities, the Fund must include
in its income the original issue discount that accrues on the securities during
the taxable year, even if the Fund receives no corresponding payment on the
securities during the year. Similarly, the Fund must include in its income
securities it receives as "interest" on pay-in-kind securities. Because the Fund
annually must distribute substantially all of its investment company taxable
income, including any original issue discount and other non-cash income, to
satisfy the Distribution Requirement and avoid imposition of the Excise Tax, it
may be required in a particular year to distribute as a dividend an amount that
is greater than the total amount of cash it actually receives. Those
distributions may be made from the proceeds on sales of portfolio securities, if
necessary. The Fund may realize capital gains or losses from those sales, which
would increase or decrease its investment company taxable income or net capital
gain, or both.
DETERMINATION OF NET ASSET VALUE
Generally, when an investor makes any purchases, sales, or exchanges, the price
of the investor's shares will be the net asset value ("NAV") next determined
after Strong Funds receives a request in proper form (which includes receipt of
all necessary and appropriate documentation and subject to available funds). The
"offering price" is the initial sales charge, if any, plus the NAV. If Strong
Funds receives such a request prior to the close of the New York Stock Exchange
("NYSE") on a day on which the NYSE is open, the share price will be the NAV
determined that day. The NAV for each Fund or each class of shares is normally
determined as of 3:00 p.m. Central Time ("CT") each day the NYSE is open. The
NYSE is open for trading Monday through Friday except New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. Additionally, if any of the
aforementioned holidays falls on a Saturday, the NYSE will not be open for
trading on the preceding Friday, and when any such holiday falls on a Sunday,
the NYSE will not be open for trading on the succeeding Monday, unless unusual
business conditions exist, such as the ending of a monthly or yearly accounting
period. The Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the NYSE closes at a time other than
3:00 p.m. CT or if an emergency exists. The NAV of each Fund or of each class of
shares of a Fund is calculated by taking the fair value of the Fund's total
assets attributable to that Fund or class, subtracting all its liabilities
attributable to that Fund or class, and dividing by the total number of shares
outstanding of that Fund or class. Expenses are accrued daily and applied when
determining the NAV. The Fund's portfolio securities are valued based on market
quotations or at fair value as determined by the method selected by the Fund's
Board of Directors.
Debt securities are valued by a pricing service that utilizes electronic data
processing techniques to determine values for normal institutional-sized trading
units of debt securities without regard to sale or bid prices when such values
are believed to more accurately reflect the fair market value for such
securities. Otherwise, sale or bid prices are used. Any securities or other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by the Board of Directors of the Fund. Debt
securities having remaining maturities of 60 days or less are valued by the
amortized cost method when the Fund's Board of Directors determines that the
fair value of such securities is their amortized cost. Under this method of
valuation, a security is initially valued at its acquisition cost, and
thereafter, amortization of any discount or premium is assumed each day,
regardless of the impact of the fluctuating rates on the market value of the
instrument.
ADDITIONAL SHAREHOLDER INFORMATION
BROKERS RECEIPT OF PURCHASE AND REDEMPTION ORDERS
The Fund has authorized certain brokers to accept purchase and redemption orders
on the Fund's behalf. These brokers are, in turn, authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Purchase and redemption orders received in this manner will be priced at
the Fund's net asset value next computed after they are accepted by an
authorized broker or the broker's authorized designee.
DEPOSIT OF UNSPECIFIED CHECKS
When your investment check does not clearly indicate the fund that you would
like to purchase, we will deposit the check into the Strong Money Market Fund
until you clarify your investment decision.
DOLLAR COST AVERAGING
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan are methods of implementing dollar cost averaging.
Dollar cost averaging is an investment strategy that involves investing a fixed
amount of money at regular time intervals. By always investing the same set
amount, an investor 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, an investor's 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, investors should consider their ability to continue
the program through periods of both low and high share-price levels. These
methods are unavailable for Institutional Class accounts.
FEE WAIVERS
The Fund reserves the right to waive some or all fees in certain conditions
where the application of the fee would not serve its purpose.
FINANCIAL INTERMEDIARIES
If an investor purchases or redeems shares of the Fund through a financial
intermediary, certain features of the Fund relating to such transactions may not
be available or may be modified. In addition, certain operational policies of
the Fund, including those related to settlement and dividend accrual, may vary
from those applicable to direct shareholders of the Fund and may vary among
intermediaries. Please consult your financial intermediary for more information
regarding these matters. In addition, the Fund may pay, directly or indirectly
through arrangements with the Advisor, amounts to financial intermediaries that
provide transfer agent type and/or other administrative services to their
customers. The Fund will not pay more for these services through intermediary
relationships than it would if the intermediaries' customers were direct
shareholders in the Fund; however, the Advisor may pay to the financial
intermediary amounts in excess of such limitation out of its own profits.
Certain financial intermediaries may charge an advisory, transaction, or other
fee for their services. Investors will not be charged for such fees if investors
purchase or redeem Fund shares directly from the Fund without the intervention
of a financial intermediary.
FUND REDEMPTIONS
Shareholders (except Advisor and Institutional Class shareholders) can gain
access to the money in their accounts by selling (also called redeeming) some or
all of their shares by mail, telephone, computer, automatic withdrawals, through
a broker-dealer, or by writing a check (assuming all the appropriate documents
and requirements have been met for these account options). Advisor and
Institutional Class shareholders may redeem some or all of their shares by
telephone or by faxing a written request. After a redemption request is
processed, the proceeds from the sale will normally be sent on the next business
day but, in any event, no more than seven days later.
MOVING ACCOUNT OPTIONS AND INFORMATION
When establishing a new account (other than an Institutional Class account) by
exchanging funds from an existing Strong Funds account, some account options
(such as check writing, the Exchange Option, Express PurchaseSM, and the
Redemption Option), if existing on the account from which money is exchanged,
will automatically be made available on the new account unless the shareholder
indicates otherwise, or the option is not available on the new account. Subject
to applicable Strong Funds policies, other account options, including automatic
investment, automatic exchange, and systematic withdrawal, may be moved to the
new account at the request of the shareholder. These options are not available
for Institutional Class accounts. If allowed by Strong Funds policies (i) once
the account options are established on the new account, the shareholder may
modify or amend the options, and (ii) account options may be moved or added from
one existing account to another new or existing account. Account information,
such as the shareholder's address of record and social security number, will be
copied from the existing account to the new account.
<PAGE>
PROMOTIONAL ITEMS
From time to time, the Advisor and/or Distributor may give de minimis gifts or
other immaterial consideration to investors who open new accounts or add to
existing accounts with the Strong Funds. In addition, from time to time, the
Advisor and/or Distributor, alone or with other entities or persons, may
sponsor, participate in conducting, or be involved with sweepstakes, give-aways,
contests, incentive promotions, or other similar programs ("Give-Aways"). This
is done in order to, among other reasons, increase the number of users of and
visits to the Fund's Internet web site. As part of the Give-Aways, persons may
receive cash or other awards including without limitation, gifts, merchandise,
gift certificates, travel, meals, and lodging. Under the Advisor's and
Distributor's standard rules for Give-Aways, their employees, subsidiaries,
advertising and promotion agencies, and members of their immediate families are
not eligible to enter the Give-Aways.
REDEMPTION IN KIND
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of $250,000 or 1% of the assets of
the Fund. If the Advisor determines that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other financial assets, valued for this purpose as they are valued in
computing the NAV for the Fund's shares (a "redemption in kind"). Shareholders
receiving securities or other financial assets in a redemption in kind may
realize a gain or loss for tax purposes, and will incur any costs of sale, as
well as the associated inconveniences. If you expect to make a redemption in
excess of the lesser of $250,000 or 1% of the Fund's assets during any 90-day
period and would like to avoid any possibility of being paid with securities
in-kind, you may do so by providing Strong Funds with an unconditional
instruction to redeem at least 15 calendar days prior to the date on which the
redemption transaction is to occur, specifying the dollar amount or number of
shares to be redeemed and the date of the transaction (please call
1-800-368-3863). This will provide the Fund with sufficient time to raise the
cash in an orderly manner to pay the redemption and thereby minimize the effect
of the redemption on the interests of the Fund's remaining shareholders.
Redemption checks in excess of the lesser of $250,000 or 1% of the Fund's assets
during any 90-day period may not be honored by the Fund if the Advisor
determines that existing conditions make cash payments undesirable.
RETIREMENT PLANS
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT (IRA): Everyone under age 70 1/2 with
earned income may contribute to a tax-deferred Traditional IRA. The Strong Funds
offer a prototype plan for you to establish your own Traditional IRA. You are
allowed to contribute up to the lesser of $2,000 or 100% of your earned income
each year to your Traditional IRA (or up to $4,000 between your Traditional IRA
and your non-working spouses' Traditional IRA). Under certain circumstances,
your contribution will be deductible.
ROTH IRA: Taxpayers, of any age, who have earned income and whose adjusted gross
income ("AGI") does not exceed $110,000 (single) or $160,000 (joint) can
contribute to a Roth IRA. Allowed contributions begin to phase-out at $95,000
(single) or $150,000 (joint). You are allowed to contribute up to the lesser of
$2,000 or 100% of earned income each year into a Roth IRA. If you also maintain
a Traditional IRA, the maximum contribution to your Roth IRA is reduced by any
contributions that you make to your Traditional IRA. Distributions from a Roth
IRA, if they meet certain requirements, may be federally tax free. If your AGI
is $100,000 or less, you can convert your Traditional IRAs into a Roth IRA.
Conversions of earnings and deductible contributions are taxable in the year of
the distribution. The early distribution penalty does not apply to amounts
converted to a Roth IRA even if you are under age 59 1/2.
EDUCATION IRA: Taxpayers may contribute up to $500 per year into an Education
IRA for the benefit of a child under age 18. Total contributions to any one
child cannot exceed $500 per year. The contributor must have adjusted income
under $110,000 (single) or $160,000 (joint) to contribute to an Education IRA.
Allowed contributions begin to phase-out at $95,000 (single) or $150,000
(joint). Withdrawals from the Education IRA to pay qualified higher education
expenses are federally tax free. Any withdrawal in excess of higher education
expenses for the year are potentially subject to tax and an additional 10%
penalty.
DIRECT ROLLOVER IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or IRC section 403(b)
plan distribution directly into an IRA. The distribution must be eligible for
rollover. The amount of your Direct Rollover IRA contribution will not be
included in your taxable income for the year.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP-IRA): A SEP-IRA plan allows an employer to
make deductible contributions to separate IRA accounts established for each
eligible employee.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLAN (SAR SEP-IRA): A SAR SEP-IRA
plan is a type of SEP-IRA plan in which an employer may allow employees to defer
part of their salaries and contribute to an IRA account. These deferrals help
lower the employees' taxable income. Please note that you may no longer open new
SAR SEP-IRA plans (since December 31, 1996). However, employers with SAR SEP-IRA
plans that were established prior to January 1, 1997 may still open accounts for
new employees.
SIMPLIFIED INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE-IRA): A SIMPLE-IRA plan is
a retirement savings plan that allows employees to contribute a percentage of
their compensation, up to $6,000, on a pre-tax basis, to a SIMPLE-IRA account.
The employer is required to make annual contributions to eligible employees'
accounts. All contributions grow tax-deferred.
DEFINED CONTRIBUTION PLAN: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans, money
purchase pension plans, and paired plans (a combination of a profit-sharing plan
and a money purchase plan).
401(K) PLAN: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
403(B)(7) PLAN: A 403(b)(7) plan is a tax-sheltered custodial account designed
to qualify under section 403(b)(7) of the IRC and is available for use by
employees of certain educational, non-profit, hospital, and charitable
organizations.
RIGHT OF SET-OFF
To the extent not prohibited by law, the Fund, any other Strong Fund, and the
Advisor, each has the right to set-off against a shareholder's account balance
with a Strong Fund, and redeem from such account, any debt the shareholder may
owe any of these entities. This right applies even if the account is not
identically registered.
SHARES IN CERTIFICATE FORM
Certificates will be issued for shares (other than Advisor Class or
Institutional Class shares) held in a Fund account only upon written request.
Certificates will not be issued for Institutional Class or Advisor Class shares
of any Fund. A shareholder will, however, have full shareholder rights whether
or not a certificate is requested.
SIGNATURE GUARANTEES
A signature guarantee is designed to protect shareholders and the Fund against
fraudulent transactions by unauthorized persons. In the following instances, the
Fund will require a signature guarantee for all authorized owners of an account:
o when adding the redemption option to an existing account;
o when adding check writing to an existing account;
o when transferring the ownership of an account to another individual or
organization;
o when submitting a written redemption request for more than $100,000;
o when requesting to redeem or redeposit shares that have been issued in
certificate form;
o if requesting a certificate after opening an account;
o when requesting that redemption proceeds be sent to a different name or
address than is registered on an account;
o if adding/changing a name or adding/removing an owner on an account;
and
o if adding/changing the beneficiary on a transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC. These institutions include banks, savings associations,
credit unions, brokerage firms, and others. Please note that a notary public
stamp or seal is not acceptable.
TELEPHONE AND ELECTRONIC EXCHANGE/REDEMPTION/PURCHASE PRIVILEGES
The Fund employs reasonable procedures to confirm that instructions communicated
by telephone or electronically are genuine. The Fund may not be liable for
losses due to unauthorized or fraudulent instructions. Such procedures include
but are not limited to requiring a form of personal identification prior to
acting on instructions received by telephone or electronically, providing
written confirmations of such transactions to the address of record, tape
recording telephone instructions, and backing up electronic transactions.
ORGANIZATION
The Fund is either a "Corporation" or a "Series" of common stock of a
Corporation, as described in the chart below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Incorporation Date Series Date Class Authorized Par
Corporation Date Created Created Shares Value ($)
-------------------------------------------------- -------------- ------------- ------------ ------------ -----------
Strong High-Yield Municipal Bond Fund, Inc. 03/20/87 Indefinite .001
oInvestor Class(2) 03/20/87 Indefinite .001
oAdvisor Class 02/22/00 Indefinite .001
Strong Municipal Bond Fund, Inc. 07/28/86 Indefinite .001
oInvestor Class(2) 07/28/86 Indefinite .001
oAdvisor Class 02/22/00 Indefinite .001
oInstitutional Class 07/24/00 Indefinite .001
Strong Municipal Funds, Inc. (1) 07/28/86 Indefinite .00001
- Strong Municipal Advantage Fund* 07/28/86 Indefinite .00001
- Strong Municipal Money Market Fund* 07/28/86 Indefinite .00001
- Strong Short-Term High Yield 10/13/97 Indefinite .00001
Municipal Fund
oInvestor Class(2) 10/13/97 Indefinite .00001
oAdvisor Class 02/22/00 Indefinite .00001
Strong Short-Term Municipal Bond Fund, Inc. 12/28/90 Indefinite .00001
oInvestor Class(2) 12/28/90 Indefinite .00001
oAdvisor Class 02/22/00 Indefinite .00001
oInstitutional Class 07/24/00 Indefinite .00001
</TABLE>
* Described in a different prospectus and Statement of Additional Information.
(1) Prior to October 27, 1995, the Corporation's name was Strong Municipal
Money Market Fund, Inc.
(2) Prior to February 22, 2000 the Investor Class shares of the Fund were
designated as shares of common stock of the Fund.
The Strong Short-Term Municipal Bond Fund, Inc., Strong Municipal Bond Fund,
Inc., and Strong High-Yield Municipal Bond Fund, Inc. are separately
incorporated, diversified, open-end management investment companies. Strong
Short-Term High Yield Municipal Fund is a diversified series of Strong Municipal
Funds, Inc., which is an open-end management investment company.
The Corporation is a Wisconsin corporation that is authorized to offer separate
series of shares representing interests in separate portfolios of securities,
each with differing investment objectives. The shares in any one portfolio may,
in turn, be offered in separate classes, each with differing preferences,
limitations, or relative rights. However, the Articles of Incorporation for the
Corporation provide that if additional series of shares are issued by the
Corporation, such new series of shares may not affect the preferences,
limitations, or relative rights of the Corporation's outstanding shares. In
addition, the Board of Directors of the Corporation is authorized to allocate
assets, liabilities, income, and expenses to each series and class. Classes
within a series may have different expense arrangements than other classes of
the same series and, accordingly, the net asset value of shares within a series
may differ. Finally, all holders of shares of the Corporation may vote on each
matter presented to shareholders for action except with respect to any matter
that affects only one or more series or class, in which case only the shares of
the affected series or class are entitled to vote. Each share of the Fund has
one vote, and all shares participate equally in dividends and other capital
gains distributions by the Fund and in the residual assets of the Fund in the
event of liquidation. Fractional shares have the same rights proportionately as
do full shares. Shares of the Corporation have no preemptive, conversion, or
subscription rights. If the Corporation issues additional series, the assets
belonging to each series of shares will be held separately by the custodian,
and, in effect, each series will be a separate fund.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered investment companies,
such as the Fund, to operate without an annual meeting of shareholders under
specified circumstances if an annual meeting is not required by the 1940 Act.
The Fund has adopted the appropriate provisions in its Bylaws and may, at its
discretion, not hold an annual meeting in any year in which the election of
directors is not required to be acted on by shareholders under the 1940 Act.
The Fund's Bylaws allow for a director to be removed by its shareholders with or
without cause, only at a meeting called for the purpose of removing the
director. Upon the written request of the holders of shares entitled to not less
than ten percent (10%) of all the votes entitled to be cast at such meeting, the
Secretary of the Fund shall promptly call a special meeting of shareholders for
the purpose of voting upon the question of removal of any director. The
Secretary shall inform such shareholders of the reasonable estimated costs of
preparing and mailing the notice of the meeting, and upon payment to the Fund of
such costs, the Fund shall give not less than ten nor more than sixty days
notice of the special meeting.
PERFORMANCE INFORMATION
The Strong Funds may advertise a variety of types of performance information as
more fully described below. The Fund's performance is historical and past
performance does not guarantee the future performance of the Fund. From time to
time, the Advisor may agree to waive or reduce its management fee and/or to
absorb certain operating expenses for the Fund. Waivers of management fees and
absorption of expenses will have the effect of increasing the Fund's
performance.
A multiple class Fund will separately calculate performance information for each
class of shares. The performance figures for each class of shares will vary
based on differences in their expense ratios.
Performance figures for the Advisor Class shares of the Fund, which were first
offered to the public on February 29, 2000, include the historical performance
of each Fund's Investor Class shares for the period from a Fund's inception
through February 28, 2000, recalculated to reflect the additional expenses
imposed on the Advisor Class shares. Performance figures for the Institutional
Class shares of the Municipal Bond and Short-Term Municipal Bond Funds, which
were first offered to the public on July 31, 2000, include the historical
performance of each Fund's Investor Class shares for the period from the Fund's
inception through July 30, 2000.
30-DAY YIELD
The Fund's yield is computed in accordance with a standardized method prescribed
by rules of the SEC. Under that method, the current yield quotation for the Fund
is based on a one month or 30-day period. In computing its yield, the Fund
follows certain standardized accounting practices specified by rules of the SEC.
These practices are not necessarily consistent with those that the Fund uses to
prepare annual and interim financial statements in conformity with generally
accepted accounting principles. The yield is computed by dividing the net
investment income per share earned during the 30-day or one month period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[( A-B + 1)6 - 1]
----
cd
Where a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
TAXABLE EQUIVALENT YIELD
The Fund's tax-equivalent yield is computed by dividing that portion of the
Fund's yield (computed as described above) that is tax-exempt by one minus the
stated federal income tax rate and adding the result to that portion, if any, of
the yield of the Fund that is not tax-exempt. Tax-equivalent yield does not
reflect possible variations due to the federal alternative minimum tax.
An investor may want to determine which investment, tax-exempt or taxable, will
provide you with a higher after-tax return. To determine the tax-equivalent
yield, simply divide the yield from the tax-exempt investment by the sum of (1
minus the investor's marginal tax rate). The tables below are provided for
making this calculation for selected tax-exempt yield and taxable income levels.
These yields are presented for purposes of illustration only and are not
representative of any yield that a Fund may generate.
The following table is based upon the 2000 federal tax rates in effect as of
January 1, 2000.
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------- -------------------------------------------------------------------
A TAX-FREE YIELD OF:
------------------------------------------------- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
------------------------------------------------- -------------- ------------ ------------- ------------ ------------
2000 Taxable Income Levels* 4% 5% 6% 7% 8%
------------------------------------------------- -------------- ------------ ------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
------------------ ------------------ ----------- -------------------------------------------------------------------
Single Married Filing Marginal IS EQUIVALENT TO A TAXABLE YIELD OF:
Jointly Tax Rate
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
------------------ ------------------ ----------- -------------------------------------------------------------------
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
under $26,250 under $43,850 15% 4.71% 5.88% 7.06% 8.24% 9.41%
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
$26,250-$63,550 $43,850 -$105,950 28% 5.56% 6.94% 8.33% 9.72% 11.11%
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
$63,550-$132,600 $105,950-$161,450 31% 5.80% 7.25% 8.70% 10.14% 11.59%
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
$132,600-$288,350 $161,450-$288,350 36% 6.25% 7.81% 9.38% 10.94% 12.50%
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
over $288,350 over $288,350 39.6% 6.62% 8.28% 9.93% 11.59% 13.25%
------------------ ------------------ ----------- -------------- ------------ ------------- ------------ ------------
</TABLE>
* A taxpayer with an adjusted gross income in excess of $128,950 may, to
the extent such taxpayer itemizes deductions, be subject to a higher
effective marginal rate.
DISTRIBUTION RATE
The distribution rate for the Fund is computed, according to a non-standardized
formula, by dividing the total amount of actual distributions per share paid by
the Fund over a twelve month period by the Fund's net asset value on the last
day of the period. The distribution rate differs from the Fund's yield because
the distribution rate includes distributions to shareholders from sources other
than dividends and interest, such as short-term capital gains. Therefore, the
Fund's distribution rate may be substantially different than its yield. Both the
Fund's yield and distribution rate will fluctuate.
AVERAGE ANNUAL TOTAL RETURN
The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the SEC. The average annual total
return for the Fund for a specific period is calculated by first taking a
hypothetical $10,000 investment ("initial investment") in the Fund's shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The redeemable value is then divided by the
initial investment, and this quotient is taken to the Nth root (N representing
the number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Average annual total returns
reflect the impact of sales charges, if any.
<PAGE>
TOTAL RETURN
Calculation of the Fund's total return is not subject to a standardized formula.
Total return performance for a specific period is calculated by first taking an
investment (assumed below to be $10,000) ("initial investment") in the Fund's
shares on the first day of the period and computing the "ending value" of that
investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value of the Fund on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
returns reflect the impact of sales charges, if any.
CUMULATIVE TOTAL RETURN
Cumulative total return represents the simple change in value of an investment
over a stated period and may be quoted as a percentage or as a dollar amount.
Total returns and cumulative total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship between these factors and their
contributions to total return. Cumulative total returns reflect the impact of
sales charges, if any.
SPECIFIC FUND PERFORMANCE
30-DAY YIELD
(30-day period ended November 30, 2000)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Waived
Tax Equivalent Yield Management Absorbed Yield Without Waivers
Fund Yield (31% Tax Bracket) Fees Expenses and Absorptions
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
High-Yield Municipal Bond 6.52% 9.45% - - 6.52%
- Investor Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
High-Yield 6.11% 8.86% - 0.11% 6.00%
Municipal Bond
- Advisor Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
Municipal Bond 5.48% 7.94% - - 5.48%
- Investor Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
Municipal Bond 5.15% 7.46% - 0.11% 5.04%
- Advisor Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
Municipal Bond 5.80% 8.41% - - 5.80
- Institutional Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
Short-Term High Yield 5.48% 7.94% - 0.05% 5.43%
Municipal
- Investor Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
Short-Term High Yield 4.99% 7.23% - 0.08% 4.91%
Municipal
- Advisor Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
Short-Term Municipal Bond 4.86% 7.04% - - 4.86
- Investor Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
Short-Term 4.43% 6.42% - - 4.43%
Municipal Bond
- Advisor Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
Short-Term 5.15% 7.46% - - 5.15%
Municipal Bond
- Institutional Class
-------------------------- --------- ---------------------- --------------- -------------- --------------------------
</TABLE>
TOTAL RETURN
HIGH-YIELD MUNICIPAL BOND FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $9,708.93 -2.91% -2.91%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Five Year $10,000 $12,590.54 25.91% 4.71%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $14,028.18 40.28% 5.02%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on October 1, 1993.
ADVISOR CLASS++
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $9,673.60 -3.26% -3.26%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Five Year $10,000 $12,364.40 23.64% 4.34%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $13,680.92 36.81% 4.64%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on October 1, 1993. ++ Commenced operations on February
29, 2000.
MUNICIPAL BOND FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $9,914.15 -0.86% -0.86%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Five Year $10,000 $12,382.68 23.83% 4.37%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Ten Year $10,000 $18,638.84 86.39% 6.42%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $21,450.91 114.51% 5.66%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on October 23, 1986.
ADVISOR CLASS++
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $9,881.35 -1.19% -1.19%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Five Year $10,000 $12,176.09 21.76% 4.02%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Ten Year $10,000 $18,021.45 80.21% 6.07%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $20,471.74 104.72% 5.31%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on October 23, 1986. ++ Commenced operations on February
29, 2000.
<PAGE>
INSTITUTIONAL CLASS++
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $9,927.97 -0.72% -0.72%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Five Year $10,000 $12,399.94 24.00% 4.40%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Ten Year $10,000 $18,664.82 86.65% 6.44%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $21,480.81 114.81% 5.67%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on October 23, 1986. ++ Commenced operations on July 31,
2000.
SHORT-TERM HIGH YIELD MUNICIPAL FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $10,125.17 1.25% 1.25%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $11,020.19 10.20% 3.60%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on November 30, 1997.
ADVISOR CLASS++
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $10,085.58 0.86% 0.86%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $10,901.59 9.02% 3.19%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on November 30, 1997. ++ Commenced operations on February
29, 2000.
SHORT-TERM MUNICIPAL BOND FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $10,361.43 3.61% 3.61%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Five Year $10,000 $12,573.98 25.74% 4.69%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $14,679.00 46.79% 4.53%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on December 31, 1991.
<PAGE>
ADVISOR CLASS++
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $10,322.67 3.23% 3.23%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Five Year $10,000 $12,342.44 23.42% 4.30%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $14,213.88 42.14% 4.14%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on December 31, 1991. ++ Commenced operations on February
29, 2000.
INSTITUTIONAL CLASS++
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- ----------------------- --------------------------
Initial $10,000 Ending value Cumulative Average Annual Total
Time Period Investment August 31, 2000 Total Return Return
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
One Year $10,000 $10,363.53 3.64% 3.64%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Five Year $10,000 $12,576.52 25.77% 4.69%
----------------------- --------------------- -------------------- ----------------------- --------------------------
----------------------- --------------------- -------------------- ----------------------- --------------------------
Life of Fund* $10,000 $14,681.96 46.82% 4.53%
----------------------- --------------------- -------------------- ----------------------- --------------------------
</TABLE>
* Commenced operations on December 31, 1991. ++ Commenced operations on July 31,
2000.
COMPARISONS
U.S. TREASURY BILLS, NOTES, OR BONDS. Investors may want to compare the
performance of the Fund to that of U.S. Treasury bills, notes, or bonds, which
are issued by the U.S. Government. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities.
CERTIFICATES OF DEPOSIT. Investors may want to compare the Fund's performance to
that of certificates of deposit offered by banks and other depositary
institutions. Certificates of deposit may offer fixed or variable interest rates
and principal is guaranteed and may be insured. Withdrawal of the deposits prior
to maturity normally will be subject to a penalty. Rates offered by banks and
other depositary institutions are subject to change at any time specified by the
issuing institution.
MONEY MARKET FUNDS. Investors may also want to compare performance of the Fund
to that of money market funds. Money market fund yields will fluctuate and
shares are not insured, but share values usually remain stable.
LIPPER INC. ("LIPPER") AND OTHER INDEPENDENT RANKING ORGANIZATIONS. From time to
time, in marketing and other fund literature, the Fund's performance may be
compared to the performance of other mutual funds in general or to the
performance of particular types of mutual funds with similar investment goals,
as tracked by independent organizations. Among these organizations, Lipper, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, may be cited. Lipper performance
figures are based on changes in net asset value, with all income and capital
gains dividends reinvested. Such calculations do not include the effect of any
sales charges imposed by other funds. The Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective and portfolio holdings.
The Fund's performance may also be compared to the average performance of its
Lipper category.
<PAGE>
MORNINGSTAR, INC. The Fund's performance may also be compared to the performance
of other mutual funds by Morningstar, Inc., which rates funds on the basis of
historical risk and total return. Morningstar's ratings range from five stars
(highest) to one star (lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a weighted average for 3, 5,
and 10 year periods. Ratings are not absolute and do not represent future
results.
OTHER SOURCES. The Fund's advertisements and supplemental sales literature may
contain full or partial reprints of editorials or articles evaluating the Fund's
management and performance from such sources as Money, Forbes, Kiplinger's,
Smart Money, Financial World, Business Week, U.S. News and World Report, The
Wall Street Journal, Mutual Fund Magazine, Barron's, and various investment
newsletters. The Fund may also include testimonials from shareholders, clients,
and others that describe their experiences with the Fund, the Advisor, or the
Distributor, including descriptions of the Fund's performance, features, and
attributes and the services, tools, and assistance provided by the Fund, the
Advisor, or the Distributor.
IBC/DONOGHUE, INC. IBC/Donoghue, Inc. is an independently operated financial
newsletter publishing firm specializing in the statistical analysis of the
trends in the money market mutual fund industry. From time to time, in marketing
and other fund literature, IBC/Donoghue data may be quoted or compared to the
Fund's performance. IBC/Donoghue, Inc. provides current (7 and 30 day yields)
and historical performance (1, 3, and 5 year returns), rankings and category
averages for over 1,100 money market mutual funds.
INDIVIDUAL MUNICIPAL BONDS. The 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.
INDICES. The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments that a Fund may
purchase and the investments measured by the indices.
HISTORICAL ASSET CLASS RETURNS. From time to time, marketing materials may
portray the historical returns of various asset classes. Such presentations will
typically compare the average annual rates of return of inflation, U.S. Treasury
bills, bonds, common stocks, and small stocks. There are important differences
between each of these investments that should be considered in viewing any such
comparison. The market value of stocks will fluctuate with market conditions,
and small-stock prices generally will fluctuate more than large-stock prices.
Stocks are generally more volatile than bonds. In return for this volatility,
stocks have generally performed better than bonds or cash over time. Bond prices
generally will fluctuate inversely with interest rates and other market
conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and payment of principal and interest may
be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
INVESTMENT OBJECTIVE. The Funds offer a comprehensive range of conservative to
aggressive investment options. The Funds and their investment objectives are
listed below.
FUND NAME INVESTMENT OBJECTIVE
--------- --------------------
<TABLE>
<CAPTION>
<S> <C>
----------------------------------------- --------------------------------------------------------------------------
CASH MANAGEMENT
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Advantage Fund Current income with a very low degree of share-price
fluctuation.
----------------------------------------- --------------------------------------------------------------------------
Strong Heritage Money Fund Current income, a stable share price, and daily
liquidity.
----------------------------------------- --------------------------------------------------------------------------
Strong Investors 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 Municipal Advantage Fund Federally tax-exempt current income with a very
low degree of share-price fluctuation.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Municipal Money Market Fund Federally tax-exempt current income, a stable
share-price, and daily liquidity.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Tax-Free Money Fund Federally tax-exempt current income, a stable
share-price, and daily liquidity.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
GROWTH AND INCOME
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong American Utilities Fund Total return by investing for both income and
capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Balanced Fund High total return consistent with reasonable risk over the
long term.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Blue Chip 100 Fund Total return by investing for both income and capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Growth and Income Fund High total return by investing for capital growth and income.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Limited Resources Fund Total return by investing for both capital growth
and income.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Schafer Balanced Fund Total return by investing for both income and
capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Schafer Value Fund Long-term capital appreciation principally through
investment in common stocks and other equity securities. Current income is a
secondary objective.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
EQUITY
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Discovery Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Dow 30 Value Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Enterprise Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Growth Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
<PAGE>
----------------------------------------- --------------------------------------------------------------------------
Strong Growth 20 Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Index 500 Fund To approximate as closely as practicable (before fees and expenses) the
capitalization-weighted total rate of return of that portion of the U.S.
market for publicly traded common stocks composed of the larger
capitalized companies.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Internet Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Large Cap Growth Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Mid Cap Disciplined Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Opportunity Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Strategic Growth Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Technology 100 Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong U.S. Emerging Growth Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Value Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
<PAGE>
----------------------------------------- --------------------------------------------------------------------------
INCOME
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Corporate Bond Fund Total return by investing for a high level of current
income with a moderate degree of
share-price fluctuation.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Government Securities Fund Total return by investing for a high level
of current income with a moderate
degree of share-price fluctuation.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong High-Yield Bond Fund Total return by investing for a high level of current income and capital
growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Short-Term Bond Fund Total return by investing for a high level of current
income with a low degree of
share-price fluctuation.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Short-Term High Yield Bond Fund Total return by investing for a high level
of current income with a moderate
degree of share-price fluctuation.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
INTERNATIONAL
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Asia Pacific Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Foreign MajorMarketsSM Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong International Bond Fund High total return by investing for both income and capital appreciation.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong International Stock Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Overseas Fund Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
LIFE STAGE SERIES
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Aggressive Portfolio Capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Conservative Portfolio Total return by
investing primarily for income and
secondarily for capital growth.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Moderate Portfolio Total return by
investing primarily for capital growth
and secondarily for income.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
MUNICIPAL INCOME
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong High-Yield Municipal Bond Fund Total return by investing for a high level
of federally tax-exempt current
income.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
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 Short-Term High Yield Municipal Total return by investing for a high
level of federally tax-exempt Fund current income with a moderate degree of
share-price fluctuation.
----------------------------------------- --------------------------------------------------------------------------
----------------------------------------- --------------------------------------------------------------------------
Strong Short-Term Municipal Bond Fund Total return by investing for a high level
of federally tax-exempt current income
with a low degree of share-price
fluctuation.
----------------------------------------- --------------------------------------------------------------------------
</TABLE>
The Advisor also serves as Advisor to several management investment companies,
some of which fund variable annuity separate accounts of certain insurance
companies.
The Fund may from time to time be compared to other Strong Funds based on a
risk/reward spectrum. In general, the amount of risk associated with any
investment product is commensurate with that product's potential level of
reward. The Strong Funds risk/reward continuum or any Fund's position on the
continuum may be described or diagrammed in marketing materials. The Strong
Funds risk/reward continuum positions the risk and reward potential of each
Strong Fund relative to the other Strong Funds, but is not intended to position
any Strong Fund relative to other mutual funds or investment products. Marketing
materials may also discuss the relationship between risk and reward as it
relates to an individual investor's portfolio.
TYING TIME FRAMES TO YOUR GOALS. There are many issues to consider as you make
your investment decisions, including analyzing your risk tolerance, investing
experience, and asset allocations. You should start to organize your investments
by learning to link your many financial goals to specific time frames. Then you
can begin to identify the appropriate types of investments to help meet your
goals. As a general rule of thumb, the longer your time horizon, the more price
fluctuation you will be able to tolerate in pursuit of higher returns. For that
reason, many people with longer-term goals select stocks or long-term bonds, and
many people with nearer-term goals match those up with for instance, short-term
bonds. The Advisor developed the following suggested holding periods to help our
investors set realistic expectations for both the risk and reward potential of
our funds. (See table below.) Of course, time is just one element to consider
when making your investment decision.
STRONG FUNDS SUGGESTED MINIMUM HOLDING PERIODS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
UNDER 1 YEAR 1 TO 2 YEARS 4 TO 7 YEARS 5 OR MORE YEARS
------------ ------------ ------------ ---------------
Heritage Money Fund Advantage Fund Conservative Portfolio Aggressive Portfolio
Investors Money Fund Municipal Advantage Fund Corporate Bond Fund American Utilities Fund
Money Market Fund Government Securities Fund Asia Pacific Fund
Municipal Money Market Fund 2 TO 4 YEARS High-Yield Bond Fund Balanced Fund
------------
Tax-Free Money Fund Short-Term Bond Fund High-Yield Municipal Bond Blue Chip 100 Fund
Short-Term High Yield Bond Fund Discovery Fund
Fund International Bond Fund Dow 30 Value Fund
Short-Term High Yield Municipal Bond Fund Enterprise Fund
Municipal Fund Foreign MajorMarketsSM Fund
Short-Term Municipal Bond Growth Fund
Fund Growth 20 Fund
Growth and Income Fund
Index 500 Fund
International Stock Fund
Internet Fund
Large Cap Growth Fund
Limited Resources Fund
Mid Cap Disciplined Fund
Moderate Portfolio
Opportunity Fund
Overseas Fund
Schafer Balanced Fund
Schafer Value Fund
Strategic Growth Fund
Technology 100 Fund
U.S. Emerging Growth Fund
Value Fund
</TABLE>
PRODUCT LIFE CYCLES. Discussions of product life cycles and their potential
impact on the Fund's investments may be used in advertisements and sales
materials. The basic idea is that most products go through a life cycle that
generally consists of an early adoption phase, a rapid growth phase, and a
maturity phase. The early adoption phase generally includes the time period
during which the product is first being developed and marketed. The rapid growth
phase usually occurs when the general public becomes aware of the new product
and sales are rising. The maturity phase generally includes the time period when
the public has been aware of the product for a period of time and sales have
leveled off or declined.
By identifying and investing in companies that produce or service products that
are in the early adoption phase of their life cycle, it may be possible for the
Fund to benefit if the product moves into a prolonged period of rapid growth
that enhances the company's stock price. However, you should keep in mind that
investing in a product in its early adoption phase does not provide any
guarantee of profit. A product may experience a prolonged rapid growth and
maturity phase without any corresponding increase in the company's stock price.
In addition, different products have life cycles that may be longer or shorter
than those depicted and these variations may influence whether the product has a
positive effect on the company's stock price. For example, a product may not
positively impact a company's stock price if it experiences an extremely short
rapid growth or maturity phase because the product becomes obsolete soon after
it is introduced to the general public. Other products may never move past the
early adoption phase and have no impact on the company's stock price.
ADDITIONAL FUND INFORMATION
PORTFOLIO CHARACTERISTICS. In order to present a more complete picture of the
Fund's portfolio, marketing materials may include various actual or estimated
portfolio characteristics, including but not limited to median market
capitalizations, earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges, growth rates,
price/book ratios, top holdings, sector breakdowns, asset allocations, quality
breakdowns, and breakdowns by geographic region.
MEASURES OF VOLATILITY AND RELATIVE PERFORMANCE. Occasionally statistics may be
used to specify fund volatility or risk. The general premise is that greater
volatility connotes greater risk undertaken in achieving performance. Measures
of volatility or risk are generally used to compare the Fund's net asset value
or performance relative to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates
volatility greater than the market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is a statistical tool that measures the
degree to which a fund's performance has varied from its average performance
during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of (SIGMA)(xi - xm)2
---------
n-1
Where: (SIGMA) = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns
during the time period.
Statistics may also be used to discuss the Fund's relative performance. One such
measure is alpha. Alpha measures the actual return of a fund compared to the
expected return of a fund given its risk (as measured by beta). The expected
return is based on how the market as a whole performed, and how the particular
fund has historically performed against the market. Specifically, alpha is the
actual return less the expected return. The expected return is computed by
multiplying the advance or decline in a market representation by the Fund's
beta. A positive alpha quantifies the value that the fund manager has added, and
a negative alpha quantifies the value that the fund manager has lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
DURATION. Duration is a calculation that seeks to measure the price sensitivity
of a bond or a bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes by taking into account the time value of
cash flows generated over the bond's life. Future interest and principal
payments are discounted to reflect their present value and then are multiplied
by the number of years they will be received to produce a value that is
expressed in years. Since duration can also be computed for the Fund, you can
estimate the effect of interest rates on the Fund's share price. Simply multiply
the Fund's duration by an expected change in interest rates. For example, the
price of the Fund with a duration of two years would be expected to fall
approximately two percent if market interest rates rose by one percentage point.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor, owned by
professionals active in its management. Recognizing that investors are the focus
of its business, the Advisor strives for excellence both in investment
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires specialized skills and
processes for each asset class and style. Therefore, the Advisor believes that
active management should produce greater returns than a passively managed index.
The Advisor has brought together a group of top-flight investment professionals
with diverse product expertise, and each concentrates on their investment
specialty. The Advisor believes that people are the firm's most important asset.
For this reason, continuity of professionals is critical to the firm's long-term
success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their impact on
the Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund include, but are not limited to, changes in interest rates,
political developments, the competitive environment, consumer behavior, industry
trends, technological advances, macroeconomic trends, and the supply and demand
of various financial instruments. In addition, marketing materials may cite the
portfolio management's views or interpretations of such factors.
EIGHT BASIC PRINCIPLES FOR SUCCESSFUL MUTUAL FUND INVESTING
These common sense rules are followed by many successful investors. They make
sense for beginners, too. If you have a question on these principles, or would
like to discuss them with us, please contact us at 1-800-368-3863.
1. HAVE A PLAN - even a simple plan can help you take control of your
financial future. Review your plan once a year, or if your circumstances
change.
2. START INVESTING AS SOON AS POSSIBLE. Make time a valuable ally. Let it put
the power of compounding to work for you, while helping to reduce your
potential investment risk.
3. DIVERSIFY YOUR PORTFOLIO. By investing in different asset classes -
stocks, bonds, and cash - you help protect against poor performance in one
type of investment while including investments most likely to help you
achieve your important goals.
4. INVEST REGULARLY. Investing is a process, not a one-time event. By
investing regularly over the long term, you reduce the impact of short-term
market gyrations, and you attend to your long-term plan before you're
tempted to spend those assets on short-term needs.
5. MAINTAIN A LONG-TERM PERSPECTIVE. For most individuals, the best discipline
is staying invested as market conditions change. Reactive, emotional
investment decisions are all too often a source of regret - and principal
loss.
6. CONSIDER STOCKS TO HELP ACHIEVE MAJOR LONG-TERM GOALS. Over time, stocks
have provided the more powerful returns needed to help the value of your
investments stay well ahead of inflation.
7. KEEP A COMFORTABLE AMOUNT OF CASH IN YOUR PORTFOLIO. To meet current needs,
including emergencies, use a money market fund or a bank account - not your
long-term investment assets.
8. KNOW WHAT YOU'RE BUYING. Make sure you understand the potential risks and
rewards associated with each of your investments. Ask questions... request
information...make up your own mind. And choose a fund company that helps
you make informed investment decisions.
STRONG FINANCIAL INTERMEDIARY GROUP
The Strong Financial Intermediary Group is dedicated to helping financial
advisors better serve their clients. Financial advisors receive regular updates
on the mutual funds managed by the Advisor, access to portfolio managers through
special conference calls, consolidated mailings of duplicate confirmation
statements, access to the Advisor's network of regional representatives, and
other specialized services. For more information on the Strong Financial
Intermediary Group, call 1-800-368-1683.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee, WI 53202, are
the independent accountants for the Fund, providing audit services and
assistance and consultation with respect to the preparation of filings with the
SEC.
LEGAL COUNSEL
Godfrey & Kahn, S.C., 780 North Water Street, Milwaukee, WI 53202, acts as legal
counsel for the Fund.
FINANCIAL STATEMENTS
The Annual Report for the Fund that is attached to this SAI contains the
following audited financial information:
1. Schedule of Investments in Securities.
2. Statement of Operations.
3. Statement of Assets and Liabilities.
4. Statements of Changes in Net Assets.
5. Notes to Financial Statements.
6. Financial Highlights.
7. Report of Independent Accountant.
<PAGE>
87
APPENDIX A- DEFINITION OF BOND RATINGS
STANDARD & POOR'S ISSUE CREDIT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The issue credit rating is not
a recommendation to purchase, sell, or hold a financial obligation, inasmuch as
it does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any credit rating
and may, on occasion, rely on unaudited financial information. Credit ratings
may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor to
meet its financial commitment on an obligation in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
'AAA'
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
'AA'
An obligation rated 'AA' differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
'A'
An obligation rated 'A' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
'BBB'
An obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
'BB'
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
'B'
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated
'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
'CCC'
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
'CC'
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
'C'
A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY HIGHLY
VULNERABLE to nonpayment. The 'C' rating may be used to cover a situation where
a bankruptcy petition has been filed or similar action taken, but payments on
this obligation are being continued. A 'C' also will be assigned to a preferred
stock issue in arrears on dividends or sinking fund payments, but that is
currently paying.
'D'
An obligation rated 'D' is in payment default. The 'D' rating category is used
when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-) : The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
r
This symbol is attached to the ratings of instruments with significant noncredit
risks. It highlights risks to principal or volatility of expected returns which
are not addressed in the credit rating. Examples include: obligations linked or
indexed to equities, currencies, or commodities; obligations exposed to severe
prepayment risk - such as interest-only or principal-only mortgage securities;
and obligations with unusually risky interest terms, such as inverse floaters.
N.R.
This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular obligation as a matter of policy.
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 the 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.
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.
<PAGE>
FITCH, INC. ("FITCH") LONG-TERM NATIONAL CREDIT RATINGS
AAA (xxx)
'AAA' national ratings denote the highest rating assigned by Fitch in its
national rating scale for that country. This rating is assigned to the "best"
credit risk relative to all other issuers or issues in the same country and will
normally be assigned to all financial commitments issued or guaranteed by the
sovereign state.
AA (xxx)
'AA' national ratings denote a very strong credit risk relative to other issuers
or issues in the same country. The credit risk inherent in these financial
commitments differs only slightly from the country's highest rated issuers or
issues.
A (xxx)
'A' national ratings denote a strong credit risk relative to other issuers or
issues in the same country. However, changes in circumstances or economic
conditions may affect the capacity for timely repayment of these financial
commitments to a greater degree than for financial commitments denoted by a
higher rated category.
BBB (xxx)
'BBB' national ratings denote an adequate credit risk relative to other issuers
or issues in the same country. However, changes in circumstances or economic
conditions are more likely to affect the capacity for timely repayment of these
financial commitments than for financial commitments denoted by a higher rated
category.
BB (xxx)
'BB' national ratings denote a fairly weak credit risk relative to other issuers
or issues in the same country. Within the context of the country, payment of
these financial commitments is uncertain to some degree and capacity for timely
repayment remains more vulnerable to adverse economic change over time.
B (xxx)
'B' national ratings denote a significantly weak credit risk relative to other
issuers or issues in the same country. Financial commitments are currently being
met but a limited margin of safety remains and capacity for continued timely
payments is contingent upon a sustained, favourable business and economic
environment.
CCC (xxx), CC (xxx), C (xxx)
These categories of national ratings denote an extremely weak credit risk
relative to other issuers or issues in the same country. Capacity for meeting
financial commitments is solely reliant upon sustained, favourable business or
economic developments.
DDD (xxx), DD (xxx), D (xxx)
These categories of national ratings are assigned to entities or financial
commitments which are currently in default.
A special identifier for the country concerned will be added to all national
ratings. For illustrative purposes, (xxx) has been used, as above.
"+" or "-" may be appended to a national rating to denote relative status within
a major rating category. Such suffixes are not added to the 'AAA (xxx)' national
rating category or to categories below 'CCC (xxx)'.
<PAGE>
SHORT-TERM RATINGS
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
'A-1'
A short-term obligation rated 'A-1' is rated in the highest category by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
'A-2'
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
'A-3'
A short-term obligation rated 'A-3' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
'B'
A short-term obligation rated 'B' is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
'C'
A short-term obligation rated 'C' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
'D'
A short-term obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
STANDARD & POOR'S SHORT-TERM MUNICIPAL ISSUE CREDIT RATINGS
SP-1
Strong capacity to pay principal and interest. An issue determined to possess a
very strong capacity to pay debt service is given a plus (+) designation.
SP-2
Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3
Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME - 1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
o Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
o Well-established access to a range
of financial markets and assured sources of alternate liquidity.
PRIME - 2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME - 3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
FITCH, INC. ("FITCH") SHORT-TERM NATIONAL CREDIT RATINGS
F1 (xxx)
Indicates the strongest capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. Under Fitch's national
rating scale, this rating is assigned to the "best" credit risk relative to all
others in the same country and is normally assigned to all financial commitments
issued or guaranteed by the sovereign state. Where the credit risk is
particularly strong, a "+" is added to the assigned rating.
F2 (xxx)
Indicates a satisfactory capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. However, the margin of
safety is not as great as in the case of the higher ratings.
F3 (xxx)
Indicates an adequate capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. However, such capacity
is more susceptible to near-term adverse changes than for financial commitments
in higher rated categories.
B (xxx)
Indicates an uncertain capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. Such capacity is highly
susceptible to near-term adverse changes in financial and economic conditions.
C (xxx)
Indicates a highly uncertain capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. Capacity or
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D (xxx)
Indicates actual or imminent payment default.
A special identifier for the country concerned will be added to all national
ratings. For illustrative purposes, (xxx) has been used, as above.
"+" or "-" may be appended to a national rating to denote relative status within
a major rating category. Such suffixes are not added to ratings other than 'F1
(xxx)'.
In certain countries, regulators have established credit rating scales, to be
used within their domestic markets, using specific nomenclature. In these
countries, our rating definitions for F1+ (xxx), F1 (xxx), F2 (xxx) and F3 (xxx)
may be substituted by the regulatory scales, E.G. A1+, A1, A2 and A3.
<PAGE>
APPENDIX B - ASSET COMPOSITION BY BOND RATINGS
For the fiscal year ended August 31, 2000, the Fund's assets were invested in
the credit categories shown below. Percentages are computed on a dollar-weighted
basis and are an average of twelve monthly calculations.
STRONG HIGH-YIELD MUNICIPAL BOND FUND
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
-------------- ---------------------------- -----------------------------------
AAA 2.5 1.8
AA 0.1 2.4
A 2.3 0.0
BBB 8.2 7.5
BB 5.7 38.4
B 0.1 26.0
CCC 0.0 1.3
CC 0.0 0.2
C 0.0 0.1
D 2.1 1.3
Total 21.0 + 79.0 = 100%
STRONG MUNICIPAL BOND FUND
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
-------------- ---------------------------- -----------------------------------
AAA 20.9 0.7
AA 14.4 3.9
A 11.5 1.4
BBB 22.5 9.0
BB 0.8 10.3
B 0.0 2.2
CCC 0.0 0.6
CC 0.0 0.2
C 0.0 0.1
D 0.3 1.2
Total 70.4 + 29.6 = 100%
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see Appendix A for the rating categories of
several NRSROs).
<PAGE>
STRONG SHORT-TERM MUNICIPAL BOND FUND
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
-------------- ---------------------------- -----------------------------------
AAA 17.5 1.9
---------------------------- -----------------------------------
AA 13.3 7.0
---------------------------- -----------------------------------
A 11.5 1.9
---------------------------- -----------------------------------
BBB 17.6 14.6
---------------------------- -----------------------------------
BB 0.6 11.6
---------------------------- -----------------------------------
B 0.0 2.1
---------------------------- ----------------------------------
CCC 0.0 0.1
---------------------------- ----------------------------------
CC 0.0 0.0
---------------------------- ----------------------------------
C 0.0 0.0
---------------------------- -----------------------------------
D 0.3 0.0
---------------------------- -----------------------------------
Total 60.8 + 39.2 = 100%
-------------- ---------------------------- -----------------------------------
STRONG SHORT-TERM HIGH YIELD MUNICIPAL FUND
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
-------------- ---------------------------- ----------------------------------
AAA 1.6 0.5
---------------------------- ----------------------------------
AA 0.0 1.8
---------------------------- ----------------------------------
A 2.7 0.1
---------------------------- ----------------------------------
BBB 13.4 8.5
---------------------------- ----------------------------------
BB 18.3 43.0
---------------------------- ----------------------------------
B 1.0 8.6
---------------------------- ----------------------------------
CCC 0.0 0.0
---------------------------- ----------------------------------
CC 0.0 0.0
---------------------------- ----------------------------------
C 0.0 0.0
---------------------------- ----------------------------------
D 0.1 0.4
---------------------------- ----------------------------------
Total 37.1 + 62.9 = 100%
-------------- ---------------------------- ----------------------------------
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see Appendix A for the rating categories of
several NRSROs).
