PROSPECTUS FEBRUARY 29, 2000
AS SUPPLEMENTED ON NOVEMBER 30, 2000
[INVESTOR CLASS (written vertically)]
The Strong
Income
Funds
[PICTURE OF MAN HOLDING TELEPHONE]
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The Strong Corporate Bond Fund
The Strong Government Securities Fund
The Strong High-Yield Bond Fund
The Strong International Bond Fund
The Strong Short-Term Bond Fund
The Strong Short-Term High Yield Bond Fund
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[STRONG LOGO] STRONG
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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.
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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?.........................................9
Who are the funds' investment advisor and portfolio managers?.................10
Other Important Information You Should Know.....................................
Comparing the Funds...........................................................14
A Word About Credit Quality...................................................15
Financial Highlights..........................................................16
Your Account....................................................................
Share Price...................................................................23
Buying Shares.................................................................24
Selling Shares................................................................27
Additional Policies...........................................................29
Distributions.................................................................31
Taxes.........................................................................32
Services For Investors........................................................33
Reserved Rights...............................................................36
For More Information..................................................Back Cover
IN THIS PROSPECTUS, "WE" REFERS TO STRONG CAPITAL MANAGEMENT, INC., THE
INVESTMENT ADVISOR, ADMINISTRATOR, AND TRANSFER AGENT FOR THE STRONG FUNDS.
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YOUR INVESTMENT
KEY INFORMATION
WHAT ARE THE FUNDS' GOALS?
The STRONG CORPORATE BOND FUND, the STRONG GOVERNMENT SECURITIES FUND, and the
STRONG SHORT-TERM HIGH YIELD BOND FUND seek total return by investing for a
high level of current income with a moderate degree of share-price fluctuation.
The STRONG HIGH-YIELD BOND FUND seeks total return by investing for a high
level of current income and capital growth.
The STRONG INTERNATIONAL BOND FUND seeks high total return by investing for
both income and capital growth.
The STRONG SHORT-TERM BOND FUND seeks total return by investing for a high
level of current income with a low degree of share-price fluctuation.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
The CORPORATE BOND FUND invests primarily in intermediate-maturity bonds issued
by U.S. companies. The fund invests primarily in higher- and medium-quality
bonds. To increase the income it pays out, it may also invest a small portion
of its assets in lower-quality, high-yield bonds (commonly referred to as junk
bonds). The managers focus primarily upon high-yield bonds rated BB with
positive or improving credit fundamentals. The fund's dollar-weighted average
maturity will normally be between seven and twelve years. To a limited extent,
the fund may also invest in foreign securities.
((Side Box))
DURATION is a general measure of risk that indicates the sensitivity of a bond
portfolio to changes in interest rates. The higher the duration, the greater
the potential share-price volatility of a fund may be.
The GOVERNMENT SECURITIES FUND invests primarily in higher-quality bonds issued
by the U.S. government or its agencies. The fund's dollar-weighted average
maturity will normally be between five and ten years. To a limited extent, the
fund may also invest in dollar-denominated foreign securities.
The HIGH-YIELD BOND FUND invests primarily in medium- and lower-quality
corporate bonds. The managers focus primarily upon high-yield bonds with
positive or improving credit fundamentals. The fund will typically maintain a
dollar-weighted average maturity between five and ten years. The fund invests a
portion of its assets (up to 20%) in common stocks. To a limited extent, the
fund may also invest in foreign securities.
The INTERNATIONAL BOND FUND invests primarily in higher- and medium-quality
bonds issued in foreign countries. The fund may also invest up to 35% of its
assets in lower-quality, high-yield bonds (commonly referred to as junk bonds).
The fund maintains an average maturity of four to nine years. To select bonds,
the fund's managers first look at overall trends in the global economy. The
managers then examine the countries, sectors, and individual companies that may
benefit from those trends. They may create synthetic bonds to make investments
that are consistent with the fund's strategy and goals. When a bond no longer
offers attractive return potential, the managers may sell it.
The SHORT-TERM BOND FUND invests primarily in short- and intermediate-term
corporate, mortgage- and asset-backed, and U.S. government (and its agencies)
bonds. The fund invests primarily in higher- and medium-quality bonds. The
fund's dollar-weighted average maturity will normally be between one and three
years. The fund may also invest a portion of its assets in lower-quality,
high-yield bonds. The managers focus primarily upon high-yield bonds rated BB
with positive or improving credit fundamentals. To a limited extent, the fund
may also invest in foreign securities.
The SHORT-TERM HIGH YIELD BOND FUND invests primarily in short- and
intermediate-term corporate bonds. The fund invests primarily in medium- and
lower-quality, high-yield bonds. The managers focus primarily upon high-yield
bonds with positive or
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improving credit fundamentals. The fund's dollar-weighted average maturity will
normally be between one and three years. To a limited extent, the fund may also
invest in foreign securities.
Although each of the funds invest 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 manager may sell a holding if its fundamental qualities deteriorate, or to
take advantage of more attractive yield opportunities. 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. In
addition, each fund's active trading approach may increase the fund's costs
which may reduce the fund's performance. The fund's active trading approach may
also increase the amount of capital gains tax that you pay on the fund's
returns.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS?
BOND RISKS: The major risks of each bond 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.
FOREIGN SECURITIES RISKS: The CORPORATE BOND FUND, HIGH-YIELD BOND FUND,
SHORT-TERM BOND FUND, and SHORT-TERM HIGH YIELD BOND FUND each may invest up to
25% of their assets in foreign securities. The GOVERNMENT SECURITIES FUND may
invest up to 20% of its assets in dollar-denominated foreign securities. The
INTERNATIONAL BOND FUND invests predominantly in securities from foreign
markets. Foreign investments involve additional risks including currency-rate
fluctuations, political and economic instability, differences in financial
reporting standards, and less-strict regulation of securities markets. These
risks are greater in less-established, emerging markets. Other risks of
emerging foreign markets include smaller securities markets and lower trading
volumes, which may lead to greater price volatility, national policies
restricting investment opportunities, and less developed legal and accounting
structures governing investments.
FUTURES RISKS: The CORPORATE BOND FUND, GOVERNMENT SECURITIES FUND, HIGH-YIELD
BOND FUND, SHORT-TERM BOND FUND, and SHORT-TERM HIGH YIELD BOND FUND often use
futures contracts to manage risk or hedge against market volatility. Futures
are agreements for the future sale by one party and purchase by another party
of an underlying financial instrument at a specified price on a specified date.
Futures may not always be successful hedges and their prices can be highly
volatile. They may not always successfully manage risk. Using them could
lower the fund's total return, and the potential loss from the use of futures
can exceed the fund's initial investment in such contracts.
HIGH-YIELD BOND RISKS: The CORPORATE BOND FUND, the HIGH-YIELD BOND FUND, the
INTERNATIONAL BOND FUND, the SHORT-TERM BOND FUND, and the SHORT-TERM HIGH
YIELD BOND FUND invest in lower-quality bonds, commonly known as high-yield
bonds or junk bonds. 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.
MANAGEMENT RISK: Each fund is subject to management risk because it is actively
managed. There is no guarantee that the investment techniques and risk
analyses used by the managers will produce the desired results.
MORTGAGE- AND ASSET-BACKED SECURITIES RISK: The CORPORATE BOND FUND, GOVERNMENT
SECURITIES FUND, HIGH-YIELD BOND FUND, SHORT-TERM BOND FUND, and SHORT-TERM
HIGH YIELD BOND FUND invest in mortgage-backed and asset-backed securities.
These
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securities are subject to prepayment risk, which is the risk that the borrower
will prepay some or all of the principal owed to the issuer. If that happens,
the fund may have to replace the security by investing the proceeds in a less
attractive security. This could reduce the fund's share price and its income
distributions.
NONDIVERSIFIED PORTFOLIO RISK: The INTERNATIONAL BOND FUND is a nondiversified
fund so it may take large positions in individual bonds. As a result, the
shares of this fund are likely to fluctuate in value more than those of funds
investing in a broader range of securities.
SYNTHETIC BOND RISK: The INTERNATIONAL BOND FUND creates synthetic bonds to
make investments that are consistent with the fund's strategy and goals, but
which would not be practical, feasible, or otherwise competitively priced to
acquire directly. Synthetic bonds are created by combining various investment
contracts, such as futures, options, and foreign currency forward contracts, to
replicate the characteristics of some foreign government bonds. These synthetic
bonds are exposed to the general risks of international government bond
investing. In addition, the use of derivatives may increase default risks due
to the possibility that the other party to one of these contracts will not
fulfill its obligations.
The funds are appropriate for investors who are comfortable with the risks
described here. Also, the CORPORATE BOND FUND, the GOVERNMENT SECURITIES FUND,
the HIGH-YIELD BOND FUND, and the INTERNATIONAL BOND FUND are appropriate for
investors whose financial goals are four to seven years in the future. The
SHORT-TERM BOND FUND and the SHORT-TERM HIGH YIELD 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, except the INTERNATIONAL BOND FUND, has adopted a multiple
class plan. The CORPORATE BOND FUND, the GOVERNMENT SECURITIES FUND, and the
SHORT-TERM BOND FUND offer Investor Class shares, Advisor Class shares, and
Institutional Class shares. The HIGH-YIELD BOND FUND and the SHORT-TERM HIGH
YIELD BOND FUND offer Investor Class shares and Advisor Class shares. The
INTERNATIONAL BOND FUND only offers Investor 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.
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
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Government International Short-Term High
Year Corporate Bond Securities Short-Term Bond Bond High-Yield Bond Yield Bond
---- -------------- ---------- --------------- ------------- --------------- ---------------
1990 -6.2% 8.7% 5.3% - - -
---- -------------- ---------- --------------- ------------- --------------- ---------------
1991 14.8% 16.7% 14.6% - - -
---- -------------- ---------- --------------- ------------- --------------- ---------------
1992 9.4% 9.2% 6.7% - - -
---- -------------- ---------- --------------- ------------- --------------- ---------------
1993 16.8% 12.7% 9.3% - - -
---- -------------- ---------- --------------- ------------- --------------- ---------------
1994 -1.3% -3.4% -1.6% - - -
---- -------------- ---------- --------------- ------------- --------------- ---------------
1995 25.4% 19.9% 12.0% 19.1% - -
---- -------------- ---------- --------------- ------------- --------------- ---------------
1996 5.5% 2.8% 6.8% 8.0% 26.8% -
---- -------------- ---------- --------------- ------------- --------------- ---------------
1997 11.9% 9.1% 7.2% -4.8% 16.0% -
---- -------------- ---------- --------------- ------------- --------------- ---------------
1998 7.2% 8.1% 4.9% 15.3% 3.1% 8.4%
---- -------------- ---------- --------------- ------------- --------------- ---------------
1999 -0.2% -1.1% 4.2% -7.4% 7.8% 5.3%
---- -------------- ---------- --------------- ------------- --------------- ---------------
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BEST AND WORST QUARTERLY PERFORMANCE
(DURING THE PERIODS SHOWN ABOVE)
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FUND NAME BEST QUARTER RETURN WORST QUARTER RETURN
-------------------------- ------------------- ---------------------
Corporate Bond 7.7% (2nd Q 1995) -4.1% (1st Q 1990)
Government Securities 6.4% (2nd Q 1995) -2.5% (1st Q 1994)
High-Yield Bond 8.2% (1st Q 1996) -5.3% (3rd Q 1998)
International Bond 13.2% (1st Q 1995) -5.4% (1st Q 1997)
Short-Term Bond 5.1% (4th Q 1991) -1.3% (2nd Q 1994)
Short-Term High Yield Bond 5.3% (3rd Q 1997) 0.6% (3rd Q 1998)
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AVERAGE ANNUAL TOTAL RETURNS
AS OF 12-31-99
FUND/INDEX 1-YEAR 5-YEAR 10-YEAR SINCE INCEPTION
CORPORATE BOND -0.23% 9.64% 7.96% 9.09% (12-12-85)
Lehman Brothers Corporate
BAA Bond Index -0.82% 8.49% 8.48% 9.33%
Lipper Corporate Debt Funds
BBB Rated Index -1.12% 7.68% 7.72% 8.18%
GOVERNMENT SECURITIES -1.09% 7.54% 8.05% 8.09% (10-29-86)
Lehman Brothers
Aggregate Bond Index -0.82% 7.73% 7.70% 7.88%
Lipper General U.S. Government
Funds Index -2.66% 6.47% 6.37% 6.43%
HIGH-YIELD BOND 7.81% - - 13.13% (12-28-95)
Lehman Brothers High-Yield
Bond Index 2.39% - - 7.00%
Lipper High Current Yield
Funds Index 4.78% - - 7.58%
INTERNATIONAL BOND -7.42% 5.49% - 6.28% (3-31-94)
Salomon Smith Barney Non-U.S.
World Government Bond Index
(Currency Unhedged) -5.07% 5.90% - 5.83%
Lipper International Income
Funds Index -4.46% 7.42% - 6.11%
SHORT-TERM BOND 4.25% 6.98% 6.85% 7.30% (8-31-87)
Lehman Brothers 1-3 Year
Government/Corporate Bond Index 3.15% 6.55% 6.64% 7.03%
Lipper Short Investment Grade
Debt Funds Average 2.81% 5.97% 6.12% 6.60%
SHORT-TERM HIGH YIELD BOND 5.32% - - 8.64% (6-30-97)
Short-Term High Yield Bond Index 6.39% - - 6.09%
Lipper High Current Yield
Funds Index 4.78% - - 4.65%
THE LEHMAN BROTHERS CORPORATE BAA BOND INDEX IS AN UNMANAGED INDEX COMPRISED OF
ALL ISSUES WITHIN THE LEHMAN BROTHERS CORPORATE BOND INDEX THAT ARE RATED BAA
BY MOODY'S INVESTOR SERVICES, INC. THE LIPPER CORPORATE DEBT FUNDS BBB RATED
INDEX IS AN EQUALLY-WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS
IN THIS LIPPER CATEGORY. THE LEHMAN BROTHERS AGGREGATE BOND INDEX IS AN
UNMANAGED INDEX COMPOSED OF INVESTMENT-GRADE SECURITIES FROM THE LEHMAN
BROTHERS GOVERNMENT/CORPORATE BOND INDEX, MORTGAGE-BACKED SECURITIES INDEX, AND
ASSET-BACKED SECURITIES INDEX. THE LIPPER GENERAL U.S. GOVERNMENT FUNDS INDEX
IS AN EQUALLY-WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS IN
THIS LIPPER CATEGORY. THE LEHMAN BROTHERS HIGH-YIELD BOND INDEX IS AN
UNMANAGED INDEX GENERALLY REPRESENTATIVE OF CORPORATE BONDS RATED BELOW
INVESTMENT-GRADE. THE LIPPER HIGH CURRENT YIELD FUNDS INDEX IS AN
EQUALLY-WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS IN THIS
LIPPER CATEGORY. THE SALOMON SMITH BARNEY NON-U.S. WORLD GOVERNMENT BOND INDEX
(CURRENCY UNHEDGED) IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE OF LIQUID,
NON-U.S. FIXED INCOME GOVERNMENT SECURITIES. THE LIPPER INTERNATIONAL INCOME
FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING
FUNDS IN THIS LIPPER CATEGORY. THE LEHMAN BROTHERS 1-3 YEAR
GOVERNMENT/CORPORATE BOND INDEX IS AN UNMANAGED INDEX GENERALLY REPRESENTATIVE
OF GOVERNMENT AND INVESTMENT-GRADE CORPORATE SECURITIES WITH MATURITIES OF ONE
TO THREE YEARS. THE LIPPER SHORT INVESTMENT GRADE DEBT FUNDS AVERAGE
REPRESENTS FUNDS THAT INVEST AT LEAST 65% OF THEIR ASSETS IN INVESTMENT-GRADE
DEBT ISSUES (RATED IN THE TOP FOUR GRADES) WITH DOLLAR-WEIGHTED AVERAGE
MATURITIES OF LESS THAN THREE YEARS. THE SHORT-TERM HIGH YIELD BOND INDEX IS A
MARKET VALUE WEIGHTED BLEND OF THE MERRILL LYNCH HIGH YIELD U.S. CORPORATES,
CASH PAY, BB RATED, 1-3 YEARS INDEX AND THE MERRILL LYNCH HIGH YIELD U.S.
CORPORATES, CASH PAY, B RATED, 1-3 YEARS INDEX. IT IS AN UNMANAGED INDEX
GENERALLY REPRESENTATIVE OF CORPORATE DEBT RATED BELOW INVESTMENT-GRADE WITH
MATURITIES OF ONE TO THREE YEARS WHICH MORE CLOSELY APPROXIMATES THE
PERFORMANCE OF THE SHORT-TERM HIGH YIELD BOND FUND. THE LIPPER HIGH CURRENT
YIELD FUNDS INDEX IS AN EQUALLY-WEIGHTED PERFORMANCE INDEX OF THE LARGEST
QUALIFYING FUNDS IN THIS LIPPER CATEGORY.
For current yield information on these funds, call 800-368-3863.
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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. Shares of the HIGH-YIELD BOND FUND held
for less than six months are subject to a redemption fee of 1.00%. Redemption
fees are paid directly to the fund.
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)
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MANAGEMENT TOTAL ANNUAL FUND
FUND FEES OTHER EXPENSES OPERATING EXPENSES
-------------------------- ---------- ------------------
Corporate Bond 0.375% 0.46% 0.84%
Government Securities 0.35% 0.45% 0.80%
High-Yield Bond 0.375% 0.49% 0.87%
International Bond 0.70% 0.93% 1.63%
Short-Term Bond 0.375% 0.44% 0.82%
Short-Term High Yield Bond 0.375% 0.45% 0.83%
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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:
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FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------- ------ ------- ------- --------
Corporate Bond $86 $268 $466 $1,037
Government Securities $82 $255 $444 $990
High-Yield Bond $89 $278 $482 $1,073
International Bond $166 $514 $887 $1,933
Short-Term Bond $84 $262 $455 $1,014
Short-Term High Yield Bond $85 $265 $460 $1,025
</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 over $38 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.
JOHN T. BENDER co-manages the CORPORATE BOND FUND, the INTERNATIONAL BOND FUND,
and SHORT-TERM BOND FUND. He has over ten years of investment experience and is
a Chartered Financial Analyst and a Certified Public Accountant. Mr. Bender
joined Strong in February 1987. He has co-managed the CORPORATE BOND FUND since
January 1996, the SHORT-TERM BOND FUND since
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November 1998, and the INTERNATIONAL BOND FUND since August 1999. From October
1990 to January 1996, Mr. Bender was a fixed income research analyst and
trader. He received his bachelors degree in Accounting from Marquette
University in 1988.
JEFFREY A. KOCH co-manages the CORPORATE BOND FUND, the HIGH-YIELD BOND FUND,
and the SHORT-TERM HIGH YIELD BOND FUND. He has over ten years of investment
experience and is a Chartered Financial Analyst. Mr. Koch joined Strong in
June 1989. He has been a portfolio manager since January 1990. He has managed
or co-managed the CORPORATE BOND FUND since July 1991, the HIGH-YIELD BOND FUND
since its inception in December 1995, and the SHORT-TERM HIGH YIELD BOND FUND
since its inception in June 1997. Prior to joining Strong, Mr. Koch was
employed by Fossett Corporation, a clearing firm, as a market maker clerk. Mr.
Koch received his bachelors degree in Economics from the University of
Minnesota in 1987 and his Masters of Business Administration in Finance from
Washington University in 1989.
THOMAS M. PRICE co-manages the HIGH-YIELD BOND FUND and the SHORT-TERM HIGH
YIELD BOND FUND. He has over ten years of investment experience and is a
Chartered Financial Analyst. He has co-managed the HIGH-YIELD BOND FUND and
the SHORT-TERM HIGH YIELD BOND FUND since May 1998. He joined Strong in April
1996 as a research analyst and became a co-portfolio manager in May 1998. From
July 1992 to April 1996 he was employed by Northwestern Mutual Life Insurance
as a high-yield bond analyst. He was a financial analyst at Houlihan, Lokey,
Howard & Zukin for two years prior to that. He received his bachelors degree
in Finance from the University of Michigan in 1989 and his Masters of
Management in Finance from the Kellogg Graduate School of Management,
Northwestern University in 1992.
JANET S. RILLING co-manages the Corporate BOND FUND. She has over five years
of investment experience and is a Chartered Financial Analyst and Certified
Public Accountant. She joined Strong as a research analyst in May 1994. From
September 1990 to August 1993, Ms. Rilling was employed at Coopers & Lybrand as
an auditor. She received her bachelors degree in Accounting and Finance from
the University of Wisconsin in 1990 and her Master of Business Administration
in Finance from the University of Wisconsin in 1995.
THOMAS A. SONTAG co-manages the GOVERNMENT SECURITIES FUND. He has over 15
years of industry experience. He joined Strong in November 1998 as a
co-portfolio manager of the GOVERNMENT SECURITIES FUND. For 12 years prior to
joining Strong, Mr. Sontag worked at Bear Stearns & Co., most recently serving
as a Managing Director of the Fixed Income Department from 1986 to November
1998. From September 1982 until December 1985, Mr. Sontag was employed in the
Fixed Income Department at Goldman Sachs & Co. Mr. Sontag received his
bachelors degree in Economics and Finance from the University of Wisconsin in
1981 and his Masters of Business Administration in Finance from the University
of Wisconsin in 1982.
BRADLEY C. TANK co-manages the GOVERNMENT SECURITIES FUND, the INTERNATIONAL
BOND FUND, and the SHORT-TERM BOND FUND. He has over 15 years of investment
experience. Mr. Tank joined Strong as a fixed income portfolio manager in June
1990. He has managed or co-managed the GOVERNMENT SECURITIES FUND and the
SHORT-TERM BOND FUND since he joined Strong and has co-managed the
INTERNATIONAL BOND FUND since August 1999. For eight years prior to joining
Strong, he worked for Salomon Brothers Inc. He was a vice president and fixed
income specialist for six years and for the two years prior to that, a fixed
income specialist. He received his bachelors degree in English from the
University of Wisconsin in 1980 and his Masters of Business Administration in
Finance from the University of Wisconsin in 1982, where he also completed the
Applied Securities Analysis Program. Mr. Tank chairs Strong's Fixed Income
Investment Committee.
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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:
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AVERAGE INCOME
FUND MATURITY/DURATION CREDIT QUALITY POTENTIAL VOLATILITY
Corporate Bond 7 to 12 At least 75% higher- or Moderate Moderate
years maturity* medium-quality to High
Up to 25% rated lower-
quality
Government Securities 5 to 10 100% Moderate Moderate
years maturity* higher- or medium-quality to High
High-Yield Bond 5 to 10 At least 65% High Moderate
years maturity* medium- or lower-quality to High
Not expected to exceed
10% rated in default
International Bond 4 to 9 At least 65% rated higher- and Moderate Moderate
years maturity medium-quality to High to High
Up to 35% rated lower-quality
Short-Term 1 to 3 At least 75% Moderate Low
Bond years maturity higher- or medium-quality
Up to 25% rated lower-
quality
Short-Term 1 to 3 At least 65% Moderate Low to
High Yield Bond years maturity medium- or lower-quality to High Moderate
</TABLE>
* EXPECTED RANGE
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.
9
<PAGE>
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 S&P'S DEFINITION S&P'S RATINGS GROUP RATING CATEGORY
QUALITY
---------- ------------------- ------------------- ---------------
Higher Highest quality AAA First highest
High quality AA Second highest
Upper medium grade A Third highest
---------- ------------------- ------------------- ---------------
Medium Medium grade BBB Fourth highest
---------- ------------------- ------------------- ---------------
Lower Low grade BB
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.
Investments in lower-quality bonds (junk 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 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.
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
STRONG CORPORATE BOND FUND - INVESTOR CLASS
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Dec. 31,
SELECTED PER-SHARE DATA(a) 1999 1998 1997 1996 1995(b) 1994
Net Asset Value,
Beginning of Period $11.09 $11.08 $10.64 $10.56 $9.36 $10.24
Income From Investment Operations:
Net Investment Income 0.73 0.73 0.74 0.73 0.63 0.73
Net Realized and Unrealized
Gains (Losses) on Investments (0.49) 0.02 0.44 0.08 1.22 (0.87)
Total from Investment Operations 0.24 0.75 1.18 0.81 1.85 (0.14)
Less Distributions:
From Net Investment Income (0.73) (0.73) (0.74) (0.73) (0.63) (0.73)
In Excess of Net Investment Income - (0.01) - - (0.02) (0.01)
Total Distributions (0.73) (0.74) (0.74) (0.73) (0.65) (0.74)
Net Asset Value, End of Period $10.60 $11.09 $11.08 $10.64 $10.56 $9.36
RATIOS AND SUPPLEMENTAL DATA
Total Return +2.2% +6.8% +11.5% +8.0% +20.3% -1.3%
Net Assets, End of Period
(In Millions) $868 $819 $492 $298 $218 $123
Ratio of Expenses to
Average Net Assets 0.8% 0.9% 1.0% 1.0% 1.0%* 1.1%
Ratio of Net Investment
Income to Average Net Assets 6.7% 6.5% 6.8% 7.0% 7.5%* 7.6%
Portfolio Turnover Rate(c) 403.2% 366.9% 542.4% 672.8% 621.4% 603.0%
* 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 1995, the fund changed its fiscal year-end from December to October.
(c) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
STRONG GOVERNMENT SECURITIES FUND - INVESTOR CLASS
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Dec. 31,
SELECTED PER-SHARE DATA(a) 1999 1998 1997 1996 1995(b) 1994
Net Asset Value,
Beginning of Period $11.04 $10.70 $10.44 $10.60 $9.63 $10.61
Income From Investment Operations:
Net Investment Income 0.58 0.60 0.65 0.63 0.54 0.62
Net Realized and Unrealized
Gains (Losses) on Investments (0.58) 0.34 0.26 (0.16) 0.99 (0.98)
Total from Investment
Operations (0.00) 0.94 0.91 0.47 1.53 (0.36)
Less Distributions:
From Net Investment Income (0.58) (0.60) (0.65) (0.63) (0.54) (0.62)
In Excess of Net Investment
Income - - - - (0.02) -
From Net Realized Gains (0.23) - - - - -
Total Distributions (0.81) (0.60) (0.65) (0.63) (0.56) (0.62)
Net Asset Value,
End of Period $10.23 $11.04 $10.70 $10.44 $10.60 $9.63
RATIOS AND SUPPLEMENTAL DATA
Total Return 0.0%(c) +9.1% +9.1% +4.6% +16.2% -3.4%
Net Assets, End of Period
(In Millions) $1,340 $1,309 $843 $638 $456 $277
Ratio of Expenses to
Average Net Assets 0.8% 0.8% 0.8% 0.9% 0.9%* 0.9%
Ratio of Net Investment
Income to Average Net Assets 5.5% 5.5% 6.2% 6.0% 6.2%* 6.2%
Portfolio Turnover Rate(d) 185.3% 284.1% 474.9% 457.6% 409.2% 479.0%
* 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 1995, the fund changed its fiscal year-end from December to
October.
(c) Amount calculated is less than 0.1%.
(d) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
STRONG HIGH-YIELD BOND FUND - INVESTOR CLASS
Oct. 31, Oct. 31, Oct. 31, Oct. 31,
SELECTED PER-SHARE DATA(a) 1999 1998 1997 1996(b)
Net Asset Value, Beginning of Period $10.73 $11.94 $11.26 $10.00
Income From Investment Operations:
Net Investment Income 1.09 1.05 1.05 0.84
Net Realized and Unrealized
Gains on Investments (0.05) (0.89) 0.81 1.26
Total from Investment Operations 1.04 0.16 1.86 2.10
Less Distributions:
From Net Investment Income (1.08) (1.04) (1.05) (0.84)
In Excess of Net Investment Income - (0.01) - -
From Net Realized Gains (0.09) (0.32) (0.13) -
Total Distributions (1.17) (1.37) (1.18) (0.84)
Net Asset Value, End of Period $10.60 $10.73 $11.94 $11.26
RATIOS AND SUPPLEMENTAL DATA
Total Return +9.8% +0.9% +17.3% +21.7%
Net Assets, End of Period
(In Millions) $595 $462 $510 $217
Ratio of Expenses to Average Net
Assets without Waivers or Absorptions 0.8% 0.8% 0.8% 1.0%*
Ratio of Expenses to
Average Net Assets 0.8% 0.8% 0.6% 0.0%*
Ratio of Net Investment Income
to Average Net Assets 9.8% 8.8% 8.9% 9.6%*
Portfolio Turnover Rate 144.7% 224.4% 409.3% 390.8%
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
fund outstanding for the entire period.
(b) For the period from January 1, 1996 (Commencement of Operations)
to October 31, 1996.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
STRONG INTERNATIONAL BOND FUND
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Dec. 31,
SELECTED PER-SHARE DATA (a) 1999 1998 1997 1996 1995(b) 1994(c)
Net Asset Value,
Beginning of Period $11.89 $11.58 $11.87 $11.48 $10.36 $10.00
Income From Investment Operations:
Net Investment Income 0.54 0.57 1.03 0.80 0.78 0.46
Net Realized and Unrealized
Gains (Losses) on Investments (1.14) 0.58 (1.11) 0.15 1.00 0.40
Total from Investment Operations (0.60) 1.15 (0.08) 0.95 1.78 0.86
Less Distributions:
From Net Investment Income (0.65) (0.58) (0.20) (0.50) (0.66) (0.46)
In Excess of Net Investment Income - - - - - (0.02)
From Net Realized Gains - - - (0.06) - -
In Excess of Net Realized Gains - (0.26) (0.01) - - (0.02)
Total Distributions (0.65) (0.84) (0.21) (0.56) (0.66) (0.50)
Net Asset Value, End of Period $10.64 $11.89 $11.58 $11.87 $11.48 $10.36
RATIOS AND SUPPLEMENTAL DATA
Total Return -5.3% +10.9% -0.7% +8.6% +17.3% +8.7%
Net Assets, End of Period
(In Millions) $19 $20 $28 $31 $21 $10
Ratio of Expenses to Average
Net Assets without Waivers
and Absorptions 1.6% 1.6% 1.5% 1.8% 2.0%* 2.0%*
Ratio of Expenses to
Average Net Assets 1.6% 1.5% 0.7% 0.0% 0.0%* 0.0%*
Ratio of Net Investment
Income to Average Net Assets 4.7% 5.3% 8.1% 7.4% 8.3%* 7.9%*
Portfolio Turnover Rate 45.7% 158.8% 208.4% 258.3% 473.3% 679.3%
</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 1995, the Fund changed its fiscal year-end from December to
October.
(c) For the period from March 31, 1994 (inception) to December 31, 1994.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
STRONG SHORT-TERM BOND FUND - INVESTOR CLASS
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Dec. 31,
SELECTED PER-SHARE DATA(a) 1999 1998 1997 1996 1995(b) 1994
Net Asset Value,
Beginning of Period $9.57 $9.78 $9.75 $9.77 $9.42 $10.23
Income From Investment Operations:
Net Investment Income 0.62 0.66 0.69 0.69 0.56 0.64
Net Realized and Unrealized
Gains (Losses) on Investments (0.17) (0.21) 0.03 (0.02) 0.35 (0.80)
Total from Investment Operations 0.45 0.45 0.72 0.67 0.91 (0.16)
Less Distributions:
From Net Investment Income (0.61) (0.66) (0.69) (0.69) (0.56) (0.65)
In Excess of Net
Investment Income - 0.00(c) - - - -
Total Distributions (0.61) (0.66) (0.69) (0.69) (0.56) (0.65)
Net Asset Value, End of Period $9.41 $9.57 $9.78 $9.75 $9.77 $9.42
RATIOS AND SUPPLEMENTAL DATA
Total Return +4.8% +4.7% +7.6 +7.1% +9.9% -1.6%
Net Assets, End of Period
(In Millions) $1,272 $1,329 $1,310 $1,148 $1,083 $1,041
Ratio of Expenses to
Average Net Assets 0.8% 0.8% 0.9% 0.9% 0.9%* 0.9%
Ratio of Net Investment
Income to Average Net Assets 6.5% 6.7% 7.0% 7.1% 7.0%* 6.5%
Portfolio Turnover Rate(d) 124.2% 138.3% 193.8% 191.5% 317.1% 249.7%
* 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 1995, the fund changed its fiscal year-end from December to
October.
(c) Amount calculated is less than $0.01.
(d) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
STRONG SHORT-TERM HIGH YIELD BOND FUND - INVESTOR CLASS
Oct. 31, Oct. 31, Oct. 31,
SELECTED PER-SHARE DATA(a) 1999 1998 1997(b)
Net Asset Value, Beginning of Period $10.20 $10.24 $10.00
Income From Investment Operations:
Net Investment Income 0.79 0.77 0.25
Net Realized and Unrealized
Gains on Investments 0.06 0.01 0.24
Total from Investment Operations 0.85 0.78 0.49
Less Distributions:
From Net Investment Income (0.79) (0.77) (0.25)
From Net Realized Gains (0.05) (0.05) -
Total Distributions (0.84) (0.82) (0.25)
Net Asset Value, End of Period $10.21 $10.20 $10.24
RATIOS AND SUPPLEMENTAL DATA
Total Return +8.5% +7.7% +4.9%
Net Assets, End of Period (In Millions) $252 $106 $45
Ratio of Expenses to Average Net Assets 0.8% 0.9% 1.0%*
Ratio of Net Investment Income
to Average Net Assets 7.6% 7.4% 7.7%*
Portfolio Turnover Rate 60.1% 190.1% 96.2%
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
fund outstanding for the entire period.
(b) For the period from June 30, 1997 (Inception) to October 31, 1997.
</TABLE>
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 (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.
10
<PAGE>
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
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.
--------------------------------------------------------
</TABLE>
FOREIGN SECURITIES
Some of a fund's portfolio securities may be listed on foreign exchanges that
trade on days when we do not calculate an NAV. As a result, a fund's NAV may
change on days when you will not be able to purchase or redeem shares. In
addition, a foreign exchange may not value its listed securities at the same
time that we calculate a fund's NAV. Events affecting the values of portfolio
securities that occur between the time a foreign exchange assigns a price to
the portfolio securities and the time when we calculate a fund's NAV generally
will not be reflected in the fund's NAV. These events will be reflected in the
fund's NAV when we, under the supervision of the Board of Directors of the
Strong Funds, determine that they would have a material effect on the fund's
NAV.
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
----------------------------- ----------------------------------- -----------------------------
Education IRA accounts $500 $50
----------------------------- ----------------------------------- -----------------------------
Other IRAs and $250 $50
UGMA/UTMA accounts
----------------------------- ----------------------------------- -----------------------------
SIMPLE IRA, SEP-IRA, the lesser of $250 or $25 per month $50
403(b)(7), Keogh, Pension
Plan, and Profit Sharing Plan
accounts
----------------------------- ----------------------------------- -----------------------------
</TABLE>
PLEASE REMEMBER ...
- You cannot use an Automatic Investment Plan with an Education IRA.
- If you open a qualified retirement plan account where we or one of our
alliance partners provides administrative services, there is no initial
investment minimum.
MULTIPLE CLASS PLAN
Each fund, except the INTERNATIONAL BOND FUND, has adopted a multiple class
plan. The CORPORATE BOND FUND, the GOVERNMENT SECURITIES FUND, and the
SHORT-TERM BOND FUND offer Investor Class shares, Advisor Class shares, and
Institutional Class shares and the HIGH-YIELD BOND FUND and the SHORT-TERM
HIGH YIELD BOND FUND offer Investor Class shares and Advisor Class shares.
The INTERNATIONAL BOND FUND only offers Investor Class shares. Each class is
offered at its net asset value and is subject to fees and expenses, which 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).
11
<PAGE>
EXCHANGE OPTION
Sign up for the exchange option when you open your account. To add this
option to an existing account, visit the Investor Services area at
WWW.ESTRONG.COM or call 800-368-3863 for a Shareholder Account Options Form.
((Side Box))
QUESTIONS?
Call 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 Investor Services area at WWW.ESTRONG.COM or call us at
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 800-368-7550. See
"Services for Investors" for more information.
STRONG NETDIRECT(R)
You can use Strong netDirect(R) 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. Call 800-368-3863 for hours and directions, or for the location of
our other Investor Centers.
WIRE
Call 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 Investor Services area at
WWW.ESTRONG.COM or by calling 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.
PLEASE REMEMBER . . .
- We only accept checks payable to Strong.
- We do not accept cash, third-party checks, credit card convenience checks, or
checks drawn on banks outside the U.S.
- 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.
12
<PAGE>
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 Investor Services area at WWW.ESTRONG.COM, or by calling
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 800-368-7550. See "Services
for Investors" for more information.
STRONG NETDIRECT(R)
You can use Strong netDirect(R) 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. Call 800-368-3863 for hours and directions, or for the location of
our other Investor Centers.
AUTOMATIC INVESTMENT SERVICES
You can set up automatic withdrawals from your account at regular intervals.
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 Investor Services area at
WWW.ESTRONG.COM or by calling 800-368-3863 for the appropriate form.
BROKER-DEALER
You may sell shares through a broker-dealer or other intermediary who may
charge you a fee.
CHECKWRITING
Sign up for free checkwriting when you open your account or call 800-368-3863
to add it later to an existing account. Check redemptions must be for a
minimum of $500. You cannot write a check to close out an account.
PLEASE REMEMBER ...
- If you recently purchased shares, a redemption request on those shares will
generally not be honored until 10 days after we receive the purchase check or
electronic transaction.
- You will be charged a $10 service fee for a stop-payment on a check written
on your Strong Funds account.
- Some transactions and requests require a signature guarantee.
13
<PAGE>
- 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.
- With an IRA (or other retirement account), you will be charged (1) a $10
annual account maintenance fee for each account up to a maximum of $30 and
(2) a $50 fee for transferring assets to another custodian or for closing an
account.
- If you sell shares out of a non-IRA retirement account and you are eligible
to roll the sale proceeds into another retirement plan, we will withhold for
federal income tax purposes a portion of the sale proceeds unless you
transfer all of the proceeds to an eligible retirement plan.
((Side Box))
There may be special distribution requirements that apply to retirement
accounts. For instructions on
- Roth and Traditional IRA accounts, call
800-368-3863, and
- SIMPLE IRA, SEP-IRA, 403(b)(7), Keogh, Pension Plan, Profit Sharing Plan, or
401(k) Plan accounts, call 800-368-2882.
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
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
$50,000. 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.
--------------------------------------------------------
</TABLE>
ADDITIONAL POLICIES
TELEPHONE AND INTERNET TRANSACTIONS
We use reasonable procedures to confirm that telephone and Internet 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 by computer, provided
we reasonably believe the instructions were genuine. To safeguard your account,
please keep your Strong Direct(R) and Strong netDirect(R) 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
800-368-7550, or Strong netDirect(R), 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 netDirect(R).
INVESTING THROUGH A THIRD PARTY
If you invest through a third party (rather than directly with Strong), 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 if you are not sure.
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.
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EARLY REDEMPTION FEE
The HIGH-YIELD BOND FUND can experience substantial price fluctuations and is
intended for long-term investors. Short-term "market timers" engage in
frequent purchases and redemptions that can disrupt the fund's investment
program and create additional transaction costs that are borne by all
shareholders. For these reasons, the HIGH-YIELD BOND FUND charges a 1.00% fee
on redemptions (including exchanges) of fund shares held for less than six
months. Redemption fees will be paid to the fund. The fund will use the
"first-in, first-out" (FIFO) method to determine the six-month holding period.
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.
VERIFICATION OF ACCOUNT STATEMENTS
You should contact Strong in writing regarding any errors or discrepancies
within 45 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 45
days.
DISTRIBUTIONS
DISTRIBUTION POLICY
Each fund, except the INTERNATIONAL BOND FUND, generally pays you dividends
from net investment income monthly and distributes any net capital gains that
it realizes annually. The INTERNATIONAL BOND FUND generally pays you
dividends from net investment income quarterly 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 GAIN DISTRIBUTIONS
Your dividends and capital gain 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 gain distributions, please call 800-368-3863.
EFFECTS OF FOREIGN CURRENCY ON DIVIDENDS FROM THE INTERNATIONAL BOND FUND
Foreign currency losses could cause the INTERNATIONAL BOND FUND'S dividends to
exceed its net investment income in any year. If this happens, all or a
portion of those dividends may be treated as a return of capital to its
shareholders. To guard against a return of capital, we may adjust the fund's
dividends to take currency fluctuations into account - this may cause
dividends to vary or be suspended. Although a return of capital is not taxed,
it does reduce the cost basis of your shares.
TAXES
TAXABLE DISTRIBUTIONS
Any net investment income and net short-term capital gain distributions you
receive are 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. Please note, however, under federal
law, the interest income earned from U.S. Treasury securities is exempt from
state and local taxes. All states allow mutual funds to pass through that
exemption to their shareholders, although there are conditions to this
exemption in some states.
15
<PAGE>
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
Generally, if your investment is in a Traditional IRA or
other TAX-DEFERRED ACCOUNT, your dividends and
distributions will not be taxed at the time they are paid,
but instead at the time you withdraw them from your
account.
----------------------------------------------------------
</TABLE>
RETURN OF CAPITAL
If your fund's (1) income distributions exceed its net investment income and
net short-term capital gains or (2) capital gain distributions exceed its net
capital gains in any year, all or a portion of those distributions may be
treated as a return of capital to you. Although a return of capital is not
taxed, it will 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 gain
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 (SSN) or
Tax Identification Number (TIN).
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
Unless your investment is in a tax-deferred retirement
account such as an IRA, YOU MAY WANT TO AVOID selling
shares of a mutual fund at a loss and then investing in the
same fund within 30 days before or after the sale. This is
called a wash sale and you will not be allowed to claim a
tax loss on the transaction.
-----------------------------------------------------------
</TABLE>
Because everyone's tax situation is unique, you should consult your tax
professional for assistance.
SERVICES FOR INVESTORS
Strong provides you with a variety of services to help you manage your
investment. For more details, call 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 (800-368-3550), to access fund and account
information (800-368-5550), and to make purchases, exchanges, or redemptions
among your existing accounts if you have elected these services
(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 NETDIRECT(R)
If you are a shareholder, you may use Strong netDirect(R) to access your
account information 24 hours a day from your personal computer. Strong
netDirect(R) 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 netDirect(R) at WWW.ESTRONG.COM.
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<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 tax purposes and may result in a capital
gain or loss. Some Strong Funds that you may want to exchange into may charge
a redemption fee of 0.50% to 1.00% on the sale of shares held for less than
six months. The HIGH-YIELD BOND FUND charges an early redemption fee of
1.00%. Purchases by exchange are subject to the minimum investment
requirements and other criteria of the fund purchased.
STRONG CHECKWRITING
Strong Funds offers checkwriting 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.
STRONG RETIREMENT PLAN SERVICES
We offer a wide variety of retirement plans for individuals and institutions,
including large and small businesses. For information on:
- INDIVIDUAL RETIREMENT PLANS, including Traditional IRAs and Roth IRAs, call
800-368-3863.
- QUALIFIED RETIREMENT PLANS, including, SIMPLE IRAs, SEP-IRAs, 403(b)(7)s,
Keoghs, Pension Plans, Profit Sharing Plans, and 401(k) Plans, call
800-368-2882.
SOME OF THESE SERVICES MAY BE SUBJECT TO ADDITIONAL RESTRICTIONS OR
CONDITIONS. CALL 800-368-3863 FOR MORE INFORMATION.
17
<PAGE>
RESERVED RIGHTS
We reserve the right to:
-Refuse, change, discontinue, or temporarily suspend account services,
including purchase, exchange, or telephone and Strong netDirect(R) redemption
privileges, for any reason.
-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).
-Change the minimum or maximum investment amounts.
-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).
-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.
-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 checkwriting.
-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.
-We may waive the minimum initial investment at our discretion.
-Reject any purchase or redemption request that does not contain all required
documentation.
-Amend or terminate purchases in kind at any time.
18
<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)
414-359-1400 or 800-368-3863 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 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 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 Corporate Bond Fund, a series of Strong Corporate Bond Fund, Inc., SEC
file number: 811-4390
Strong Government Securities Fund, a series of Strong Government Securities
Fund, Inc., SEC file number: 811-4798
Strong High-Yield Bond Fund, a series of Strong Income Funds, Inc., SEC file
number: 811-6195
Strong International Bond Fund, a series of Strong International Income Funds
Inc., SEC file number: 811-8318
Strong Short-Term Bond Fund, a series of Strong Short-Term Bond Fund, Inc., SEC
file number: 811-5108
Strong Short-Term High Yield Bond Fund, a series of Strong Income Funds, Inc.,
SEC file number: 811-6195
19
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
STRONG CORPORATE BOND FUND, A SERIES FUND OF STRONG CORPORATE BOND FUND, INC.
STRONG GOVERNMENT SECURITIES FUND, A SERIES FUND OF STRONG GOVERNMENT
SECURITIES FUND, INC.
STRONG HIGH-YIELD BOND FUND, A SERIES FUND OF STRONG INCOME FUNDS, INC.
STRONG INTERNATIONAL BOND FUND, A SERIES FUND OF STRONG INTERNATIONAL INCOME
FUNDS, INC.
STRONG SHORT-TERM BOND FUND, A SERIES FUND OF STRONG SHORT-TERM BOND FUND, INC.
STRONG SHORT-TERM HIGH YIELD BOND FUND, A SERIES FUND OF STRONG INCOME FUNDS,
INC.
P.O. Box 2936
Milwaukee, WI 53201
Telephone: (414) 359-1400
Toll-Free: (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 February 29, 2000 as
supplemented on November 30, 2000. 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.
February 29, 2000 as supplemented on November 30, 2000
1
<PAGE>
TABLE OF CONTENTS PAGE
INVESTMENT RESTRICTIONS........................................................4
INVESTMENT POLICIES AND TECHNIQUES.............................................6
Strong Corporate Bond Fund.....................................................6
Strong Government Securities Fund..............................................6
Strong High-Yield Bond Fund....................................................6
Strong International Bond Fund.................................................6
Strong Short-Term Bond Fund....................................................6
Strong Short-Term High Yield Bond Fund.........................................7
Borrowing......................................................................7
Cash Management................................................................7
Convertible Securities.........................................................7
Debt Obligations...............................................................8
Depositary Receipts............................................................8
Derivative Instruments.........................................................9
Duration......................................................................17
Foreign Investment Companies..................................................18
Foreign Securities............................................................18
High-Yield (High-Risk) Securities.............................................19
Illiquid Securities...........................................................20
Lending of Portfolio Securities...............................................21
Loan Interests................................................................21
Maturity......................................................................22
Mortgage- and Asset-Backed Debt Securities....................................23
Municipal Obligations.........................................................24
Participation Interests.......................................................24
Repurchase Agreements.........................................................25
Reverse Repurchase Agreements and Mortgage Dollar Rolls.......................25
Short Sales...................................................................26
Sovereign Debt................................................................26
Standby Commitments...........................................................27
U.S. Government Securities....................................................28
Variable- or Floating-Rate Securities.........................................28
Warrants......................................................................29
When-Issued and Delayed-Delivery Securities...................................29
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities..........................29
DIRECTORS AND OFFICERS........................................................30
PRINCIPAL SHAREHOLDERS........................................................32
INVESTMENT ADVISOR............................................................33
ADMINISTRATOR.................................................................37
DISTRIBUTOR...................................................................40
DISTRIBUTION PLAN.............................................................40
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................41
CUSTODIAN.....................................................................45
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT..................................45
TAXES.........................................................................47
DETERMINATION OF NET ASSET VALUE..............................................50
ADDITIONAL SHAREHOLDER INFORMATION............................................50
ORGANIZATION..................................................................54
SHAREHOLDER MEETINGS..........................................................55
PERFORMANCE INFORMATION.......................................................55
GENERAL INFORMATION...........................................................66
INDEPENDENT ACCOUNTANTS.......................................................68
LEGAL COUNSEL.................................................................68
FINANCIAL STATEMENTS..........................................................69
APPENDIX A- DEFINITION OF BOND RATINGS........................................70
APPENDIX B - ASSET COMPOSITION BY BOND RATINGS................................78
2
<PAGE>
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.
3
<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.
Fundamental Policy No. 1 does not apply to the International Bond Fund because
the Fund is non-diversified.
4
<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.
STRONG CORPORATE BOND FUND. The Fund may invest up to 5% of its total assets
in warrants. In addition, the Advisor has adopted an internal policy that the
Fund will not invest more than 10% of its total assets in debt obligations
rated lower than BB or its equivalent. For the purposes of this internal
policy, convertible securities will not be considered debt obligations.
5
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment
objective, policies, and techniques described in the Prospectus.
STRONG CORPORATE BOND FUND
- Under normal market conditions at least 65% of the Fund's total assets will
be invested in the bonds of corporate issuers, which includes any corporate
debt obligation.
- The Fund may invest up to 35% of its total assets in any other type of fixed
income security, such as U.S. government securities and mortgage-backed
issues.
- Under normal market conditions, at least 75% of the Fund's net assets will be
invested in investment-grade debt obligations, which include a range of
securities from those in the highest rating category to those rated
medium-quality (E.G., BBB or higher by S&P).
- The Fund may also invest up to 25% of its net assets in non-investment-grade
debt obligations and other high-yield (high-risk) securities (E.G., those
bonds rated as low as C by S&P).
- The Fund may invest up to 25% of its net assets directly or indirectly in
foreign securities.
STRONG GOVERNMENT SECURITIES FUND
- Although the Fund must invest at least 80% of its net assets in U.S.
government securities, the Fund intends on investing at least 90% of its net
assets in such securities under normal market conditions.
- The balance of the Fund's assets may be invested in other investment-grade
debt obligations.
- The Fund may invest up to 20% of its net assets, directly or indirectly in
foreign securities. The Fund will limit its investments in foreign securities
to those denominated in U.S. dollars. The Funds may invest in U.S. securities
enhanced as to credit quality or liquidity by foreign issuers without regard
to this limit.
STRONG HIGH-YIELD BOND FUND
- Under normal market conditions the Fund invests at least 65% of its total
assets in medium- and lower-quality debt obligations of corporate issuers.
Medium-quality debt obligations are those rated in the fourth-highest
category (E.G., bonds rated BBB through C by S&P).
- The Fund also may invest in debt obligations that are in default, but such
obligations are not expected to exceed 10% of the Fund's net assets.
- The Fund may also invest up to 20% of its net assets in common stocks and
securities that are convertible into common stocks, such as warrants.
- The Fund may invest up to 25% of its net assets directly or indirectly in
foreign securities.
STRONG INTERNATIONAL BOND FUND
- The Fund invests primarily in investment-grade debt obligations of foreign
issuers. Under normal market conditions, the Fund will invest at least 65% of
its total assets in securities of issuers in at least three foreign
countries.
- The Fund may invest up to 35% of its net assets in non-investment-grade debt
obligations.
- The Funds will not invest more than 25% of its total assets in securities
issued by any single foreign government, but each Fund may invest more than
25% of its total assets in securities of issuers in a single foreign country.
STRONG SHORT-TERM BOND FUND
- Under normal market conditions at least 65% of the Fund's total assets will
be invested in debt obligations, such as corporate and U.S. government debt
obligations.
- Under normal market conditions, at least 75% of the Fund's net assets will be
invested in investment-grade debt obligations, which generally include a
range of obligations from those in the highest rating category to those in
the fourth-highest rating category (E.G., BBB or higher by S&P).
6
<PAGE>
- The Fund may also invest up to 25% of its net assets in non-investment-grade
debt obligations that are rated in the fifth-highest rating category (E.G.,
BB by S&P) or unrated securities of comparable quality.
- The Fund may invest up to 25% of its net assets directly or indirectly in
foreign securities.
STRONG SHORT-TERM HIGH YIELD BOND FUND
- Under normal market conditions, at least 65% of the Fund's total assets will
be invested in medium- and-lower quality debt obligations. Medium-quality
debt obligations are those rated in the fourth-highest category (E.G., bonds
rated BBB by S&P).
- The Fund intends to invest at least 80% of its net assets in debt obligations
rated B- or above by S&P or other nationally recognized statistical rating
organizations ("NRSROs").
- The Fund may invest up to 25% of its net assets directly or indirectly in
foreign 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 which may be considered a
borrowing (such as mortgage dollar rolls and reverse repurchase agreements).
However, the Fund may not purchase securities when bank borrowings exceed 5% of
the Fund's total assets. Presently, the Fund only intends to borrow from banks
for temporary or emergency purposes.
The Fund has established a line-of-credit ("LOC") with certain banks by which
it may borrow funds for temporary or emergency purposes. A borrowing is
presumed to be for temporary or emergency purposes if it is repaid by the Fund
within 60 days and is not extended or renewed. The Fund intends to use the LOC
to meet large or unexpected redemptions that would otherwise force the Fund to
liquidate securities under circumstances which are unfavorable to the Fund's
remaining shareholders. The Fund pays a commitment fee to the banks for the
LOC.
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
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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.
DEBT OBLIGATIONS
The Fund may invest a portion of its assets in debt obligations. Issuers of
debt obligations have a contractual obligation to pay interest at a specified
rate on specified dates and to repay principal on a specified maturity date.
Certain debt obligations (usually intermediate- and long-term bonds) have
provisions that allow the issuer to redeem or "call" a bond before its
maturity. Issuers are most likely to call such securities during periods of
falling interest rates and the Fund may have to replace such securities with
lower yielding securities, which could result in a lower return for the Fund.
PRICE VOLATILITY. The market value of debt obligations is affected primarily
by changes in prevailing interest rates. The market value of a debt obligation
generally reacts inversely to interest-rate changes, meaning, when prevailing
interest rates decline, an obligation's price usually rises, and when
prevailing interest rates rise, an obligation's price usually declines.
MATURITY. In general, the longer the maturity of a debt obligation, the higher
its yield and the greater its sensitivity to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. Commercial paper is generally considered the shortest
maturity form of debt obligation.
CREDIT QUALITY. The values of debt obligations may also be affected by changes
in the credit rating or financial condition of their issuers. Generally, the
lower the quality rating of a security, the higher the degree of risk as to the
payment of interest and return of principal. To compensate investors for
taking on such increased risk, those issuers deemed to be less creditworthy
generally must offer their investors higher interest rates than do issuers with
better credit ratings.
In conducting its credit research and analysis, the Advisor considers both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings
compiled by a number of Nationally Recognized Statistical Rating Organizations
("NRSROs").
DEPOSITARY RECEIPTS
The Fund may invest in foreign securities by purchasing depositary receipts,
including American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"), or other securities convertible into securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs,
in registered form, are denominated in U.S. dollars and are designed for use in
the U.S. securities markets, while EDRs, in bearer form, may be denominated in
other currencies and are designed for use in the European securities markets.
ADRs are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts evidencing
a similar arrangement. For purposes of the Fund's investment policies, ADRs
and EDRs are deemed to have the same classification as the underlying
securities they represent, except that ADRs and EDRs shall be treated as
indirect foreign investments. For example, an ADR or EDR representing
ownership of common stock will be treated as common stock. Depositary receipts
do not eliminate all of the risks associated with directly investing in the
securities of foreign issuers.
ADR facilities may be established as either "unsponsored" or "sponsored." While
ADRs issued under these two types of facilities are in some respects similar,
there are distinctions between them relating to the rights and obligations of
ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without participation by (or
even necessarily the permission of) the issuer of the deposited securities,
although typically the depositary requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facility. The depositary usually charges
fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions, and the performance of other services. The depositary of an
unsponsored facility frequently
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is under no obligation to pass through voting rights to ADR holders in respect
of the deposited securities. In addition, an unsponsored facility is generally
not obligated to distribute communications received from the issuer of the
deposited securities or to disclose material information about such issuer in
the U.S. and there may not be a correlation between such information and the
market value of the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depositary. The deposit agreement
sets out the rights and responsibilities of the issuer, the depositary, and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
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.
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EXCHANGE AND OTC DERIVATIVES. Derivative instruments may be exchange-traded
or traded in OTC transactions between private parties. Exchange-traded
derivatives are standardized options and futures contracts traded in an
auction on the floor of a regulated exchange. Exchange contracts are
generally very liquid. The exchange clearinghouse is the counterparty of
every contract. Thus, each holder of an exchange contract bears the credit
risk of the clearinghouse (and has the benefit of its financial strength)
rather than that of a particular counterparty. OTC transactions are subject
to additional risks, such as the credit risk of the counterparty to the
instrument, and are less liquid than exchange-traded derivatives since they
often can only be closed out with the other party to the transaction.
RISKS AND SPECIAL CONSIDERATIONS. The use of derivative instruments involves
risks and special considerations as described below. Risks pertaining to
particular derivative instruments are described in the sections that follow.
(1) MARKET RISK. The primary risk of derivatives is the same as the risk
of the underlying assets, namely that the value of the underlying asset may go
up or down. Adverse movements in the value of an underlying asset can expose
the Fund to losses. Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly the
ability of 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, 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
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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 the segregation of the Fund's
assets. To the extent required by SEC guidelines, the Fund will not enter into
any such transactions unless it owns either: (1) an offsetting ("covered")
position in securities, options, futures, or derivative instruments; or (2)
cash or liquid securities positions with a value sufficient at all times to
cover its potential obligations to the extent that the position is not
"covered". The Fund will also set aside cash and/or appropriate liquid assets
in a segregated custodial account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be
sold while the derivative position is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of the Fund's
assets to segregated accounts could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
In some cases, the Fund may be required to maintain or limit exposure to a
specified percentage of its assets to a particular asset class. In such cases,
when the Fund uses a derivative instrument to increase or decrease exposure to
an asset class and is required by applicable SEC guidelines to set aside liquid
assets in a segregated account to secure its obligations under the derivative
instruments, the Advisor may, where reasonable in light of the circumstances,
measure compliance with the applicable percentage by reference to the nature of
the economic exposure created through the use of the derivative instrument and
not by reference to the nature of the exposure arising from the liquid assets
set aside in the segregated account (unless another interpretation is specified
by applicable regulatory requirements).
OPTIONS. The Fund may use options for any lawful purpose consistent with its
investment objective such as hedging or managing risk. An option is a contract
in which the "holder" (the buyer) pays a certain amount ("premium") to the
"writer" (the seller) to obtain the right, but not the obligation, to buy from
the writer (in a "call") or sell to the writer (in a "put") a specific asset at
an agreed upon price ("strike price" or "exercise price") at or before a
certain time ("expiration date"). The holder pays the premium at inception and
has no further financial obligation. The holder of an option will benefit from
favorable movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option will receive fees or premiums but is exposed to
losses due to changes in the value of the underlying asset. The Fund may buy
or write (sell) put and call options on assets, such as securities, currencies,
financial commodities, and indices of debt and equity securities ("underlying
assets") and enter into closing transactions with respect to such options to
terminate an existing position. Options used by the Fund may include European,
American, and Bermuda style
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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
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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
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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 maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities
markets involving arbitrage, "program trading" and other investment strategies
might result in temporary price distortions.
FOREIGN CURRENCIES. The Fund may purchase and sell foreign currency on a spot
basis, and may use currency-related derivatives instruments such as options on
foreign currencies, futures on foreign currencies, options on futures on
foreign currencies and forward currency contracts (I.E., an obligation to
purchase or sell a specific currency at a specified future date, which may be
any fixed number of days from the contract date agreed upon by the parties, at
a price set at the time the contract is entered into). The Fund may use these
instruments for hedging or any other lawful purpose consistent with the Fund's
investment objective, including transaction hedging, anticipatory hedging,
cross hedging, proxy hedging, and position hedging. The Fund's use of
currency-related derivative instruments will be directly related to the Fund's
current or anticipated portfolio securities, and the Fund may engage in
transactions in currency-related derivative instruments as a means to protect
against some or all of the effects of adverse changes in foreign currency
exchange rates on its investment portfolio. In general, if the currency in
which a portfolio investment is denominated appreciates against the U.S.
dollar, the dollar value of the security will increase. Conversely, a decline
in the exchange rate of the currency would adversely affect the value of the
portfolio investment expressed in U.S. dollars.
For example, the Fund might use currency-related derivative instruments to
"lock in" a U.S. dollar price for a portfolio investment, thereby enabling the
Fund to protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date the security is purchased or sold and the
date on which payment is made or received. The Fund also might use
currency-related derivative instruments when the Advisor believes that one
currency may experience a substantial movement against another currency,
including the U.S. dollar, and it may use currency-related derivative
instruments to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the
Fund may use currency-related derivative instruments to hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. The use of this basket hedging technique may be more
efficient and economical than using separate currency-related derivative
instruments for each currency exposure held by the Fund. Furthermore,
currency-related derivative instruments may be used for short hedges - for
example, the Fund may sell a forward currency contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
In addition, the Fund may use a currency-related derivative instrument to shift
exposure to foreign currency fluctuations from one foreign country to another
foreign country where the Advisor believes that the foreign currency exposure
purchased will
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appreciate relative to the U.S. dollar and thus better protect the Fund against
the expected decline in the foreign currency exposure sold. For example, if
the Fund owns securities denominated in a foreign currency and the Advisor
believes that currency will decline, it might enter into a forward contract to
sell an appropriate amount of the first foreign currency, with payment to be
made in a second foreign currency that the Advisor believes would better
protect the Fund against the decline in the first security than would a U.S.
dollar exposure. Hedging transactions that use two foreign currencies are
sometimes referred to as "cross hedges." The effective use of currency-related
derivative instruments by the Fund in a cross hedge is dependent upon a
correlation between price movements of the two currency instruments and the
underlying security involved, and the use of two currencies magnifies the risk
that movements in the price of one instrument may not correlate or may
correlate unfavorably with the foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the currency
instruments used or investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
The Fund also might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using currency-related derivative instruments on
another foreign currency or a basket of currencies, the values of which the
Advisor believes will have a high degree of positive correlation to the value
of the currency being hedged. The risk that movements in the price of the
hedging instrument will not correlate perfectly with movements in the price of
the currency being hedged is magnified when this strategy is used.
The use of currency-related derivative instruments by the Fund involves a
number of risks. The value of currency-related derivative instruments depends
on the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such derivative
instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots (generally consisting of transactions of greater than $1 million).
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they re-open.
Settlement of transactions in currency-related derivative instruments might be
required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
When the Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for
exchange-traded instruments is generally less than for privately negotiated or
OTC currency instruments, since generally a clearing agency, which is the
issuer or counterparty to each instrument, provides a guarantee of performance.
For privately negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the expected
benefit of the transaction and possibly other losses to the Fund. The Fund
will enter into transactions in currency-related derivative instruments only
with counterparties that the Advisor reasonably believes are capable of
performing under the contract.
Purchasers and sellers of currency-related derivative instruments may enter
into offsetting closing transactions by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract (or
any other currency-related derivative instrument) at a time and price favorable
to the Fund. In addition, in the event of insolvency of the counterparty, the
Fund might be unable to close out a forward currency contract at any
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time prior to maturity. In the case of an exchange-traded instrument, the Fund
will be able to close the position out only on an exchange which provides a
market for the instruments. The ability to establish and close out positions
on an exchange is subject to the maintenance of a liquid market, and there can
be no assurance that a liquid market will exist for any instrument at any
specific time. In the case of a privately negotiated instrument, the Fund will
be able to realize the value of the instrument only by entering into a closing
transaction with the issuer or finding a third party buyer for the instrument.
While the Fund will enter into privately negotiated transactions only with
entities who are expected to be capable of entering into a closing transaction,
there can be no assurance that the Fund will in fact be able to enter into such
closing transactions.
The precise matching of currency-related derivative instrument amounts and the
value of the portfolio securities involved generally will not be possible
because the value of such securities, measured in the foreign currency, will
change after the currency-related derivative instrument position has been
established. Thus, the Fund might need to purchase or sell foreign currencies
in the spot (cash) market. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily in
the OTC market, the Fund will normally purchase or sell OTC options on foreign
currency only when the Advisor reasonably believes a liquid secondary market
will exist for a particular option at any specific time.
There will be a cost to the Fund of engaging in transactions in
currency-related derivative instruments that will vary with factors such as the
contract or currency involved, the length of the contract period and the market
conditions then prevailing. The Fund using these instruments may have to pay a
fee or commission or, in cases where the instruments are entered into on a
principal basis, foreign exchange dealers or other counterparties will realize
a profit based on the difference ("spread") between the prices at which they
are buying and selling various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to resell that currency to the
dealer.
When required by the SEC guidelines, the Fund will set aside permissible liquid
assets in segregated accounts or otherwise cover the Fund's potential
obligations under currency-related derivative instruments. To the extent the
Fund's assets are so set aside, they cannot be sold while the corresponding
currency position is open, unless they are replaced with similar assets. As a
result, if a large portion of the Fund's assets are so set aside, this could
impede portfolio management or the Fund's ability to meet redemption requests
or other current obligations.
The Advisor's decision to engage in a transaction in a particular
currency-related derivative instrument will reflect the Advisor's judgment that
the transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives and policies. In making such a judgment,
the Advisor will analyze the benefits and risks of the transaction and weigh
them in the context of the Fund's entire portfolio and objectives. The
effectiveness of any transaction in a currency-related derivative instrument is
dependent on a variety of factors, including the Advisor's skill in analyzing
and predicting currency values and upon a correlation between price movements
of the currency instrument and the underlying security. There might be
imperfect correlation, or even no correlation, between price movements of an
instrument and price movements of investments being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets
in which these instruments are traded. In addition, the Fund's use of
currency-related derivative instruments is always subject to the risk that the
currency in question could be devalued by the foreign government. In such a
case, any long currency positions would decline in value and could adversely
affect any hedging position maintained by the Fund.
The Fund's dealing in currency-related derivative instruments will generally be
limited to the transactions described above. However, the Fund reserves the
right to use currency-related derivatives instruments for different purposes
and under different circumstances. Of course, the Fund is not required to use
currency-related derivatives instruments and will not do so unless deemed
appropriate by the Advisor. It also should be realized that use of these
instruments does not eliminate, or protect against, price movements in the
Fund's securities that are attributable to other (I.E., non-currency related)
causes. Moreover, while the use of currency-related derivatives instruments
may reduce the risk of loss due to a decline in the value of a hedged currency,
at the same time the use of these instruments tends to limit any potential gain
which may result from an increase in the value of that currency.
SWAP AGREEMENTS. The Fund may enter into interest rate, securities index,
commodity, or security and currency exchange rate swap agreements for any
lawful purpose consistent with the Fund's investment objective, such as for the
purpose of attempting to obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had invested directly in an
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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 the maintenance of a segregated
account consisting of cash and/or other appropriate liquid assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend, in part, on the Advisor's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Swap agreements may be considered to be
illiquid. Moreover, the Fund bears the risk of loss of the amount expected to
be received under a swap agreement in the event of the default or bankruptcy of
a swap agreement counterparty. Certain restrictions imposed on the Fund by the
Internal Revenue Code of 1986 ("IRC") may limit the Fund's ability to use swap
agreements. The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that the Advisor
reasonably believes are capable of performing under the swap agreements. If
there is a default by the other party to such a transaction, the Fund will have
to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In addition to the
derivative instruments and strategies described above and in the Prospectus,
the Advisor expects to discover additional derivative instruments and other
hedging or risk management techniques. The Advisor may utilize these new
derivative instruments and techniques to the extent that they are consistent
with the Fund's investment objective and permitted by the Fund's investment
limitations, operating policies, and applicable regulatory authorities.
DURATION
Duration was developed as a more precise alternative to the concept of
"maturity." Traditionally, a debt obligations' maturity has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
maturity measures only the time until a debt obligation provides its final
payment, taking no account of the pattern of the security's payments prior to
maturity. In contrast, duration incorporates a bond's yield, coupon interest
payments, final maturity and call features into one measure. Duration
management is one of the fundamental tools used by the Advisor.
Duration is a measure of the expected life of a debt obligation on a present
value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, the time the principal payments
are expected to be received, and weights them by the present values of the cash
to be received at each future point in time. For any debt obligation with
interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest of a fixed income security, the longer
the duration of the security; conversely, the higher the stated or coupon rate
of interest of a fixed income security, the shorter the duration of the
security.
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Futures, options and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions will lengthen the duration of the Fund's
portfolio by approximately the same amount of time that holding an equivalent
amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount of time
that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
Finally, the duration of a debt obligation may vary over time in response to
changes in interest rates and other market factors.
FOREIGN INVESTMENT COMPANIES
The Fund may invest, to a limited extent, in foreign investment companies.
Some of the countries in which the Fund invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may
be less expensive and more expedient for the Fund to invest in a foreign
investment company in a country which permits direct foreign investment.
Investing through such vehicles may involve frequent or layered fees or
expenses and may also be subject to limitation under the 1940 Act. Under the
1940 Act, the Fund may invest up to 10% of its assets in shares of other
investment companies and up to 5% of its assets in any one investment company
as long as the investment does not represent more than 3% of the voting stock
of the acquired investment company. The Fund does not intend to invest in
such investment companies unless, in the judgment of the Advisor, the
potential benefits of such investments justify the payment of any associated
fees and expenses.
FOREIGN SECURITIES
Investing in foreign securities involves a series of risks not present in
investing in U.S. securities. Many of the foreign securities held by the Fund
will not be registered with the SEC, nor will the foreign issuers be subject to
SEC reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the Fund than is
available concerning U.S. companies. Disclosure and regulatory standards in
many respects are less stringent in emerging market countries than in the U.S.
and other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets,
and enforcement of existing regulations may be extremely limited. Foreign
companies, and in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting, auditing and financial
reporting standards, or to other regulatory requirements comparable to those
applicable to U.S. companies. The Fund's net investment income and capital
gains from its foreign investment activities may be subject to non-U.S.
withholding taxes.
The costs attributable to foreign investing that the Fund must bear frequently
are higher than those attributable to domestic investing; this is particularly
true with respect to emerging capital markets. For example, the cost of
maintaining custody of foreign securities exceeds custodian costs for domestic
securities, and transaction and settlement costs of foreign investing also
frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the Fund may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities.
Tax treaties between the U.S. and foreign countries, however, may reduce or
eliminate the amount of foreign tax to which the Fund would be subject.
Foreign markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when
assets of the Fund are uninvested and are earning no investment return. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result either
in losses to the
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Fund due to subsequent declines in the value of such portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
THE FOLLOWING SECTION APPLIES TO EACH FUND, EXCEPT THE GOVERNMENT SECURITIES
FUND:
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 with respect to the issuer's capacity to pay interest and repay
principal. The special risk considerations in connection with investments in
these securities are discussed below. Refer to the Appendix for a description
of the securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated security market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such
conditions could severely disrupt the market for and adversely affect the value
of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of lower-quality and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, the Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so
will the Fund's net asset value. If the Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), the Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would force the Fund to sell the more liquid
portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, the Fund may
have to replace the securities with a lower yielding security, which would
result in a lower return for the Fund.
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
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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 which are not readily marketable
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(except for 144A Securities and 4(2) commercial paper deemed to be liquid by
the Advisor), the Fund will take such steps as is deemed advisable, if any, to
protect the liquidity of the Fund's portfolio.
The Fund may sell OTC options and, in connection therewith, segregate assets
or cover its obligations with respect to OTC options written by the Fund. The
assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that
the Fund may repurchase any OTC option it writes at a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. Although the Fund is authorized to lend, the Fund does not
presently intend to engage in lending. In determining whether to lend
securities to a particular broker-dealer or institutional investor, the Advisor
will consider, and during the period of the loan will monitor, all relevant
facts and circumstances, including the creditworthiness of the borrower. The
Fund will retain authority to terminate any loans at any time. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when retaining such
rights is considered to be in the Fund's interest.
THE FOLLOWING SECTION APPLIES TO THE CORPORATE BOND, HIGH YIELD BOND,
INTERNATIONAL BOND, SHORT-TERM BOND, AND SHORT-TERM HIGH-YIELD BOND FUNDS
ONLY:
LOAN INTERESTS
The Fund may acquire a loan interest (a "Loan Interest"). A Loan Interest is
typically originated, negotiated, and structured by a U.S. or foreign
commercial bank, insurance company, finance company, or other financial
institution ("Agent") for a lending syndicate of financial institutions. The
Agent typically administers and enforces the loan on behalf of the other
lenders in the syndicate. In addition, an institution, typically but not
always the Agent ("Collateral Bank"), holds collateral (if any) on behalf of
the lenders. These Loan Interests may take the form of participation interests
in, assignments of or novations of a loan during its secondary distribution, or
direct interests during a primary distribution. Such Loan Interests may be
acquired from U.S. or foreign banks, insurance companies, finance companies, or
other financial institutions who have made loans or are members of a lending
syndicate or from other holders of Loan Interests. The Fund may also acquire
Loan Interests under which the Fund derives its rights directly from the
borrower. Such Loan Interests are separately enforceable by the Fund against
the borrower and all payments of interest and principal are typically made
directly to the Fund from the borrower. In the event that the Fund and other
lenders become entitled to take possession of shared collateral, it is
anticipated that such collateral would be held in the custody of a Collateral
Bank for their mutual benefit. The Fund may not act as an Agent, a Collateral
Bank, a guarantor or sole negotiator or structurer with respect to a loan.
The Advisor will analyze and evaluate the financial condition of the borrower
in connection with the acquisition of any Loan Interest. The Advisor also
analyzes and evaluates the financial condition of the Agent and, in the case of
Loan Interests in which the Fund does not have privity with the borrower, those
institutions from or through whom the Fund derives its rights in a loan
("Intermediate Participants").
In a typical loan, the Agent administers the terms of the loan agreement. In
such cases, the Agent is normally responsible for the collection of principal
and interest payments from the borrower and the apportionment of these payments
to the credit of all institutions which are parties to the loan agreement. The
Fund will generally rely upon the Agent or an Intermediate Participant to
receive and forward to the Fund its portion of the principal and interest
payments on the loan. Furthermore, unless under the terms of a participation
agreement the Fund has direct recourse against the borrower, the Fund will rely
on the Agent and the other members of the lending syndicate to use appropriate
credit remedies against the borrower. The Agent is typically responsible for
monitoring compliance with covenants contained in the loan agreement based upon
reports prepared by the
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borrower. The seller of the Loan Interest usually does, but is often not
obligated to, notify holders of Loan Interests of any failures of compliance.
The Agent may monitor the value of the collateral and, if the value of the
collateral declines, may accelerate the loan, may give the borrower an
opportunity to provide additional collateral or may seek other protection for
the benefit of the participants in the loan. The Agent is compensated by the
borrower for providing these services under a loan agreement, and such
compensation may include special fees paid upon structuring and funding the
loan and other fees paid on a continuing basis. With respect to Loan Interests
for which the Agent does not perform such administrative and enforcement
functions, the Fund will perform such tasks on its own behalf, although a
Collateral Bank will typically hold any collateral on behalf of the Fund and
the other lenders pursuant to the applicable loan agreement.
A financial institution's appointment as Agent may usually be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held
by the Agent under the loan agreement should remain available to holders of
Loan Interests. However, if assets held by the Agent for the benefit of the
Fund were determined to be subject to the claims of the Agent's general
creditors, the Fund might incur certain costs and delays in realizing payment
on a loan interest, or suffer a loss of principal and/or interest. In
situations involving Intermediate Participants, similar risks may arise.
Purchasers of Loan Interests depend primarily upon the creditworthiness of the
borrower for payment of principal and interest. If the Fund does not receive
scheduled interest or principal payments on such indebtedness, the Fund's share
price and yield could be adversely affected. Loans that are fully secured
offer the Fund more protections than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
borrower's obligation, or that the collateral can be liquidated. Indebtedness
of borrowers whose creditworthiness is poor involves substantially greater
risks, and may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a small
fraction of the amount owed. Direct indebtedness of developing countries will
also involve a risk that the governmental entities responsible for the
repayment of the debt may be unable, or unwilling, to pay interest and repay
principal when due.
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.
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
which 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 which would prevent the security from being priced at par.
Furthermore, it is possible that the interest rate may reset to a level which
increases the interest expense to the issuer by an amount which negatively
affects the credit quality of the security.
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MORTGAGE- AND ASSET-BACKED DEBT SECURITIES
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or are secured by and payable from, assets such as
motor vehicle installment sales contracts, other installment loan contracts,
home equity loans, leases of various types of property, and receivables from
credit card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on
asset-backed debt obligations may be supported by non-governmental credit
enhancements including letters of credit, reserve funds, overcollateralization,
and guarantees by third parties. The market for privately issued asset-backed
debt obligations is smaller and less liquid than the market for government
sponsored mortgage-backed securities.
The rate of principal payment on mortgage- and asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any mortgage- and asset-backed security is
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. The yield characteristics of
mortgage- and asset-backed securities differ from those of traditional debt
securities. Among the principal differences are that interest and principal
payments are made more frequently on mortgage-and asset-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Fund purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing the yield to maturity. Conversely, if the Fund purchases these
securities at a discount, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Amounts available for reinvestment by
the Fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates. Accelerated prepayments on
securities purchased by the Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government-sponsored mortgage-backed securities.
While many mortgage- and asset-backed securities are issued with only one class
of security, many are issued in more than one class, each with different
payment terms. Multiple class mortgage- and asset-backed securities are issued
for two main reasons. First, multiple classes may be used as a method of
providing credit support. This is accomplished typically through creation of
one or more classes whose right to payments on the security is made subordinate
to the right to such payments of the remaining class or classes. Second,
multiple classes may permit the issuance of securities with payment terms,
interest rates, or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (mortgage- and asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-mortgage-
or asset-backed securities, such as floating interest rates (I.E., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
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
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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
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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.
THE FOLLOWING PARAGRAPH APPLIES TO THE INTERNATIONAL BOND FUND ONLY:
In addition, the Fund may invest in foreign repurchase agreements. Foreign
repurchase agreements may include agreements to purchase and sell foreign
securities in exchange for fixed U.S. dollar amounts, or in exchange for
specified amounts of foreign currency. In the event of default by the
counterparty, the Fund may suffer a loss if the value of the security
purchased, I.E., the collateral, in U.S. dollars, is less than the agreed-upon
repurchase price, or if the Fund is unable to successfully assert a claim to
the collateral under foreign laws. As a result, foreign repurchase agreements
may involve greater credit risk than repurchase agreements in U.S. markets, as
well as risks associated with currency fluctuations. Repurchase agreements
with foreign counterparties may have more risk than with U.S. counterparties,
since less financial information may be available about the foreign
counterparties and they may be less creditworthy.
REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR ROLLS
The Fund may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions as discussed below. In a reverse repurchase agreement, the Fund
would sell a security and enter into an agreement to repurchase the security
at a specified future date and price. The Fund generally retains the right to
interest and principal payments on the security. Since the Fund receives cash
upon entering into a reverse repurchase agreement, it may be considered a
borrowing. When required by guidelines of the SEC, the Fund will set aside
permissible liquid assets in a segregated account to secure its obligations to
repurchase the security.
The Fund may also enter into mortgage dollar rolls, in which the Fund would
sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Fund would forego principal and interest
paid on the mortgage-backed securities during the roll period, the Fund would
be compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the
proceeds of the initial sale. The Fund also could be compensated through the
receipt of fee income equivalent to a lower forward price. At the time the
Fund would enter into a mortgage dollar roll, it would set aside permissible
liquid assets in a segregated account to secure its obligation for the forward
commitment to buy mortgage-backed securities. Mortgage dollar roll
transactions may be considered a borrowing by the Fund.
The mortgage dollar rolls and reverse repurchase agreements entered into by
the Fund may be used as arbitrage transactions in which the Fund will maintain
an offsetting position in investment grade debt obligations or repurchase
agreements that mature on or before the settlement date on the related
mortgage dollar roll or reverse repurchase agreements. Since the Fund will
receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities or repurchase agreements will be high quality
and will mature on or before the settlement date of the mortgage dollar roll
or reverse repurchase agreement, the Advisor believes that such arbitrage
transactions do not present the risks to the Fund that are associated with
other types of leverage.
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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.
SOVEREIGN DEBT
Sovereign debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank loans to the same sovereign
entity may not contest payments to the holders of sovereign debt in the event
of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by a variety of factors, including
among others, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. A country
whose exports are concentrated in a few commodities could be vulnerable to a
decline in the international price of such commodities. Increased
protectionism on the part of a country's trading partners, or political
changes in those countries, could also adversely affect its exports. Such
events could diminish a country's trade account surplus, if any, or the credit
standing of a particular local government or agency. Another factor bearing
on the ability of a country to repay sovereign debt is the level of the
country's international reserves. Fluctuations in the level of these reserves
can affect the amount of foreign exchange readily available for external debt
payments and, thus, could have a bearing on the capacity of the country to
make payments on its sovereign debt.
To the extent that a country has a current account deficit (generally when its
exports of merchandise and services are less than its country's imports of
merchandise and services plus net transfers (E.G., gifts of currency and
goods) to foreigners), it may need to depend on loans from foreign
governments, multilateral organizations or private commercial banks, aid
payments from foreign governments and inflows of foreign investment. The
access of a country to these forms of external funding may not be certain, and
a withdrawal of external funding could adversely affect the capacity of a
government to make payments on its obligations. In addition, the cost of
servicing debt obligations can be adversely affected, by a change in
international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid interest to Brady
Bonds (discussed below), and obtaining new credit to finance interest
payments. Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors, and the interests of holders of sovereign debt could be
adversely affected in the course of restructuring arrangements or by certain
other factors referred to below. Furthermore, some of the participants in the
secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants, such as the Fund.
Obligations arising from past restructuring agreements may affect the economic
performance and political and social stability of certain issuers of sovereign
debt. There is no bankruptcy proceeding by which sovereign debt on which a
sovereign has defaulted may be collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in such sovereign debt and increase the costs and
expenses of the Fund. Certain countries in which the Fund may invest require
governmental approval prior to investments by foreign persons, limit the amount
26
<PAGE>
of investment by foreign persons in a particular issuer, limit the investment
by foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries, or impose additional taxes on foreign
investors. Certain issuers may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments, the country could impose temporary restrictions
on foreign capital remittances. The Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments. Investing in local markets may require the Fund to adopt special
procedures, seek local government approvals or take other actions, each of
which may involve additional costs to the Fund.
The sovereign debt in which the Fund may invest includes Brady Bonds, which
are securities issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. In restructuring its external debt under the
Brady Plan framework, a debtor nation negotiates with its existing bank
lenders as well as multilateral institutions such as the International
Monetary Fund ("IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of commercial bank debt for newly issued Brady
Bonds. Brady Bonds may also be issued in respect of new money being advanced
by existing lenders in connection with the debt restructuring. The World Bank
and the IMF support the restructuring by providing Fund pursuant to loan
agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.
There can be no assurance that the circumstances regarding the issuance of
Brady Bonds by these countries will not change. Investors should recognize
that Brady Bonds do not have a long payment history. Agreements implemented
under the Brady Plan to date are designed to achieve debt and debt-service
reduction through specific options negotiated by a debtor nation with its
creditors. As a result, the financial packages offered by each country
differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt,
which carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from the face value of such debt (generally
known as discount bonds), bonds bearing an interest rate which increases over
time, and bonds issued in exchange for the advancement of new money by
existing lenders. Regardless of the stated face amount and stated interest
rate of the various types of Brady Bonds the Fund will purchase Brady Bonds,
if any, in secondary markets, as described below, in which the price and yield
to the investor reflect market conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at maturity
by U.S. Treasury zero coupon bonds with maturities equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank, and the debtor nations' reserves. In the event of a default with
respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1) the
collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments, and (4) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds have speculative
characteristics. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in
accordance with the terms of the Brady Bonds. Brady Bonds issued to date are
purchased and sold in secondary markets through U.S. securities dealers and
other financial institutions and are generally maintained through European
transnational securities depositories.
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
27
<PAGE>
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.
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:
- 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;
- the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- the Federal National Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- the Student Loan Marketing Association, the Interamerican Development Bank,
and International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
VARIABLE- OR FLOATING-RATE SECURITIES
The Fund may invest in securities which offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a
new interest rate at fixed intervals (E.G., daily, monthly, semi-annually,
etc.). Floating-rate securities generally provide for automatic adjustment of
the interest rate whenever some specified interest rate index changes. The
interest rate on variable- or floating-rate securities is ordinarily
determined by reference to or is a percentage of a bank's prime rate, the
90-day U.S. Treasury bill rate, the rate of return on commercial paper or bank
certificates of deposit, an index of short-term interest rates, or some other
objective measure.
Variable- or floating-rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many
cases, the demand feature can be exercised at any time on seven days notice;
in other cases, the demand feature is exercisable at any time on 30 days
notice or on similar notice at intervals of not more than one year. Some
securities which do not have variable or floating interest rates may be
accompanied by puts producing similar results and price characteristics. When
considering the maturity of any instrument which may be sold or put to the
issuer or a third party, the Fund may consider that instrument's maturity to
be shorter than its stated maturity.
Variable-rate demand notes include master demand notes which are obligations
that permit the Fund to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Fund, as lender,
and the borrower. The interest rates on these notes fluctuate from time to
time. The issuer of such obligations normally has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of
days notice to the holders of such obligations. The interest rate on a
floating-rate demand obligation is based on a known lending rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments will
generally be traded. There generally is not an established secondary market
for these obligations, although they are redeemable at face value.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies and, if not so
rated, the Fund may invest in them only if the Advisor determines that at the
time of investment the obligations are of comparable quality to the other
obligations in which the Fund may invest. The Advisor, on 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.
28
<PAGE>
The Fund will not invest more than 15% of its net assets (10% for money market
funds) in variable- and floating-rate demand obligations that are not readily
marketable (a variable- or floating-rate demand obligation that may be
disposed of on not more than seven days notice will be deemed readily
marketable and will not be subject to this limitation). In addition, each
variable- or floating-rate obligation must meet the credit quality
requirements applicable to all the Fund's investments at the time of purchase.
When determining whether such an obligation meets the Fund's credit quality
requirements, the Fund may look to the credit quality of the financial
guarantor providing a letter of credit or other credit support arrangement.
In determining the Fund's weighted average portfolio maturity, the Fund will
consider a floating- or variable-rate security to have a maturity equal to its
stated maturity (or redemption date if it has been called for redemption),
except that it may consider (1) variable-rate securities to have a maturity
equal to the period remaining until the next readjustment in the interest
rate, unless subject to a demand feature, (2) variable-rate securities subject
to a demand feature to have a remaining maturity equal to the longer of (a)
the next readjustment in the interest rate or (b) the period remaining until
the principal can be recovered through demand, and (3) floating-rate
securities subject to a demand feature to have a maturity equal to the period
remaining until the principal can be recovered through demand. Variable- and
floating-rate securities generally are subject to less principal fluctuation
than securities without these attributes since the securities usually trade at
amortized cost following the readjustment in the interest rate.
WARRANTS
The Fund may acquire warrants. Warrants are securities giving the holder the
right, but not the obligation, to buy the stock of an issuer at a given price
(generally higher than the value of the stock at the time of issuance) during
a specified period or perpetually. Warrants may be acquired separately or in
connection with the acquisition of securities. Warrants do not carry with
them the right to dividends or voting rights with respect to the securities
that they entitle their holder to purchase, and they do not represent any
rights in the assets of the issuer. As a result, warrants may be considered
to have more speculative characteristics than certain other types of
investments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities, and a warrant ceases to have
value if it is not exercised prior to its expiration date.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or delayed-delivery basis.
The price of debt obligations so purchased, which may be expressed in yield
terms, generally is fixed at the time the commitment to purchase is made, but
delivery and payment for the securities take place at a later date. During
the period between the purchase and settlement, no payment is made by the Fund
to the issuer and no interest on the debt obligations accrues to the Fund.
Forward commitments involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. While when-issued
and delayed-delivery securities may be sold prior to the settlement date, the
Fund intends to purchase such securities with the purpose of actually
acquiring them unless a sale appears desirable for investment reasons. At the
time the Fund makes the commitment to purchase these types of securities, it
will record the transaction and reflect the value of the security in
determining its net asset value. The Fund does not believe that its net asset
value will be adversely affected by these types of securities purchases.
To the extent required by the SEC, the Fund will maintain cash and marketable
securities equal in value to commitments for when-issued or delayed-delivery
securities. Such segregated securities either will mature or, if necessary,
be sold on or before the 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
29
<PAGE>
tax, the Fund may be required to distribute a portion of such discount and
income and may be required to dispose of other portfolio securities, which may
occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
DIRECTORS AND OFFICERS
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 56 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 $86,000 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
$94,600 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. 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.
30
<PAGE>
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.
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.
31
<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 P.O. Box 7657, Avon, CO 81620.
Mr. Malicky's address is 518 Bishop Place, Berea, OH 44017.
Unless otherwise noted below, as of January 31, 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. The Institutional Class and
Advisor Class shares of the Corporate Bond, Government Securities, and
Short-Term Bond Funds were not offered for sale until August 31, 1999. The
Advisor Class shares of the High-Yield Bond and Short-Term High Yield Bond
Funds were not offered for sale until February 29, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
FUND CLASS/SHARES PERCENT
-------------------------- -------------------------- -------
Corporate Bond Investor Class - 2,826,877 3.64%
Government Securities Advisor Class - 1,592 100%
Short-Term Bond Investor Class - 5,115,626 4.01%
Advisor Class - 1,709 100%
Short-Term High Yield Bond 2,125,187 8.45%
</TABLE>
PRINCIPAL SHAREHOLDERS
Unless otherwise noted below, as of January 31, 2000 no persons owned of
record or are known to own of record or beneficially more than 5% of the
Fund's then outstanding shares. The Institutional Class and Advisor Class
shares of the Corporate Bond, Government Securities, and Short-Term Bond Funds
were not offered for sale until August 31, 1999. The Advisor Class shares of
the High-Yield Bond and Short-Term High Yield Bond Funds were not offered for
sale until February 29, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND ADDRESS FUND/CLASS/SHARES PERCENT
---------------------------------------- ----------------------------------------------------- -------
Merrill Lynch Pierce Fenner & Smith Inc. Corporate Bond - Investor Class - 5,780,263 7.45%
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
Security Trust Company Corporate Bond - Advisor Class - 461,180 99.66%
2390 E. Camelback Rd. Ste. 240
Phoenix, AZ 85016-3434
National Investor Services Corp. Corporate Bond - Institutional Class - 27,029 15.94%
55 Water St. F. 32
New York, NY 10041-3299
Strong Capital Management, Inc. Government Securities - Advisor Class - 1,592 100%*
100 Heritage Reserve
Menomonee Falls, WI 53051
Saxon & Co. Government Securities - Institutional Class - 215,731 23.84%
P.O. Box 7780-1888
Philadelphia, PA 19182-0001
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Firstar Trust Company International Bond - 135,037 7.75%
P.O. Box 1787
Milwaukee, WI 53201-1787
National Investor Services Corp. International Bond - 103,722 5.95%
55 Water St. Fl. 32
New York, NY 10041-3299
Firstar Trust Company International Bond - 102,547 5.89%
P.O. Box 1787
Milwaukee, WI 53201-1787
Strong Capital Management, Inc. Short-Term Bond - Advisor Class - 1,709 100%*
100 Heritage Reserve
Menomonee Falls, WI 53051
First Union National Bank Short-Term Bond - Institutional Class - 1,429,108 80.90%
1525 W. Wt. Harris Blvd. #1151
Charlotte, NC 28262-8522
</TABLE>
* This represents the initial capital of the class of shares for 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, 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 December 31, 1999 , the Advisor had over $38 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. 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
33
<PAGE>
not "interested persons" of the Advisor; expenses of indemnification;
extraordinary expenses; and costs of shareholder and director meetings.
On July 23, 1999 for the Corporate Bond, Government Securities, and Short-Term
Bond Funds, and January 28, 2000 for the High-Yield Bond and Short-Term High
Yield Bond Funds, 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 August 31, 1999. 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 Administrative Agreement for the Institutional Class
shares of the Fund exceed 0.02% of the average daily net asset value of the
Fund.
The Institutional Class and Advisor Class shares of the Corporate Bond,
Government Securities, and Short-Term Bond Funds were not affected by the new
advisory and administrative arrangements because those classes of shares were
first offered for sale on August 31, 1999.. The Advisor Class shares of the
High-Yield Bond and Short-Term High Yield Bond Fund were not affected by the
new advisory and administrative arrangements because those classes of shares
were first offered for sale on February 29, 2000.
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>
FUND CURRENT ANNUAL RATE
ANNUAL RATE PRIOR TO 8/31/99
------------------------------- ----------- ----------------
Corporate Bond Fund 0.375% 0.625%
Government Securities Fund 0.35% 0.60%
International Bond Fund 0.70% NA
High-Yield Bond Fund 0.375% 0.625%
Short-Term Bond Fund 0.375% 0.625%
Short-Term High Yield Bond Fund 0.375% 0.625%
</TABLE>
The Fund paid the following management fees for the time periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MANAGEMENT FEE
FISCAL YEAR ENDED MANAGEMENT FEE ($) WAIVER($) AFTER WAIVER ($)
----------------- ------------------ --------- ----------------
</TABLE>
Corporate Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/97 2,234,458 0 2,234,458
10/31/98 4,337,455 0 4,337,455
10/31/99 5,046,206 0 5,046,206
</TABLE>
34
<PAGE>
Government Securities Fund
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/97 4,280,451 0 4,280,451
10/31/98 6,371,222 0 6,371,222
10/31/99 7,481,765 0 7,481,765
</TABLE>
High-Yield Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/97 2,498,816 0 2,498,816
10/31/98 3,841,368 0 3,841,368
10/31/99 3,464,553 0 3,464,553
</TABLE>
International Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10/31/97 222,163 206,614 15,549
10/31/98 153,490 22,692 130,798
10/31/99 129,572 0 129,572
</TABLE>
Short-Term Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/97 7,811,426 0 7,811,426
10/31/98 8,397,040 0 8,397,040
10/31/99 7,635,090 0 7,635,090
</TABLE>
Short-Term High Yield Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/97(1) 51,221 0 51,221
10/31/98 540,595 0 540,595
10/31/99 1,165,909 0 1,165,909
</TABLE>
(1) Commenced operations on June 30, 1997.
The organizational expenses for the Fund which were advanced by the Advisor
and which will be reimbursed by the Fund over a period of not more than 60
months from the Fund's date of inception are listed below.
<TABLE>
<CAPTION>
<S> <C>
FUND ORGANIZATIONAL EXPENSES
------------------------------- -----------------------
High-Yield Bond Fund $1,346
Short-Term High Yield Bond Fund $2,027
</TABLE>
The Advisory Agreement requires the Advisor to reimburse the Fund in the event
that the expenses and charges payable by the Fund in any fiscal year,
including the management fee but excluding taxes, interest, brokerage
commissions, and similar fees and to the extent permitted extraordinary
expenses, exceed two percent (2%) of the average net asset value of the Fund
for such year, as determined by valuations made as of the close of each
business day of the year. Reimbursement of expenses in excess of the
applicable limitation will be made on a monthly basis and will be paid to the
Fund by reduction of the Advisor's fee, subject to later adjustment, month by
month, for the remainder of the Fund's fiscal year. The Advisor may from time
to time voluntarily absorb expenses for the Fund in addition to the
reimbursement of expenses in excess of applicable limitations.
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
35
<PAGE>
agreed to a censure and a cease and desist order and the Advisor agreed to
various undertakings, including adoption of certain procedures and a limitation
for six months on accepting certain types of new advisory clients.
On June 6, 1996, the Department of Labor ("DOL") filed an action against the
Advisor for equitable relief alleging violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") in connection with cross trades that
occurred between 1987 and late 1989 involving certain pension accounts managed
by the Advisor. Contemporaneous with this filing, the Advisor, without
admitting or denying the DOL's allegations, agreed to the entry of a consent
judgment resolving all matters relating to the allegations. Reich v. Strong
Capital Management, Inc., (U.S.D.C. E.D. WI) ("Consent Judgment"). Under the
terms of the Consent Judgment, the Advisor agreed to reimburse the affected
accounts a total of $5.9 million. The settlement did not have any material
impact on the Advisor's financial position or operations.
The Fund and the Advisor have adopted a Code of Ethics ("Code") which governs
the personal trading activities of all "Access Persons" of the Advisor. Access
Persons include every director and officer of the Advisor and the investment
companies managed by the Advisor, including the Fund, as well as certain
employees of the Advisor who have access to information relating to the
purchase or sale of securities by the Advisor on behalf of accounts managed by
it. The Code is based upon the principal that such Access Persons have a
fiduciary duty to place the interests of the Fund and the Advisor's other
clients ahead of their own.
The Code requires Access Persons (other than Access Persons who are
independent directors of the investment companies managed by the Advisor,
including the Fund) to, among other things, preclear their securities
transactions (with limited exceptions, such as transactions in shares of
mutual funds, direct obligations of the U.S. government, and certain options
on broad-based securities market indexes) and to execute such transactions
through the Advisor's trading department. The Code, which applies to all
Access Persons (other than Access Persons who are independent directors of the
investment companies managed by the Advisor, including the Fund), includes a
ban on acquiring any securities in an initial public offering, other than a
new offering of a registered open-end investment company, and a prohibition
from profiting on short-term trading in securities. In addition, no Access
Person may purchase or sell any security which is contemporaneously being
purchased or sold, or to the knowledge of the Access Person, is being
considered for purchase or sale, by the Advisor on behalf of any mutual fund
or other account managed by it. Finally, the Code provides for trading "black
out" periods of seven calendar days during which time Access Persons who are
portfolio managers may not trade in securities which have been purchased or
sold by any mutual fund or other account managed by the portfolio manager.
The Advisor provides investment advisory services for multiple clients 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, 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.
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 a program of custom portfolio management called the
Strong Advisor. This program is designed to determine which investment
approach fits an investor's financial needs and then provides the investor
with a custom built
36
<PAGE>
portfolio of Strong Funds based on that allocation. The Advisor, on behalf of
participants in the Strong Advisor program, may determine to invest a portion
of the program's assets in any one Strong Fund, which investment, particularly
in the case of a smaller Strong Fund, could represent a material portion of the
Fund's assets. In such cases, a decision to redeem the Strong Advisor
program's investment in a Fund on short notice could raise a potential conflict
of interest for the Advisor, between the interests of participants in the
Strong Advisor program and of the Fund's other shareholders. In general, the
Advisor does not expect to direct the Strong Advisor program to make redemption
requests on short notice. However, should the Advisor determine this to be
necessary, the Advisor will use its best efforts and act in good faith to
balance the potentially competing interests of participants in the Strong
Advisor program and the Fund's other shareholders in a manner the Advisor deems
most appropriate for both parties in light of the circumstances.
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 800-368-3863 and
ask for a copy of Part II of the Advisor's Form ADV.
THE FOLLOWING SECTION APPLIES TO THE CORPORATE BOND, GOVERNMENT SECURITIES,
HIGH-YIELD BOND, SHORT-TERM BOND, AND SHORT-TERM HIGH YIELD BOND FUNDS ONLY.
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 separate administration agreements with the
Advisor for each of its separate class of shares ("Administration Agreement -
Investor Class," "Administration Agreement - Institutional Class," and
"Administration Agreement - Advisor Class"). The Corporate Bond, Government
Securities, and Short-Term Bond Funds currently offer three classes of shares:
Investor Class shares, Advisor Class shares, and Institutional Class shares.
The High-Yield Bond and Short-Term High Yield Bond Funds currently offer two
classes of shares: Investor Class and Advisor 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
37
<PAGE>
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 - 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.
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)
38
<PAGE>
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.
The Fund paid the following administrative fees for the time period indicated:
NOTE - THE FOLLOWING TABLE DOES NOT CONTAIN INFORMATION ON THE ADVISOR CLASS
SHARES OF THE HIGH-YIELD BOND AND SHORT-TERM HIGH YIELD BOND FUNDS SINCE THEY
WERE NOT OFFERED UNTIL FEBRUARY 29, 2000.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ADMINISTRATIVE FEE
FISCAL YEAR ENDED ADMINISTRATIVE FEE ($) WAIVER($) AFTER WAIVER ($)
----------------- ---------------------- --------- ------------------
</TABLE>
Corporate Bond Fund - Investor Class
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/99* 367,177 0 367,177
</TABLE>
Corporate Bond Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C>
10/31/99* 0 0 0
</TABLE>
Corporate Bond Fund - Institutional Class
<TABLE>
<CAPTION>
<S> <C><C><C>
10/31/99* 9 0 9
</TABLE>
Government Securities Fund - Investor Class
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/99* 555,829 0 555,829
</TABLE>
Government Securities Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C>
10/31/99* 0 0 0
</TABLE>
Government Securities Fund - Institutional Class
<TABLE>
<CAPTION>
<S> <C><C><C>
10/31/99* 2 0 2
</TABLE>
Short-Term Bond Fund - Investor Class
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/99* 538,235 0 538,235
</TABLE>
Short-Term Bond Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C>
10/31/99* 0 0 0
</TABLE>
Short-Term Bond Fund - Institutional Class
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/99* 81 0 81
</TABLE>
High-Yield Bond Fund - Investor Class
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/99* 252,390 0 252,390
</TABLE>
Short-Term High Yield Bond Fund - Investor Class
<TABLE>
<CAPTION>
<S> <C> <C><C>
10/31/99* 105,543 0 105,543
</TABLE>
* For the two-month period ended October 31, 1999.
39
<PAGE>
DISTRIBUTOR
Under a Distribution Agreement with the Fund ("Distribution Agreement"), Strong
Investments, Inc. ("Distributor"), P.O. Box 2936, Milwaukee, Wisconsin, 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 which are
used for selling purposes, as well as advertising and any other costs
attributable to the distribution of the Fund's shares. The Distributor is 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.
Pursuant to a distribution plan adopted on behalf of the Advisor Class shares
of the CORPORATE BOND FUND, GOVERNMENT SECURITIES FUND, HIGH YIELD BOND FUND,
SHORT-TERM BOND FUND and SHORT-TERM HIGH YIELD BOND 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 of 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 CORPORATE BOND, GOVERNMENT SECURITIES,
HIGH YIELD BOND, SHORT-TERM BOND, AND SHORT-TERM HIGH YIELD BOND FUNDS 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 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.
40
<PAGE>
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:
NOTE: THE FOLLOWING TABLE DOES NOT CONTAIN INFORMATION ON THE ADVISOR CLASS
SHARES OF THE HIGH-YIELD BOND AND SHORT-TERM HIGH YIELD BOND FUNDS SINCE THEY
WERE NOT OFFERED UNTIL FEBRUARY 29, 2000.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PAID BY RETAINED BY PAID BY
FISCAL YEAR ENDED FUND DISTRIBUTORS* DEALERS
----------------- ------- ------------- -------
</TABLE>
Corporate Bond Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C>
10/31/99** 1 0 0
</TABLE>
Government Securities Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C>
10/31/99** 1 0 0
</TABLE>
Short-Term Bond Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C>
10/31/99** 1 0 0
</TABLE>
* Amounts retained by Distributors were used to offset costs associated with
printing marketing materials.
** For the two-month period ended October 31, 1999.
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
41
<PAGE>
bunched order. When a bunched order is only partially filled, the securities
purchased will be allocated on a pro rata basis to each client account
participating in the bunched order based upon the initial amount requested for
the account, subject to certain exceptions, and each participating account will
participate at the average share price for the bunched order on the same
business day.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment advisor, under certain circumstances, to cause an account to pay
a broker or dealer a commission for effecting a transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
the transaction in recognition of the value of the brokerage and research
services provided by the broker or dealer. Brokerage and research services
include (1) furnishing advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; (2) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement, the Advisor may
cause the Fund to pay a broker, which provides brokerage and research services
to the Advisor, a commission for effecting a securities transaction in excess
of the amount another broker would have charged for effecting the transaction.
The Advisor believes it is important to its investment decision-making process
to have access to independent research. The Advisory Agreement provides that
such higher commissions will not be paid by the Fund unless (1) the Advisor
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Advisor's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion; (2) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal laws, and the
Advisory Agreement; and (3) in the opinion of the Advisor, the total
commissions paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term. The investment management fee paid by the Fund
under the Advisory Agreement is not reduced as a result of the Advisor's
receipt of research services. To request a copy of the Advisor's Soft Dollar
Practices, please call 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
that 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).
42
<PAGE>
At least annually, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Fund and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e),
the Advisor allocates brokerage to those firms, provided that the value of any
research and brokerage services was reasonable in relationship to the amount
of commission paid and was subject to best execution. In no case will the
Advisor make binding commitments as to the level of brokerage commissions it
will allocate to a broker, nor will it commit to pay cash if any informal
targets are not met. The Advisor anticipates it will continue to enter into
such brokerage arrangements.
The Advisor may direct the purchase of securities on behalf of the Fund and
other advisory clients in secondary market transactions, in public offerings
directly from an underwriter, or in privately negotiated transactions with an
issuer. When the Advisor believes the circumstances so warrant, securities
purchased in public offerings may be resold shortly after acquisition in the
immediate aftermarket for the security in order to take advantage of price
appreciation from the public offering price or for other reasons. Short-term
trading of securities acquired in public offerings, or otherwise, may result
in higher portfolio turnover and associated brokerage expenses.
The Advisor places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Advisor. Research services
furnished by firms through which the Fund effects its securities transactions
may be used by the Advisor in servicing all of its accounts; not all of such
services may be used by the Advisor in connection with the Fund. In the
opinion of the Advisor, it is not possible to measure separately the benefits
from research services to each of the accounts managed by the Advisor. Because
the volume and nature of the trading activities of the accounts are not
uniform, the amount of commissions in excess of those charged by another broker
paid by each account for brokerage and research services will vary. However,
in the opinion of the Advisor, such costs to the Fund will not be
disproportionate to the benefits received by the Fund on a continuing basis.
With respect to the INTERNATIONAL BOND FUND'S foreign equity investing, the
Advisor is responsible for selecting brokers in connection with foreign
securities transactions. The fixed commissions paid in connection with most
foreign stock transactions are usually higher than negotiated commissions on
U.S. stock transactions. Foreign stock exchanges and brokers are subject to
less government supervision and regulation as compared with the U.S. exchanges
and brokers. In addition, foreign security settlements may in some instances
be subject to delays and related administrative uncertainties.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In
making such allocations between the Fund and other advisory accounts, the main
factors considered by the Advisor are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending
the investment.
Where consistent with a client's investment objectives, investment
restrictions, and risk tolerance, the Advisor may purchase securities sold in
underwritten public offerings for client accounts, commonly referred to as
"deal" securities. To a limited extent, each Fund may participate in the
initial public offering ("IPO") market. 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.
The Advisor has adopted deal allocation procedures ("Procedures"), summarized
below, that reflect the Advisor's overriding policy that deal securities must
be allocated among participating client accounts in a fair and equitable
manner and that deal securities may not be allocated in a manner that unfairly
discriminates in favor of certain clients or types of clients.
The Procedures provide that, in determining which client accounts a portfolio
manager team will seek to have purchase deal securities, the team will
consider all relevant factors including, but not limited to, the nature, size,
and expected allocation to the Advisor of deal securities; the size of the
account(s); the accounts' investment objectives and restrictions; the risk
tolerance of the
43
<PAGE>
client; the client's tolerance for possibly higher portfolio turnover; the
amount of commissions generated by the account during the past year; and the
number and nature of other deals the client has participated in during the past
year.
Where more than one of the Advisor's portfolio manager team seeks to have
client accounts participate in a deal and the amount of deal securities
allocated to the Advisor by the underwriting syndicate is less than the
aggregate amount ordered by the Advisor (a "reduced allocation"), the deal
securities will be allocated among the portfolio manager teams based on all
relevant factors. The primary factor shall be assets under management,
although other factors that may be considered in the allocation decision
include, but are not limited to, the nature, size, and expected allocation of
the deal; the amount of brokerage commissions or other amounts generated by
the respective participating portfolio manager teams; and which portfolio
manager team is primarily responsible for the Advisor receiving securities in
the deal. Based on relevant factors, the Advisor has established general
allocation percentages for its portfolio manager teams, and these percentages
are reviewed on a regular basis to determine whether asset growth or other
factors make it appropriate to use different general allocation percentages
for reduced allocations.
When a portfolio manager team receives a reduced allocation of deal
securities, the portfolio manager team will allocate the reduced allocation
among client accounts in accordance with the allocation percentages set forth
in the team's initial allocation instructions for the deal securities, except
where this would result in a DE MINIMIS allocation to any client account. On
a regular basis, the Advisor reviews the allocation of deal securities to
ensure that they have been allocated in a fair and equitable manner that does
not unfairly discriminate in favor of certain clients or types of clients.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"). The Fund's procedures in selecting FCMs to execute the
Fund's transactions in futures contracts are similar to those in effect with
respect to brokerage transactions in securities.
The Fund paid the following brokerage commissions for the time periods
indicated:
<TABLE>
<CAPTION>
<S> <C>
FISCAL YEAR ENDED BROKERAGE COMMISSIONS ($)
------------------ -------------------------
</TABLE>
Corporate Bond Fund
<TABLE>
<CAPTION>
<S> <C>
10/31/97 67,080
10/31/98 94,065
10/31/99 199,168
</TABLE>
Government Securities Fund
<TABLE>
<CAPTION>
<S> <C>
10/31/97 80,433
10/31/98 70,554
10/31/99 106,300
</TABLE>
High-Yield Bond Fund
<TABLE>
<CAPTION>
<S> <C>
10/31/97 72,755
10/31/98 46,605
10/31/99 34,164
</TABLE>
International Bond Fund
<TABLE>
<CAPTION>
<S> <C>
10/31/97 4,814
10/31/98 1,744
10/31/99 0
</TABLE>
Short-Term Bond Fund
<TABLE>
<CAPTION>
<S> <C>
10/31/97 282,741
10/31/98 262,212
10/31/99 145,602
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
145,602
</TABLE>
Short-Term High Yield Bond Fund
<TABLE>
<CAPTION>
<S> <C>
10/31/97(1) 0
10/31/98 1,688
10/31/99 1,388
</TABLE>
(1) Commenced operations on June 30, 1997.
Unless otherwise noted below, the Fund has not acquired securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
their parents.
<TABLE>
<CAPTION>
<S> <C>
REGULAR BROKER OR DEALER (OR PARENT) ISSUER VALUE OF SECURITIES OWNED AS OF OCTOBER 31, 1999
------------------------------------------- ------------------------------------------------
Lehman Brothers, Inc. $12,509,000 (Corporate Bond)
</TABLE>
For the fiscal period ended October 31, 1999, the Corporate Bond Fund's
portfolio turnover rates was 403.2% The portfolio turnover rates were higher
than anticipated primarily because the Fund employed a trading strategy to take
advantage of yield opportunities to help enhance the Fund's total return.
CUSTODIAN
As custodian of the CORPORATE BOND, GOVERNMENT SECURITIES, HIGH YIELD BOND,
SHORT-TERM BOND, and SHORT-TERM HIGH-YIELD BOND FUND'S assets, Firstar Bank
Milwaukee, N.A., P.O. Box 761, Milwaukee, Wisconsin 53201, has custody of all
securities and cash of the Fund, delivers and receives payment for securities
sold, receives and pays for securities purchased, collects income from
investments, and performs other duties, all as directed by officers of the
Fund. The custodian is in no way responsible for any of the investment
policies or decisions of the Fund.
As custodian of the INTERNATIONAL BOND FUND'S assets, Brown Brothers Harriman &
Co., 40 Water Street, Boston, Massachusetts 02109, 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. In addition, the Fund, with the approval of
the Board of Directors and subject to the rules of the SEC, will have
sub-custodians in those foreign countries in which their respective assets may
be invested. The custodian and, if applicable, the sub-custodian are in no way
responsible for any of the investment policies or decisions of the Funds.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin, 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 0.20% of the average daily net asset value of all Advisor Class shares.
Funds
------------------------------------ ------------------------------------------------------------------------------
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
------------------------------------ ------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 received and the services provided as transfer agent and dividend
disbursing agent are in addition to those received and provided by the Advisor
under the Administration Agreements. 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:
NOTE - THE FOLLOWING TABLE DOES NOT CONTAIN INFORMATION ON THE ADVISOR CLASS
SHARES OF THE HIGH-YIELD BOND AND SHORT-TERM HIGH YIELD BOND FUNDS SINCE THEY
WERE NOT OFFERED UNTIL FEBRUARY 29, 2000.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OUT-OF-POCKET PRINTING/MAILING TOTAL COST AFTER
FUND FEE($) EXPENSES ($) SERVICES ($) WAIVER ($) WAIVER ($)
---- ------ ------------- ---------------- ---------- ----------------
</TABLE>
Corporate Bond Fund - Investor Class
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C><C>
10/31/97 949,756 41,516 6,801 0 998,073
10/31/98 1,378,729 58,573 22,957 0 1,460,259
10/31/99 1,775,735 79,907 5,140 0 1,860,782
</TABLE>
Corporate Bond Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C><C><C>
10/31/99* 0 0 0 0 0
</TABLE>
Corporate Bond Fund - Institutional Class
<TABLE>
<CAPTION>
<S> <C> <C><C><C><C>
10/31/99* 14 0 0 0 14
</TABLE>
Government Securities Fund - Investor Class
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C><C>
10/31/97 1,379,194 34,322 6,647 0 1,420,163
10/31/98 1,737,170 42,577 5,368 0 1,785,115
10/31/99 2,369,342 94,520 4,458 0 2,468,320
</TABLE>
Government Securities Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C><C><C>
10/31/99* 0 0 0 0 0
</TABLE>
46
<PAGE>
Government Securities Fund - Institutional Class
<TABLE>
<CAPTION>
<S> <C><C><C><C><C>
10/31/99* 1 0 0 0 1
</TABLE>
International Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
10/31/97 102,111 6,676 1,038 11,363 98,462
10/31/98 56,106 7,169 1,238 0 64,513
10/31/99 60,294 4,794 220 0 65,308
</TABLE>
High-Yield Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
10/31/97 601,313 33,515 4,951 194,015 445,764
10/31/98 853,883 65,830 6,055 0 925,768
10/31/99 904,780 52,097 3,710 0 960,587
</TABLE>
Short-Term Bond Fund - Investor Class
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C><C>
10/31/97 2,311,996 125,033 21,478 0 2,458,507
10/31/98 2,176,944 135,156 22,056 0 2,334,156
10/31/99 2,130,200 147,103 10,017 0 2,287,320
</TABLE>
Short-Term Bond Fund - Advisor Class
<TABLE>
<CAPTION>
<S> <C><C><C><C><C>
10/31/99* 0 0 0 0 0
</TABLE>
Short-Term Bond Fund - Institutional Class
<TABLE>
<CAPTION>
<S> <C> <C><C><C><C>
10/31/99* 46 0 0 0 46
</TABLE>
Short-Term High Yield Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C><C>
10/31/97(1) 14,405 1,009 162 0 15,576
10/31/98 115,663 9,838 998 0 126,499
10/31/99 247,012 18,998 944 0 266,954
</TABLE>
* For the two-month fiscal year ended October 31, 1999.
(1) Commenced operations on June 30, 1997.
TAXES
GENERAL
The Fund intends to qualify annually for treatment as a regulated investment
company ("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
47
<PAGE>
gain, and net gains from certain foreign currency transactions, if applicable)
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities (or foreign currencies if applicable) or other income (including
gains from options, futures, or forward contracts) derived with respect to its
business of investing in securities ("Income Requirement"); (2) at the close of
each quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs, and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer. 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 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 a 4% excise tax on undistributed income and gains.
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.
FOREIGN TRANSACTIONS
Dividends and interest received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the U.S may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, it will be eligible to, and may, file an
election with the Internal Revenue Service that would enable its shareholders,
in effect, to receive the benefit of the foreign tax credit with respect to
any foreign and U.S. possessions income taxes paid by it. The Fund would
treat those taxes as dividends paid to its shareholders and each shareholder
would be required to (1) include in gross income, and treat as paid by the
shareholder, the shareholder's proportionate share of those taxes, (2) treat
the shareholder's share of those taxes and of any dividend paid by the Fund
that represents income from foreign or U.S. possessions sources as the
shareholder's own income from those sources, and (3) either deduct the taxes
deemed paid by the shareholder in computing the shareholder's taxable income
or, alternatively, use the foregoing information in calculating the foreign
tax credit against the shareholder's federal income tax. The Fund will report
to its shareholders shortly after each taxable year their respective shares of
its income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund holding foreign securities in its investment portfolio maintains its
accounts and calculates its income in U.S. dollars. In general, gain or loss
(1) from the disposition of foreign currencies and forward currency contracts,
(2) from the disposition of foreign-currency-denominated debt securities that
are attributable to fluctuations in exchange rates between the date the
securities are acquired and their disposition date, and (3) attributable to
fluctuations in exchange rates between the time the Fund accrues interest or
other receivables or expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects those receivables or pays
those liabilities, will be treated as ordinary income or loss. A
foreign-currency-denominated debt security acquired by the Fund may bear
interest at a high normal rate that takes into account expected decreases in
the value
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<PAGE>
of the principal amount of the security due to anticipated currency
devaluations; in that case, the Fund would be required to include the interest
in income as it accrues but generally would realize a currency loss with
respect to the principal only when the principal was received (through
disposition or upon maturity).
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs") in accordance with its investment objective, policies and
restrictions. A PFIC is a foreign corporation that, in general, meets either
of the following tests: (1) at least 75% of its gross income is passive or (2)
an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain on disposition of the stock
(collectively, "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital
gain over net short-term capital loss) -- which probably would have to be
distributed to its shareholders to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax -- even if those earnings and gain were not
received by the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
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.
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.
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.
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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.
THE FOLLOWING PARAGRAPH APPLIES TO THE CORPORATE BOND, GOVERNMENT SECURITIES,
HIGH-YIELD BOND, SHORT-TERM BOND, AND SHORT-TERM HIGH YIELD BOND FUNDS ONLY:
Securities quoted in foreign currency are valued daily in U.S. dollars at the
foreign currency exchange rates that are prevailing at the time the daily NAV
per share is determined. Although the Fund values its foreign assets in U.S.
dollars on a daily basis, it does not intend to convert its holdings of
foreign currencies into U.S. dollars on a daily basis. Foreign currency
exchange rates are generally determined prior to the close of trading on the
NYSE. Occasionally, events affecting the value of foreign investments and
such exchange rates occur between the time at which they are determined and
the close of trading on the NYSE. Such events would not normally be reflected
in a calculation of the Fund's NAV on that day. If events that materially
affect the value of the Fund's foreign investments or the foreign currency
exchange rates occur during such period, the investments will be valued at
their fair value as determined in good faith by or under the direction of the
Board of Directors.
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 techniques 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.
Debt securities having remaining maturities of 60 days or less are valued by
the amortized cost method when the Board of Directors determines that the fair
value of such securities is their amortized cost. 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.
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
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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 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). 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 checkwriting, 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.
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
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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 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.
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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:
- when adding the Redemption Option to an existing account;
- when transferring the ownership of an account to another individual or
organization;
- when submitting a written redemption request for more than $50,000;
- when requesting to redeem or redeposit shares that have been issued in
certificate form;
- if requesting a certificate after opening an account;
- when requesting that redemption proceeds be sent to a different name or
address than is registered on an account;
- if adding/changing a name or adding/removing an owner on an account; and
- if adding/changing the beneficiary on a transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC. These institutions include banks, savings associations,
credit unions, brokerage firms, and others. Please note that a notary public
stamp or seal is not acceptable.
TELEPHONE AND INTERNET EXCHANGE/REDEMPTION PRIVILEGES
The Fund employs reasonable procedures to confirm that instructions
communicated by telephone or the Internet are genuine. The Fund may not be
liable for losses due to unauthorized or fraudulent instructions. Such
procedures include but are not limited to requiring a form of personal
identification prior to acting on instructions received by telephone or the
Internet, providing written confirmations of such transactions to the address
of record, tape recording telephone instructions and backing up Internet
transactions.
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ORGANIZATION
The Fund is either a "Corporation" or a "Series" of common stock of a
Corporation, as described in the chart below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Incorporation Date Series Date Class Authorized Par
Corporation Date Created Created Shares Value ($)
------------------------------------------ ------------- ----------- ---------- ---------- ---------
Strong Corporate Bond Fund, Inc.(1) 07/19/85 Indefinite .001
- Strong Corporate Bond Fund 07/19/85 Indefinite .001
* Investor Class(3) 07/19/85 Indefinite .001
* Advisor Class 08/23/99 Indefinite .001
* Institutional Class 08/23/99 Indefinite .001
Strong Government Securities Fund, Inc. 08/08/86 Indefinite .001
- Strong Government Securities Fund 08/08/86 Indefinite .001
* Investor Class(3) 08/08/86 Indefinite .001
* Advisor Class 08/23/99 Indefinite .001
* Institutional Class 08/23/99 Indefinite .001
Strong Income Funds, Inc.(2) 02/24/89 Indefinite .00001
- Strong High-Yield Bond Fund 10/27/95 Indefinite .00001
* Investor Class(4) 2/22/00 Indefinite .00001
* Advisor Class 2/22/00 Indefinite .00001
- Strong Short-Term High Yield Bond Fund 06/26/97 Indefinite .00001
* Investor Class(4) 2/22/00 Indefinite .00001
* Advisor Class 2/22/00 Indefinite .00001
Strong International Income Funds, Inc.(5) 01/05/94 Indefinite .01
- Strong International Bond Fund 01/05/94 Indefinite .01
Strong Short-Term Bond Fund, Inc. 03/20/87 Indefinite .001
- Strong Short-Term Bond Fund 03/20/87 Indefinite .001
* Investor Class(3) 03/20/87 Indefinite .001
* Advisor Class 08/23/99 Indefinite .001
* Institutional Class 08/23/99 Indefinite .001
</TABLE>
(1) Prior to April 17, 1995, the Corporation's name was Strong Income Fund,
Inc.
(2) Prior to April 17, 1995, the Corporation's name was Strong U.S. Treasury
Money Fund, Inc.
(3) Prior to August 23, 1999, the Investor Class shares of the Fund were
designated as shares of common stock of the Fund.
(4) Prior to February 22, 2000, the Investor Class shares of the Fund were
designated as shares of common stock of the Fund.
(5) Prior to January 22, 1998, the Corporation's name was Strong International
Bond Fund, Inc.
The Strong High-Yield Bond Fund and Strong Short-Term High Yield Bond Fund are
diversified series of Strong Income Funds, Inc., which is an open-end
management investment company. The Strong Short-Term Bond Fund is a
diversified series of Strong Short-Term Bond Fund, Inc., which is an open-end
management investment company. The Government Securities Fund is a diversified
series of Strong Government Securities Fund, Inc., which is an open-end
management investment company. The Strong Corporate Bond Fund is a diversified
series of Strong Corporate Bond Fund, Inc., which is an open-end management
investment company. The Strong International Bond Fund is a non-diversified
series of Strong International Income 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
which affects only one or more series or class, in which case only the shares
of the affected series or class are entitled to vote. 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
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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 Institutional Class shares of the Corporate Bond,
Government Securities, and Short-Term Bond Funds, which were first offered to
the public on August 31, 1999, include the historical performance of each
Fund's Investor Class shares for the period from a Fund's inception through
August 30, 1999. For the Advisor Class shares of these Funds, which also were
first offered to the public on August 31, 1999, performance is based on the
historical performance of each Fund's Investor Class of shares, which has been
recalculated to reflect the additional expenses imposed on the Advisor Class
shares. Performance figures for the Advisor Class shares of the High-Yield
Bond and Short-Term High Yield Bond Funds, 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. The performance figures for each class of shares will vary based on
differences in their expense ratios.
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.
55
<PAGE>
The following table is based upon the 2000 federal tax rates in effect as of
January 1, 2000.
<TABLE>
<CAPTION>
A TAX-FREE YIELD OF:
2000 Taxable Income Levels* 4% 5% 6% 7% 8%
Single Married Filing Marginal IS EQUIVALENT TO A TAXABLE YIELD OF:
Jointly Tax Rate
<S> <C> <C> <C> <C> <C> <C> <C>
under under $43,850 15% 4.71% 5.88% 7.06% 8.24% 9.41%
$26,250
$26,250 $43,850 28% 5.56% 6.94% 8.33% 9.72% 11.11%
$63,550 $105,950
$63,550 $105,950 31% 5.80% 7.25% 8.70% 10.14% 11.59%
$132,600 $161,450
$132,600 $161,450 36% 6.25% 7.81% 9.38% 10.94% 12.50%
$288,350 $288,350
over over $288,350 39.6% 6.62% 8.28% 9.93% 11.59% 13.25%
$288,350
</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.
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.
56
<PAGE>
SPECIFIC FUND PERFORMANCE
30-DAY YIELD
(30-day period ended October 31, 1999)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Waived Absorbed Yield Without Waivers
Fund Yield Management Fees Expenses and Absorptions
-------------------- ------ --------------- --------- ----------------------
Corporate Bond 7.51% 0 0 7.51%
Fund - Investor
Class
-------------------- ------ --------------- --------- ----------------------
Corporate Bond 6.71% 0 0 6.71%
Fund - Advisor
Class
-------------------- ------ --------------- --------- ----------------------
Corporate Bond 7.89% 0 0 7.89%
Fund - Institutional
Class
-------------------- ------ --------------- --------- ----------------------
Government 6.07% 0 0 6.07%
Securities Fund -
Investor Class
-------------------- ------ --------------- --------- ----------------------
Government 5.59% 0 0 5.59%
Securities Fund -
Advisor Class
-------------------- ------ --------------- --------- ----------------------
Government 6.56% 0 0 6.56%
Securities Fund -
Institutional Class
-------------------- ------ --------------- --------- ----------------------
High-Yield Bond 11.36% 0 0 11.36%
Fund
-------------------- ------ --------------- --------- ----------------------
International Bond 3.51% 0 0 3.51%
Fund
-------------------- ------ --------------- --------- ----------------------
Short-Term Bond 7.10% 0 0 7.10%
Fund - Investor
Class
-------------------- ------ --------------- --------- ----------------------
Short-Term Bond 6.30% 0 0 6.30%
Fund - Advisor
Class
-------------------- ------ --------------- --------- ----------------------
Short-Term Bond 7.39% 0 0 7.39%
Fund - Institutional
Class
-------------------- ------ --------------- --------- ----------------------
Short-Term High 8.37% 0 0 8.37%
Yield Bond Fund
-------------------- ------ --------------- --------- ----------------------
</TABLE>
NOTE - THE 30-DAY YIELDS FOR THE ADVISOR CLASS SHARES OF THE HIGH-YIELD BOND
AND SHORT-TERM HIGH YIELD BOND FUNDS ARE NOT SHOWN HERE BECAUSE THESE SHARES
WERE FIRST ISSUED ON FEBRUARY 29, 2000.
57
<PAGE>
TOTAL RETURN
CORPORATE BOND FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 10,218 2.18% 2.18%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 16,062 60.62% 9.94%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 21,008 110.08% 7.71%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 33,912 239.12% 9.19%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* Commenced operations on December 12, 1985.
INSTITUTIONAL CLASS+
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 10,218 2.18% 2.18%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 16,062 60.62% 9.94%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 21,008 110.08% 7.71%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 33,912 239.12% 9.19%
------------- --------------- ---------------- ------------ --------------
</TABLE>
*Commenced operations on December 12, 1985.
+ Commenced operations on August 31, 1999.
ADVISOR CLASS+
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 9,753 -2.47% -2.47%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 15,204 52.04% 8.74%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 19,679 96.79% 7.00%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 31,590 215.90% 8.64%
------------- --------------- ---------------- ------------ --------------
</TABLE>
*Commenced operations on December 12, 1985.
+ Commenced operations on August 31, 1999.
GOVERNMENT SECURITIES FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 9,996 -0.04% -0.04%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 14,529 45.29% 7.76%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 22,000 120.00% 8.20%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 27,986 179.86% 8.23%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* Commenced operations on October 29, 1986.
58
<PAGE>
INSTITUTIONAL CLASS+
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 9,996 -0.04% -0.04%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 14,529 45.29% 7.76%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 22,000 120.00% 8.20%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 27,986 179.86% 8.23%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* Commenced operations on October 29, 1986.
+ Commenced operations on August 31, 1999.
ADVISOR CLASS+
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 9,532 -4.68% -4.68%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 13,694 36.94% 6.49%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 20,436 104.36% 7.41%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 25,759 157.59% 7.55%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* Commenced operations on October 29, 1986.
+ Commenced operations on August 31, 1999.
HIGH-YIELD BOND FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 10,977 9.77% 9.77%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 15,809 58.09% 12.65%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* Commenced operations on December 30, 1995.
ADVISOR CLASS+
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 10,483 4.83% 4.83%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 14,989 49.89% 11.10%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* Commenced operations on December 30, 1995.
+ Commenced operations on February 29, 2000.
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ ---------------
One Year $10,000 9,466 -5.34% -5.34%
------------- --------------- ---------------- ------------ ---------------
Five Year $10,000 12,998 29.98% 5.38%
------------- --------------- ---------------- ------------ ---------------
Life of Fund* $10,000 14,421 44.21% 6.78%
------------- --------------- ---------------- ------------ ---------------
</TABLE>
* Commenced operations on March 31, 1994.
59
<PAGE>
SHORT-TERM BOND FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 10,482 4.82% 4.82%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 13,790 37.90% 6.64%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 19,215 92.15% 6.75%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 23,653 136.53% 7.33%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* Commenced operations on August 31, 1987.
INSTITUTIONAL CLASS+
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 10,482 4.82% 4.82%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 13,790 37.90% 6.64%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 19,215 92.15% 6.75%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 23,653 136.53% 7.33%
------------- --------------- ---------------- ------------ --------------
</TABLE>
*Commenced operations on August 31, 1987.
+ Commenced operations on August 31, 1999.
ADVISOR CLASS+
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 10,216 2.16% 2.16%
------------- --------------- ---------------- ------------ --------------
Five Years $10,000 13,293 32.93% 5.86%
------------- --------------- ---------------- ------------ --------------
Ten Years $10,000 18,268 82.68% 6.21%
------------- --------------- ---------------- ------------ --------------
Life of Fund* $10,000 22,354 123.54% 6.84%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* Commenced operations on August 31, 1987.
+ Commenced operations on August 31, 1999.
SHORT-TERM HIGH YIELD BOND FUND
INVESTOR CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ ---------------
One Year $10,000 10,851 8.51% 8.51%
------------- --------------- ---------------- ------------ ---------------
Life of Fund* $10,000 12,255 22.55% 9.11%
------------- --------------- ---------------- ------------ ---------------
</TABLE>
* Commenced operations on June 30, 1997.
60
<PAGE>
ADVISOR CLASS+
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ ---------------
One Year $10,000 10,575 5.75% 5.75%
------------- --------------- ---------------- ------------ ---------------
Life of Fund* $10,000 11,894 18.94% 7.72%
------------- --------------- ---------------- ------------ ---------------
</TABLE>
* Commenced operations on June 30, 1997.
+ Commenced operations on February 29, 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 ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT RANKING
ORGANIZATIONS. From time to time, in marketing and other fund literature, the
Fund's performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value,
with all income and capital gains dividends reinvested. Such calculations do
not include the effect of any sales charges imposed by other funds. The Fund
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings. The Fund's performance may also be compared
to the average performance of its Lipper category.
MORNINGSTAR, INC. The Fund's performance may also be compared to the
performance of other mutual funds by Morningstar, Inc., which rates funds on
the basis of historical risk and total return. Morningstar's ratings range
from five stars (highest) to one star (lowest) and represent Morningstar's
assessment of the historical risk level and total return of a fund as a
weighted average for 3, 5, and 10 year periods. Ratings are not absolute and
do not represent future results.
INDEPENDENT SOURCES. Evaluations of fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the Fund,
especially those with similar objectives. Sources for fund performance and
articles about the Fund may include publications such as Money, Forbes,
Kiplinger's, Smart Money, Financial World, Business Week, U.S. News and World
Report, The Wall Street Journal, Barron's, and a variety of investment
newsletters.
THE FOLLOWING SECTION APPLIES TO THE CORPORATE BOND, GOVERNMENT SECURITIES,
HIGH-YIELD BOND, SHORT-TERM BOND, AND SHORT-TERM HIGH YIELD BOND FUNDS ONLY:
VARIOUS BANK PRODUCTS. The Fund's performance also may be compared on a
before or after-tax basis to various bank products, including the average rate
of bank and thrift institution money market deposit accounts, Super N.O.W.
accounts and certificates of deposit of various maturities as reported in the
Bank Rate Monitor, National Index of 100 leading banks, and thrift
institutions as published by the Bank Rate Monitor, Miami Beach, Florida. The
rates published by the Bank Rate Monitor National Index are averages of the
personal account rates offered on the Wednesday prior to the date of
publication by 100 large banks and thrifts in the top ten Consolidated
Standard Metropolitan Statistical Areas. The rates provided for the bank
accounts
61
<PAGE>
assume no compounding and are for the lowest minimum deposit required to open
an account. Higher rates may be available for larger deposits.
With respect to money market deposit accounts and Super N.O.W. accounts,
account minimums range upward from $2,000 in each institution and compounding
methods vary. Super N.O.W. accounts generally offer unlimited check writing
while money market deposit accounts generally restrict the number of checks
that may be written. If more than one rate is offered, the lowest rate is
used. Rates are determined by the financial institution and are subject to
change at any time specified by the institution. Generally, the rates offered
for these products take market conditions and competitive product yields into
consideration when set. Bank products represent a taxable alternative income
producing product. Bank and thrift institution deposit accounts may be
insured. Shareholder accounts in the Fund are not insured. Bank passbook
savings accounts compete with money market mutual fund products with respect
to certain liquidity features but may not offer all of the features available
from a money market mutual fund, such as check writing. Bank passbook savings
accounts normally offer a fixed rate of interest while the yield of the Fund
fluctuates. Bank checking accounts normally do not pay interest but compete
with money market mutual fund products with respect to certain liquidity
features (E.G., the ability to write checks against the account). Bank
certificates of deposit may offer fixed or variable rates for a set term.
(Normally, a variety of terms are available.) Withdrawal of these deposits
prior to maturity will normally be subject to a penalty. In contrast, shares
of the Fund are redeemable at the net asset value (normally, $1.00 per share)
next determined after a request is received, without charge.
INDICES. The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments that a Fund may
purchase and the investments measured by the indices.
HISTORICAL ASSET CLASS RETURNS. From time to time, marketing materials may
portray the historical returns of various asset classes. Such presentations
will typically compare the average annual rates of return of inflation, U.S.
Treasury bills, bonds, common stocks, and small stocks. There are important
differences between each of these investments that should be considered in
viewing any such comparison. The market value of stocks will fluctuate with
market conditions, and small-stock prices generally will fluctuate more than
large-stock prices. Stocks are generally more volatile than bonds. In return
for this volatility, stocks have generally performed better than bonds or cash
over time. Bond prices generally will fluctuate inversely with interest rates
and other market conditions, and the prices of bonds with longer maturities
generally will fluctuate more than those of shorter-maturity bonds. Interest
rates for bonds may be fixed at the time of issuance, and payment of principal
and interest may be guaranteed by the issuer and, in the case of U.S. Treasury
obligations, backed by the full faith and credit of the U.S. Treasury.
THE FOLLOWING PARAGRAPH APPLIES TO THE INTERNATIONAL BOND FUND ONLY:
HISTORICAL FOREIGN CURRENCY INFORMATION. Because the Fund's investments
primarily are denominated in foreign currencies, the strength or weakness of
the U.S. dollar against these currencies may account for part of the Fund's
investment performance. Historical information regarding the value of the
dollar versus foreign currencies may be used from time to time in
advertisements concerning the Funds. Such historical information is not
indicative of future fluctuations in the value of the U.S. dollar against these
currencies. Marketing materials may cite country and economic statistics and
historical stock or bond market performance for any of the countries in which
the Fund may invest, including, but not limited to, the following: population
growth, gross domestic product, inflation rate, average stock market price
earnings ratios, selected returns on stocks or bonds, and the total value of
stock or bond markets. Sources of such statistics may include official
publications of various foreign governments, exchanges, or investment research
firms. In addition, marketing materials may cite the portfolio management's
views or interpretations of such statistical data or historical performance.
62
<PAGE>
STRONG FUNDS. The Strong Funds offer a comprehensive range of conservative to
aggressive investment options. The Strong Funds and their investment objectives
are listed below.
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 Federally tax-exempt current income, a stable share-price, and daily
Fund 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.
--------------------------------- ------------------------------------------------------------------------
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.
--------------------------------- ------------------------------------------------------------------------
--------------------------------- ------------------------------------------------------------------------
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.
--------------------------------- ------------------------------------------------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 Total return by investing for a high level of current income with a
Fund moderate degree of share-price fluctuation.
--------------------------------- --------------------------------------------------------------------------
--------------------------------- --------------------------------------------------------------------------
INTERNATIONAL
--------------------------------- --------------------------------------------------------------------------
Strong Asia Pacific Fund Capital growth.
--------------------------------- --------------------------------------------------------------------------
Strong Foreign MajorMarketsSM Capital growth.
Fund
--------------------------------- --------------------------------------------------------------------------
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 Total return by investing for a high level of federally tax-exempt current
Fund 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 Total return by investing for a high level of federally tax-exempt current
Municipal Fund income with a moderate degree of share-price fluctuation.
--------------------------------- --------------------------------------------------------------------------
Strong Short-Term Municipal Bond Total return by investing for a high level of federally tax-exempt current
Fund 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.
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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 2 TO 4 YEARS High-Yield Bond Fund Balanced Fund
Market Fund
Short-Term Bond Fund High-Yield Municipal Bond Blue Chip 100 Fund
Short-Term High Yield Fund Discovery Fund
Bond Fund International Bond Fund Dow 30 Value Fund
Short-Term High Yield Municipal Bond Fund Enterprise Fund
Municipal Fund Foreign MajorMarketsSM
Short-Term Municipal Fund
Bond Fund Growth 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
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<PAGE>
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 S(xi - xm)2
n-1
Where: S = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
Statistics may also be used to discuss the Fund's relative performance. One
such measure is alpha. Alpha measures the actual return of a fund compared to
the expected return of a fund given its risk (as measured by beta). The
expected return is based on how the market as a whole performed, and how the
particular fund has historically performed against the market. Specifically,
alpha is the actual return less the expected return. The expected return is
computed by multiplying the advance or decline in a market representation by
the Fund's beta. A positive alpha quantifies the value that the fund manager
has added, and a negative alpha quantifies the value that the fund manager has
lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
DURATION. Duration is a calculation that seeks to measure the price
sensitivity of a bond or a bond fund to changes in interest rates. It
measures bond price sensitivity to interest rate changes by taking into
account the time value of cash flows generated over the bond's life. Future
interest and principal payments are discounted to reflect their present value
and then are multiplied by the number of years they will be received to
produce a value that is expressed in years. Since duration can also be
computed for the Fund, you can estimate the effect of interest rates on the
Fund's share price. Simply multiply the Fund's duration by an expected change
in interest rates. For example, the price of the Fund with a duration of two
years would be expected to fall approximately two percent if market interest
rates rose by one percentage point.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor, owned by
professionals active in its management. Recognizing that investors are the
focus of its business, the Advisor strives for excellence both in investment
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires specialized skills
and processes for each asset class and style. Therefore, the Advisor believes
that active management should produce greater returns than a passively managed
index. The Advisor has brought together a group of top-flight investment
professionals with diverse product expertise, and each concentrates on their
investment specialty. The Advisor believes that people are the firm's most
important asset. For this reason, continuity of professionals is critical to
the firm's long-term success.
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<PAGE>
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 800-368-3863.
1. HAVE A PLAN - even a simple plan can help you take control of your
financial future. Review your plan once a year, or if your circumstances
change.
2. START INVESTING AS SOON AS POSSIBLE. Make time a valuable ally. Let it
put the power of compounding to work for you, while helping to reduce your
potential investment risk.
3. DIVERSIFY YOUR PORTFOLIO. By investing in different asset classes -
stocks, bonds, and cash - you help protect against poor performance in one
type of investment while including investments most likely to help you achieve
your important goals.
4. INVEST REGULARLY. Investing is a process, not a one-time event. By
investing regularly over the long term, you reduce the impact of short-term
market gyrations, and you attend to your long-term plan before you're tempted
to spend those assets on short-term needs.
5. MAINTAIN A LONG-TERM PERSPECTIVE. For most individuals, the best
discipline is staying invested as market conditions change. Reactive,
emotional investment decisions are all too often a source of regret - and
principal loss.
6. CONSIDER STOCKS TO HELP ACHIEVE MAJOR LONG-TERM GOALS. Over time,
stocks have provided the more powerful returns needed to help the value of
your investments stay well ahead of inflation.
7. KEEP A COMFORTABLE AMOUNT OF CASH IN YOUR PORTFOLIO. To meet current
needs, including emergencies, use a money market fund or a bank account - not
your long-term investment assets.
8. KNOW WHAT YOU'RE BUYING. Make sure you understand the potential risks
and rewards associated with each of your investments. Ask questions... request
information...make up your own mind. And choose a fund company that helps you
make informed investment decisions.
STRONG RETIREMENT PLAN SERVICES
Strong Retirement Plan Services offers a full menu of high quality, affordable
retirement plan options, including traditional money purchase pension and
profit sharing plans, 401(k) plans, simplified employee pension plans, salary
reduction plans, Keoghs, and 403(b) plans. Retirement plan specialists are
available to help companies determine which type of retirement plan may be
appropriate for their particular situation.
MARKETS. The retirement plan services provided by the Advisor focus on four
distinct markets, based on the belief that a retirement plan should fit the
customer's needs, not the other way around.
1. SMALL COMPANY PLANS. Small company plans are designed for companies
with 1-50 plan participants. The objective is to incorporate the features and
benefits typically reserved for large companies, such as sophisticated
recordkeeping systems, outstanding service, and investment expertise, into a
small company plan without administrative hassles or undue expense. Small
company plan sponsors receive a comprehensive plan administration manual as
well as toll-free telephone support.
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2. LARGE COMPANY PLANS. Large company plans are designed for companies
with between 51 and 1,000 plan participants. Each large company plan is
assigned a team of professionals consisting of an account manager, who is
typically an attorney, CPA, or holds a graduate degree in business, a
conversion specialist (if applicable), an accounting manager, a
legal/technical manager, and an education/communications educator.
3. WOMEN-OWNED BUSINESSES.
4. NON-PROFIT AND EDUCATIONAL ORGANIZATIONS (THE 403(B) MARKET).
TURNKEY APPROACH. The retirement plans offered by the Advisor are designed to
be streamlined and simple to administer. To this end, the Advisor has
invested heavily in the equipment, systems, and people necessary to adopt or
convert a plan, and to keep it running smoothly. The Advisor provides all
aspects of the plan, including plan design, administration, recordkeeping, and
investment management. To streamline plan design, the Advisor provides
customizable IRS-approved prototype documents. The Advisor's services also
include annual government reporting and testing as well as daily valuation of
each participant's account. This structure is intended to eliminate the
confusion and complication often associated with dealing with multiple
vendors. It is also designed to save plan sponsors time and expense.
The Advisor strives to provide one-stop retirement savings programs that
combine the advantages of proven investment management, flexible plan design,
and a wide range of investment options. The open architecture design of the
plans allow for the use of the family of mutual funds managed by the Advisor
as well as a stable asset value option. Large company plans may supplement
these options with their company stock (if publicly traded) or funds from
other well-known mutual fund families.
EDUCATION. Participant education and communication is key to the success of
any retirement program, and therefore is one of the most important services
that the Advisor provides. The Advisor's goal is twofold: to make sure that
plan participants fully understand their options and to educate them about the
lifelong investment process. To this end, the Advisor provides attractive,
readable print materials that are supplemented with audio and video tapes, and
retirement education programs.
SERVICE. The Advisor's goal is to provide a world class level of service.
One aspect of that service is an experienced, knowledgeable team that provides
ongoing support for plan sponsors, both at adoption or conversion and
throughout the life of a plan. The Advisor is committed to delivering
accurate and timely information, evidenced by straightforward, complete, and
understandable reports, participant account statements, and plan summaries.
The Advisor has designed both "high-tech" and "high-touch" systems, providing
an automated telephone system as well as personal contact. Participants can
access daily account information, conduct transactions, or have questions
answered in the way that is most comfortable for them.
STRONG FINANCIAL ADVISORS GROUP
The Strong Financial Advisors Group is dedicated to helping financial advisors
better serve their clients. Financial advisors receive regular updates on the
mutual funds managed by the Advisor, access to portfolio managers through
special conference calls, consolidated mailings of duplicate confirmation
statements, access to the Advisor's network of regional representatives, and
other specialized services. For more information on the Strong Financial
Advisors Group, call 800-368-1683.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, are the independent accountants for the Fund, providing audit services
and assistance and consultation with respect to the preparation of filings with
the SEC.
LEGAL COUNSEL
Godfrey & Kahn, S.C., 780 North Water Street, Milwaukee, Wisconsin 53202, acts
as legal counsel for the Fund.
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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 Accountants.
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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.
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'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.
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.
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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.
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FITCH IBCA, 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)'.
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THOMSON BANKWATCH (TBW) LONG-TERM DEBT RATINGS
Long-Term Debt Ratings assigned by TBW HEAVILY WEIGH GOVERNMENT OWNERSHIP AND
SUPPORT. The quality of both the company's management and franchise are of
even greater importance in the Long-Term Debt Rating decisions. Long-Term Debt
Ratings look out over a cycle and are not adjusted frequently for what it
believes are short-term performance aberrations.
Long-Term Debt Ratings can be restricted to local currency debt - ratings will
be identified by the designation LC. In addition, Long-Term Debt Ratings may
include a plus (+) or minus (-) to indicate where within the category the issue
is placed. BankWatch Long-Term Debt Ratings are based on the following scale:
INVESTMENT GRADE
AAA (LC-AAA) - Indicates that the ability to repay principal and interest on a
timely basis is extremely high.
AA (LC-AA) - Indicates a very strong ability to repay principal and interest on
a timely basis, with limited incremental risk compared to issues rated in the
highest category.
A (LC-A) - Indicates the ability to repay principal and interest is strong.
Issues rated A could be more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
BBB (LC-BBB) - The lowest investment-grade category; indicates an acceptable
capacity to repay principal and interest. BBB issues are more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
NON-INVESTMENT GRADE - may be speculative in the likelihood of timely repayment
of principal and interest
BB (LC-BB) - While not investment grade, the BB rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the ability to
adequately service debt obligations.
B (LC-B) - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely
basis.
CCC (LC-CCC) - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
CC (LC-CC) - CC is applied to issues that are subordinate to other obligations
rated CCC and are afforded less protection in the event of bankruptcy or
reorganization.
D (LC-D) - Default.
SHORT-TERM RATINGS
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
'A-1'
A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
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'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.
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:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- 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.
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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 IBCA, 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.
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THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS
TBW assigns Short-Term Debt Ratings to specific debt instruments with original
maturities of one year or less. The ratings are based on the overall health
and financial condition of the rated company on a consolidated basis. In
addition, the ratings place a GREAT EMPHASIS ON THE LIKELIHOOD OF GOVERNMENT
SUPPORT.
TBW-1 (LC-1) The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 (LC-2) The second-highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
TBW-3 (LC-3) The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 (LC-4) The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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APPENDIX B - ASSET COMPOSITION BY BOND RATINGS
For the fiscal year ended October 31, 1999, 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 CORPORATE BOND FUND
<TABLE>
<CAPTION>
<S> <C> <C>
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
------ ----------- ---------------------------------
AAA 3.4% 0.0%
AA 1.9 0.20
A 11.0 2.10
BBB 58.4 1.00
BB 19.9 0.9
B 1.2 0.0
CCC 0.0 0.0
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Total 95.8% + 4.20% = 100%
</TABLE>
STRONG HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
<S> <C> <C>
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
------ ----------- --------------------------------
AAA 1.6% 0.0%
AA 0.0 0.0
A 0.1 0.1
BBB 2.0 1.3
BB 20.3 4.9
B 63.4 0.6
CCC 5.4 0.3
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Total 92.8% + 7.2% = 100%
</TABLE>
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see Appendix A for the rating categories
of several NRSROs).
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STRONG INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
<S> <C> <C>
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
------ ----------- ----------------------------
AAA 55.9% 0.0%
AA 30.8 1.1
A 4.5 0.0
BBB 2.8 0.0
BB 4.9 0.0
B 0.0 0.0
CCC 0.0 0.0
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Total 98.9% + 1.1% = 100%
</TABLE>
STRONG SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
<S> <C> <C>
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
------ ----------- --------------------------------
AAA 29.7% 0.6%
AA 3.8 0.3
A 14.2 3.1
BBB 28.1 1.0
BB 16.6 2.5
B 0.1 0.0
CCC 0.0 0.0
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Total 92.5% + 7.5% = 100%
</TABLE>
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see Appendix A for the rating categories
of several NRSROs).
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STRONG SHORT-TERM HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
<S> <C> <C>
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
------ ----------- --------------------------------
AAA 3.9% 0.0%
AA 0.0 0.0
A 2.0 0.0
BBB 7.5 0.6
BB 27.7 3.4
B 51.3 1.6
CCC 2.0 0.0
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Total 94.4% + 5.6% = 100%
</TABLE>
STRONG GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
<S> <C> <C>
RATED ADVISOR'S ASSESSMENT
RATING SECURITIES* OF UNRATED SECURITIES
------ ----------- --------------------------------
AAA 92.5% 0.0%
AA 0.4 0.0
A 1.5 0.4
BBB 5.0 0.2
BB 0.0 0.0
B 0.0 0.0
CCC 0.0 0.0
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Total 99.4% + 0.6% = 100%
</TABLE>
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see Appendix A for the rating categories
of several NRSROs).
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